Report No. 27886-TP The Democratic Republic of Timor-Leste Public Expenditure Review July 19, 2004 Poverty Reduction and Economic Management Sector Unit East Asia and the Pacific Region Document of the World Bank ACKNOWLEDGEMENTS This report was written by a core team led by Adrian Fozzard comprising Amanda Green, Andrew Laing, Jane Nassim, Ian Morris, and William Paterson. The document i s based on background papers prepared by Bruce Taplin (fiscal sustainability and resource allocation), Russell Craig (education), James Lamont (law and order), Richard Wyatt and David Bray (infrastructure) and David Hamilton (health). The PER has benefited from advice, contributions and active discussion on public expenditure issues with the staff o f the Ministry o f Planning and Finance. The Ministry o f Planning and Finance counterpart team was led b y Aicha Basserawan, Vice Minister o f Planning and Finance, and included Gastao de Sousa (Director, Planning and External Assistance Management Division, MPF), Eusebio Jerdnimo (Director, Planning and External Assistance Management Division, MPF), Antonio Freitas (Director, Budget Division, MPF), Ismaila Ceesay and Utpal Kumar Maitra (Directors, Treasury Division, MPF), Gregorio da Silva (Director, Procurement Division, MPF), Cristino Gusmao (Chief, Macroeconomics Division, MPF). The PER team i s also indebted to Ministry of Planning and Finance technical advisers who provided contributions and comments on drafts, including Richard Neves and Anne Morant (Advisers, Budget Division, MPF), Bruce Taplin (Adviser, Macroeconomics Division, MPF), Emilia Pires, Musunuru Rao and Kristina Tang (Advisers, Planning and External Assistance Management Division, MPF). The team received considerable assistance from counterpart teams in the Ministries o f Health (MoH), Education, Culture, Youth and Sports (MoESCYS) and Ministry o f Transport, Communications and Public Works (MoTCPW). Participants in discussions during the preparation o f PER background papers and follow-up work include: from the Ministry o f Education, Culture, Youth and Sports, Armindo Maia (Minister o f Education, Culture, Youth and Sports), Domingos de Sousa (Director General, MECYS), Cidalio Leite (Director o f Planning, MECYS), and Marcia1 Salvatierra (Adviser, MECYS); from the Ministry o f Health, Rui Maria de Araujo (Minister for Health), Basilio Martins (Director, Division o f Planning, MoH), Domingos da Cruz (Head o f Sub- Division o f Budget, MoH), Erling Larsson (Senior Adviser, MoH), and Olga Alyoshina (Budget Adviser, MoH); from the Ministry o f Transport, Communications and Public Works, Ovidio de Jesus Amaral (Minister o f Transport, Communications, and Public Works), Joao Alves (Secretary o f State, Public Works), Jose Piedade (Director General, Public Works), Fernando da Cruz (Director General, Transport and Communications), Januario da Costa (Director, Planning Unit), Silvestre de Oliveira (Deputy Director, Land Transportation), Evaristo de Sousa (Director, Roads, Bridges and Flood Control), and Joseph Oenarto (Adviser, Public Works and Planning). The World Bank would like to extend their most sincere thanks to the Timor-Leste Government Team-including those officials not named here-for i t s valuable guidance and significant contributions to the public expenditure review process. Valuable comments and suggestions were provided by Homi Kharas, Helen Sutch, Elisabeth Huybens, Sanjay Dhar, Jerry Strudwick, and Barry Trembath. Peer Reviewers for the report were Ed Campos and Stefan Koeberle. The team received excellent support from Gloria Elmore, the Team Assistant. Contents EXECUTIVE SUMMARY ........................................................................................................................... v A . Introduction............................................................................................................................... v B. Towards a Sustainable Pro-Poor Expenditure Policy ................................................................ v C. Improving Accountability and Effectiveness in Public Spending........................................... v i i D. Towards a Lean and Effective Civil Service ........................................................................... ix E. Key Issues and Strategic Directions in Education..................................................................... x F. Maintaining a Viable Road Network ........................................................................................ xi G. EnsuringAccess to Quality Health Services........................................................................... x11 .. . 1 INTRODUCTION ............................................................................................................................. 1 A . Background............................................................................................................................... 1 B. Process. Outputs and Outcomes ................................................................................................ 2 C. Following Up ............................................................................................................................ 3 . 2 TOWARDS A SUSTAINABLE PRO-POOR EXPENDITURE POLICY ........................ 7 A . Introduction............................................................................................................................... 7 B. Combined Sources Expenditure Framework............................................................................. 7 . C Consolidated Fund Medium-Term Expenditure Framework .................................................. 10 D. Functional Composition o f Expenditure ................................................................................. 16 E. Economic Composition o f Expenditure .................................................................................. 21 3 . IMPROVING ACCOUNTABILITY AND EFFECTIVENESS IN PUBLIC SPENDING ............. 27 A . Introduction............................................................................................................................. 27 B. Strengthening the Fiduciary and Governance Framework ...................................................... 29 C . Improving Budget Execution .................................................................................................. 32 D. Reducing Costs ....................................................................................................................... 34 E. Getting Resources D o w n to the Field Level............................................................................ 35 F. Aligning Resources with Policies and Strategies .................................................................... 37 4 . TOWARDS A LEAN AND EFFECTIVE C I V I L SERVICE ................................................................ 41 A . Introduction............................................................................................................................. 41 B. Containing C i v i l Service Numbers ......................................................................................... 41 C . Reforming Public Sector Pay .................................................................................................. 44 D. Managing the C i v i l Service .................................................................................................... 46 5 . IMPROVING ACCESS AND QUALITY IN BASIC EDUCATION ....................................................... 51 A . Introduction............................................................................................................................. 51 B. The Education System............................................................................................................. 52 C. Improving Efficiency and Access ........................................................................................... 54 D. Improving Quality o f Education ............................................................................................. 57 E. Financing and Resource Allocation in the Education Sector .................................................. 59 F. Strengthening Expenditure Management ................................................................................ 65 6 . MAINTAINING A VIABLE ROAD NETWORK ............................................................................... 69 A . Introduction............................................................................................................................. 69 B. The Road Network .................................................................................................................. 69 C . Defining and Programming Expenditure Priorities ................................................................. 72 1 D. Aligning Expenditures with Priorities..................................................................................... 76 E. Mobilizing and Managing Road Sector Finance ..................................................................... 79 F. Works Implementation ............................................................................................................ 80 G. Strengthening Institutional Capacity ....................................................................................... 82 7. IMPROVING ACCESS TO QUALITY HEALTH SERVICES ............................................................ g5 A . Introduction............................................................................................................................. 85 B. Health Facilities ...................................................................................................................... 86 C . Health Personnel ..................................................................................................................... 88 D. Health System Performance .................................................................................................... 89 E. Health Expenditure Framework .............................................................................................. 92 F. Costing Health Service Provision ............................................................................................ 96 G. Health Expenditure Management............................................................................................ 97 H. Accountability and Oversight ............................................................................................... 100 I. Where to N o w......................................................................................................................... 100 BOXES B o x 1.1 Key Recommendations . Expenditure Reviews ................................................................. 4 B o x 2.1 Developing Fiscal Policies to Manage Timor Sea Windfalls ............................................. 15 Box 2.2 Controlling Power Sector Subsidies.................................................................. 18 B o x 2.3 Recent Expenditure Control Measures ............................................................................... 24 Box 2.4 K e y Recommendations - Expenditure Policy .................................................................... 26 B o x 3.1 Towards a Capacity Building Strategy for Financial Management .................................... 28 Box 3.2 Safeguarding Timor Sea Revenues and Savings ................................................................ 30 B o x 3.3 K e y Recommendations - Public Spending ........................................................................ 39 Box 4.1 K e y Recommendations - Civil Service .............................................................................. 48 Box 5.1 Use o f Block Grants in Uganda .......................................................................................... 67 Box 5.2 Key Recommendations . Education ................................................................................... 68 Box 6.1 Improving Access beyond the “Core Network” ................................................................. 75 B o x 6.2 Key Recommendations . Roads ......................................................................................... 83 B o x 7.1 Key Recommendations .Health....................................................................................... 101 FIGURES Figure 2.1 Actual and Programmed Combined Sources Expenditures US$ million ............................. 8 Figure 2.2 Actual and Programmed Expenditure and Revenues. % GDP ............................................. 8 Figure 2.3 US$ ODA per capita to L o w & Lower-Middle Income Small States .................................. 9 Figure 2.4 Trends in Aid Flows to African Post Conflict Countries .................................................... 9 Figure 2.5 Timor-Sea Central Case Revenue Scenarios May 2002 to May 2004 ............................... 11 Figure 2.6 External Assistance as Share o f Combined Sources Programmed Expenditure ............... 20 Figure 2.7 Actual Spending on Goods and Services US$ m. FY2002 and FY2003 ............................ 23 Figure 4.1 Filled C i v i l Service Posts by Agency. September 2003 .................................................... 42 Figure 4.2 Filled Posts b y Grade. September 2003 .............................................................................. 42 Figure 4.3 Civil Service and Police Posted Outside o f Dili. September 2003 ..................................... 43 Figure 5.1 Dropout. Repetition and Promotion b y Grade .................................................................... 55 Figure 5.2 Primary Education Enrolment Scenarios to 2015 ............................................................... 56 Figure 6.1 Relation Road Density to GDP per capita .......................................................................... 70 .. 11 Figure 6.2 Average Daily Traffic and Economic Internal Rate o f Return . Eastern Indonesia Periodic Maintenance HDM-I11Analysis........................................................................... 73 TABLES Table 1.1 Timing o f PER Outputs and Policy Process......................................................................... 3 Table 2.1 Consolidated Fund Financing based on FY2005 Budget ................................................... 12 Table 2.2 Structure o f Consolidated Fund Spending by Function...................................................... 17 Table 2.3 Comparison o f NDP and FY 2004 Budget and MTEF Recurrent Expenditure Allocations .......................................................................................................................... 19 Table 2.4 Structure o f Combined Sources Budget by Function ......................................................... 20 Table 2.5 Economic Structure o f Consolidated Fund Expenditure .................................................... 22 Table 2.6 Composition of Trust Fund for East Timor Disbursement by Broad Component to end- October 2003 ...................................................................................................................... 25 Table 3.1 Timor-Leste’s Performance against HIPC Public Expenditure Management Indicators ...27 Table 3.2 Budget Execution FY2002. FY2003 and annualized for FY2004 ..................................... 32 Table 3.3 Procurement Processing Times. Ql-Q3 FY2003 ............................................................... 33 Table 3.4 Expenditure Deconcentration Estimates FY2003............................................................... 36 Table 3.5 Community Empowerment Project. Sub-projects by Cycle ............................................... 36 Table 4.1 Budgeted Staffing Profile Ey2004 ..................................................................................... 41 Table 4.2 Estimates o f Budgetary Impact o f within Grade Increments.............................................. 45 Table 5.1 Educational Attainment o f Adults ...................................................................................... 52 Table 5.2 Gross and Net Enrolment. 1998/99 to 2002/03 .................................................................. 53 Table 5.3 K e y Indicators. 2000/01 to 2003/4 School Years ............................................................... 53 Table 5.4 Estimated Payroll Costs for Teaching Staff at various STR and Enrolment Rates against FY2004 Budget in US$’OOO ................................................................................... 57 Table 5.5 Financing of Public Spending on Education ...................................................................... 60 Table 5.6 Structure o f Consolidated Fund Spending by Program ...................................................... 61 Table 5.7 Allocation of Education Expenditures. F2000 to FY2003 ................................................. 61 Table 5.8 Personnel Share o f Consolidated Fund Spending b y Program........................................... 62 Table 5.9 Budget Execution FY2002 through FY2004 ...................................................................... 64 Table 6.1 Road Network by Class and Region. 2003 ......................................................................... 70 Table 6.2 Status o f Major Roads. 2003 .............................................................................................. 71 Table 6.3 Distance o f Vehicle Passable & Paved Roads from Village Centers. 2001 ....................... 7 1 Table 6.4 Potential Annual Cost o f Maintaining Road Network to Design Standards based on Historic Unit Costs ............................................................................................................. 73 Table 6.5 Estimates o f Actual and Programmed Road Sector Expenditure and Financing ...............77 Table 6.6 Cost Estimates for Ten-year Road Rehabilitation and Maintenance Program High and Low Case Scenarios ........................................................................................................... 78 Table 6.7 Road Contractors by Class. February 2003 ........................................................................ 81 Table 7.1 Timor-Leste Millennium Development Goals .................................................................... 85 Table 7.2 Health Status Indicators in Timor-Leste. 2002 ................................................................... 86 Table 7.3 Government Health Facilities ............................................................................................. 87 Table 7.4 Timor-Leste Medical Staff Numbers .................................................................................. 88 Table 7.5 Health Performance Indicators by District ......................................................................... 90 Table 7.6 Financing o f the Health Sector ........................................................................................... 92 Table 7.7 Consolidated Fund Expenditure on Health b y Economic Classification............................ 94 Table 7.8 Forward Estimates o f Consolidated Fund Expenditures on Health by Program ................94 Table 7.9 Health Expenditure b y District ........................................................................................... 95 Table 7.10 Annual Health Sector Unit Cost Estimates by Facility Level ............................................ 96 Table 7.11 Annual Health Sector Unit Cost Estimates by Expenditure Category ................................ 96 ... 111 Table 7.12 Modified Program BudgetingStructure for M o H .............................................................. 99 REFERENCES .................................................................................................................................. 103 iv EXECUTIVE SUMMARY A. INTRODUCTION 1. Timor-Leste became independent on M a y 20, 2002, following 25 years of conflict, a violent transition from Indonesian rule in September 1999 and two and half years of United Nations administration. The country now faces all the challenges o f nation-building with limited human resources, embryonic institutions, a stagnant economy, and high levels o f poverty and unemployment. The Government’s National Development Plan (NDP), prepared through a broad participatory process before Independence, has two overriding goals: to promote rapid, equitable and sustainable economic growth and to reduce poverty. Alongside an ambitious program o f state institutional development, priority i s given to the provision of basic services education, health, jobs, security and basic infrastructure. Through the FY2004 budget cycle, the f i r s t to take place after transition to Independence, the Government has had the opportunity to translate i t s development vision into a national expenditure plan. 2. This Public Expenditure Review represents the culmination of a year-long process of World Bank support to the Government’s work on policy development and budget formulation. The specific objectives of the Public Expenditure Review (PER) were to: increase the poverty reduction impact o f the expenditure program through an emphasis on service delivery and accountability at all levels; and stimulate transparency and enhance accountability through improved availability and dissemination o f information on expenditure issues. The PER also serves as an analytical foundation for the design of the annual Transition Support Program, a multi-donor mechanism for budget support to the Government’s development program during the lean-years before substantial o i l and gas revenues come on stream. Starting from background papers in four key areas-fiscal policy and resource allocation, expenditure management and accountability, public sector pay and employment, and sector expenditure reviews in education, health, law and order, and roads-the PER exercise developed into an extended process o f dissemination, discussion, and policy development. Through this process the PER exercise has served as an input to the preparation o f the FY2004 and FY2005 budgets, the preparation o f Sector Investment Programs in education, transport and health, and the formulation o f sector policies, as well the annual action matrix supporting the Second and Third Transition Support Programs. The PER exercise has also served to promote the use o f public expenditure analysis in the policy and decision-making process. T o build on this interactive process, the present report advocates integration o f stand-alone sector expenditure reviews as part o f the sector policy and expenditure planning exercise, and the implementation o f the next cross-sectoral PER in FY2007, to support preparation o f the successor to the National Development Plan. Given the Government’s strong anticorruption stance and the need to develop strong institutions, a governance focus i s envisaged in the next Transition Support Strategy. This w i l l build on the Governance Issues Paper recently prepared b y the Bank at the Government’s request. A SUSTAINABLE PRO-POOR EXPENDITURE B. TOWARDS POLICY 3. Following the broad objectives laid out in the NDP, the Government has sought to restrain expenditures at sustainable levels and ensure that expenditure allocations are consistent with the NDP’s development priorities, giving particular priority to basic V education and health services. However, NDP priorities have had to be adjusted to take account o f the slower than expected mobilization o f Timor Sea revenues and a continuing reduction in external assistance inflows. The NDP’s fiscal projections were based on the expectation that Timor Sea o i l and gas revenues would be sufficient to cover programmed expenditures b y FY2006. Timor Sea revenue estimates were revised downwards in the FY2003 and FY2004 budget exercises, with corresponding reductions in forward expenditure estimates and increases in financing requirements. Mid-way through the FY2005 budget process, Timor Sea estimates were revised again, to take account o f acceleration o f the production schedule and increases in o i l prices. Changes in projected revenues have yet to be reflected in expenditure estimates, which are now significantly lower than programmed at Independence for the period to FY2008. On the basis o f revised Timor Sea revenues and FY2005 expenditure estimates, the financing gap for the period FY2006 to FY2007 i s now estimated at US$30 million. 4. Since Independence, the Government has also been faced with a declining trend in external assistance from around US$300 per capita in FY2002 to US$175 per capita in FY2004. Rehabilitation projects financed by the Trust Fund for East Timor (TFET) are coming to a close, and bilateral assistance i s declining as donors shift from high-volume rehabilitation and humanitarian assistance to lower-volume development support. While this trend i s inevitable, there i s some concern regarding the speed of adjustment. If the reduction in external assistance i s too abrupt i t w i l l have a significant impact on the quantity and quality o f public services and, given the weight o f the public sector, on the performance o f the economy. 5. Faced with continued uncertainty regarding Timor Sea revenues, the Government has adopted a prudent fiscal policy, with continued efforts to mobilize additional domestic revenues and a modest expenditure program, but even so additional financing measures may be needed. Following the cuts in forward estimates during the FY2005 budget process, there i s little scope for further reductions in Consolidated Fund expenditures. The scope for further increases in domestic revenues i s also limited in the short term due to a narrow revenue base and limited capacity, but there i s some room to boost funding through the one-off sale o f assets, such as excess vehicles and other project-related equipment. Consequently, any further adjustment would need to be addressed through financing measures. There are three options for mobilization o f additional financing in the case o f delays in Timor Sea revenues: (preferably) extending grant- financed budget support provided by development partners; (cautiously and temporarily) allowing for concessional borrowing, perhaps to finance projects that have been identified in the Sector Investment Programs but not yet reflected in the CFET investment program; and (provided that a savings strategy has been outlined and appropriate fund management arrangements put in place) amending the policy on savings from Timor Sea royalties to allow a portion o f the savings to be drawn down in the near term. 6. Functional expenditure patterns are broadly in line with poverty reduction and development objectives. However, the current allocation o f 32 percent o f total Consolidated Fund spending to education and health i s significantly lower than the ambitious targets set in the NDP. Conversely, spending on police and defense, currently at 20 percent o f total Consolidated Fund spending, i s higher than originally anticipated. Allocations for general public services, including governance bodies and core administrative institutions, which represent a significant fixed cost for a small public sector, are also significantly higher than programmed at Independence. Allocations for economic services, in contrast, are extremely low and insufficient to meet the Government’s development objectives. Of particular concern are the low levels o f programmed expenditures for road maintenance. The composition o f Combined Sources funding i s somewhat different, with greater focus on general public services, agriculture, economic support services and the social vi sectors. The high level o f external dependence in priority sectors i s a matter o f concern given the anticipated decline in external financing. 7. The economic composition of expenditure shows a much lower level of capital spending than originally intended and worrying growth of spending on administrative overheads. Faced with successive reductions in Timor Sea revenue projections, the Government has postponed the significant increase in capital expenditures programmed at Independence. Nevertheless, expansion o f the Consolidated Fund capital program remains a valid objective in view o f the pressing need for investment in road rehabilitation, to support implementation o f the Sector Investment Programs, and to offset the impact o f reduction in external assistance. Programmed personnel expenditures, at 35 percent of Consolidated Fund spending, are similar to other low- income countries but are expected to decline as a share o f spending. Goods and services spending, in contrast, has been expanding fast. This i s of concern where a large part o f the increase i s allocated to administrative overheads, including the cost o f maintaining the large number o f vehicles, computers and other equipment transferred upon the departure o f UNTAET. 8. The Government acted promptly to curtail the trend in administrative overheads during its FY2004 Mid-Year Budget Update and in setting limits for the FY2005 budget process. Goods and services allocations were cut and specific measures announced to contain expenditures on vehicles, including sale o f part o f the vehicle fleet. A number o f additional control measures are suggested including: reporting on high risk line items in budget execution and closer monitoring o f these items so that managers are held accountable for spending decisions; disconnection o f utilities upon exhaustion o f administrative overhead allocations; and elimination of central allocations for sensitive expenditures such as official travel. 9. There are a number of risks to the programmed expenditure framework, particularly from increases in administrative overheads and additional charges arising from the reduction of external financing. These include: continuing pressure to increase staffing levels beyond the limit of 17,200 permanent public sector employees; implementation o f local administration reforms, potentially leading to an expansion o f the number o f institutions and employees; further transfers o f equipment and installations as UNMISET winds down; and inadequate budgeting o f expenditures, notably those related to the operating expenditures o f the police, currently covered by UNPOL. Recent improvements in power sector cost recovery suggest that this risk to the expenditure framework i s now being brought under control. The appointment o f the Management Contractor and progress in the installation o f pre-payment meters have provided a sound mechanism for cost recovery, progress has also been made in putting in place appropriate fuel contracting arrangements and in the identification o f investments that w i l l reduce operating costs. c. IMPROVING ACCOUNTABILITY AND EFFECTIVENESS IN m L I C SPENDING 10. The core financial management system compares favorably with that of other low- income countries and fiduciary arrangements are basically sound, if still incomplete, but agency level financial management systems are often rudimentary and the viability of the system as a whole i s threatened by the scheduled departure of key expatriate personnel. The budget documents are comprehensive, include most external financing, and present information by agency and program, following GFS classifications, together with forward estimates. The budget i s approved b y Parliament. Comprehensive quarterly budget execution reports are published within fifteen days o f end o f period, financial statements are prepared within three months o f the end of year and an external audit undertaken within six months o f end o f year. Further work i s needed on the development of a government-wide, integrated financial management information system, which would facilitate tracking o f expenditure execution and transactions at agency level. vii Parliamentary oversight and engagement in the budget process could be strengthened b y adopting a two stage budget process, allowing for parliamentary review o f expenditure l i m i t s at the start o f the budget process before these are communicated to agencies. The establishment o f an independent audit authority under the judiciary, as foreseen under the Constitution, even if the audit function continues to b e exercised by a commercial external auditor, would put in place the remaining element o f the core financial management system. Two areas o f risk are identified. First, the rudimentary financial management and control systems at agency level. Development o f these systems and the cadre o f financial managers needed to implement and oversee them i s a key challenge for the future. Second, the Ministry o f Planning and Finance w i l l need to resolve the s k i l l s gap created by the scheduled departure o f technical assistance, as the remaining UN funded posts are withdrawn after FY2005. This w i l l require significant investments in training o f national personnel to take over the responsibilities o f expatriate staff and alternative arrangements to fill senior management posts before national personnel are sufficiently qualified and experienced. 11. Improvements in agency level expenditure and procurement planning, together with improvements in procurement administration, will be needed if the Government i s to bring budget execution in line with appropriations and improve service delivery. Budget execution tends to be slow during the first half o f the year, followed by an end-of-year surge as agencies try to expend their budget balances. The underlying problem i s poor planning. Solutions lie in early procurement planning for capital and major goods and services spending, preparation o f in-year expenditure plans and monitoring o f progress at agency level. MPF can assist agencies b y using Expenditure Authorization Notices as a tool for front-loading expenditures in critical sectors and tracking implementation. Further work i s also needed to extend standardization and improve the formulation o f specifications, so as to avoid delays in procurement processing. The approval o f the Public Procurement Decree Law w i l l clarify procurement procedures. I t also provides an opportunity for limited delegation o f procurement authority, thereby reducing pressures on the central procurement system. Further delegation o f authority would ideally follow a hurdle approach, where agencies have first demonstrated capacity to manage procurement according to established procedures. 12. Even though unit costs are expected to fall gradually as external assistance flows decline, specific measures are needed to improve value-for-money in public spending. Fostering competition i s the most effective means of containing prices. Significant savings could be generated by competitively tendering fuel supplies, for instance. This i s likely to require relatively low thresholds for international bidding, given the narrow domestic market. In addition, unit costs may be reduced through contracting out o f appropriate low-level services, which has the additional benefit o f supporting private sector growth and increasing flexibility within the public sector. Though direct comparisons may appear to suggest that contracting out i s more costly than public sector provision, such direct comparisons do not factor in the public sector’s administrative overheads or the long-term cost savings that may arise from contract flexibility. Another cost- saving measure i s standardization, which can limit overspending b y focusing attention on key design considerations and facilitating bulk procurement. Finally, benchmarking between contractors and service providers can provide useful information regarding their relative efficiency. 13. Development of mechanisms to promote the deconcentration of spending merits particular attention if the Government i s to support further improvements in service delivery. Estimates indicate that, in FY2003, only one-third o f total Consolidated Fund expenditures and only one-fifth o f Consolidated Fund goods and services spending were directed to national programs or districts outside Dili. Further work i s needed to determine the constraints in channeling resources to field level. Block grants can be an important mechanism to build local expenditure management capacity relatively quickly and to get resources down to the field level. viii Such grant mechanisms often start with funds to support local investment project initiatives. However, block grants can also be used to fund operating and maintenance costs o f service delivery units. The Ministry o f Education, Culture, Youth and Sports intends to pilot this approach in schools. 14. Over the next few years, the challenge in expenditure planning will be to move toward a definition of priorities within their agreed expenditure limits. Without distinct u priori expenditure l i m i t s , agencies w i l l tend to be overly optimistic in their planning and in defining their resource requirements. B y establishing hard l i m i t s at the start o f the budget process, the Government was able to instill discipline in the FY2005 budget process. This i s a considerable achievement. In order to focus attention on service delivery, it w i l l be important for service performance measures to be better integrated into planning and budgeting processes. At the same time, the recent Sector Investment Program exercise has helped formulate sector policies that take account o f resource constraints and should help align external financing with Government’s policy priorities. Gradually, agencies are expected to take the lead in the development o f their sector expenditure programs. The establishment o f sector working groups to support this process can assist in achieving consensus on priorities, improving operational coordination, and consolidating disparate donor activities into a coherent sector program. D. TOWARDS A LEAN AND EFFECTIVE C I V I L SERVICE 15. Timor-Leste faces three main challenges in developing the civil service in the post- Independence era: controlling the size of the civil service, developing an appropriate pay policy, and establishing basic, but critical, management systems. Budgeted public service stuflng levels have already reached the ceilings set out in the NDP, though actual staffing i s lower-15,328 permanent public sector employees--owing to recruitment shortfalls. The number o f unfilled positions i s significantly higher in the senior grades, due to the shortage o f adequately qualified candidates. Containment o f staffing levels i s likely to be difficult in the future as increasing numbers of university graduates enter the workforce, creating political pressures, and as agency mandates expand beyond budgeted staffing levels, creating demands from within the administration. External assistance arrangements tend to exacerbate these pressures b y putting in place staff-intensive management systems and financing activities outside agency core functions. Staffing levels are currently contained through approved staffing structures and budget ceilings on personnel expenditures, as well as through aggregate staffing l i m i t s negotiated as part o f the Transition Support Program. Periodic functional reviews, undertaken as part o f the sector policy and expenditure planning exercises, would help assess appropriate staffing levels in light o f sector policy and financing constraints. 16. Pay policy in Timor-Leste will need to be adjusted in order to provide appropriate incentives for performance in the civil service. The Government i s currently considering alternative pay policy arrangements, including grade and within-grade increments to provide room to recognize increased responsibility and complexity and reward merit. A pay and employment modeling exercise indicates that the introduction o f within-grade increments into the current grade structure i s affordable in Timor-Leste, as long as budgeted staffing levels are maintained and only 20 percent o f staff receive increments in each year. Incentives to work at higher levels would entail selective decompression o f salaries, particularly those o f agency senior managers whose wages are considered to be low in relation to non-government employment alternatives. As a transitional measure, selected allowances could be considered to reward key additional responsibilities. Again, pay and employment modeling shows that decompression at higher levels i s fiscally feasible under the current medium-term expenditure framework, but that decompressing the salaries o f lower grades begins to incur unrealistic costs. At the lower end o f the pay scale, remuneration appears to ix be relatively high, and the NDP has recognized the need for some realignment through a gradual erosion o f base pay levels in the face o f inflation. Another workable solution could be the contracting out o f basic service functions to the private sector, thereby removing lower-skilled workers from the public sector payroll. 17. The improvement of civil service performance incentives also requires a greater focus on the development of human resource management systems. The recent approval o f the Public Service Statute i s an important step forward. However, supplementary regulations w i l l need to be put in place disciplinary procedures for the most serious cases and systems for careers, performance assessment and promotion. An up-to-date, comprehensive personnel registry i s now a pressing need if these systems are to be developed. The major challenge for the years ahead i s to put in place the basic architecture of the personnel management system and then to ensure that the system i s applied systematically, without favor, so as to gradually professionalize the civil service. E. K E Y I S S U E S AND STRATEGIC DIRECTIONS I N EDUCATION 18. Education i s considered the top national development priority by the majority of Timor-Leste’s population. Remarkable progress has been made in reconstructing the school system and in expanding enrolment across the system, particularly among the poor. A National Education Policy, approved in March 2004, defines the key objectives o f the education sector as expanding access, enhancing internal efficiency, and improving the quality o f education, particularly at the primary level. 19. Improving access, efficiency, and quality will involve a combination of supply-side and demand-side interventions. Enrolment scenarios suggest that there are currently enough places in the primary school system to meet access targets, but further expansion i s needed at the junior secondary and senior secondary levels. The efficiency o f basic education i s hampered b y high levels o f repetition and dropout, particularly among poorer students. Currently, only half o f children complete a full primary school cycle. For those who do, the average cost o f their education i s twice that o f a regular six-year cycle, owing to the high repetition and dropout rates. Repetition rates are recognized as a priority issue, but there i s not yet a clear strategy to address this challenge. Student absenteeism i s high, with lack o f interest and family labor obligations playing a significant role. The quality of education i s affected by high student-teacher ratios, though these have improved significantly in the last three years. In addition, many students are receiving fewer than the required five hours o f instruction due to the frequent use o f double shifting in schools. Though double shifting may increase access and decrease capital costs, regulation i s needed to ensure that students s t i l l spend enough time in the classroom. The proportion o f qualified teachers i s relatively low, underlining the need for in-service training mechanisms. Training programs started in FY2004 with 1,000 teachers enrolled. However, improvements in teacher performance w i l l also require adequate incentives, oversight and adequate support in training materials and methods. A new national cumculum i s under development-a crucial step in improving the quality and relevance o f education in Timor-Leste. This w i l l need to be accompanied b y an appropriate language policy to manage the transition to Portuguese as the official language o f instruction. 20. As the education system shifts from reconstruction to longer-term development, expenditure policy will need to focus on aligning resources toward established policy objectives while accommodating a gradual reduction in external financing. Given the significant social benefits involved, the Government’s current priority focus on primary education expenditures in the Consolidated Fund i s appropriate. The Combined Sources budget, however, indicates that substantial resources are directed at tertiary education. Decisions on the allocation o f expenditure between levels o f education, service providers, component expenditures and levels o f X administration should be addressed through the Sector Investment Program. It w i l l be important to define a clear policy on the appropriate level of student contributions to education. There i s evidence that fees discourage demand for education and place a disproportionate burden on the poor. A strong case may be made for the elimination o f fees for basic education, limiting cost- recovery to secondary and tertiary education. 21. Basic management systems and mechanisms for channeling resources directly to schools will be critical if budget execution rates are to improve. L o w budget execution in education i s a major concern, particularly given the resumption o f school charges. The principal concern relates to spending on goods and services, which covers key basic inputs such as school materials and maintenance. These spending bottlenecks seem to arise from a combination of poor expenditure and procurement planning, inadequate processing and follow-up on procurement, and the excessive centralization of expenditures. L o w levels o f budget execution underline the need for improvement in internal control and management systems. Spending efficiency could be enhanced through the decentralization o f Consolidated Fund resources to the school level. With assistance from UNICEF, MECYS i s piloting a mechanism for the distribution o f small block grants directly to schools. A VIABLE ROAD F. MAINTAINING NETWORK 22. The main challenge facing the roads sector in Timor-Leste i s to create and implement a strategy for sustainable provision, rehabilitation and maintenance of roads. The road network i s extensive. This has the benefit o f enhancing accessibility but also implies the need for greater expenditure on road maintenance in order to keep road quality to acceptable standards. Maintenance costs are increased by the poor condition o f the road network and frequent landslips and flooding. Though most o f the rural population lives close to passable roads, there are very few vehicles in Timor-Leste and traffic volumes are light. 23. The cost of fully maintaining the current road network i s high, particularly in view of its poor condition and light usage, and i s neither financially feasible nor economically viable. A maintenance strategy i s needed that maximizes returns from limited resources while continuing to ensure adequate nation-wide access to roads. Strategic prioritization would entail a primary emphasis on maintenance and emergency repairs, as outlined in the Transport Master Plan, with more substantial rehabilitation efforts undertaken where they are most likely t o result in future cost reductions. I t w i l l also be important to define the core network according to availablefinds, in order to concentrate on the most important and most heavily utilized routes. Responsibilityfor road maintenance i s best assigned formally to authorities depending on the function and location o f the roads, i.e. to national agencies for the core national network and to communities for rural roads. This arrangement offers the possibility o f improving access to and quality o f roads beyond the defined core network. Finally, an appropriate maintenance strategy would clearly define and enforce service standards for each class o f roads, in terms o f both access (frequency and duration o f road closures) and service (average travel times). Such standards can improve the transparency and accountability o f decision making, and thus the quality o f service. 24. The FY2004 budget provided adequate financing for the Government’s road maintenance program over the medium-term, but complementary rehabilitation activities will require substantial additional financing. In the past, road sector expenditures have focused on emergency rehabilitation, but future spending i s expected to shift toward routine maintenance. FY2004 budget forecasts increased funding for maintenance o f most o f the national and district road network, but would leave little funding for lower priority rural roads and were subsequently adjusted downwards during the FY2005 budget process. Formulation o f a long-term financing xi strategy for the roads sector, ensuring predictable budget allocations, should be a priority. The Transport Sector Investment Program calls for greater levels o f spending than currently programmed in the budget, indicating a need to mobilize additional financing and reduce unit costs. Reductions in the unit costs o f road maintenance and rehabilitation could derive from enhancing community responsibility for rural roads and greater use o f private contractors. Although some capacity for direct administration i s needed for emergency works and routine maintenance, the establishment of a Directorate o f Equipment and Materials has shifted resources further toward direct administration than appropriate. Further investments in capacity are needed within the Ministry o f Transport, Communications and Public Works (MTCPW), particularly in the area of engineering and, even more so, in policy, planning and management. Capacity building efforts w i l l need to be supplemented by improvements in the availability o f up-to-date information on sector performance. Updating and institutionalizing the Road Asset Management System (RAMS) database w i l l be critical steps in this direction. G. ENSURING ACCESS SERVICES TO QUALITY HEALTH 25. The Government of Timor-Leste has made significant progress in re-establishing health services and can now turn its attention to operationalizing health sector strategies. A Health Policy Framework (HPF) lays out the primary objective o f ensuring access to basic curative and primary health care services, particularly for the poor. Public health facilities have been rebuilt, staff recruited, and pharmaceuticals made available. Health outcomes have improved, but further progress i s needed in expanding immunization coverage, improving pre-natal care, mitigating the spread o f HIV/AIDS, and addressing cross-sectoral and systemic issues that affect health service delivery. Utilization of public health services i s low, leading to inefficient levels o f outpatient coverage per staff member. 26. A revised service configuration recognizes financial and human resource constraints while maximizing the percentage of the population with access to primary health care. However, defining access in terms o f travel time (within two hours’ walking distance) could lead to the operation o f more health facilities in remote areas than can realistically be staffed or resourced, and i t i s worthwhile to consider access in terms o f service volumes as well. More work i s needed to determine the cost effectiveness o f expanding the services o f mobile clinics as compared to stationary health posts. The Ministry o f Health has made good progress in recruiting staff up to established ceilings, but workers continue to be clustered in the middle levels o f the salary scale. M O H has taken some initial steps to contract out lower-level services, following upon a policy commitment to strengthen ties with the private sector and non-government health service providers, which play a significant role in health service delivery in Timor-Leste. Given severe capacity limitations, the health system continues to depend on international doctors and specialists whose salaries are largely funded from external sources but w i l l soon be integrated into the Consolidated Fund. This, along with an expected decline in the level o f external assistance as major infrastructure rehabilitation efforts wind down, w i l l i s likely to place a squeeze on Consolidated Fund resources. 27. Health sector expenditures are generally in line with sector priorities, with hospital and specialized services spending capped at around 40 percent of Consolidated Fund expenditures, but there are pressures to increase spending on administrative overheads and hospital services. Estimates indicate that the cost o f the currently planned health sector configuration w i l l exceed projected Consolidated Fund allocations. Cost containment efforts w i l l need to focus on hospital services, salaries for internationally recruited doctors and specialists, and medical supplies, including pharmaceuticals. External assistance, which plays a significant role in health sector financing, i s relatively well aligned with health policy priorities, but i s currently xii directed to a broader set o f activities than can be sustained by programmed funding for recurrent costs. The Government has endorsed the development o f a Sector Investment Program and sector wide approach to coordinate donor inputs. Health expenditure management has improved significantly with the introduction of a new program budget structure, but further work can be done to ensure successful coordination among various components o f the health system. Improvements could also be made in mechanisms for transparency and bottom-up accountability for performance, through publication o f sector monitoring reports, improved posting o f information on available services, prominent display o f medical stock registries to discourage inappropriate use o f drugs and equipment, and the establishment o f community oversight mechanisms at the facility level. ... Xlll 1 INTRODUCTION A. BACKGROUND 1.1 Timor-Leste became independent on M a y 20, 2002, following twenty-five years of conflict, a violent transition from Indonesian rule in September 1999 and two and half years of United Nations administration. The country now faces all the challenges of nation building with limited human resources, embryonic institutions, and high levels o f unemployment and poverty. 1.2 The Government’s response to Timor-Leste’s development and poverty reduction challenges i s laid out in its National Development Plan, approved by the National Parliament shortly after Independence. Prepared following widespread consultations, the Plan presents a clear development vision for Timor-Leste in 2020 and articulates the people’s development priorities: access to education and health services, jobs, security and basic infrastructure. The plan goes on to outline the policy principles, strategies and specific programs the Government intends to pursue to achieve i t s ambitious development goals in FY2007, together with a medium-term expenditure framework allocating resources between the key sectors. Immediately following Independence, attention turned to operationalizing the plan: transforming the strategies into agency action plans, the expenditure framework into agency budgets, and the plans and budgets into improved services at the field level. Notwithstanding the immensity o f this task for a new administration, the FY2004 budget cycle-prepared from January to M a y 2003, and so the first budget prepared after Independence-was seen as the opportunity to transform the plan into action. 1.3 A significant part of the external assistance in support of the NDP i s provided as budgetary support under the Transition Support Program. The Transition Support Program (TSP) was conceived as bridging finance, allowing the Government to implement a modest development program in the years before substantial o i l and gas revenues came on stream. TSP financing for FY2003 through FY2005 amounts to about US$96 million--covering over 40 percent of Consolidated Fund expenditure-of which US$12 million i s financed b y the World Bank and US$75 million by Bank administered Trust Funds on behalf o f nine bilateral donors. B y channeling funds through the Government’s expenditure management system, the program seeks to strengthen capacity to manage future revenue streams and allow the Government to allocate resources in support o f i t s NDP priorities. 1.4 The Bank supported formulation of the NDP with a program of analytical work in the run-up to Independence. Household and suco (village) surveys were undertaken in 2001. A preliminary Poverty Assessment, based on these surveys, was presented in M a y 2002, and subsequently finalized in December o f that year. A Country Economic Memorandum, released in May 2002, provides an assessment o f development options and priorities. The Memorandum included an assessment o f expenditure policy options, focusing on the implications o f future o i l and gas revenue streams, and an overview of the expenditure management system and i t s development challenges. These issues were examined in greater detail in a Public Expenditure Management and Accountability Note, released in April 2002. The Note includes a review o f aggregate expenditure trends, resource allocation issues, the impact o f public spending on the poor (including benefit 1 incidence analysis for the education, health and power sectors using household survey data), and a detailed assessment o f public expenditure management systems and fiduciary risks. Following extensive discussion with the authorities, some o f the Note’s key recommendations were included in the Govemment’ s FY2003 Action Plan and their implementation monitored under the f i r s t Transition Support Program. B. PROCESS, OUTPUTS AND OUTCOMES 1.5 Building on prior Bank analytic work, the present Public Expenditure Review was conceived as a means of providing support to the FY2004 budget process, the Government’s on-going sector policy work and the design of the Transition Support Program. The Concept Note identified two objectives for the Review exercise: (a) T o increase the poverty reduction impact o f the expenditure program b y improving i t s service delivery orientation and strengthening accountability at all levels o f the expenditure management system. The outcomes o f this analysis were expected to facilitate the planning and budget process and, in particular, inform the formulation o f the FY2004 Medium Term Fiscal Framework, budget and key sectoral programs. (b) T o provide parliament, civil society, external partners, the media and the public with information on public expenditure policy and management issues, thereby stimulating debate and improving transparency and accountability. 1.6 The PER team was fielded at the start of the FY2004 budget process to provide technical support to Government agencies, contributing to the preparation of agency budget submissions and sector programs as well as preparing analytical background papers. K e y activities, outputs and outcomes at this stage included: a Fiscal Policy and Resource Allocation Study, providing an assessment o f financing and expenditure options, used as the basis for setting the FY2004 budget limits. The study contributed to the moderation o f the expenditure growth path and some realignment in expenditure composition, including significant increases in shares for infrastructure spending over the medium term. an Expenditure Management and Accountability Study, primarily intended to monitor progress in implementing Government’s program for strengthening expenditure management, focusing attention on delays in budget execution and procurement, and generating a number o f system performance indicators that allowed performance in these areas to be tracked under TSP 11. a review o f Public Sector Pay and Employment was undertaken to support the definition o f pay policy options for the medium term. A preliminary model for assessing the financial implications o f decompression scenarios and the introduction o f within-grade increments was developed for the Budget Office. Although n o policy decisions were taken, forward estimates were revised to allow for possible changes in pay policy. Sector Expenditure Reviews were conducted for the NDP priority sectors o f education, health, law and order and roads. These reviews focused on: the modeling o f sector expenditure policy to facilitate the preparation o f sector budget submissions and MTEFs; and the proposal o f measures to streamline sector expenditure management and channel a larger proportion o f resources to service delivery units. Faced with a fragmented institutional structure and an inadequate policy framework, the law and order review made little progress. In contrast, detailed expenditure models were 2 prepared as part o f the education, health and roads reviews and used to support agency budget submissions. Table 1.1: Timing o f PER Outputs and Policy Process SIPS & FY04 Mid- Development TSP 111 FY04 Budget TSP I1 Final PER Component Policy TSP Year Budget Partners Process Appraisal Reviews Review Update Meeting Report Feb-Apr 03 Apr-May 03 Sep-Nov 03 Oct 03 Nov 03 Dec 03 Apr 04 May04 Fiscal Policy and Background Updated Updated Resource Allocation Paper Report Report Study Expenditure Management and Background Updated , Updated Updated Accountability Study Paper Report Report ’ Report Civil Service Pay and j Background i Updated Updated Employment Study 1........................................ ......................................................................... ; Paper 1;... ................................... Report Report - . Education Sector I Background! Updated Updated ExpenditureReview j ................................................................... /..... Paper ................... i: .................... Report Report Roads Sector j Background! Updated ExpenditureReview i Paper ~ Report Health Sector i Background: I Updated Expenditure Review ......................................................................... 1...................................... i Paper ;. ................................. ...................................... ! i ...................................... j ........................................ .................................. i i .................................. j .j Report ............................... Law and Order Sector j Background! ExpenditureReview I Paper i ! 1.7 Following on from the initial work in support of the FY2004 budget process, PER studies have been revised and updated to support Government’s on-going policy development and Bank monitoring of the Transition Support Program. The timing o f PER outputs and their relation to the on-going policy process are outlined in Table 1.1. Updated sector expenditure reviews were issued to support the preparation o f the education and roads sector expenditure programs, and as an input to the education sector policy congress, from September through November 2003. The expenditure policy, expenditure management and civil service pay and employment studies were extensively revised as an input to the TSP I1progress mission in October 2003. The review highlighted expenditure control issues, which were extensively discussed with authorities, and contributed to the presentation o f expenditure control measures in Government’s mid-year budget review. An updated version o f these sections was presented as the Bank’s background paper at the December 2003 Development Partners’ Meeting. In early 2004, the Government requested the Bank to prepare a Governance Issues Paper to pave the way for an increased emphasis on transparency and accountability in the next stages o f the Transition Support Program. The finalization o f the review as a Bank Grey Cover report, therefore, i s one milestone in an extended process o f dissemination, discussion and policy development rather than the beginning. C. FOLLOWING UP 1.8 Expenditure policy and management issues will continue to figure prominently in the development discourse in Timor-Leste, creating demand for a regular expenditure analysis. This i s partly because the Bank and bilateral donors need fiduciary and policy assessments when providing budget support. The more fundamental concern, however, relates to Timor-Leste’s prospects as an o i l and gas producer. Reflecting on the track record o f low-income o i l producing countries, the Bank and other development partners consider the establishment o f a sound revenue and expenditure policy and management framework a prerequisite for the effective use o f additional resources and thus a matter o f urgency. Policy dialogue and monitoring o f program 3 implementation w i l l continue within the framework o f the Transition Support Program. If such expenditure analysis i s to have an impact, however, i t w i l l need to be tied to key decision making instruments and their timetables, rather than implemented as a stand-alone exercise. A framework for expenditure analysis i s proposed below. 1.9 Sector expenditure reviews need to be integrated into the sector policy process. Policies have to be formulated within the framework o f resource constraints, so that the merits o f alternative applications o f public funds can be assessed. This requires rough costing of policy alternatives and the formulation o f expenditure packages, based on agreed cost structures, to guide the budget process. Costing could build on the expenditure modeling work initiated under this PER. While the formulation o f sector expenditure programs has been timed to coincide with the FY2005 budget process, policy development and budgeting are unlikely to be synchronized in future years. Sector expenditure reviews are likely to be more helpful if they are integrated into the policy process. This w i l l mean a stronger line agency role in the design and implementation o f expenditure reviews than i s currently the case. In this context, it i s noteworthy that the Ministry of Agriculture, Forestry and Fisheries has recently launched an expenditure review process, independently o f the Ministry o f Planning and Finance, to support the design o f i t s sector policies. These reviews should focus on the costing o f policy alternatives, alignment o f external assistance with policy objectives, and assessment o f the trade-offs between alternative applications o f public funds. 1.10 Cross-sectoral expenditure reviews need to be linked to major planning events, such as the preparation of the next National Development Plan. Sector expenditure reviews can contribute to this kind o f exercise, as an input to the preparation o f sector plans and supporting resource allocations. Cross-sectoral allocations should also be addressed, so as to provide a framework for the formulation o f subsequent budget exercises. Preparation o f major plans provides an opportunity to realign resource allocations rolled over through the forward estimates prepared in annual budget exercises. Again, such analysis should focus on the Combined Sources budget, covering both Consolidated Fund expenditures and external financing. While forward estimates w i l l inevitably have to be adjusted during implementation, the initial allocations do provide a reference point to assess implementation against the benchmark o f the plan’s expenditure policy objectives, in much the same way as the NDP has served as a point o f reference for this PER. 1.11 There i s also need for timely, focused analysis to guide the budget process and monitor budget implementation. Ideally, this routine analysis should be undertaken as part o f the Government’s internal budget process, in order to assess the policy consistency o f spending and identify corrective measures where expenditure outcomes are deviating from plan. This kind o f analysis should be timed to feed into the mid-year budget update and the guidelines for the following year’s budget process, generating short policy-oriented briefs. If these are focused exercises, additional reviews can take place as necessary: in February 2004, the Bank and MPF conducted a brief review o f progress in implementing the expenditure control measures announced Box 1.1 Key Recommendations - Expenditure Reviews Integration o f sector expenditure reviews into the policy process, led by the sector agencies, focusing on the costing o f policy alternatives, alignment o f external assistance with policy objectives, and assessment o f the trade-offs between alternative applications of public funds. Linking o f cross-sector expenditure reviews with majorplanning events, such as the update o f the National Development Plan, focusing on key resource allocation issues. Implementation o f timely, focused studies on budget execution and the alignment o f expenditure with policy priorities in support of the annual budget exercise. 4 in the Mid-Year Budget Update. In this context, the timeliness of the analysis i s likely to be more important than the scope of the review. 5 2. TOWARDS A SUSTAINABLE PRO-POOR EXPENDITURE POLICY A. INTRODUCTION 2.1 The National Development Plan highlighted two expenditure policy goals: firstly, “restraining total expenditure to levels that are sustainable’’ and, secondly, “ensuring that expenditure allocations between Agencies/Functions are consistent with plan objectives and particularly that the high levels of central administration expenditures fall to the benefit of health, education, agriculture and infrastructure” (NDP, 2002, page 68). The NDP’s fiscal strategy was predicated on early inflow of substantial Timor Sea o i l and gas revenues which were expected to cover programmed expenditures from FY2006. In the intervening “lean years”, the financing gap would be covered by external grant financing. At the same time, the NDP and forward estimates presented in the FY2003 budget proposed a significant increase in social expenditure, rising to nearly half o f total recurrent spending by the end o f the plan period. Some reduction in the level of external assistance was anticipated, though the NDP “hoped that [bilateral assistance] can be maintained over the medium-term to levels o f at least US$SS million a year”, noting that “this i s the minimum level needed over a long period o f time to sustain the growth and development projections” (NDP, 2002, page 92). 2.2 While the broad goals of Government’s expenditure policy remain unchanged, the programmed expenditure path has been undermined by delays in the mobilization of Timor Sea revenues, slower than anticipated reallocation of resources from unproductive sectors and increases in spending on administrative overheads. The present chapter reviews recent expenditure trends and their implications for expenditure policy. Section B stresses the importance o f avoiding a sharp reduction in external assistance as Timor-Leste emerges from post-conflict status. Section C examines the Government’s options in response to continued uncertainty regarding the level o f Timor Sea revenues in the period to FY2008, arguing that changes in financing policies w i l l be needed to complement revenue and expenditure measures, and stressing the importance o f establishing appropriate fund management arrangements and a savings strategy before using Timor Sea royalties. Section D demonstrates that the functional allocation i s broadly in line with NDP priorities, though the growth o f spending on social services i s much slower than anticipated and spending on agriculture and infrastructure continues to be extremely limited, largely due to slower than programmed reductions in spending on core administration, power subsidies and security. Section E highlights the recent increases in administrative overheads and the need for improved expenditure monitoring, particularly at agency level, to ensure that priority i s given to service delivery. The chapter concludes with a brief overview o f policy recommendations arising from the expenditure review. B. COMBINED SOURCES EXPENDITURE FRAMEWORK 2.3 Combined Sources public expenditures have dropped sharply in the immediate post- conflict period due to reductions in external assistance inflows. Figures 2.1 and 2.2 present estimates o f Combined Sources expenditures and financing in US$ million and as percent o f GDP, comprising programmed Consolidated Fund expenditures, United Nations sponsored technical 7 assistance, Trust Fund for East Timor (TFET) expenditures and bilateral assistance, based on data from the Ministry o f Planning and Finance's Register o f External Assistance.' Combined Sources expenditures peaked at around US$280 million in FY2001, equivalent to about US$340 per capita and 77 percent o f GDP. There has been a sharp decline in the post-Independence period, to about US$196 million in FY2004 (US$225 per capita, 52 percent o f GDP), owing to: a gradual winding down o f TFET rehabilitation projects; reductions in the number o f United Nations technical assistance posts; and, most importantly, the closure of most humanitarian assistance programs and gradual termination o f many bilaterally financed rehabilitation and technical assistance programs approved before Independence. Rgure 2.1: Actual and Programmed Figure 2.2: Actual and Programmed Combined Sources Jhpnditures US$ m Expndiure and Revenues, % GDP - -___ 1 90 -- ~ I _I_ - _- - ___I____^I 80 250 n 70 200 60 50 150 n 40 IO0 30 20 50 10 -4*c I - 0 -- I - 0 U FYOl FY02 FY03 FY04 FY05 FY06 FY07 FYOl FY02 FY03 FY04 FY05 FY06 FY07 IConsolidatedFund United Nations 1Trust Fundfor East Tim01 0 Bilateral - -Combined Expenditure -Total Revenues -- =CF Expenditure IDomestict Revenues 2.4 As Combined Sources expenditures declined, Consolidated Fund expenditures increased from US$51.3 million in FY2001 to a budget of US$74.1 million in Ff2OO4. This corresponds to an increase in the Consolidated Fund's share o f Combined Sources expenditures from 18 percent in FY2001 to 39 percent in FY2004, and i t s share of GDP from 14 percent to 22 percent. This level o f public expenditure i s slightly higher than the average o f 18 percent o f GDP for low-income countries in 1998 (WDI, 2001), but slightly lower than the average o f 24 percent for post-conflict countries, where l o w levels o f private sector activity tend to boost the public sector share. The share o f Consolidated Fund expenditures financed from revenues (excluding Timor Sea revenues assigned to savings) has gradually increased from 47 percent in FY2001 to 60 percent FY2003, and was programmed to remain at around this level in FY2004 (see para 2.10). Budgetary support has covered the financing gap, first from United Nations assessed contributions and since FY2003 from the multi-donor Transition Support Program. While domestic revenue mobilization i s increasing, from 4 percent of GDP in FY2001 to around 8 percent in FY2004, i t ' The Register of External Assistance (REA) includes humanitarian assistance and bilaterally financed NGO programs. The data set ha s been cleaned to eliminate obvious double counting. However, the data set i s s t i l l likely to overestimate external assistance inflows. REA estimates for actual external inflows are about 20 percent higher than the values reported by Government agencies through the budget process. 8 remains significantly lower than the average o f 14 percent for low-income countries ( W D I 2001).2 In this context, high levels o f budgetary support are justified by the need to increase Consolidated Fund expenditures to their medium-to-long term sustainable level, taking into account future inflows o f Timor-Sea revenues (see para 2.9). 2.5 Combined Sources expenditures will ' Figure 2.3: W$ ODA per Capita to decline over the next three to four years as Low & Lower-MiddleIncome Small external assistance inflows continue to fall. On- States (Points for Marshall Islands & going TFET projects are expected to close in Micronesia not shown) FY2005 and FY2006. United Nations sponsored technical assistance will continue on a much- reduced scale in FY2005 and i s scheduled to terminate in FY2006. However, the key determinant o f the future Combined Sources expenditure path will be the level o f bilateral assistance. Current forward estimates mainly I comprise on-going projects and thus show a rapidly declining profile as these projects close. Since most bilateral agencies have not finalized + + their country programs-MPF requested that * ! agencies postpone preparation of country 0 0 250 500 750 1,000 1,250 programs to take into account the results of the Population '000 on-going Sector Investment Program exercise (see Chapter 3)-the overall level o f bilateral financing for the next three to four years has yet Figure 2.4: Trends in Aidmows to to be defined. During the immediate post-conflict African Past Conflict Countries (US$ period, levels o f external assistance to Timor- per capita) Leste have been higher than comparable low and low- to middle-income small countries (see Figure 2.3) and significantly higher than the average for low-income countries (at just U S $ l l I10 per capita, US$21 per capita for Africa). However, the experience o f African post-conflict countries suggests that the peace dividend i s short-lived (see Figure 2.4). Bilateral assistance 60 tends to decline as donors' country programs shift from high-volume rehabilitation and humanitarian 40 assistance to low-volume development assistance. 20 I t should be noted that, while external assistance to Timor-Leste has been significantly higher than seen in most small and post-conflict countries, 1 2 3 4 5 6 7 8 9 10 substantial adjustment has already taken place, Years A f t e r C o n f l i c t with MPF-reported per capita aid flows dropping from a peak o f around US$300 per capita in ----~-.Rwanda ---- Chad Uganda - - -.-_- - .- - Mozambique -Burundi -Ethiopia FY2002 to US$175 per capita in FY2004. -Africa 2.6 Although further adjustment in Combined Sources public expenditures i s ..levitable, sharp reductions from current levels 'See World Bank, East Timor: Public Expenditure Management and Accountability Note (April 2002) pages 3-6 for an overview o f domestic revenue trends and prospects. 9 would have a significant impact on the economy. Recent World Bank comparative studies have shown that external assistance to post-conflict countries often drops o f f prematurely, before their economies have reached a sustainable growth path. The economic impact o f significant reductions in external assistance i s likely to be particularly severe in Timor-Leste where public expenditure s t i l l amounts to around 50 percent of GDP, external assistance directly or indirectly finances the bulk o f imports (the deficit on external account before official transfers amounted to US$235 million in 2002, with exports covering just US$7 million o f a US$185 million import bill), and the commercial and construction sectors are geared almost entirely to servicing the public sector. Although agricultural production has recovered to pre-conflict levels, further growth i s likely to be slow and depend on' deepening commercialization, which in turn depends on growth in other economic sectors. Reductions in public spending have already led to a contraction in the economy o f around 2 percent a year in both FY2003 and FY2004, as evidenced by the closure o f some larger service enterprises and sale o f others. Further reductions in public expenditure, owing to reduced external assistance flows, w i l l deepen and prolong this downturn, thereby reducing domestic revenues from imports and businesses, leading to further compression o f the Consolidated Fund. 2.7 Sharp reductions in external assistance would also lead to a reduction in the volume and quality of public services. External assistance finances a substantial part o f the Government's programs in priority sectors with a direct impact at the field level, such as agriculture, health and education (see para 2.29). Ironically, external assistance to post-conflict countries tends to drop off just as absorptive capacity i s increasing, when agencies are leaming the s k i l l s that enable them to use resources more effectively. 2.8 Governments that adjust spending to sustainable levels and engage external partners in priority-setting tend to use external assistance more effectively and are more successful in mobilizing external assistance. Expenditure adjustment i s critical, since external partners are reluctant to finance programs that have little prospect o f sustainability. Adjustment requires priority setting, so that resources are aligned with poverty reduction and development programs that external partners are willing to finance (see paras 2.29). External resources are best aligned with these priorities through joint programming based on a sector policies and strategies that reflect a consensus between stakeholders. Recent moves towards sector approaches in countries with substantial external assistance inflows have helped achieve these goals. A number o f agencies in Timor-Leste are gradually moving towards a sector approach, notably in health, but also in education, agriculture and police. The development o f Sector Investment Programs provides an opportunity for agencies to move towards this approach systematically in future planning and budgeting cycles (see Chapter 2, Section F). MEDIUM-TERM EXPENDITURE FUND C. CONSOLIDATED FRAMEWORK 2.9 The Medium Term Expenditure Framework presented in the FY2002 budget anticipated substantial increases in Timor Sea oil and gas revenues from FY2005 and, on that basis, provided for rapid growth in expenditures and early accumulation of Timor Sea savings during the lean years immediately after Independence. Following this initial scenario, Consolidated Fund expenditures were programmed as increasing to US$96 million in FY2005, around 25 percent o f GDP, a level broadly consistent with the medium- to long-term sustainable level o f draw-down on Timor Sea revenues. Forward expenditure estimates included significant allocations for capital and development spending, which were seen as essential to support growth and create capacity for the use o f Timor Sea revenues when these came on stream. The Government planned to use Timor Sea tax revenues for budgetary purposes but invest royalties (First Tranche Petroleum) and investment income, pending the implementation o f institutional arrangements and articulation o f a longer-term savings policy that would take into account the 10 much larger volumes o f tax revenues and royalties to be generated over the medium- to long-term. Budgetary support was to be provided to close the financing gap in the period through FY2005, with sufficient grant funding being available to make i t unnecessary for Government to borrow, even on concessional terms. The early accumulation o f savings was considered a prudent measure, firstly to establish the principle that Timor Sea revenues should be saved, laying the foundations o f an investment fund that would generate income in perpetuity, and secondly to provide a cushion against possible changes in the revenue profile. 2.10 Recent budget scenarios have highlighted the uncertainties around forward estimates of Timor Sea revenues, with successive postponements of revenues leading to cuts in expenditures (see Figure 2.5). Adjustments were made in the timing o f Timor Sea revenues during preparation of FY2004 budget, resulting in a financing gap o f US$71 million in FY2005 and FY2007, whereas before the Consolidated Fund was expected to be self-financing over this period. Revenue estimates presented in the FY2004 Mid-Year Budget Figure 2.5: ‘limor-Sea Central Case Kevenue Update (MYBU) pointed to Scenarios M a y 2002 to M a y 2004 (US$ mn) further reductions in Timor Sea revenues in FY2004 through I FY2007, widening the financing i -I gap. On the basis o f these estimates the Government cut FY2004 expenditures by US$5.1 million (about 6 percent o f the original budget) and reduced forward estimates for FY2005 through FY2007 by US$30 million. At the same time, the Government requested an extension of budget support beyond FY2005 for an extended “lean period” in FY2006 and I FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY2007. Revenue estimates were I 0 FY2003 Budget 0 FY2004 Budget FY2004 MYBU NFY2005 Budget revised once again in April 2004, half way through the FY2005 budget process. This time estimates pointed to a significant increase in Timor Sea revenues in FY2005 through FY2007, as a result o f increases in oil prices, the acceleration o f the production schedule and postponement of tax depreciation allowances. These changes in the Timor Sea revenue estimates, combined with reductions in forward estimates for expenditures and increases in domestic revenues, led to a significant reduction in the projected financing gap, now estimated at US$30 million for the period through FY2008 (see Table 2.1). 2.11 Continued uncertainty over the level of Timor Sea revenues and, consequently, financing requirements will remain a feature of fiscal planning over the next two to three years. This i s partly due to production risks, with revenues depending on the output o f one major project, Bayu Undan, as the existing Elang Kakatua Kakatua North (EKKN) project gradually winds down over the next few years. At the time o f the FY2004 budget, the 2004 liquids production was projected at 22 million barrels (bbl): this was revised downwards to 12 million bbl at the time o f the FY2004 MYBU and has subsequently been revised upwards to 15 million bbl. During the start-up phase, with the pipeline expected to open in 2006, further revisions in production schedules can be expected. There are also price uncertainties. The Government has 11 Table 2.1: Consolidated Fund Financing based on FY2004 MYBU (Following Current Savings Policy) FYOl FY02 FY03 FY04 FY05 FY06 FY07 FY08 Total Component Actual Actual Actual Est. Budget MTEF FYO5-OS Revenue 27.2 31.3 48.8 57.4 67.1 86.4 110.7 103.9 368.1 Domestic Revenues 14.1 20.5 19.3 26.1 23.0 23.8 25.0 26.6 98.4 Timor Sea Revenues 13.1 10.8 29.5 31.3 44.1 62.6 85.7 77.3 269.7 Consolidated Fund Expenditures 51.3 52.6 70.8 74.6 75.1 78.9 81.9 84.2 320.1 Overall Balance (-deficit) -24.1 -21.3 -22.0 -17.2 -8.0 7.5 28.8 19.7 48.0 Net Financing: 24.2 21.3 22.0 17.2 8.0 -27.4 -29.3 -29.6 -78.3 External Financing (Grants) ;I (1 22.7 33.8 35.7 30.8 30.8 Consolidated Fund Reserves (- increase) -4.3 2.8 -8.7 -13.9 2.9 2.9 Timor-Sea Account (- increase) -3.1 -4.3 -3.1 -4.6 -25.7 -27.4 -29.3 -29.6 -112.0 Financing "Gap" 0.1 0.0 0.0 0.0 0.0 -19.9 -0.5 -9.9 -30.3 Memorandum: Balances end of period Timor Sea Account 3.1 7.4 10.5 15.1 40.8 68.2 97.5 127.1 Source: Ministry of Planning and Finance and Bank estimates. projected oil revenues on the basis o f a two year moving average o f market expectations, with central case scenarios at US$25.41 per bbl in 2004 falling gradually to US$23.26 in 2008. These prices are well below current market prices, but are broadly in line with World Bank forecasts prepared in April 2004 and higher than the market average o f US$21 since 1986. There are also uncertainties about taxation, with increases in the cost o f the LNG plant compounded by appreciation o f the Australian dollar, leading to increased depreciation charges. Scenarios prepared by the Ministry o f Planning and Finance demonstrate the impact o f changes in production and prices. Under the Ministry's high case scenario (prices at US$28 per bbl, closure o f the EKKN field in 2006 and reserves 18 percent higher than under the central scenario), revenues in FY2005 through FY2008 are estimated at US$120 million higher than the central case, eliminating the financing gap from FY2006. Under a low case scenario (prices at US$22 per bbl, early closure of EKKN and production reserves 16 percent lower than the central case), revenues in FY2005 through FY2008 are US$110 million lower than the central case, creating a financing gap o f around US$130 million for the period. 2.12 Notwithstanding the short-term uncertainties, the medium- to long-term fundamentals remain sound. The overall volume o f Timor Sea revenues i s unchanged-with a net present value estimated at US$1,770 million, based on the current central production and price scenario-the revenues have merely been postponed. In this context, the remainder o f this section addresses the policy challenges for Government and development partners in dealing with uncertainty and possible shortfalls in revenues during the period before FY2009, when Timor Sea revenues are expected to approach US$200 million. B o x 2.1 examines some o f the fiscal policy challenges to be addressed in preparing for a significant increase in o i l and gas revenues. 2.13 The downward adjustments to the forward expenditure estimates during the FY2005 budget process have brought expenditures in line with a sustainable financing scenario but leave no room for further cuts. Forward estimates now provide for modest increases in Consolidated Fund expenditures from US$75 million in FY2005 to US$84 million in FY2008. This gives little scope for the expansion o f services or public investment. From a poverty reduction and development perspective, savings should be identified from unproductive sectors and administrative overheads before cutting priority programs and service delivery. Sections D and E, which examine the functional and economic composition o f expenditures, demonstrate that FY2005 budget adjustments have been broadly in line with these principles. Education and health have maintained their expenditure shares, albeit within a lower level o f aggregate expenditure, and across all sectors most o f the cuts have come from goods and services and minor capital in an effort 12 to curtail wasteful expenditures on administrative overheads. There i s no slack for further cuts should forward revenue estimates fail to materialize. This rebasing o f expenditures provides a sound basis for managed increases in expenditures, guided by the cross-governmental and sector expenditure priorities laid out in the Sector Investment Programs. The challenge w i l l be to ensure that increases in sector expenditures are kept within financing l i m i t s and avoid excessive expenditure growth. At the same time, Government w i l l have to take into account alternative sources o f financing by programming resource allocations on a Combined Sources basis. If these objectives are to be achieved, the Government w i l l have to revise i t s Medium-Term Expenditure Framework fairly early in FY2005, so as to establish revised budget l i m i t s for the FY2006 budget process and guide bilateral partners allocations of funds as new country programs are negotiated (see Chapter 3, Section F). 2.14 Whilst there i s some scope for redirecting external assistance to cover priority recurrent expenditures, thereby reducing expenditure pressures, continued underreporting of externally financed expenditures increases risks to the expenditure scenario. Several external assistance projects currently finance recurrent expenditures that would otherwise be financed from the Consolidated Fund. These include: medicines and medical supplies, road maintenance, veterinary supplies, school books, operation o f the Oecussi ferry, and police operating costs. There may be scope for extending external financing to other recurrent expenditure items. However, these expenditures need to be identified separately so that provision can be made for on-going financing in forward estimates. This would also help to improve transparency, by providing a more accurate picture o f total expenditures. Lack o f information on the recurrent costs covered by external assistance programs and projects-particularly those in the police services- constitutes a significant risk to the expenditure program, since this prevents a planned adjustment in service or financing levels as external assistance winds down. These risks are particularly acute if projected revenue flows fail to materialize over the short-term, since there w i l l be little slack to absorb unprogrammed increases in expenditures and the burden w i l l have to fall on reductions in service levels. Solutions lie in improved financial reporting by external partners, so as to ensure that external financing o f both recurrent and non-recurrent expenditures i s taken into account in the preparation o f Sector Investment Programs and the sectors’ forward expenditure estimates. 2.15 The FY2005 budget projects further increases in domestic revenues, but these will have limited impact on the overall level of financing and expenditure. Domestic revenues in FY2003, at US$19.3 million, were about 10 percent higher than programmed, with further unprogrammed increases in domestic revenues in FY2004, to around US$26 million. This was largely due to improvements in tax and customs administration, notably as a result o f the introduction o f a new customs information system, ASYCUDA. Domestic revenues are expected to fall to US$23 million in FY2005, owing to further contraction in the economy. Thereafter, MPF projections point to modest revenue growth to just over US$26.6 million b y FY2008. The scope for additional resource mobilization from domestic sources over the short term i s limited given current capacity and the narrow revenue base. M u c h w i l l depend on the strength o f the economy over the next few years. Nevertheless, the Government may be able to introduce some new revenue measures over the next few years by, for instance, procuring fuel competitively and introducing a fuel levy over part o f the reduction in unit costs (see Chapter 3, Section C). 2.16 Modest funding could be raised from one-off asset sales, though the real benefit of asset disposal i s most likely to come from reduced pressures on expenditures. As the UNMISET mission winds down, vehicles, generators, office equipment and installations w i l l be transferred to Government. Although the inventory i s yet to be finalized, the residual value o f equipment i s estimated at about US$11 million. A potentially larger number o f assets could be transferred by departing Peacekeeping Forces (PKF). One departing PKF unit has already begun 13 the transfer o f a large inventory o f PKF construction equipment, prefabricated houses, and field equipment, with a residual value o f around US$20 million. Asset transfers are difficult to refuse, but the budget may not be able to cover operating costs without severely distorting the expenditure program. The Government i s currently reviewing options for asset disposal, including sale and leasing o f equipment to private contractors through transparent and competitive mechanisms. Although the funds mobilized through these measures may be much less than the book value o f assets, disposal w i l l avoid unproductive expenditures. Bilateral partners w i l l need to adopt a flexible approach to asset disposal if they are to ensure that Timor-Leste benefits from asset transfers. 2.17 Clearly, there i s limited scope to accommodate any shortfall in Timor Sea revenues from additional expenditure and revenue measures and so adjustment would have to be managed by mobilizing additional financing. Here the Government i s faced with three options: firstly and preferentially, an extension o f grant financed budget support; secondly, limited concessional borrowing; and thirdly, changes in Timor Sea savings policy. 2.18 A strong case can be made for extended grant-financed budgetary support where the Government implements a pro-poor expenditure program, has effective expenditure controls in place and where there i s adequate dialogue on expenditure priorities. The Government has maintained i t s request for an extension o f TSP arrangements through to FY2007 in the FY2005 budget, albeit at US$30 million rather than the US$70 million as proposed following the FY2004 MYBU. This would be sufficient to close the projected financing gap through to FY2007, allowing the Government to maintain i t s current savings policy for Timor Sea revenues and maintain some Consolidated Fund reserves as a precautionary measure against fiscal shocks. Recognizing that Timor Sea revenues may be higher than projected, the Government has indicated that if programmed budgetary support i s not needed to cover a financing gap, budgetary support would be used to increase capital and development expenditures on projects and programs agreed with the financing partners. This follows the rationale o f the expenditure program agreed with external partners at Independence and which served as the basis for the first TSP, where a quarter o f outer- year forward expenditures were allocated to capital and development spending in order to build capacity for project management prior to significant increases in Timor Sea revenues (see para 2.9). For some external partners the allocation o f external assistance as budgetary support over the coming two to three years may be preferable to project assistance regardless o f the level o f Timor Sea revenues. Government may also wish to explore options for sector budgetary support, whereby external financing i s targeted to specific programs, since this may be feasible for external partners that are not able to provide general budget support. However, if grant financed budgetary support i s to be sustained close to present levels, mechanisms w i l l need to be in place to involve external partners in the policy process and the programming o f expenditures. Building on the TSP experience and the recent work on Sector Investment Programs, the introduction o f stakeholder working groups, including external partners, could provide a framework for extended general and sector budget support over the medium term (see Chapter 3, Section F). 2.19 The Government has prudently avoided borrowing to date and would only need to undertake concessional borrowing for budgetary support if there are significant shortfalls in Timor Sea revenues. Decisions regarding the appropriate financing policy should follow an assessment o f debt management and policy requirements. They should also take account o f the opportunity cost o f alternative financing strategies: the cost o f concessional borrowing may be significantly lower than the income forgone on savings. However, from an economic perspective i t i s preferable to use borrowing to finance investments. In this context, concessional borrowing would be most appropriate in financing projects identified in the Sector Investment Programs which are not yet reflected in the Consolidated Fund investment program. 14 Box 2.1 Developing Fiscal Policies to manage Timor Sea windfalls The experience of the few oil rich countries that have been able to make effective use o f their revenue windfalls underlines the importance o f establishing a sound, transparent and widely understood governance framework for the management o f Timor Sea resources (see Box 3.1). Equally important is the rigorous application of prudent fiscal policies. Key considerations in the formulation o f these policies include: e Establishment o f mechanisms to ensure that expenditure decisions are subject to appraisal, monitoring and periodic evaluation, thereby promoting policy consistency, efficiency and effectiveness in the application o f public funds. The recent rebasing o f forward estimates during the FY2005 budget process will stand the Government in good stead, providing an opportunity to realign expenditures with the policy priorities defined in the Sector Investment Programs as the resource envelope expands. The institutional capacity to usefinancing to support service delivery eficiently and effectively will need to be tested through periodic expenditure reviews, since excess financing is likely to be wasted on administrative overheads. At the same time, agencies will need to put in place mechanisms to appraise individual projects and spending decisions to ensure that these are consistent with policy priorities. This expenditure review focuses on the institutional and policy measures needed to achieve this objective. e Definition of the sustainable level o f draw-down against Timor Sea revenues consistent with long-term savings objectives. This is a function o f the structure of the revenue stream, assumptions regarding discounting of revenues and investment income, and policy decisions regarding the target level of assets assigned to the perpetual fund. On the basis of fairly conservative assumptions (a long-term interest rate of 2.25 percent and a 5 percent discount rate), a draw down of around one-third o f Timor Sea revenues would leave suficient savings to fund income in perpetuity of US$65 million a year in real terms. This is broadly in line with current levels of recurrent spending. Clarity regarding the savings objectives and their implications for draw-downs on Timor Sea revenues is essential. At the same time, some flexibility is needed. Price and production scenarios will change and the target level of assets and sustainable draw down will need to be adjusted accordingly. Specific rules may be needed to control the use of Timor Sea savings for the purposes o f short-term fiscal stabilization, to limit on year-on-year increases in expenditures, so as to smooth the expenditure path, and to prevent borrowing against future Timor Sea revenues. Use of Timor Sea revenues primarily to finance investment rather than consumption. Spending on infrastructure and human capital will provide a foundation for economic growth, excessive spending on consumption will bring limited returns and could be destabilizing. Ideally, expenditures should aim to improve the competitiveness of the non-oil sector by providing access to roads, communication, energy and water, as well as developing education and health services, particularly outside the capital. The availability of funding for operation and maintenance of infrastructure and priority services will be an factor in determining the sustainable level of investment. e Development o f the domestic revenue base. Reductions in tax rates may be an alternative to expenditures, where they help to improve the competitiveness of the non-oil sectors. However, the costs and benefits of changes in tax policy should be carefully assessed. Tax policy is best applied evenly, rather than through widespread exemptions. Furthermore, it is important to maintain an adequate domestic revenue base. Once the sustainable draw-down has been determined, domestic revenue mobilization will drive the level of incremental financing. Indeed, over the project lifetime, the contribution of Timor Sea revenues to total revenues should gradually decline as the economy grows and domestic tax revenues increase from their current low base of 8 percent of GDP to levels comparable in other low income countries. 2.20 While the Government could also draw down on Timor Sea royalties and savings if there are significant shortfalls in Timor Sea revenues, this should only be considered once a savings policy and the institutional framework for management of these savings are in place. The Government’s current savings policy provides for the retention of FTP (royalties) and investment income, whilst Timor Sea taxes are applied to the budget. Application of savings or FTP revenues in closing a financing gap would imply a change in savings policy. While technically 15 there i s little difference between components o f the revenue stream, the policy implications are profound: used once, the royalties w i l l no longer be viewed as the sacrosanct foundations o f the perpetual fund. In this context, i t i s critical that changes in the savings policy are integrated into the legal framework for management of Timor Sea revenues, incorporating appropriate governance structures. B o t h the savings policy and the institutional arrangements should be defined through a transparent and consultative process, ensuring that there is, broad understanding among all stakeholders, including the wider public, o f how Timor Sea revenues w i l l be managed (see Box 3.2). A broad consensus and public understanding o f these rules i s perhaps the most effective safeguard in protecting the perpetual fund. In this context, i t i s important to ensure that alternative financing mechanisms are available to cover the financing gap until the perpetual fund i s put in place. 2.21 I n order to avoid recourse to Timor Sea account savings to cover fiscal shocks, such as unprogrammed reductions in Timor Sea revenues, the Government will need to build up adequate Consolidated Fund reserves. This i s particularly important given the risks associated with revenues derived from a single project on the Bayu-Undan field. Some allowance for these risks has been made in the Timor Sea revenue forecasts by discounting the revenue stream by 15 percent. Nevertheless, prudential savings are essential to cushion against unforeseen project delays or other external shocks. Ideally, these savings should be sufficient to cover, with domestic revenues, recurrent expenditures for at least one year, allowing Government sufficient time to make expenditure adjustments and arrange financing. This points to an appropriate level o f prudential savings o f around US$50 million. Forward estimates presented in the FY2005 budget indicate that the Government intends to retain some Consolidated Fund reserves, albeit at a lower level o f around US$27 million. Once the savings policy i s in place, with clear rules regarding the draw- down on Timor Sea savings for the purposes o f fiscal stabilization, the appropriate level o f Consolidated Fund reserves can be reassessed. COMPOSITION OF EXPENDITURE D. FUNCTIONAL 2.22 The broad structure of Consolidated Fund programmed expenditure remains consistent with the Government’s poverty reduction and development objectives. However, it i s unlikely that the Government w i l l be able to achieve the ambitious targets for growth in the social sectors’ expenditure shares presented in the National Development Plan (NDP) at Independence. Expenditures on general public services remain much higher than originally anticipated, largely because the costs o f establishment o f governance structures were not reflected in earlier budgets. Furthermore, there i s continuing concern that the level o f expenditure on key economic infrastructure, particularly roads, i s insufficient to meet Timor-Leste’s development needs. The remainder o f this section reviews the changing functional composition o f expenditures in light o f Government’s stated policy objectives. In this context it should be stressed that the most recent allocations, presented in the FY2005 budget, are provisional. Once the Sector Investment Programs are finalized in the lead up to the FY2006 budget, the overall composition o f expenditures w i l l be adjusted to take account o f revised revenue and external financing estimates. 2.23 The FY2004 and FY2005 budgets kept education and health’s share of total spending at about one third of total spending. Education spending i s programmed as falling in FY2004, in part due to poor execution at the time o f budget preparation, particularly as regards capital expenditure (see Table 2.2). The education sector’s share o f total spending stabilizes thereafter. The health sector’s share o f total spending increases gradually to 14 percent b y FY2007. Although i t i s recognized that complementary external financing-particularly for basic inputs such as medical supplies and education materials-may reduce the need for increased Consolidated Fund spending over the medium-term, these trends are discouraging in view o f the high priority given to 16 these sectors b y citizens during N D P consultations and their poverty reduction impact. In the education sector, increases in allocations are warranted to support improvements in the quality o f education throughout the system and further expansion o f junior and senior secondary schools. Table 2.2: Structure of Consolidated Fund Spending by Function, % FYOl FY02 FY03 FY04 FY05 FY06 FY07 FY08 Function Act Act Act MYBU Budget - MTEF General Public Services 38 21 16 16 17 17 17 17 Defence 1 8 7 8 8 8 8 8 Public Order and Safety, of which 11 13 15 14 13 13 13 13 Police Services 7 10 12 12 11 11 1I 10 Judicial Services 3 2 2 1 1 1 1 1 Economic Affairs, of which 21 22 22 22 21 20 19 20 Agriculture, Forestry, Fisheries 2 2 2 2 2 2 2 2 Fuel and Energy 16 I3 I2 9 8 S 4 4 Transport 2 6 5 8 9 10 10 IO Environmental Protection Housing and Community Development 3 4 3 3 3 4 4 4 Health 6 10 11 11 13 13 14 14 Recreation, Culture, Religion 1 1 1 1 1 1 Education 20 22 23 21 22 22 22 22 Social Protection 0 0 0 0 Unclassified 2 2 1 1 1 1 Total Appropriations 100 100 100 98 100 100 100 100 Source: FYOl, FY02 and FY03 froin Financial Statenients; FY04 MYBU; FY200S to FY2008 from draft Budget Papers of May 2004. Functional based on one-to-one pairing at program level 2.24 Programmed expenditure shares for defense and public order and safety are expected to stabilize at 18 percent of Consolidated Fund expenditures to FY2008. Recent increases in spending on public order have been directed towards PDTL, mainly to support higher staffing levels (which have increased by almost 20 percent since FY2002) and increased operating expenditures. The FY2005 MTEF caps future police spending. However, there are significant risks to this scenario because the substantial-though s t i l l unquantified-subsidization o f operations by UNPOL has not been factored into forward estimates. This may give rise to pressure for increases in police spending in the FY2006 and subsequent budget exercises in order to avoid reductions in police operating expenditures. Improvements in information on total expenditures on police operations should continue to be a priority. Spending on the judiciary, at just 1 percent o f Consolidated Fund spending, i s modest in relation to the level o f spending on policing. I t also provides limited resources for newly created independent institutions-notably the Superior Councils for Public Prosecutors and Public Defenders-and the scheduled expansion o f services with the reopening of district courts in Suai and Oecussi. Again, there are likely to be pressures to increase allocations in FY2006. 2.25 Allocations for general public services declined sharply in the period before Independence, but have now leveled off at around 17 percent of programmed expenditures. General public services-including Parliament, the Presidency, Ombudsman, the central bodies and support services o f the executive including the Ministries o f State Administration, the Ministry o f Planning and Finance, the Ministry o f Foreign Affairs and foreign representation-represent a substantial fixed cost on a relatively small public sector. Previous budgets anticipated a reduction in the sector’s expenditure shares during the outer years o f the expenditure plan in order to free resources for service delivery functions. Instead, expenditure shares have had to be revised upwards to provide adequate resources for new governance agencies and provide stable allocations for independent institutions. In this context, the Government has indicated i t s intention to ring- fence these allocations so as to protect the independent institutions from in-year adjustments in 17 spending. While the general public services allocations merit continued review to ensure efficiency and effectiveness, there i s little scope for savings and so future reductions in the share o f general public services w i l l depend on growth in the expenditure base. Pressures for increases in expenditures on administration remain, notably for local government. The Government i s currently reviewing an options paper on local government reform. Rough estimates of the annualized costs of the various options are presented in the study. The key cost drivers w i l l be the number o f levels and units o f local administration, final staffing levels and their functional responsibilities. I n view o f capacity and financing constraints, the Government has opted for a gradual establishment o f municipal administrations at the District and possibly sub-district levels. This i s only likely to have an impact on expenditures at the outer years o f the plan. 2.26 The economic sectors, notably transport infrastructure, but also agriculture and private sector support services, have consistently been under-funded, a situation aggravated by cuts in forward estimates during the FY2005 budget process. At Independence, attention focused on the need for reductions in subsidies to the power sector, which accounted for 13 percent o f Consolidated Fund expenditures in FY2002, in order release funds for productive and poverty reduction spending. The power sector’s financial position now appears to stabilized and reduced allocations are anticipated (see B o x 2.2). The FY2004 budget and MTEF provided for significant increases in spending on transport, from 5 percent o f outtums in FY2003 to 12 percent o f programmed expenditure in FY2007, mainly for road maintenance, and modest increases in the expenditure shares for agriculture and other economic services. According to the PER Roads Sector expenditure model, these increases would have been sufficient to cover the routine and periodic maintenance costs for a core network o f about 1,400 km o f roads over the medium-term. During preparation o f the FY2005 budget, transport sector allocations were cut back to 10 percent of Consolidated Fund expenditures-a reduction in allocations for FY2007 in forward estimates from US$11.2 million to US$7.9 million-largely owing to reductions in capital spending, pending the completion o f the Sector Investment Programs. Given that an effective road transport network Box 2.2: Controlling Power Sector Subsidies At Independence, reduction in power sector subsidies through improved cost-recovery was seen as critical to the release of resources for poverty reduction and development expenditures. Power subsidies absorbed 13 percent o f Consolidated Fund expenditures in FY2002, more than spending on the health sector. Power sector cost recovery improved in FY2003, largely due to settlement of public sector and commercial arrears late in the year. Further improvement in cost recovery during FY2004, notably in the third quarter, together with external financing of fuel purchases amounting to US$I.1 million, has allowed a reduction in subsidies to an estimated 9 percent o f Consolidated Fund expenditures. The mechanisms needed to improve revenue collections have now been put in place. A management team took over responsibility for Timor Leste Electricity (EDTL) in March 2004. The management contract incorporates incentives for improved commercial performance, through a flat fee and a bonus linked to reductions in sector subsidies. The installation of pre-payment meters, which started in 2003, has been stepped up: by the end o f the third quarter about 7,000 meters had been installed against a target of 10,000 units. A further 17,000pre-payment meters have been ordered. Disconnections for non- payment are now enforced and mechanisms put in place for the collection of arrears. At the same time, efforts are being taken to reduce operating costs. Perhaps the most significant of these is the contracting offuel supplies, which are significantly higher than regional rates: a 20 percent reduction in fuel prices would reduce EDTL’s operating costs by about US$1.6 million. The draft Sector Investment Program identifies further investments to reduce costs (investments in the network to reduce distribution losses, a pipeline to reduce fuel transport costs from the terminal) and demand (proposed distribution of compact fluorescent lamps), which would result in further savings. These developments are reflected in the FY2005 budget, which anticipates a gradual reduction in subsidies from 7.5 percent o f Consolidated Fund expenditures in FY2005 to just 3.6 percent in FY2008. 18 i s critical to the achievement o f development objectives across all sectors, further increases in spending merit high priority. While rehabilitation expenditures may be covered by external project financing, the recurrent costs o f road maintenance will have to be programmed in Consolidated Fund forward estimates. I n order to ensure an adequate basis for forward planning, since the viable road network w i l l depend on the availability o f maintenance funding, some consideration should be given to protecting the road maintenance budget from any future expenditure adjustment. 2.27 Changes in the functional composition of Consolidated Fund expenditures are highlighted when expenditure estimates presented in the FY2004 MYBU and FY2005 budget are compared with those of the National Development Plan of M a y 2002 (see Table 2.3). NDP forecasts only covered recurrent Table 2.3: Comparison of NDP and FY2005 Budget and spending, since the capital and MTEF Recurrent Expenditure Allocations, % development budget was held in reserve, and so for the purpose o f NDP MYBU MTEF comparison only MTEF recurrent Function ~ y 0 4 ~ y 0 7 FYM ~ y 0 7 expenditures are used, resulting in a General Public Services 14 11 15 19 slightly - . different structure to that Defence 8 6 9 9 shown in Table 2.2 above. Public Order and Safety 15 12 16 15 Nevertheless, i t i s worth noting that: Economic Affairs 14 9 19 13 health and, most notably, education’s Water, Environment, Community 5 6 3 3 shares o f recurrent spending are now Health 13 17 12 16 programmed to grow at a much Education 31 39 24 23 slower pace than originally Unallocated 2 2 anticipated; general public services’ Total Appropriations 100 100 100 100 share (broadly core state functions) i s Source: NDP, May 2002; FY04 MYBU; draft FY2005 budget papers. expected to increase rather than decline; and allocations for economic affairs are significantly higher than originally anticipated, largely due to the continued subsidies for the power sector and increases in transport sector allocations relative to those presented in 2002. 2.28 There are marked differences in the pattern of Combined Sources expenditures to that seen for the Consolidated Fund. Table 2.4 presents Combined Sources expenditures up to FY2004 (thereafter the limited portfolio of approved projects provides an unreliable picture o f the future structure o f expenditure). General public services accounted for about a quarter o f Combined Sources spending during this period. This was partly due to the large number o f United Nations technical assistance assigned to core government institutions, such as the Ministries o f Planning and Finance, State Administration and Government Structures. These allocations drop sharply in FY2004 and beyond as the UN program winds down. Allocations to economic affairs are comparable to those for the Consolidated Fund, though a substantial share o f the external assistance i s allocated to agriculture and economic support services-contrasting with the l o w levels o f Consolidated Fund spending in these sectors. Allocations for community development are also significantly higher than those for the Consolidated Fund, largely due to the high level o f bilateral and TFET assistance in water supply, community and area development programs. I n the social sectors, Combined Sources allocations to social protection were substantial in FY2001, primarily for humanitarian assistance activities that have now largely phased out. Surprisingly, health Combined Sources expenditures are now equivalent to those for the education sector, underlining the extent to which the health sector has benefited preferentially from external financing. 19 Table 2.4: Structure o f Combined Sources Budget by 2.29 There i s a high degree of Function, YO dependence on external financing in most sectors, but particularly so in key FYOl FY02 FY03 FY04 Function poverty reduction sectors including Estimates Budget agriculture, water and community General Public Services 27 25 24 16 Defense 0 2 2 3 development, and health, where Public Order and Safety 6 5 7 8 external assistance accounts for more Economic Affairs, o f which 26 26 21 23 than 70 percent of Combined Sources Agriculture, Foreshy, Fisheries 6 7 7 6 expenditure (see Figure 2.6). Such high Fuel and Energy 6 6 6 4 levels of external dependence are o f Transport 8 7 5 5 particular concern in light o f the impact o f Environmental Protection 1 1 1 1 the likely reduction in levels o f external Water and Community Development 9 11 12 11 assistance, since external financing Health 7 8 14 15 Recreation, Culture, Religion 0 0 0 0 supports programs with a direct impact on Education 12 13 15 15 service delivery and key inputs such as Social Protection 10 8 3 2 medicines, school books and veterinary Unclassified 1 2 1 6 supplies. Unfortunately, no assessment Total Expenditure 100 100 , 100 100 has been made o f the induced costs o f this Source: Consolidated Fund FYOl, FY02 and FYO3from Financial external assistance, in terms of Statements; FY04 to FY07from Budget Papers. External Assistancef r o m operational expenditures that would have REA database estimates. Functional based on one-to-one pairing at program level for CF andproject for REA. to be transferred to the Consolidated Fund to sustain externally financed activities in the longer term. However, even assuming that induced costs are just 20 percent o f the external assistance, the implications for aggregate and sector expenditures are significant: on this basis Consolidated Fund expenditures would have to double to sustain externally financed agricultural programs under implementation in FY2004. 2.30 The recurrent budget implications of external assistance projects and programs should be clarified during the preparation of Sector Investment Programs and revised during each budget exercise. This requires collaboration from external partners in providing information on the recurrent budget goods and services they finance. F i g u r e 2.6: E x t e r n a l A s s i s t a n c e as S h a r e o f C o m b i n e d S o u r c e s P r o g r a m m e d E x p e n d i t u r e FY2004, YO MPF has set up a Registry o f External Assistance and Total regularly requests updated Social Protection information on external Education Recreation, Culture, Religion - assistance by project. Health However, the poor quality o f Water and Community Development information provided by Environmental Protection external partners makes it i Transport Fuel and Energy difficult to integrate projects Agriculture, Forestry, Fisheries into the Government’s budget Economic Affairs Public Order and Safety framework. Furthermore there Defence are often substantial General Public Services discrepancies between the 20 40 60 80 100 value o f assistance provided by external partners and the records o f recipient agencies. Lack o f detailed information o n external financing increases the risk o f expenditure drift, since insufficient budgetary provision i s made for programs with approved external financing leading to unprogrammed increases in allocations during implementation. 20 2.31 One way of ensuring that expenditures are aligned with policy priorities i s to define prioritization criteria in budget documentation, identify priority programs and protect these programs from cuts in expenditure. From a poverty reduction and developmental perspective, the key priorities are those identified in the NDP: delivery o f social services, maintenance o f basic infrastructure, such as roads, and services that contribute to production, particularly in agriculture and support to small-scale businesses. Mobilization o f Consolidated Fund resources for these sectors requires tight control over non-productive expenditures (such as agency administrative overheads and core state functions such as defense, security, foreign affairs, public administration) and willingness to cut non-productive expenditures when the resource profile i s compressed. Some countries have sought to target resources by treating high priority poverty reduction programs (such as primary education, primary health care, and road maintenance) as a virtual poverty fund for the purposes o f expenditure planning. High priority programs are clearly flagged in budget documentation, gaining preferential access to funding when the resource envelope increases, but are ring-fenced when the resource envelope contracts. A similar approach might help Timor-Leste ensure that priority programs receive preferential financing during future budget exercises. However, care must be taken to ensure that the criteria for determining which programs are priority are clearly defined and agreed across Government. Criteria might include, for instance, the extent to which the services provided are used by the poor and the proportion o f funding allocated to service delivery. 2.32 Prioritization also requires adequate costing of expenditure programs, based on clearly defined sector policies. Poor costing leads to foot-in-the-door expenditures, where agencies present policy proposals with low initial costs that subsequently require supplementary funding. In this context, the agencies’ creation o f new departments and embassies and new functions present particular risks. These risks are best addressed b y the agencies themselves, within the context o f hard budget constraints applied throughout the budget process. A start has been made on this process through the preparation o f Sector Investment Programs. However, given the continuing development o f sector policies and limited information o f key program cost drivers further work on the development o f sector expenditure programs w i l l be needed in the coming years. COMPOSITION OF EXPENDITURE E. ECONOMIC 2.33 Forward estimates point to much lower levels of capital spending than programmed at Independence. The FY2002 budget proposed significant Consolidated Fund capital and development expenditures to support investments in infrastructure, with capital spending amounting to about US$25 million a year in the outer years o f the plan. The intention was to build up capacity in investment management through Government systems after Independence so that institutions would be better equipped to manage Timor Sea revenues when these came on stream. These capacity building objectives remain valid, particularly in view o f the proposed expansion o f capital programs in infrastructure under the Sector Investment Programs and the gradual winding down o f TFET projects. However, faced with successive reductions in the medium-term resource envelope, the proposed capital program has been cut back drastically, amounting to less than US$40 million for the period FY2004 to FY2008, as compared with the US$90 million originally proposed. Programmed capital and development expenditures amount to just 9 percent o f spending in FY2004, increasing slightly to 13 percent b y FY2008. Once the Sector Investment Programs have been finalized, providing a portfolio o f investment projects reflecting the Government’s development policies and priorities, there w i l l be a strong case for increasing capital spending from Consolidated Fund resources. 21 Table 2.5: Economic Structure o f Consolidated Fund Expenditure (US$ million) FYOl FY02 FY03 FY04 FY05 FY06 FY07 FYO8 Component Actual MYBU MTFF Recurrent 29.6 41.1 56.1 67.1 66.7 69.6 71.8 73.3 Salaries &Wages 13.9 18.8 21.9 25.8 28.2 28.9 29.5 30.0 Goods & Services 15.7 22.2 34.2 38 36.8 37.8 39.6 40.4 Minor Capital 3.2 1.7 2.9 2.7 2.8 Capital 21.7 11.5 14.6 7 8.4 9.3 10.1 10.9 Total Expenditure US$ 51.3 52.6 70.8 74.1 75.1 78.9 81.9 84.2 Recurrent % 57.7 78.1 79.3 90.6 88.9 88.2 87.7 87.0 Salaries & Wages 27 35.8 30.9 34.9 37.5 36.6 36.0 35.6 Goods & Services 30.7 42.3 48.4 51.3 49.0 47.9 48.3 48.0 Minor Capital 4.4 2.3 3.7 3.3 3.4 Capital % 42.3 21.9 20.7 9.4 11.1 11.8 12.3 13.0 Source: FYOI, FY02 and FY03 froni Financial Statements; FY05 to FY08frorn Draft Budget/Background Paper, May 2004. 2.34 During the FY2005 budget exercise forward estimates for recurrent spending were revised downwards, providing for minimal growth over the period to FY2008. Previous budgets were broadly in line with NDP forward estimates: the FY2004 MTEF provided an increase in recurrent spending from US$67 million in FY2004 to US$83 million in FY2007, as compared with the NDP estimates o f US$86 million for FY2007. The FY2005 MTEF provides for just US$73 million in recurrent spending by FY2007. There has been a slight reduction in programmed spending on wages and salaries. However, most of the cuts in recurrent spending are against allocations for goods and services and minor capital. This reflects Government’s response to the reduced financing levels following the FY2004 MYBU and evidence o f rapid growth administrative overhead expenditures. The Government has effectively re-based expenditures, so as to focus attention on priority service delivery activities. This decision was a sound policy decision. B y cutting expenditures in early FY2005, when projected revenues indicated a need for significant budgetary compression, the Government has created an opportunity to realign the structure o f forward estimates during FY2006 on the basis o f an expanded expenditure profile. B y this time, the Sector Investment Programs should provide a sounder basis for assessing the relative priority between sectors and programs. 2.35 Personnel costs, at 35 percent of recurrent expenditures in FY2004, are comparable to other low-income countries. So too are staffing levels, with permanent civil servants amounting to about 3 percent o f the working-age population (public sector employees about 4.4 percent). MTEF estimates provide for a 16 percent increase in personnel costs to FY2008, primarily for the implementation of a revised public sector pay policy (see Chapter 4, Section C). Staffing l i m i t s agreed with budget support partners, through the TSP process, cap the number o f permanent public sector employees at 17,200 (see Chapter 4, Section B). Preliminary estimates suggest that no provision has been made for increases in staffing beyond the present budgeted levels. Nevertheless, there i s s t i l l pressure from agencies to increase staffing levels. Recent proposals have included increases in FDTL staffing and numbers o f health workers, which would bring the total number o f public employees over their TSP limits. If increases in staffing levels for specific programs were to proceed, cuts in budgeted posts would be required elsewhere in the staffing profile. 2.36 Goods and services constituted over 50 percent of total Consolidated Fund expenditure in FY2004, with a substantial and growing share of these expenditures used to 22 cover administrative overheads. Goods and services spending increased from US$22.2 million in FY2002 to US$34.2 in FY2003. Four categories o f expenditure account for half this increase and one-third o f total goods and services spending in FY2003: travel and subsistence, utilities, vehicle operation and office supplies (see Figure 2.7: Actual Spending on Goo& & Figure 2.7). Of these categories, Services a$ m, FY2002 andFY2003 expenditure on utilities has grown -~ ---,- r ‘ ^ l fastest, largely because agencies have / l / / / I Travel and Subsistence 1 1 / / 1 1 / / 1 1 1 1 assumed telephone and electricity Training & Workshops I I 1 1 I 1 I 1 I 1 1 I charges that were previously covered 1 I 1 I 1 I 1 I I 1 I I by 1 UNTAET. Over the last two Utilities l l 1 / 1 1 I 1 / 1 1 years, spending on vehicle operation I tripled and now accounts for an 1 1 1 1 1 1 I 1 1 Vehicle Operation extraordinary six percent o f total 1 1 1 I l l I l l Office Supplies 1 I 1 l l 1Consolidated Fund expenditure, while travel and subsistence doubled, Operational Supplies with a large part o f these funds going to international travel. Preliminary Routine Maintenance 1 / 1 1results for FY2004 suggest that these Other Operational Expenses categories continue to grow rapidly: b y the end o f the first quarter, for 0 1 2 3 4 5 6 7 instance, many agencies had nearly FY2003 FY2002 exhausted their annual vehicle operations allocations, and around three-quarters o f the annual allocation for official travel had already been spent. Also o f concern i s the increase in “Other Operational Expenses”, a catch-all category that includes some off-payroll personnel payments to contractors. This item more than doubled from FY2002 to FY2003, when it accounted for nearly 10 percent o f total Consolidated Fund expenditure. These trends all point to a high degree o f administrative capture, with charges that benefit central agencies and their staff crowding out funding for service delivery. 2.37 Increases in some administrative overhead costs have been driven by the proliferation of vehicles, computers, mobile phones, air conditioners and other equipment. Growth o f the vehicle inventory i s largely due to UNTAET transfers, but there have also been some transfers from projects and direct acquisitions. At the end o f FY2003, the Government asset register included 1,969 operational vehicles (1,037 cars and trucks and 932 motorbikes). This corresponds to one vehicle for every eight public sector employees, or one for every eleven permanent budgeted posts. If defense and autonomous agency staff, teachers, and health workers are excluded, then there i s one vehicle for every four civil servants. Further transfers o f 459 cars and 200 trucks from UNMISET are scheduled over during FY2004 and FY2005. The cost o f this large number of vehicles i s compounded by the age and poor condition o f many o f the vehicles transferred to Government. 2.38 Administrative measures are being taken to curtail agency administrative costs, but these will have to be backed up by close monitoring of the budget at a line item level. The Government announced a number o f expenditure control measures, prior to and as part o f the FY2004 MYBU process, summarized in Box 2.3. Goods and services allocations were subsequently singled out for cuts in the FY2005 budget and MTEF, with goods and services allocations cut back to 48 percent of expenditures in estimates for FY2008. However, these measures are unlikely to be sufficient on their own. Tight line item control i s also needed, so that managers are held responsible for their operational spending: Commitment and Payment Vouchers (CPVs) should be returned when line items for overhead items are exhausted and utilities 23 Box 2.3 Recent Expenditure Control Measures Measures p r i o r to November 2003 e ClariJied roles and responsibilities of Ministers, Vice-Ministers and Secretaries o f State regarding expenditure management, procurement and disciplinary issues. Several disciplinary investigations have already been launched. e Established joint UNIGovernment committee to assess implications and determine management oj handover o f UNMISET assets. e Review o f options for rationalizing jleet, including selling excess vehicles. Ceased vehicle purchases in FY04 budget and sequesteredfunds. Established review o f current contract for vehicle maintenance given high cost and poor output. Implemented vehicle access and usage policy resulting in decline in abuse of vehicles for personal purposes. Measures presented in the FY2004 Mid-Year Budget Update e Sequestration offirst quarter salary savings. e Capping o f power sector subsidies at budgeted level-though additional fuel purchases anticipated using bilateral grant funds. Freeze i n overseas travel expenditures pending reassessment of travel priorities. 8 Cutting o f goods and services allocations between 5 and 10 percent with the exception o f service delivery (non-administrative) expenditures in health and education. 0 Tightening o f control on procurement and petty cash. Measures to be implemented through FY05 budget and subsequent budget exercises Setting of agency budget ceilings at the outset o f the budget process. Safeguard of priority poverty reduction expenditures ffom cuts while enhancing tracking oj effectiveness and eficiency o f spending for priority programs. Institution of bottom-up mechanismsfor using and overseeing use of public funds. e Organization of asset sales. e Issuing o f a policy curtailing recruitment of temporary personnel. disconnected until agencies redistribute funds. Although Treasury can play a role in monitoring budgetary compliance against line items, ultimately, responsibility for the composition o f agency expenditures lies with the spending agency. Agency managers should be held accountable for the economic and effective use of public funds. The practice o f holding centralized allocations, such as those for official travel, should be discouraged because there i s little incentive for agencies and managers to restrict use o f line items for which they are not directly responsible. Close monitoring of the level and structure o f spending w i l l be needed to ensure that these expenditure control measures have the desired impact. Information on high-risk expenditure lines should be included in the Treasury’s budget execution reports so that progress in controlling overhead costs can be followed by stakeholders, including Parliament and external partners. However, it should be stressed that tight line item control does not necessarily entail centralization o f each spending decision, which can impact on budget execution. Line item control i s best achieved b y routine monitoring o f the composition o f spending at agency level to verify whether the allocations are consistent with a service delivery focus in public spending. Rapid increases in spending against specific line items may signal the need for internal administrative controls to ensure that goods and services are used appropriately. 2.39 Ultimately, vehicle operation costs and utilities can only be curtailed by reducing the amount of equipment used by agencies. Agency capital procurement plans provide a useful control. Ideally, only proposals for increases in vehicles and other equipment that w i l l be directly employed in service delivery would merit consideration. Since transfers o f assets from projects and UNTAET are now managed centrally, the Government might consider introducing a capital charge, 24 deducting the value of assets from the agencies capital budget, since this w i l l force managers to assess the opportunity cost o f additional equipment. Government should also consider sale o f transferred assets surplus to immediate service delivery requirements rather than further increases in inventory (see para 2.16). This would be particularly important for assets procured b y extemally financed projects that do not meet Government-wide procurement specifications, such as vehicles and office equipment procured from tied sources. 2.40 A t the same time, expenditures on service delivery and maintenance should be encouraged. Maintenance spending showed little increase from FY2002 to FY2004. As a rule of thumb, expenditure on maintenance should be above 5 percent of the capital stock: current levels o f maintenance spending are less than 2 percent o f annual capital spending, and are insignificant in relation to total public sector assets. Because maintenance requires many small, timely interventions, management o f maintenance i s best delegated to individual service delivery units, backed up b y a system o f block grant transfers to facilitate access to funds. Further deconcentration o f spending i s also likely to significantly increase the share o f funds spent on service delivery (see para Chapter 3, Section D). Table 2.6: Compositionof Trust Fund for East Timor (TFET) Disbursements by broad component to end-October 2003 (percent) Agri- Infra- Component CEP PSD Education Health Other Total culture structure Civil Works 23 77 5 11 14 27 31 Equipment,Goods & Services 29 12 3 48 20 16 OperatingCosts 3 1 2 1 2 2 2 Consultants & Training 37 14 32 10 22 42 80 24 Sub-Grants / Lending 1 45 56 6 13 Unallocated 6 8 4 14 8 9 20 8 Total 100 100 100 100 100 100 100 100 Source: World Bank. Note: CEP Cotnrnunity Empowernlent Project: PSD Private Sector Development (including Microfinance and the Sinall Enterprise Development Projects). Unallocated mainly comprises advances to special accounts. 2.4 1 Rough estimates of the composition of externally financed project expenditures suggest that more than half of total funding has been provided as technical assistance. Detailed assessments are hampered by the lack o f consolidated information on the structure o f bilateral programs, which accounted for about half o f reported Combined Sources expenditures over the period FY2001 to FY2004. Comprehensive data are only available for the United Nations programs and TFET projects. Technical assistance provided through the United Nations amounted to about US$110 million over the four-year period (about 12 percent o f reported Combined Sources expenditures). In the case o f TFET projects, technical assistance and training inputs amounted to about one-quarter o f total disbursements to end-October 2003, around US$37 million. However, there are significant differences in the composition o f inputs between programs: with technical assistance accounting for more than one-third o f total disbursements in the case of agriculture, community empowerment and health programs (see Table 2.6). Expenditure on technical assistance from these two sources alone, TFET and United Nations, i s about twice the level o f CFET spending on the wage bill over the same period. At the same time, the TFET data suggest that more than a third o f the funding has been used for investment in c i v i l works and the total fixed investment i s higher still, at around 50 percent o f disbursements, if small grant and lending allocations are included. A review o f a small sample o f bilaterally funded projects suggests that the proportion o f funding allocated to technical assistance i s somewhat higher, generally between fifty and sixty percent o f total project costs. 25 2.42 One of the key issues to be determined as development partners prepare their country programs will be the appropriate balance between expenditure on technical assistance, investment and operational costs. Substantial allocations to technical assistance can be justified in terms o f the development program’s institutional development objectives. Over the next few years, the share o f technical assistance in externally financed projects and programs can be expected to decline. This trend i s already apparent in the TFET portfolio. However, agencies have proved reluctant to forego technical assistance personnel where this i s provided from a central pool-as under the current 100 and 200 posts arrangements-with the final selection o f posts being determined centrally, in line with financing availability. As the United Nations stability posts are wound down, agencies w i l l increasingly rely on posts funded by bilateral partners. In this context, the appropriate composition of external financing can best be determined through the sector planning process, the Sector Investment Programs, where agencies and financing partners can assess the trade-offs between inputs and their contribution to the agencies’ development objectives (see para Chapter 3, Section F). Box 2.4 Key Recommendations - Expenditure Policy Frequent monitoring of high-risk line item expenditures by: a) including information on high-risk expenditure lines (such as travel, vehicle maintenance and other administrative overheads) in Treasury’s budget execution reports; b) eliminating centralized allocations, such as those for oflcial travel, so that agencies have to plan for the use of such funds. Formulation of a policy for disposal o f excess assets, including sale and leasing of vehicles, through transparent and competitive mechanisms. Definition of criteria for prior@ programs (such as contribution to poverty reduction and delivery oj services direct to the public) and specific programs in budget documentation together with informal rules regarding the rules preferential financing o f these programs. ClarCficationo f the recurrent budget implications of external assistance projects and programs in the lead-up to each budget exercise, focusing on those programs where external assistance covers a large share of recurrent expenditures, such as the police. Establishment o f a Petroleum Fund, supported by a savings policy, through a consultative and transparent process. Review o f agency organic laws and staffing levels, taking into account medium-term expenditure constraints. 26 3. IMPROVING ACCOUNTABILITY AND EFFECTIVENESS IN PUBLIC SPENDING A. INTRODUCTION 3.1 The NDP’s Vision 2020 stresses the importance of sound financial management: “The economy and finances of the State will be managed efficiently, transparently and will be free from corruption’’ (NDP, 2002, xviii). Underlying this vision i s the expectation that Timor-Leste w i l l use i t s future oil and gas revenues prudently and productively, safeguarding a stock o f assets that w i l l generate income in perpetuity for future generations. The NDP stresses that the flow o f revenues w i l l be “a blessing to the people o f Timor [allowing] them to more fully address their development needs and priorities” (NDP, 2002, p. 30). The experience o f other o i l and gas rich countries suggests that these benefits are unlikely to materialize unless sound governance arrangements are put in place. Sound governance arrangements include a public expenditure management system that enforces regulatory compliance, promotes the effective use o f resources and i s open to independent and public scrutiny. Appropriate legislation provides the blueprint for such a system, but legislation itself cannot make the system work. The transformation o f legislation into practice requires an organizational culture that rewards compliance and performance, and personnel inspired by these values and armed with the requisite technical and management skills. Table 3.1: Timor-Leste’s Performanceagainst HIPC Public Expenditure Management Indicators Bench- HIPC Indicator Mark Timor-Leste Average Fiscal information associatedwith the budget match the GFS A B B Govemment activities not significantly funded through extra-budgetary sources A A A Budget outtum relatively close to the original budget’s appropriation B B B Identification of poverty reduction spending A B B Donor funds included in governments’ budgets A A B Budget classified on an administrative, economic and functional basis B B Integrationof medium term forecasts in budget cycle A A Small stock of expenditure arrears at the end of the last financial year A A Intemal audit function active A A Intemal control supplementedby public expenditure tracking surveys B C Govemment bank accounts reconciled with the accounting records A A Budget tracking reports from line ministries & treasury received within 4 weeks B A B In-year budget reports present spending on a functional basis A A C Accounts closed within two months after the end of the fiscal year A A B Audited accounts presentedto the legislature within 12 months B A C 3.2 The core expenditure management system compares favorably with that of other low- income countries on most criteria, but performance in terms of timely expenditures to support service delivery i s poor. Table 3.1 compares Timor-Leste’s expenditure management system against HIPC Public Expenditure Management benchmark^.^ The key elements o f budget preparation and coverage, quality and timeliness o f reporting meet HIPC benchmarks. Thirteen public expenditure management indicators are monitored for all Highly Indebted Poor Countries (HIPC), to assess the transparency and effectiveness of systems in delivering expenditures for poverty reduction purposes. T h i s i s the most systematic and comprehensive assessment of public expenditure management system performance available for low-income country comparators. 27 Qualifications relate to: the classification o f expenditures, notably priority poverty reduction programs, which are not yet clearly flagged in the overall expenditure framework and given specific priority in the budget process; and the lack o f Public Expenditure Tracking surveys to identify public spending actually applied in service delivery. However, the fundamental problem facing the system i s poor budget execution, with significant and consistent under-spending in priority sectors such as roads and education. Section B focuses on the control and oversight environment. Section C identifies the measures needed to improve budgetary execution, without sacrificing the quality o f public spending. Section C identifies measures needed to reduce unit costs and improve the efficiency o f spending. Section D examines how to get resources down closer to the field level, to the service delivery units where resources are needed. Section E reviews the recent developments in the planning and budgeting system, advocates a period o f consolidation and suggests how the existing instruments can be used to the improve policy alignment o f public spending without over-burdening scarce management capacity. 3.3 Notwithstanding this ambitious agenda, the immediate concern of Government and external partners relates not so much to system development as to how to sustain the system over the short to medium term, as the international presence gradually winds down. I Box 3.1: Towards a Capacity Building Strategy for Financial Management Functions Key considerations in the design of a capacity building strategy for financial management functions include: a Adoption o f a long-term, system-wide approach. External support to capacity building has been fragmented: provided as critical posts through the UN system, standalone projects for budgeting and tax administration, and line Ministry project implementation units. Inadequate attention has been to ensuring consistency in approach between the various interventions and follow-up with line agencies. A program approach, with all external assistance under unified management led by MPF and long-term commitments to funding would provide a more coherentframework for capacity building. e Addressing systems development requirements as well as skills transfer. Legitimate concerns have been raised regarding the complexity and viability o f current budgeting, planning and reporting requirements in a low-capacity environment. Capacity constraints are best addressed through a system- wide approach, integrating systems development advice (based on practical experience rather than international models) with investments in information systems and capacity building interventions. Putting in place qualified and experienced stafj Senior financial management personnel need to have an understanding o f the principles offinancial management as well as procedures, and the authority and confidence to enforce controls regardless o f political pressures. Development of a cadre o f national personnel with these characteristics takes time and requires investments in basic training, often in specialist institutions overseas. In the meantime, some senior posts may have to be filled by expatriates, with a transition to advisory posts as capacity develops. This requires long-term funding and continuity oj stafing. To reduce costs, long-term expatriate staff could be recruited directly in the region rather than through multi-lateral agencies, or through institutional twinning arrangements. Monitoring of performance. This requires monitoring of systems, by tracking indicators such as agency budget execution, as well as of personnel. Monitoring of capacity building pelformance indicators at the level of individual departments and in reviews of international personnel’s contracts will make it more likely that capacity building will be given attention alongside routine functions. e Putting in place basic personnel planning and record keeping routines. Capacity building has to be managed. Basic tools include a capacity building strategy, group training schedules, individual training plans, succession plans for international and senior personnel, routine personnel and institutional evaluations. These basic tools have yet to be put in place. Recruitment o f suitably qualij?ed personnel to fuljill these functions is perhaps the most urgent priority. I n the absence of these management systems, capacity building will continue to be ad hoc and supply-driven. I 28 Significant improvements in national capacity in financial management have been achieved in a relatively short-time. This i s particularly true o f the Ministry o f Planning and Finance, where national personnel have assumed responsibility for most routine budget, treasury and procurement procedures. However, progress at line agency level has been much slower and there i s s t i l l an acute shortage o f personnel sufficiently qualified, experienced to occupy senior management posts with oversight responsibility. Given. the scheduled departure o f expatriate personnel currently occupying senior posts, significant investments in capacity building are needed now to avoid a deterioration in performance and increase in fiduciary risk just as Timor Sea revenues come on stream. At the end o f 2003, there were some 90 full-time international personnel employed in the Ministry, as compared with 450 national staff. The UN mission i s to be scaled back after M a y 2004 to 58 posts, with fifteen o f these post in the Ministry o f Planning and Finance. Further reductions are likely over the medium term. This raises two concerns. Firstly, how to develop and sustain the technical and management capacity o f national personnel so that they can assume additional responsibilities and functions as expatriate staff leave. Secondly, how to fill critical senior management posts when national personnel are not yet adequately qualified and experienced. While the means o f addressing these capacity development concerns goes beyond the scope o f this PER, they are just as critical to the future performance o f the system as the technical and management system developments highlighted here. Box 3.1 highlights key elements of a successful strategy. AND GOVERNANCE B. STRENGTHENING THE FIDUCIARY FRAMEWORK 3.4 The core public expenditure management system’s fiduciary arrangements are basically sound. The Financial Management Law (UNTAET Regulation 2001/13) provides for comprehensive and timely reporting on expenditures and lays out the budget and expenditure process. Further improvements are to be introduced b y a revised Law currently in preparati~n.~ The Budget i s submitted to Parliament in M a y o f each year for approval before the start o f the fiscal year in July. Budget execution i s controlled through Expenditure Authorization Notices and transaction commitment approval by Treasury, with Treasury making payments to suppliers on confirmation o f receipt o f goods and services by the respective agency. A specialist MPF Procurement Unit oversees procurement. Quarterly budget execution reports, disaggregated by all budget classifiers, are available within fifteen days o f each period, and spot reports can be generated easily from Treasury’s computerized financial management system. There i s an active internal audit department within MPF, complemented by an Inspector General reporting directly to the Prime Minister. External audits are undertaken by a commercial auditor and the audited financial statements and management report are presented to the executive and Parliament, through MPF, within six months o f every year. Specific governance arrangements w i l l have to be made to deal with Timor Sea revenues (see Box 3.2) and, as noted below, independent audit arrangements w i l l need to be put in place, but otherwise the basic architecture o f the core system i s robust and w i l l serve Timor-Leste’s needs for the foreseeable future. 3.5 A t agency level, however, expenditure management systems are often rudimentary. Spending agencies should establish adequate internal controls to ensure compliance with procedures and achieve value-for-money in the use o f public funds. Simple control mechanisms include: internal authorization procedures for Commitment and Payments Vouchers (CPVs), with clear delegation o f authority for commitments up to agreed limits; simple records o f those CPVs submitted to the Ministry o f Planning and Finance; and regular reconciliation o f these records against the budget execution reports generated from Treasury’s computerized financial For a comprehensive review of public expenditure management systems, readers are referred to: World Bank, East Timor: Public Expenditure Management and Accountability Note, April 2002; and Chapter 8 of World Bank, East Timor: Policy Challenges for a New Nation (Country Economic Memorandum), March 2002. 29 I Box 3.2 Safeguarding Timor Sea Revenues and Savings Specijk governance arrangements will be needed to address the fiduciary risks associated with the mobilization, investment and draw-down of Timor Sea oil and gas revenues. The NDP favors a statutory fund, leaving the executive with limited discretion over the volume of financial jlows, providing for clearly defined investment policies, implemented by offshore fund managers, and overseen by independent auditors (NDP, 2002, page 90). These arrangements, currently being developed with technical advice from Norway and the IMF, should provide a sound framework for fund management. Additional governance safeguards should ensure: Widespread consultation on and understanding of fund management arrangements. Perhaps the most effective safeguard is widespread understanding of the rules of the game: how the Timor Sea funds should and can be used. Investments in consultation and information are likely to pay dividends by facilitating on-going public scrutiny and reducing the appeal of populist, high-spending policies. Broad representation o f stakeholders amongst trustees. Public confidence will be enhanced by broad representation o f stakeholders amongst trustees, including civil society organizations as well as political appointees, possibly complemented by representatives o f suitably qualijted intemational bodies. e Disclosure o f financial information by trustees and concessionaires. Publication of fund financial statements, including investment pegormance records, is essential. Publication of concessionaires' transactions with Government is highly desirable-"publish what you pay "-since this provides a means o f verifying the accuracy of trustees' reporting. The Government's decision to participate in the Extractive Industries Transparency Initiative is particularly encouraging in this regard. a Use of the budget and public expenditure system as the channel for disbursing funds. Channeling funds through the budget-as opposed to parallel mechanisms-promotes policy consistency and ensures that funds are subject to adequate oversight and fiduciary arrangements. While attention will, inevitably, focus on the arrangementsfor the statutory fund, it should be stressed that the existence of a statutory fund is not in itself a solution to the management and governance problems arising from Timor Sea revenue streams. The best safeguard is a well functioning public expenditure management system that enforces budget discipline, compliance with expenditure procedures and rigorous appraisal of proposed applications of public funds. management information system. However, recent increases in expenditures on travel and vehicle operations, together with the significant arrears in utility bills and the late response to slow budget execution, demonstrate that these basic controls are not used systematically. Weak agency internal coptrol systems constitute a fiduciary risk, particularly where agencies undertake unauthorized direct procurement, bypassing the central Procurement Division, or through the use o f petty cash. In this context i t i s encouraging to note that the Government has indicated in i t s FY2004 MYBU that it intends to tighten-up the use o f petty cash and compliance with procurement procedures. The Government has also sought to enforce internal control b y requiring that CPVs are authorized by the spending Minister. While this may strengthen control and Ministerial accountability, it has contributed to delays in budget execution. The fundamental problem remains the lack of basic financial management systems, compounded by a shortage o f experienced financial management officers. Clearly, investments in financial management systems and training at the agency must be the priority for the future since this i s the system's weakest link. 3.6 Further work i s needed on the development of a strategy for integration and roll-out of financial management information systems in order to ensure that agencies have access to timely financial information and to reduce transactions costs. MPF' s financial management information system (FMIS) was installed under UNTAET. The core module provided for a treasury cash and budget management system. Subsequently, commitment control, procurement and asset management modules were introduced to support MPF management functions. These systems are 30 not yet functionally integrated, requiring the hard copy transfer of transaction information and re- keying o f transactions as they pass from treasury, to procurement and then on to asset management. This causes delays and increases the risks o f error. While modules for read-only access at the agency level were planned, these have yet to be installed. Future development o f the system w i l l have to be planned, taking into account future information requirements. Basic functionality would include a fully integrated system for MPF, supporting information management, transaction tracking and reporting, while at the same time providing for the gradual roll-out o f the system to the line agencies. While read-only access to the FMIS may be the first step, allowing agency management to track budget execution and individual transactions, the eventual goal should be for transaction information to be entered at agency level. 3.7 Parliamentary oversight and engagement in the budget process could be strengthened by introducing a two-step budget process. Although parliamentary intervention in the budget process may not always result in desirable fiscal and expenditure outcomes-Parliaments may, for instance, be more inclined to spend than the executive, particularly where this brings benefits to constituents - there i s growing awareness that effective parliamentary oversight and engagement in the budget process i s a critical safeguard. Parliament’s role i s twofold: first, approval o f appropriations-the authority for the executive to spend-provides an opportunity for Parliament to make amendments to fiscal policies; second, Parliament holds the Government to account for i t s stewardship o f public funds, verifying compliance with the approved appropriations schedule and the review o f financial and audit statements. Effective parliamentary engagement requires access to information, through the presentation o f timely, clearly presented budget documents, budget execution reports and financial statements, together with opportunities to question officials regarding the expenditure policy and spending decisions. I t also requires adequate time for review and consultation. In Timor-Leste this has proved problematic. Budget preparation schedules are relatively compressed, with the budget process launched in January, presentation to Parliament in M a y for approval and presidential ratification prior to the start o f the fiscal year in July. This compares with an average o f four months for parliamentary consultation in OECD countries. Extension o f time frame at the end of the budget process would require an earlier start to the budget process. This i s probably unrealistic at the present time, when forward revenue estimates are subject to significant changes and slow budget execution means that significant adjustments to the budget are needed mid-year. One solution to this problem adopted in South Africa i s to put in place a two-step budget process. The Government discusses a policy statement at the start o f the budget process with parliamentary committees. The policy statements lays out the macro-economic framework and defines broad expenditure allocations. Following consultations, the policy statement i s used as the basis for setting expenditure l i m i t s in the annual Budget Circular. Parliament i s then able to verify whether the final appropriations schedule i s consistent with the policy framework discussed and seek clarification regarding changes. A similar process in Timor- Leste would considerably improve the quality o f parliamentary engagement in the budget process, without significant changes to budget preparation schedules or additional work for hard-pressed MPF officials. 3.8 A transition from the current external audit to an independent audit i s needed to complete the fiduciary arrangements. Under UNTAET the head o f the executive appointed an external auditor through a competitive procurement process. The executive continues to appoint the external auditor, though the auditor’s report on the financial statement and the management report are now submitted to Parliament as well as the Minister of Planning and Finance. These arrangements are not consistent with the Constitution which provides for the creation o f a High Administrative, Tax and Audit Court, as part o f the judiciary, and so independent o f both the executive and the legislature. Given the limited capacity in the judiciary, establishment o f a fully fledged Audit Court i s likely to take decades. In the meantime, alternative arrangements may be 31 feasible, such as nomination and supervision o f a commercial auditor b y a judge o f the Court o f Appeal. A clear strategy for transition to an independent audit institution i s needed, so as to establish the basic framework for independent oversight foreseen under the Constitution and start building oversight capacity. C. IMPROVING BUDGETEXECUTION 3.9 Budget execution tends to be slow during the first half of the year, followed by an end-of-year surge in spending as agencies tried to exhaust budget balances. Final budget outcomes, against the mid-year budget update, increased from 82 percent in FY2002 to 96 percent in FY2003 on a commitment basis (see Table 3.2). However, expenditures on a commitment basis at the end o f FY2003 were US$15 million higher than liquidated payments, with execution on a cash basis at only 77 percent. This raises concerns regarding the quality o f spending-it i s much easier to accelerate sending on administrative functions in central agencies than on service delivery at the field level-which are confirmed by the high level o f administrative overheads in Consolidated Fund expenditures. I t also generates a considerable budget overhang at the end o f the fiscal year, with a substantial number o f commitments from the budget accounts payable after the end o f the fiscal year. Table 3.2 Budget Execution FY2002 and FY2003 FY2002 FY2003 FY2004 Estimate Function Actual Cash Actual Cash Actual Cash General Public Services 80 76 92 87 85 75 Defence 126 124 91 15 94 13 Public Order and Safety 88 86 98 80 83 66 Police Services 99 98 100 81 86 69 Judicial Services 63 59 91 70 55 43 Economic Affairs, of which 93 91 91 I1 88 56 Agriculture, Forestry, Fisheries 87 87 95 75 93 62 Fuel and Energy 99 98 100 77 113 83 Transport 90 87 98 86 69 38 EnvironmentalProtection 61 60 91 95 62 62 Water and Community Development 83 19 99 60 93 28 Health 85 80 94 17 90 59 Recreation, Culture, Religion 39 31 83 32 56 39 Education 15 14 95 18 87 13 Social Protection 81 84 92 61 82 49 ~ Total Expenditure 84 82 96 I1 87 65 Source: FY02 Financial Statements compared with MYBU update revised appropriations; FYO3 Financial Stateiiients coinpared with MYBU revised appropriations; and FY2004 inid-year budget execution report data, annualized and compared with original appropriations. 3.10 Preliminary data suggest that key sectors could follow a similar pattern of delayed start and end-of-year surge in the FY2004 budget. Annualized data for FY2004 point to a relatively slow start in committing funds across the board, but a particularly slow start in road maintenance and the judiciary. In the education sector there are significant delays on goods and services spending, where annualized execution o f 56 percent on commitment basis and 24 percent on a cash basis compare with averages o f 90 percent and 66 percent for all sectors. Execution i s particularly slow against the capital and development budget, with commitments trailing cash allotments (authorized expenditure) b y nearly 60 percent, annualized commitments standing at just 32 50 percent, and n o payments liquidated by mid-year. This analysis points to continuing problems in budget execution. 3.1 1 The underlying problem in budget execution i s inadequate expenditure and procurement planning and follow-up at agency level. At present, budget execution seems to be addressed on an ad hoc basis, with individual requisitions processed as they are received from spending departments. This leads to a gradual build up in the number o f requisitions through the year, rather than a planned structure o f spending that reflects requirements such as the school year or seasonal changes. Again, the solution i s to put in place basic management systems. Key elements o f such a system would include: preparation o f agency procurement plans for capital and goods and services and quarterly expenditure plans before the start o f the fiscal year to guide budget execution; regular reporting on budget execution against these plans to agency management; and periodic updating o f expenditure plans. Agency management could support these systems by establishing routine, perhaps monthly, meeting o f budget management committees comprising heads of all departments to review progress in budget execution. The Ministry o f Planning and Finance can play an important role too, by using the Expenditure Authorization Notices to guide and track progress in budget execution. Negotiation o f the Expenditure Authorization Notices provides an opportunity to front-load expenditures in key programs and serves as a benchmark for assessing execution. The recent creation o f a cross-agency committee by the Prime Minister to oversee budget execution w i l l provide a mechanism for identifying bottlenecks in budget execution so that they can be resolved well before the last quarter o f the year. 3.12 Procurement processing has contributed to slow budget execution, though this often seems to be due to poor understanding of procurement requirements at the agency level. Under current arrangements, procurement i s administered b y the Ministry o f Planning and Finance's Procurement Unit, other than in those cases where the Unit has delegated authority to the spending agency. Agencies frequently complain that the Table 3.3: Procurement centralized system i s a source o f delays. Data provided b y the Processing Times, Q1-Q3 Procurement Office for the first three quarters o f FY2003 indicate FY2003 (% of CPVs) that about 70 percent o f procurement requests were processed in fewer than thirty days and 80 percent in fewer than forty-five days. US$'OOO 4 0 days e45 days Delays appear to be longest for lower value requisitions, which in >500<5,000 83 83 principle have less time consuming market consultation >200<500 50 50 requirements. Efforts to rationalize the procurement process by >25<200 71 82 batching the procurement o f common items-thereby allowing the > 10<25 45 48 administration as a whole to achieve better terms through <10 75 84 standardization and bulk purchases-are likely to have slowed All 72 80 down procurement processing times in FY2004. However, the Source: MPF. main cause o f delays appears to be the poor specification o f agency requisitions, which prevents further processing as the Procurement Unit seeks clarification. Solutions lie in greater standardization b y the Procurement Office and agencies, complemented by training for agency personnel in drawing up specifications and improved quality control by agency managers. A draft standard specifications manual was prepared in FY2004, but has yet to be distributed. MPF i s currently preparing a training program on procurement for agency personnel. Ministries have also been encouraged to place personnel in the Procurement Unit to learn procurement procedures and oversee their agency's procurement activities. 3.13 Some delegation of procurement administration i s foreseen under forthcoming legislation. The draft Public Procurement Decree L a w provides for delegation o f authority for purchases up to US$lO,OOO to line agencies. This should reduce the pressures on the M P F 33 Procurement Unit. However, the delegation of authority w i l l only work effectively if agencies put in place adequate management controls to ensure that procurement procedures are followed. Further delegation may be appropriate where agencies have demonstrated compliance with government-wide procedures. A “hurdle approach” to delegation i s an effective way to gain the benefits o f devolved controls without running excessive fiduciary risk. This involves delegating higher control thresholds to agencies that have demonstrated a consistent capacity to spend and procure in line with rules and regulations. Both Treasury and the Procurement Office are using this approach informally: the Ministry o f Health’s Autonomous Medical Stores now handles all procurement and distribution o f medical supplies; and the Ministry o f Defense has been given higher thresholds for petty cash, CPV clearances, procurement and line item transfers after demonstrating i t s ability to comply with procedures. A formal “hurdle approach”, with clearly defined standards and a communication strategy to demonstrate the benefits o f compliance, would create some incentive for agencies to improve public expenditure management practices. D. REDUCING COSTS 3.14 Unit costs are significantly higher in Timor-Leste than regional and low-income country averages. Data from World Bank projects during the reconstruction phase suggest that construction costs are between thirty and seventy-five percent higher than in neighboring provinces o f Indonesia, with comparable disparities for supervision costs. This is, in part, a “Dutch disease” effect, with substantial inflows o f external assistance driving up real price and wage levels. The “Dutch disease” effect was compounded in a post-conflict setting, where virtually all construction materials, equipment and skilled labor were imported, there were few local contractors, and extensive use o f emergency procurement procedures meant that there was little competition between suppliers and contractors. While unit prices are expected to settle as external assistance inflows decline, active measures are needed to bring costs down and thereby improve the efficiency o f spending. Key interventions w i l l include: promotion o f competition through the procurement process and through contracting out; standardization o f government purchases and construction; and benchmarking across projects and service providers. 3.15 Competition i s the most effective means of reducing unit costs. Timor-Leste’s fuel supply system provides a salutary example. There i s one bulk import terminal for o i l products, operated by Pertamina, the Indonesian national o i l and gas company. Other companies are not allowed to use the bulk import terminal, leaving Pertamina with about 80 percent o f the market for imported o i l products. The tax-free price o f diesel o i l in Timor Leste i s about 60 percent higher than the non-subsidized price that Pertamina customers pay in Indonesia for the same product. Shipping and terminal costs cover only a small part o f the difference. Retail o i l prices in APEC countries are around 30 c/l with the lowest at 28 c/l in Samoa, which procures o i l through long- term contracts awarded through a competitive bidding process. These retail prices would translate into wholesale prices o f about 25 cA and 23 c/l respectively. Clearly, competitive tendering for o i l supplies could significantly reduce costs to Government and the private sector. In Timor-Leste’s narrow domestic market, with as yet limited domestic production, effective competition i s likely to require relatively low thresholds for international bidding. 3.16 Contracting out of services may also help reduce costs, but also brings additional benefits by supporting the private sector and making the public sector more flexible. B y far the largest contracting program i s that for routine road maintenance, with contracts let to local private sector contractors and to communities (see Chapter 6). This i s consistent with the guiding principle laid out in the NDP, which indicates that Government w i l l “utilize the private sector to the maximum extent possible in the cost effective delivery o f projects” (NDP, 2002, page 265). Contracting out helps foster the small-business sector, providing a foundation from which larger 34 enterprises can grow. The unit costs for contracting out may appear to be higher than the cost o f implementation by direct administration. However, such direct comparisons may be inaccurate- they are unlikely to factor in the public sector’s administrative overheads-and fail to capture the longer-term cost savings that contract flexibility offers. Public institutions and staff have to be paid whether or not they are working productively during slack periods; contractors are only paid for work done and can be more easily held to account for performance. There i s considerable scope for contracting out o f services in the public sector. Progress has been made in the health sector, where cleaning and laundry services are now contracted out in some facilities. Other services that might be better contracted out include, for instance, security. Where agencies can encourage competition between providers and reap the benefits o f cost savings, management are generally quick to identify opportunities for contracting out. 3.17 Standardization discourages extravagance and over design and facilitates bulk procurement, thereby helping to keep costs down. The setting and enforcement o f appropriate service standards i s a critical policy decision, which w i l l determine future cost structures. Standards generally address working conditions, equipment and service charges, such as travel subsistence rates. There has always been a concern that the working conditions under UNTAET would create expectations that could not be met after Independence. Early on, it was announced that most Government offices would not be air-conditioned. B y setting standards, the Government may determine how many vehicles and what kind o f vehicles are appropriate for Government departments. In construction, the setting o f appropriate design standards can avoid the problem o f over-design that caused high construction costs in World Bank education projects. More appropriate design standards not only help to reduce materials costs, they can also open up opportunities for smaller, national construction companies and community-based initiatives. Standardization also facilitates bulk procurement and allows the Government to reduce parts inventories. Progress in these areas has been slow. However, it i s encouraging to note that M P F i s now proceeding with the preparation o f standards in key areas, and M E C Y S has begun preparation o f standard specifications for commonly used office and field equipment. 3.18 Lastly, benchmarking between contractors and service providers may provide a guide as to their relative efficiency. Comparison o f the unit costs offered b y contractors provides a good guide as to the actual costs. Comparison between agencies and service providers can be used in a similar way. Comparisons o f the costs o f providing a standardized package o f health, education, and road maintenance services can provide some indication o f whether i t would be better to outsource to NGOs or the private sector. Such analysis i s best undertaken in the context o f periodic sector policy and expenditure reviews. E. GETTINGRESOURCES DOWN TO THE FIELDLEVEL 3.19 Rough estimates based on MPF data for FY2003 suggest that only one-third of total Consolidated Fund expenditure and one-fifth of Consolidated Fund goods and services expenditure, on a cash basis, i s allocated to national programs o r districts other than Dili (see Table 3.4). The proportion o f Consolidated Fund expenditure channeled through district imprest accounts-and thus used for purchases o f goods and services in the district-is even lower, at around 5 percent o f total expenditure. There are significant variations in the degree o f deconcentration between sectors. Road maintenance i s already highly deconcentrated, with about half o f total spending and goods and services spending undertaken through local contractors and communities. Health, too, has made progress in deconcentrating funding to hospitals and clinics, largely through imprest account mechanisms. In education, deconcentration i s largely for personnel, and deconcentrated spending on goods and services i s negligible. 35 Table 3.4: Expenditure Deconcentration 3.20 Greater attention needs to be given to Estimates (Expenditure on National Programs tracking the deconcentration of resources. This and outside Dili, Cash Basis), FY2003 requires improved coding o f CPVs to indicate whether expenditures are intended for national Function Total G&S programs or specific districts, and the preparation General Public Services 14 27 o f indicative budget allocations for agency Defense 20 26 spending at the district level. Although time Public Order and Safety 33 13 consuming, the preparation o f district allocations Economic Affairs, of which 19 19 i s perhaps the most effective means o f getting Agriculture, Forestry, Fisheries 19 13 agencies to focus on service delivery rather than Fuel and Energy 11 11 institutional requirements. Certainly, the Transport 50 57 feasibility o f such district allocations in key Environmental Protection service delivery sectors merits review. The Housing and Community Development 15 11 Government intends to undertake a review of Health 35 18 budget execution constraints. This could usefully Recreation, Culture, Religion 2 2 address constraints faced in channeling resources Education 69 5 to the field level. Social Protection 0 0 Total 34 18 3.21 Block grants for investment projects Source: MPF. are a good way to get resources down to the field level and build up local management capacity fairly quickly. Small-scale works-such as schools, water supplies, feeder roads and bridges, and small irrigation systems4an be identified and implemented by communities. They are relatively l o w risk, since funding for project implementation can be isolated within the public expenditure management system. Many countries-including Mozambique, Zambia, Malawi, Uganda, and Cambodia-have used small-scale project funds to channel resources directly to communities and local authorities. The U N C D F Local Development Fund i s one o f the most Table 3.5: Community Empowerment Project, successful models for this Sub-projects by Cycle kind o f program. The Community Empowerment Cycle 1 Cycle 2 Cycle 3 Project in Timor-Leste 04/00 to 09/00 11/00 to 06/02 07/02 to 12/03 demonstrates the potential o f Project Type Projects US$'OOO Projects US$'OOO Projects US$'OOO this approach, with a Roads 45 90 88 456 91 484 substantial and diverse Bridges 8 30 13 52 portfolio o f small-scale sub- Water & Sanitation 56 89 166 986 190 1,194 projects implemented at Irrigation 9 33 115 50 29 1 community level (see Table Social Housing 50 232 137 783 3.5)-though this has been Village Buildings 235 726 supported b y substantial Clinics 1 2 2 5 technical assistance and local Schools 2 I 6 28 staffing costing about 58 Markets Buildings 2 19 cents for every dollar Household Equipment 99 297 28 99 disbursed to sub-projects. A Agricultural Equipment 61 159 38 126 strong case may be made for Electrification 43 47 following up the CEP with Women's Group Activities 55 134 community block grants Other Activities 11 32 implemented through a more Training 32 66 47 streamlined process, better Credit Activities 545 1,047 45 Awaiting Proposals 151 integrated into Government Total Sub Pro.iects 496 1,381 1,014 3,311 568 3,165 systems: with grants Source: Coininunity Empowerment Project. transferred directly to 36 community accounts by Treasury, overseen by and with technical support from the Ministry o f State Administration and line agencies. 3.22 Block grants can also be used to channel resources to field level service delivery units. The MECYS intends to pilot this approach for schools, with Parents and Teachers Associations and School Councils assuming a role in the management o f resources. Such funding mechanisms have a significant impact at relatively low cost. Block grants can provide a framework for bottom-up accountability. Evidence from other countries suggests that resources tend to be better used where the beneficiaries are directly involved in their management and have information about the funds available and how they can be used. There i s scope for exploring this approach in other sectors. 3.23 Further work i s needed to address the constraints on the deconcentration of resources. These include low petty cash limits, transportation difficulties, and lack o f sub-district banking facilities. Training and close supervision o f district level financial management personnel i s critical. Recent cases o f fraud in district treasuries highlight the risks inherent in a system that relies on districts holding large sums in cash. Lack o f banking facilities could be addressed using alternative financial intermediaries, such as micro-finance offices and post offices, to provide financial services to government agencies in the districts. Alternatively, MPF and M S A could identify district and sub-district Government suppliers, who can be paid through the centralized CPV system, until a larger share o f resources can be executed b y districts. F. ALIGNING RESOURCES WITH POLICIES AND STRATEGIES 3.24 Planning instruments introduced since Independence have sought to translate the broad guidelines provided by National Development Plan into more operational tools. Some o f these instruments, notably the Prioritization and Sequencing (P&S) exercise to map out implementation o f the NDP up to FY2007 and the Road Map, are best seen as complementing the NDP. The key elements o f the planning system now comprise both medium-term strategic planning instruments and operational plans. Annual Action Plans (AAP) and Quarterly Reporting Matrices (QRM), introduced in August 2002 and now in their second year, provide a framework for agency level operational planning and progress monitoring. Summary reports are prepared b y MPF on a quarterly basis and submitted to the Council o f Ministers. MPF i s currently developing a computerized information system to facilitate compilation o f AAPs and tracking o f QRMs. A Medium-Term Expenditure Framework (MTEF) provides estimates o f rolling expenditure allocations at program and aggregate component level over a five-year planning horizon. Sector policies, developed as agency initiatives, are now being followed up with Sector Investment Programs, which seek to identify priority interventions for external financing over the medium term, and agency organic laws. 3.25 The challenge over the next few years i s to move towards a planning approach where priorities are defined within agreed expenditure limits, defined at a cross-governmental level, rather than on the basis of needs. I n the absence o f hard expenditure limits, agency planners w i l l tend to present over-optimistic plans and resource requirements. The Prioritizing and Sequencing and the Road Map exercises followed a needs-based approach. During the subsequent budget exercise, agency submissions for the Consolidated Fund totaled US$127 million (US$93.8 million for recurrent expenditures and US$32.6 million for major capital works), around double the Budget Guidelines’ expenditure l i m i t s . Proposals were subsequently trimmed to US$74.3 million b y the Council o f Ministers, involving an inordinate amount o f time for the Budget Office, creating considerable frustration at the agency level, and leading to last-minute changes in the structure o f expenditure. In the FY2005 budget process these problems were avoided b y reaching broad agreement on the expenditure l i m i t s at the level o f the Council o f Ministers before budget and 37 planning guidelines were circulated. As a result agency submissions were largely in line with limits. This i s a significant achievement. If subsequent budget exercises can impose a similar level o f discipline, the Government w i l l be well placed to ensure that expenditures are aligned with priorities both at the agency and cross-governmental levels. 3.26 Greater attention needs to be given to the needs of service delivery. Agency planning i s currently focused on project identification, to define priorities for externally financed investment, and detailed activity planning, through the Annual Action Plan process, which tends to focus on the work o f agencies’ head offices. These tools do not provide a sound basis for expenditure planning across service networks, where the key issues are affordable service volumes and standards, based on an assessment of unit costings (such as the appropriate level o f spending per student or per school) and the corresponding cost drivers (such as pupil-teacher ratios, numbers o f books, quality o f schools). During the public expenditure review exercise, simple cost estimation models were prepared for the education, health and roads sectors, to help agencies understand the financial implications o f alternative service volumes and standards. This approach can be followed through into budget execution through the use o f formula-based block grants to allocate resources to service delivery facilities, on the basis of agreed standards o f service. 3.27 A n essential support to a service delivery focus in expenditure management i s the integration of performance measures during the planning and budget process. Some progress has been made in this direction, notably in the FY2003 budget, which presented some quantitative output indicators at program level. For the most part, however, attention has focused on AAPs, which are primarily geared to the presentation and monitoring o f process indicators and milestones-performance indicators were dropped in the FY2004 budget. The notable exception here i s the Ministry o f Health, which has identified a small number o f output indicators for the purpose o f monitoring budget and AAP implementation. However, it i s unclear to what extent these cascade down through the administrative structures, and serve as the basis for internal agency management. The focus on Millennium Development Goals (MDGs) provides an opportunity to focus on quantitative performance indicators more systematically across the administration. I n this context, the creation o f agency Budget Committees, again a Ministry o f Health initiative, provides an opportunity to link service delivery planning with the formulation o f agency budgets. Ideally, information on performance indicators and targets should be presented in Budget Papers so that i t i s readily available to the Council o f Ministers and National Parliament when budget allocations are reviewed. 3.28 Now that the basic framework of the planning system has been put in place, there i s scope for greater flexibility and line agency leadership through a rolling process of sector policy development. The health sector’s experience in developing a sector policy, on-going work in education and agriculture, together with the recent introduction o f Sector Investment Programs provide the nucleus for sectodagency level strategic planning. The development o f Sector Investment Programs has been driven by the imperative o f identifying government priorities at the sector level to guide the formulation o f external partners’ country assistance strategies. Following this initial push, it i s likely that each sector w i l l adopt i t s own timeframe for strategic and policy reviews. This i s consistent with the consultative approach adopted b y the health and education sectors in the formulation o f their sector policies. MPF may be able to provide some structure to this process by implementing a rolling program o f sector expenditure reviews, which would highlight issues o f policy consistency and expenditure effectiveness and provide a starting point for strategic reviews. Preliminary sector expenditure reviews were used to support the FY2004 budgeting exercise and the formulation o f education, health and roads sector strategic planning exercises. A rolling program o f reviews every three years for key sectors would allow agency staff to take a much more active role in this process. 38 Box 3.3 Key Recommendations - Managing Public Spending 0 Development o f a system-wide capacity building program for financial management, under unified management led by MPF and with long-term, multi-donor finding. 0 Development o f simple expenditure control mechanisms at agency level, including: internal authorization procedures for Commitment and Payments Vouchers (CPVs), with clear delegation of authority for commitments up to agreed limits; simple records of those CPVs submitted to the Ministry of Planning and Finance: and regular reconciliation o f these records against the budget execution reports generatedfrom Treasury’s computerizedfinancial management information system. 0 Formulation o f a clear strategy for transition to an independent audit institution, so as to establish the basic framework for independent oversight foreseen under the Constitution and start building oversight capacity. 0 Preparation o f agency procurement plans and quarterly expenditure plans before the start o f the fiscal year to guide budget execution, regular reporting on budget execution against these plans to agency management. 0 M P F negotiation o f Expenditure Authorization Notices to guide and track progress in budget execution, withfront-loading o f expenditures in key programs. 0 Further standardization o f commonly procured items by the Procurement Ofice and agencies, and extended training for agency personnel in drawing up specifications. 0 Adoption o f a formal “hurdle approach” to delegation o f procurement authority, for agencies that demonstrate capacity to spend and procure in line with rules and regulations. 0 Contracting out of a wider range o f services, to promote private sector and improve flexibility in services, and benchmarking o f costs between service providers to identify areas where services can be outsourced to NGOs and the private sector. 0 Review of feasibility of setting district allocations through the budget to guide to budget execution, thereby promoting deconcentration o f spending andfacilitating tracking. 0 Establishment o f a Local Development Fund to channel resources to locally identified small-scale public investment projects. 0 Review o f options for use o f banking facilities in districts, including use of micro-finance institutions and post ofices. 0 Application o f hard budget constraints,set by the Budget Circular, throughout the budget process. 0 Integration o f program level performance information in budget documentation, to reinforce the link between expenditures and service delivery. 0 Implementation a rolling program o f sector expenditure reviews, highlighting issues o f policy consistency and expenditure effectiveness, as a starting point for strategic reviews and the sector policy process. 0 Creation o f formal sector working groups to support the development of sector policies and align external financing with sector expenditure priorities. 3.29 The problem of expenditure drift can be addressed by setting l i m i t s on external financing that reflect Government priorities. This signals priorities to external partners, complementing the identification o f priority programs and projects through the SIPS. More importantly, by putting in place l i m i t s on external financing at agency or sector level, agency management i s forced to assess the opportunity cost o f alternative applications of external financing-the trade-offs between spending on different programs. In order t o enforce such discipline, all external financing agreements would have to be approved b y the Ministry o f Planning and Finance and formally gazetted before integration into the budget. 3.30 Engagement of external partners in sector strategic planning will be critical to sustaining external assistance and improving the effectiveness of externally financed projects and programs. Considerable progress has been made in involving agency managers through successive planning exercises-first the NDP, then Prioritizing and Sequencing, and annual planning exercises. Empowerment o f Government agencies through the policy and planning 39 process should remain the priority. External assistance has supported this objective b y providing considerable technical input through consultants. However, external partners have sometimes been brought in at a very late stage, when key decisions have already been taken. This i s in marked contrast to the approach followed in other countries with substantial external assistance flows, such as Uganda, Tanzania and Mozambique. Here sector working groups, led b y the responsible Government agencies, engage external partners in an on-going dialogue on policy issues, priorities and financing requirements, as well as operational issues. This approach brings benefits-a consensus on priorities, improved operational coordination, opportunities to consolidate donor programs through co-financing and harmonization o f procedures-that cannot be realized by dealing with donors individually, even though that may appear to increase Government’s leverage. A number o f agencies in Timor-Leste are gradually moving towards this sector approach to external management, notably in health, but also in education, agriculture and police. The introduction of the Sector Investment Programs provides an opportunity for agencies to adopt a sector approach to external assistance management on a more systematic basis. 40 4. TOWARDS A LEANAND EFFECTIVE CIVIL SERVICE A. INTRODUCTION 4.1 Creation of a “lean, efficient, effective, accountable and transparent civil service” figured prominently in the NDP’s development goals as a means of achieving good governance and improvements in public services (NDP, 2002, page 21). The NDP goes on to stress the importance o f creating “a culture o f public service, establishing professionalism in service provision” and “internal mechanisms to control and avoid corruption and nepotism” (NDP, 2002, page 108). In order achieve these goals, the Government w i l l have to address the legacy not just o f Indonesian occupation, but also decisions taken under UN administration. 4.2 Although the broad structure of the administration was already es’tablished by Independence, key management systems were still not in place. The Transitional Administration used staffing levels as an indicator o f the readiness o f the civil service, police and defense forces, and so gave priority to recruitment numbers. B y April 2002, in little over two years, staff had been recruited for 11,000 out o f a total o f 15,000 approved posts.5 Most o f the staff were appointed to institutions using fairly generic terms o f reference: the rationale o f specific posts in relation to institutional mandates and policies was often i lldefined. The public sector pay scale was simple to administer but compromised regional competitiveness and did not provide for progression or performance incentives. Beyond the recruitment process, there were scant regulations to guide basic personnel management functions or disciplinary procedures. Beyond the payroll and recruitment, there was no systematic record keeping on public employees. The post- Independence administration now faces three challenges: first, to contain civil service numbers; second, to put in place an appropriate pay policy; and last and most important, to put in place basic personnel management systems. These challenges are reviewed in turn in the present chapter. B. CONTAINING CIVIL SERVICE NUMBERS 4.3 The NDP capped civil service staffing levels at around 12,000 (NDP, 2002, pages 29 and 76). This limit was based Table 4.1: Budgeted Staffing Profile, FY2004 on a proposal b y a Joint Assessment Mission of Permanent Temporary Total Agency No. % No. % No. % November 1999 for a light Civil Service, of which 11,988 68 447 3 12,435 70 central administration of Education 6,965 39 251 I 7,216 41 around 2,000 staff, with 80 Health 1,760 IO 7 0 1,767 10 percent o f c i v i l servants Other agencies 3,263 18 189 I 3,452 19 Defense 1,346 8 - 1,346 8 directly engaged in service Police 3,362 19 - 3,362 19 delivery in the education and Autonomous Agencies 454 3 159 1 613 3 health sectors.6 The proposed Total Budgeted Posts 17,150 97 606 3 11,756 100 Source: MPF, FY2004 Budget Books. staffing levels were United Nations Security Council, Report of the Secretary-General on the United Nations Transitional Administration in East Timor, 17 April 2002, SI2002i432, page 2. Joint Assessment Mission, Governance Background Paper, for East Timor: Building a Nation, November 1999, page 2 and Annex 3. 41 significantly lower than the estimated 28,000 civil servants employed under the Indonesian administration. However, at an aggregate level, the target o f 12,000 civil servants was broadly in line with staffing levels for low-income countries, amounting to about 3 percent o f the population o f working age (4.4 percent o f the working population in the case o f total budgeted posts). 4.4 Budgeted staffing levels have already reached their NDP ceilings, with 11,988 civil service posts and 17,150 permanent public employees. Actual budgeted staffing levels, at 17,756, are somewhat higher than those for permanent staff, when temporary posts are included (see Table 4.1). The majority o f these “temporary” posts are for permanent staff o f institutions that l i e outside the administration, such as the University o f Timor-Leste, judges, and 206 political appointees (including ministerial support staff). The FY2004 budgeted staffing levels represent a slight increase (around 5 percent, 763 permanent posts) in relation to staffing limits set in the initial FY2003 budget, approved in June 2002. 4.5 There remains a shortfall on recruitment, with a total payroll o f 15,328 employees in September 2003, amounting to 86 percent of budgeted posts (Figure 4.1). O f current employees, 14,289 are permanent employees and 1,039 are temporary employees. About one-third o f the temporary employees are appointed figure 4.1: Filled Cidl Serdce Posts by Agency, against permanent posts. There may September 2003 YO be additional temporary employees Total Civil Servants financed from agencies’ goods and Transport, Comm &Public Works services appropriations who are not Planning &Finance Foreign Affairs &Cooperation captured by payroll data. The Lab o r &Solidarity proportion o f budgeted posts filled i s Eealth lowest in Government structures and Education, Youth, Culture &Sport the Ministry o f Justice and highest for Agriculture, Forestry &Fisheries the ministries o f Interior, Health and Trade &Industry Development &Environment Education. Justice Interior 4.6 Shortfalls against budgeted S tale A d ministration posts are much higher for senior Government Structures National Parliament grades (see Figure 4.2). This i s largely due to an acute shortage of 20 40 60 80 100 Timorese with relevant university qualifications and work experience, compounded by the fact that Figure 4.2: FClledPosts by Grade, Sept. Government salaries for senior staff ‘ 2003 are much lower than those offered by 0 25 50 75 100 125 ?4 aid agencies and the financial sector. Where agencies have been unable to find suitably qualified personnel, they 2 have occasionally been authorized to fill posts with staff at a lower level. As a result, temporary employees fill a large proportion o f the highest- grade posts. 4.7 Most public sector employees are engaged in service delivery, though numbers engaged @Total I Permanent in central administrative functions 42 are higher than originally envisaged. About 70 percent o f public sector posts are civil servants, and about half o f all public sector employees work in education and health. There are over three thousand employees o f central agencies, about 50 percent more than envisaged at the time o f the Joint Assessment Mission. The largest public sector employer outside the civil service i s the police force, which accounts for nearly one in five budgeted public sector posts. Budgeted police numbers have increased by nearly 20 percent since Independence. 4.8 Around 60 percent o f civil service staff are stationed in Dili. Staffing levels outside Dili are somewhat higher in the education, health and state administration sectors (see Figure 4.3). This suggests a preponderance o f Figure 4.3: Civil Service andPolice PostedOutside of staffing in central agencies. Dili, September 2003 YO Further work i s needed to Police assess the proportion o f staff Total Civil Servants directly involved in service Transport Comm &Public Works delivery and those engaged in Planning &Finance Foreign Affairs &Cooperation I support functions. In order to l a b o r &So lidaritv promote a stronger service Health delivery focus, M P F and MSA Education, Youth. Culture &Sport might consider restricting new 1 A g ricuiture Forestry &Fisheries i Trade &Industry Development &Environment 1 I appointments for agencies and for agency core Justice administrative functions, Interior State Administration thereby giving priority to Government Structures service delivery activities. National Parliament t Opportunities for 20 40 60 80 100 redeployment to field level should also be explored. Over the longer-term, a process o f functional reviews would help integrate assessments o f appropriate staffing levels into-the sector policy process and formulation o f agency organic laws. 4.9 As civil service staffing approaches budgeted limits, the pool o f potential recruits i s expected to increase rapidly in the next few years, putting considerable pressure on public sector employment policies. Over the next few years approximately 2,000 students a year will graduate from the University o f Timor-Leste and more s t i l l from private colleges. There i s some scope for recruiting from this pool into the middle grades over the next few years, but thereafter the recruitment needs are likely to drop back to the standard replacement rate o f 5 percent a year, amounting to about 900 staff per year across all grades, but only 50 staff in grades that require university education. Since the public sector i s by far the largest employer (data from the 2001 household survey indicate that the public sector employed about 40 percent o f salaried employees), opportunities for these graduates will be extremely limited. In these circumstances, strong political commitment to a lean civil service will be needed to resist pressures to multiply the number o f public sector posts. 4.10 There are also demands for higher levels o f staffing from within the administration to fulfill expanding agency mandates. The continuing process o f preparing agency organic laws in part fuels these demands. In the absence o f staffing and financial constraints, this process has encouraged agencies t o adopt ambitious mandates, leading to a multiplication o f functions and departments, all o f which have to be staffed. There i s a risk that some o f these departments may end up with minimal staffing and resources, with functions filled on paper but with little or no impact in reality. External assistance has played a part too, by implementing management systems 43 that require relatively high levels o f manpower relative to local capacity constraints, and financing a wide range o f activities outside agencies’ core functions. 4.11 Agency staffing levels are best contained by setting hard staffing limits through the budget process and carrying out periodic functional reviews to assess appropriate staffing levels in the light of sector policy and financing limits. Under current practice, staffing levels are determined during the budget process through approved staffing structures and l i m i t s for personnel expenditures. These l i m i t s have been complemented b y aggregate l i m i t s on permanent staffing levels negotiated as part o f the Transition Support Program. N o w that these l i m i t s have been reached, Government has instructed agencies to redeploy staff rather than request new appointments as part o f their FY2005 budget proposals. Over the coming years, however, a more thorough assessment o f appropriate staffing levels w i l l be needed, with a view to reducing the numbers o f staff in central administration functions and, where necessary, increasing numbers o f personnel in service delivery functions. Functional reviews-linking agency internal structure to core functions and identifying staffing requirements to deliver these functions-are best undertaken as part o f a periodic policy and expenditure review process. This allows policy makers to assess the trade-offs between alternative service delivery models; between spending on personnel, goods and services and investment; and between administrative and service delivery functions. Such assessments can only be made where the functional review takes into account a hard budget constraint, reflecting the medium- to long-term recurrent spending levels. In this context, the appropriate framework for carrying out functional reviews i s as part o f the on-going sector expenditure program exercise. I t i s likely that the functional review process w i l l require agency organic laws to be revised periodically so as to ensure that they reflect policy, agency mandates, functions and organizational structure. In this way agency organic laws can be used as an instrument o f policy, rather than a policy constraint. c. REFORMING m L I C SECTOR P A Y 4.12 The present pay scale structure does not adequately differentiate between personnel on the basis of experience, responsibility and performance. Staff are appointed, primarily on the basis o f qualifications, to a seven-grade pay scale rising from US$S5 per month in grade one, to US$361 at Grade seven, without any within-grade increments. The internal compression rate o f 4.25 i s low by international standards, usually ranging between 7.5 and 10, though in l o w income countries compression rates in excess o f 10 are not uncommon. Under current arrangements, there are no incentives for improved performance or for assuming additional responsibilities: all primary school teachers are classified in grade three, for instance, with school directors and teachers paid the same salary. 4.13 Over the next few years, the salary scale will have to be adjusted to provide an appropriate incentive regime. The Government i s currently reviewing alternative models o f public sector pay. This w i l l entail the introduction o f within-grade increments, and, possibly, a strictly limited number o f allowances. A model prepared as part o f the PER process helps assess the financial implications o f changing the internal compression rate and introducing within-grade increments. Preliminary estimates suggest that the introduction o f within-grade increments based on the current grade structure i s affordable, if budgeted staffing levels are maintained (see Table 4.2). Estimates are based on the assumption that only 20 percent o f staff receive increments in each year. This i s compatible with an incentive regime, where increments are linked to performance rather than seniority and the proportion o f staff receiving increments each year i s capped. On this basis, after three years, the total costs for the c i v i l service would be about three percent higher than the current payroll bill for budgeted posts, rising to six percent above current payroll b y year five. These costs could be absorbed within the current MTEF estimates for personnel costs. Further 44 work i s needed to determine the costs o f alternative remuneration systems geared to providing appropriate incentives within the administration. A pre-condition o f such schemes, however, i s the establishment of an Table 4.2: Estimates o f Budgetary Impact of Within Grade Increments effective performance appraisal regime, Scenarios Year0 Year1 Year2 Year3 Year4 Year5 supported by a personnel Current Grade Structure (DCR 4.25) registry. Annual Payroll US$’OOO 25,631 25,842 26,095 26,398 26,762 27,199 % Increase on FY2004 Payroll 100 101 102 103 104 106 Revised Grade Structure (DCR 7) 4.14 A case may also Annual Payroll US$’OOO 26,062 26,284 26,594 26,966 27,413 be 27,948 made for % Increase on FY2004 Payroll 102 103 104 105 107 109 decompressing the salary Source: World Bank estirnates. grade structure, so as to provide more competitive salaries for higher-level civil servants. This relates mainly to grades six and seven, agency senior management, where remuneration i s considered low in relation to competitors- primarily aid organizations and financial institutions. This partly explains the significant recruitment shortfalls for these grades (see para 4.6). Decompression i s viable, as long as it i s limited to the higher grades. The introduction o f within grade increments and increases in grade six base pay to US$380 (DCR 4.5) and US$595 (DCR 7), would result in an immediate two percent increase in payroll for budgeted posts and a nine percent increase over five years, which could be financed under the current MTEF (see Table 4.2). Proportional decompression lower down the pay scale significantly increases costs, rising to about 17 percent o f payroll for budgeted posts over five years. In order to significantly improve the prospects o f recruiting and retaining highly skilled staff, much higher levels of decompression may be needed. In an interim phase it may be worth considering the hire o f senior managers on a contract basis, with clear performance criteria and more flexible employment terms. 4.15 A t the bottom of the pay scale there are concerns that public sector pay i s uncompetitive relative to countries in the region, exerts upward pressure on the labor market, and so acts as a deterrent to foreign investment. While current pay scales are comparatively high (US$S5 month for primary school graduates, US$100 for secondary school), their impact i s difficult to assess in the absence o f labor market data (anecdotal evidence suggests that downward adjustments in private sector pay have occurred in recent months). Nevertheless, the NDP recognized that some realignment would be needed and-given the difficulty in imposing reductions in base pay-proposed that base pay should be gradually eroded b y ensuring that “growth in public wage levels [is] below price inflation throughout the Plan period” (NDP, 2002, page 77). 4.16 Although base pay for civil servants has not been changed, recent increases in pay for contract workers are a matter for concern. The Ministry o f Transport, Communications and Public Works increased pay for contract labor from US$3.00 a day to US$3.50, a seventeen percent increase, following negotiations with community leaders. Although this was explained as a response to inflation, the award was significantly above the prevailing inflation rate. What i s more, there does not appear to have been any assessment o f the financial and economic implications of the change in pay policy before the new pay rates were announced. Clearly, if further unilateral changes in pay policy are to be avoided, a formal review process involving core ministries including M P F and the Ministry o f State Administration w i l l need to be put in place. 4.17 Perhaps the most effective way to allow base pay to settle to more competitive levels would be to outsource basic service functions, thereby taking most of the staff with limited academic qualifications and technical skills off payroll. The health sector has already made 45 progress in this direction and there i s scope for outsourcing other functions, such as low level ancillary services to public institutions and the defense forces. While this may not necessarily reduce the cost of services, it i s does allow wage levels to be set by contractors, who w i l l have to follow market rates. This helps reduce distortions created by the relatively high base pay in the public sector wage scale. Further adjustments can be made through recruitment policies, b y increasing the level o f qualifications for new recruits in grades one to five. Further studies are needed to assess the likely impact o f these policy options on the labor market, public sector recruitment and retention, and public finances. In parallel, i t w i l l be important to develop contract design, procurement and monitoring skills. 4.18 Whilst recognizing the importance of pay policies in improving public sector performance, reforms should proceed cautiously. Public sector employment and pay should be linked to merit and performance. Govemment-wide pay reforms can only proceed once transparent procedures for performance assessment and an effective, up-to-date personnel registry have been put in place. Until then, a temporary system o f allowances for exceptional cases could address the discrepancies between grade levels and levels o f responsibility by, for instance, introducing allowances for school directors who are currently paid at the same level as teachers. But t h i s anomaly, and other cases for complementary allowances, such as for risk or rural postings, w i l l ultimately have to be addressed in the context of broader pay reform and definition o f the grading structure. D. MANAGING THE CIVIL SERVICE 4.19 Personnel management has been given much lower priority than financial management in Timor-Leste’s development agenda, even though lack of human resources i s Timor-Leste’s binding development constraint, and the effective use and development of human resources will be critical in determining Timor-Leste’s development trajectory. The parlous state o f Timor-Leste’s public administration system was made apparent soon after Independence. Routine personnel management transactions-such as transfer, promotion, and disciplinary action-and record keeping were paralyzed in the absence o f a regulatory framework and clearly assigned institutional responsibilities. I n the rush to staff institutions, staffs’ responsibilities and functions were i ll defined and postings occasionally ill-suited to their assignments. Training was generally ad-hoc and supply driven-geared to the transfer o f skills from expatriate Advisers-with little attention given to the NDP’s goal o f professionalizing the civil service (NDP, 2002, page 63). Discipline proved difficult to enforce, in part because the accountability structure and disciplinary procedures were i ll defined. The Government i s now beginning to take the necessary steps to address these development challenges. 4.20 The recent approval of the Public Service Statute will provide a framework for the personnel management systems, but implementing regulations and procedures are still needed. Although a draft c i v i l service statute was prepared under the Transitional Administration-following a consultative process in line agencies and districts-it was only approved by Parliament in M a y 2004. While the proposed statute provides a broad framework for civil service management and an outline o f disciplinary mechanisms, supplementary regulations covering disciplinary procedures, recruitment, procedures, gifts, reporting requirements and the role o f the Public Service Directorate w i l l be needed to implement the Statute. Particular attention needs to be given to ensuring that the most serious disciplinary measures, and recruitment and promotion o f senior personnel are overseen b y panels rather than c i v i l servants hierarchical superiors. The Ministry o f State Administration has already advanced with the preparation o f a manual covering basic human resource transactions. Further work i s needed to define policies before implementing regulations can be drawn up. Particular attention i s needed to clarify the 46 Government’s objectives and personnel policies regarding: recruitment (for example, appropriate practice where suitably qualified personnel cannot be identified), remuneration, performance assessment, promotion and career development. Development o f regulations and guidelines on these issues w i l l be critical if agencies are to assume responsibility for personnel management. 4.2 1 Responsibility for routine personnel management functions will have to be delegated to the line agencies, with the Ministry of State Administration providing a supporting and oversight role. Even in a small country such as Timor-Leste, with a modest c i v i l service, excessive centralization i s likely to result in the central agencies being overwhelmed by the sheer volume o f routine personnel management transactions. This would tend to disempower agency managers and distract attention from critical oversight functions. Under UN Transitional Administration, although a Public Service Directorate was established as a central c i v i l service agency, responsibility for recruitment and personnel management was delegated to the larger specialized line agencies (education and health) and the police and security forces. However, neither the roles nor responsibilities o f agencies in personnel management, nor their relationship with the Ministry of State Administration, have been clearly defined. Moreover, most of the smaller agencies did not put in place comparable structures. The Ministry o f State Administration i s currently trying to establish a more systematic personnel management structure at agency level by requiring each Ministry to include a Department o f Administration and Finance (DAF), with staff holding the functions o f the National Directorate o f Public Service (NDPS), in the agency Organic Statute. Establishment o f these units and training o f their staff i s a prerequisite o f a functioning civil service management system. This w i l l also imply a gradual transformation o f the NDPS’s function, from direct involvement in routine personnel management transactions to one o f providing support and oversight over agency personnel management units. NDPS oversight responsibilities s t i l l have to be defined. This may entail, for instance, participation in the recruitment, performance review and promotion o f all senior personnel, and periodic personnel registry audits. The NDPS is, at present, ill equipped to fulfill this oversight function. Clearly, given the scale and importance o f the task, the appointment o f an adequately qualified and well-motivated NDPS team w i l l be critical. 4.22 A n up-to-date, comprehensive personnel registry needs to be put in place if there i s to be effective personnel management. I n early 2001, the NDPS set-up a centralized personnel registry and database to keep track o f appointments. Although this covered only part o f the civil service (excluding health workers, teachers, police and defense force personnel), the registry was incomplete and already out-of-date at Independence. Some agencies maintained personnel records; others did not. Payroll provided the only comprehensive, up-to-date record o f government personnel, though this contained only basic identification and contract information. I n the absence o f an up-to-date registry, it i s impossible to record basic personnel administration transactions (such as recruitment, appointment, transfer, promotion, leave, retirement, and disciplinary action), let alone develop more advanced human resource management functions (such as staff appraisal, training and personnel management policies and strategies). As the f i r s t step towards a comprehensive registry, M S A recently sent NDPS teams to review the status o f agency personnel records. While this may be helpful in assessing the current status, the only realistic way o f maintaining up-to-date records i s b y delegating responsibility for record keeping to the employing agency. If this i s to happen, responsibility for personnel record keeping w i l l have to be clearly assigned, documentation requirements clarified and staff trained in personnel management transactions. Development o f a computerized record keeping system would help NDPS keep track o f personnel transactions and facilitate a linkage to the computerized payroll system managed b y Treasury. However, computerization can only proceed if the agencies have up-to-date personnel records to enter into the database. Given the urgency o f establishing a registry, and the scale o f the task in some o f the larger agencies, notably education, additional support staff may need to be 47 contracted to establish the requisite personnel records and thereby allow agency personnel to concentrate on routine record keeping. 4.23 Flexibility in appointments i s critical if staff are to be deployed where their skills can be used most effectively. Unfortunately, in the rush to staff Government agencies in the run-up to Independence, i t proved difficult to match candidates to the appropriate posting. A Government- wide s k i l l s assessment conducted by the MPF-PEAMD has highlighted some obvious mis-matches o f s k i l l s and assignments. Furthermore, eighteen months after Independence, differences in staffs’ motivation, management and technical s k i l l s are also becoming apparent. Some flexibility in posting staff, so that they can be moved between agencies and functions, i s needed. Given the size o f the Timor-Leste civil service, the scope of career advancement i s likely to be limited without flexibility in assignments. This requires clear procedures on redeployment, with an exchange o f information on staff performance supported b y a well-staffed and qualified c i v i l service agency. NDPS could usefully assume this clearinghouse function, particularly where re-assignment i s pursued actively to support staffs’ career development. 4.24 Structures for career progression and transparent procedures for performance review will need to be put in place if the NDP goal of professionalizing the civil service i s to be achieved. These structures have yet to be defined in Timor-Leste. Again, the options are for a centralized system, a delegated system or some hybrid o f the two. Delegated systems require line agencies to assume broader personnel management functions for personnel cadres in their area o f professional competence. Thus the Ministry o f Finance assigns accountants throughout the public sector, and the Ministry oversees professional standards, provides training and participates in promotions and rotations between institutions. T o be effective, a cadre system has to be properly managed, with an anchor team coordinating administrative and technical support in the sector agency. The alternative, centralized system would prove difficult for NDPS to manage, unless it i s limited to only the highest ranks o f the civil service. 4.25 Professionalization of the system will also require adequate systems for enforcing discipline and accountability. Recent surveys have pointed to problems o f poor attendance at schools and other government services in the field. The Prime Minister has highlighted poor Box 4.1 Key Recommendations - Civil Service Implementation of periodic functional reviews as part of any future sector policy and expenditure review process. Such reviews would assess appropriate stafing levels, establish limits on new appointments for core agencies and for agency administrative functions, and assess the feasibility o f redeployment o f staff to the field level Preparation o f regulations to support implementation o f the Public Service Statute, starting with procedures for disciplinary measures, promotion and recruitment. Regulations should include provision for panels to review the most serious disciplinary offences, and recruitment and promotion o f senior personnel, so that these measures are not determined solely by the civil servant’s hierarchical superior. Establishment o f a formal pay policy review process, leading to decompression, involving core ministries including MPF and MSA, so that the expenditure impact o f changes in policy is assessed. Interim measures to increase pay flexibility include: at the top o f the salary scale, hiring senior managers on a contract basis, with clear performance criteria and jlexible employment terms; and at the bottom o f the scale, outsourcing o f support functions and adjustments in minimum qualifications of clerical grade staff: Formal delegation o f responsibility for routine personnel management to line agencies’ personnel units, with M SA providing support and oversight. Establishment o f an up-to-date, comprehensivepersonnel registty with a view to the development o f a computerized record keeping system. 48 attendance as a problem in central agencies too. More serious disciplinary infractions have been identified in Inspector General reports. Identification o f disciplinary infractions has not always been followed promptly by disciplinary action. This may be due in part to lack o f clear disciplinary procedures. These w i l l soon be in place. The Public Service Statute defines infractions (including abuse of authority, abuse o f privileged information, use o f public office for personal benefit and other corrupt practices), provides for graduated disciplinary measures and outlines disciplinary procedures to be followed. Further regulation i s needed to establish procedures for the most serious cases, including the establishment o f review panels. A draft supporting “Manual” provides examples o f the documentation to be used in documenting and processing disciplinary cases. The Ministry has recently launched a disciplinary process using these procedures. The next step i s to ensure dissemination of the disciplinary procedures throughout the public service, possibly through an agency-level training o f trainers program, with more comprehensive training o f senior management. I t i s critical that disciplinary procedures are not only applied, but also seen to be applied through prompt action, with dismissal in the most egregious cases. This i s true both in the central agencies and at the field level, where agencies have to demonstrate commitment to investigate complaints by service users and follow-up with disciplinary action. Such accountability i s likely to be most effective where i t i s supported by representative oversight bodies close to the field level, such as Parent Teachers Associations. 49 5. IMPROVING ACCESS AND QUALITY IN BASIC EDUCATION A. INTRODUCTION 5.1 Seven out of ten people cited education as the top national priority when the government consulted with the people on their aspirations for the new nation in 2002. The National Development Plan mirrored these preferences, giving priority to the delivery o f quality primary junior secondary and senior secondary education (see NDP, 2002, page 38). Broad policy goals included a commitment to primary education for all and to partnerships with parents and civil society in the delivery o f education services. At the same time, the Plan recognized that a period o f consolidation was needed, to rationalize the system and build institutional capacity following the massive reconstruction effort in the immediate post-conflict period. The NDP also set ambitious targets for increases in public spending on education, rising from around one-fifth to one-third o f total spending in the period to FY2007. 5.2 Reconstruction was a remarkable success, with a functioning education system of over 900 schools and nearly a quarter of a million students put in place in just four years. The education system was literally in ruins in late 1999, most schools were destroyed, virtually all Indonesian personnel left causing an acute shortage o f qualified teachers and other professional. staff, particularly at the post-primary level, there was no national curriculum or instructional materials, both gross and net enrolment rates fell sharply. Pragmatic policy decisions had to be taken so that services could be restored. Most schools have now been rehabilitated, teaching places are filled and instructional materials are distributed and used. Enrolment rates have more than recovered, in part due to the late enrolment o f children whose schooling was disrupted and in part due to the enrolment o f children who had not previously participated in schooling. 5.3 The Ministry of Education, Culture, Youth and Sports ( M E C Y S ) i s now turning its attention to longer term development challenges for the education sector. An Education Policy was approved by the Council of Ministers in March 2004. This lays out the broad framework for development o f the sector. The present chapter highlights some o f the key expenditure policy and management issues to be addressed in support o f this policy framework. Section B reviews the structure o f education services, highlighting the success o f the reconstruction program and the significant role played b y the non-government sector. Section C identifies some o f the challenges in improving internal efficiency, by reducing repetition and dropouts, and their implications for improved access. Section D examines some o f the measures needed to improve the quality o f education, particularly in primary education, including staffing issues, curriculum development and the transition to teaching in the official languages o f Tetun and Portuguese. Section E reviews education financing and expenditure in the light o f these policy considerations, focusing on allocation o f resources to the policy priority, basic education, funding on non-personnel costs and the need for specific policies as regards parental contributions and public funding o f private education. Finally, the Section F underlines the importance o f improvements in management information systems and expenditure management systems to address slow budget execution, and proposes the establishment o f a system o f school block grants to cover operational and maintenance costs. 51 SYSTEM B. THEEDUCATION 5.4 Literacy and school attendance indicators reveal a legacy of under-investment in the education sector in the period to 1999. Overall, less than sixty percent o f adults are literate. Gender differences are substantial: 65 percent of males and 52 percent o f females are literate. While there i s little regional variation, literacy i s much higher in the lowlands (65 percent) than the highlands (46 percent), and much higher in urban (73 percent) than in rural areas (53 percent) (see Table 3). There i s also fairly wide variation in literacy b y wealth quintile, ranging from 40 percent among females in the poorest quintile to 90 percent among males in the richest quintile. Educational attainment follows a s i m i l a r pattern. For example, among adults aged 35-44 (prime ages in terms of workforce participation) two-thirds o f males and nine out o f ten females have less than a full primary school education. In rural areas, only 11 percent o f those aged 15 and over have progressed beyond lower secondary school, and this figure falls below 10 percent in highland areas Table 5.1: Educational Attainment of Adults (15 and Over) Percent (Table 5.1). Surveys suggest that about five Level of Completed Education percent o f people speak Area Never Some Completed Lower Upper Portuguese and about Enrolled in Primary Primary Secondary Secondary Total School School School School or Higher eighty percent speak Eastern Region 54 16 6 11 13 100 Tetun. Measures to raise Central Region 51 14 6 11 18 100 agricultural productivity Westem Region 61 13 8 8 IO 100 or improve maternal and Highland 64 15 4 8 9 100 child health must take into Lowland 49 14 7 11 17 100 account the l o w levels o f Urban 39 15 7 13 27 100 literacy and education, as Rural 59 14 6 IO II 100 well as language Total 54 14 6 10 15 100 constraints. The low Source: UNICEF, Multiple Indicator Cluster Survey, 2003. levels o f educational achievement amongst adults also underline the huge challenge facing Government in achieving i t s education policy objectives. 5.5 The education system i s characterized by a relatively wide-based pyramid. Most recent estimates suggest that about 240,000 students are enrolled in primary and secondary education. Of these, 75 percent are enrolled in primary grades (one through six), 16 percent in junior secondary (grades seven through nine) and just 9 percent in senior secondary school (ten through twelve). In a move toward nine years o f basic education, Government has established an Escola Basica providing both primary and junior secondary education, with plans for at least one in each district. Vocational and technical education i s also available at secondary level. 5.6 After strong growth in enrolment during the immediate post-conflict period, the number of primary school students has now stabilized. There was a surge in primary school enrolment in 2000, from 165,000 students in 1998 to 185,000 when schools reopened, with the intake to grade one increasing by 50 percent over this period. Most new enrollees were girls, the poor and children in rural areas, including a large number o f older children who had not previously attended school.’ This significantly reduced gender, income and rural-urban disparities in school attendance. The surge in enrolment was motivated b y post-conflict optimism and facilitated b y the temporary abolition o f fees, uniforms and parent contributions. Increasing enrolment was reflected in the rise in primary education Gross Enrolment Ratio (GER) from 89 percent to 110 percent, ’WorId Bank, Timor-Leste: Meeting the Challenges o f Independence: The Way Forward, February2004, page 7-8. 52 Table 5.2: Gross and Net Enrolment, 1998/99 to 2002/03 while Net Enrolment Ratio (NER) increased 2002103 from 5 1 to 70 percent in Level School Year M a l e Female 2001.* Since then 1998/99 2000/01 2002/03 Urban Rural Urban Rural enrolment has stabilized. Primary There was a drop in Gross Enrolment 89 113 105 115 102 110 103 student numbers from Net Enrolment 51 67 15 86 73 84 72 school year 2001-02 to Junior secondary 2002/03, though this may Gross Enrolment 44 47 65 87 63 89 52 have been due to Net Enrolment 24 22 30 42 24 46 25 underreporting by Senior secondary schools. While gross Gross Enrolment 19 26 enrolment fell from 113 Net Enrolment 11 16 percent in 2000/01 to 105 Source: 1998/99 and 2000/01 data based on TLSS. 2002/03 data based on MICS. percent in 2002/03, net enrolment increased from Table 5.3: Key Education Indicators, 2000/01 to 200314 School Years 67 percent to 75 percent ove; the same period. School Year % Preliminary data from 2000101 2001102 2002103 2003104 Change 2003-04 suggest that Students 224,971 234,436 233,871 247,183 9.87 primary school student Primary 185,378 183,806 174,822 185,594 0.12 numbers have now Junior Secondary 29,586 32,862 38,180 40,368 36.44 recovered. There i s some Senior Secondary 10,007 17,768 20,869 21,221 112.06 variation between Teachers 4,459 5,532 5,762 5,922 32.81 districts, in part due to Primary 2,992 3,926 4,080 4,173 39.47 recent population Junior Secondary 884 1,026 1,103 1,176 33.03 movements. While Senior Secondary 583 580 579 573 (1.72) enrolment ratios have to Schools 844 852 890 924 9.48 be interpreted with Primary 707 714 735 749 5.94 caution owing to their Y Junior Secondary 103 102 113 120 basis in sample surveys, Senior Secondary 34 36 42 55 61.76 data do show significant STR 50 42 41 42 gender and rural-urban Primary 62 47 43 44 disparities at primary Junior Secondary 33 32 35 34 school levels. Primary Senior Secondary 17 31 36 37 school teacher numbers Source: World Bank estimates based on MECYS data. have grown at a much faster rate, by 39 percent between 2000-01 and 2003-04, allowing a significant reduction in student-teacher ratios from 62: 1 to 44: 1 over this period. Currently an average primary school has about 250 students and five teachers. Some districts, such as Dili, have larger schools, giving greater flexibility and the opportunity for single teacher classes and some specialization. 5.7 There has been a huge increase in junior secondary and senior secondary enrolment since 2000-01. The number o f junior secondary school students has increased b y 36 percent and the number o f senior secondary students has more than doubled. Increases in the number o f junior secondary school teachers have almost kept pace with enrolment. However, the range across districts i s much wider than for primary schools: from 20:l in Viqueque to 49:l in Ainaro. At senior secondary school level, however, numbers o f salaried teachers have actually dropped *Estimates of enrolment ratios are based on population and age group estimates generated b y the Timor Living Standard Survey of 2001 (with total population estimated at 828,205). 53 slightly 2000-01, leading to a significant increase in student-teacher ratios. L o w levels o f enrolment in 2000-01 were largely due to acute shortages o f qualified teachers as Indonesian teaching staff left. Secondary schools addressed this problem by hiring “volunteer” teachers, largely financed from parental contributions, many o f which lack the requisite qualifications to be hired b y the Ministry. As many as one-third o f the teaching staff are volunteers. Further recruitment of secondary school teachers continues to be hampered b y a lack o f appropriately qualified candidates. 5.8 The non-governmental sector, mainly church schools, i s a major provider of education, especially at secondary level. Data from the 2002-03 school year indicate that church schools account for about 13 percent o f primary school enrolment and 13 percent o f primary school teachers. At junior secondary school level, church schools account for 25 percent o f enrolment and teachers, with this proportion rising to 32 percent o f enrolment and 3 1 percent of teachers at senior secondary level. Church schools are funded from the Ministry’s budget, apparently on the same basis as public schools, including payments for teachers’ salaries and provision o f school materials. 5.9 Thousands of tertiary students that had their studies interrupted in 1999, whether in Timor-Leste or in Indonesia, have been able to resume their studies. The University and colleges in Timor-Leste did not reopen for a year. The former University reopened as the National University o f Timor-Leste (UNTL) in October 2000, with about 4,000 former students enrolled together with about 2,000 students who had been studying in Indonesia. A further 2,000 students in their final semesters, requested to return to their former places o f study in Indonesia. MECYS established a scholarship system to fund 2,000 students returning to Indonesia, as well as a scholarship program for the 500 students who, for various reasons, had remained in Indonesia. 5.10 There has also been a rapid expansion of post-secondary training institutions. In addition to UNTL, there are now seven institutions that call themselves universities; eight institutes and colleges; and three academies. In total, these enroll roughly 4,000 students, though half o f this number i s in the largest o f the private universities. Under the Indonesian higher education system, polytechnics and academies were professional institutions training people with a direct orientation towards the world o f work in contrast to degree-granting institutions like universities. The presence o f eighteen private tertiary institutions in Timor-Leste suggests that there i s a large market for private supply-even though the absence o f regulation and accreditation means that the quality o f these institutions i s unknown and the market in Timor-Leste for graduates must be narrow given the size o f the country’s formal sector. The recent National Consultative Congress on Education recommended that an accreditation system be set up to ensure both quality institutions and courses at this level, and draft regulations have been prepared. c. IMPROVING EFFICIENCY AND ACCESS 5.1 1 The NDP argues that the priorities for the education sector over the medium term are to expand access, with a view to achieving universal basic education, and to improve internal efficiency. These goals are closely related: the feasibility and cost o f improving access w i l l depend on the level o f efficiency in the system. Improvements in internal efficiency w i l l determine the proportion o f children graduating from each grade in primary education, and so determine the rate o f expansion o f junior and senior secondary education. 5.12 The late entry of children, high repetition rates and high dropout rates all undermine educational efficiency, particularly in primary education. While children aged six should enroll in six-year primary education, many parents feel their children are too young at this age to enroll and wait until they are older. Data from the 2001 school mapping exercise revealed that at grade 54 one, only 29 percent o f Figure 5.1: Dropout, Repetition and Promotion by Grade children started school at age I I% ).2001 seven. Children from poor families tend to start school later: just 10 percent o f children from the poorest quintile started grade one at 7 years old. The problem o f delayed entry i s compounded by the backlog o f older children with insufficient primary education. This i s in part due to high rates o f I I 1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 repetition. Data from the l school mapping exercise Dropout Repetition O Promotion indicate that about one- quarter o f children repeat in each grade o f primary and junior secondary education. As a result, the proportion o f overage children tends to be greatest in the higher grades: by grade six only 15 percent o f children were aged eleven, the appropriate age for the grade. Dropout rates are also high, with around 10 percent o f children dropping out in each grade o f primary education (see Figure 5.1). Repetition and dropout rates tend to be highest amongst children from poor families. Senior secondary education has lower dropout and repetition rates: students who reach that level tend to come from wealthier families. At a l l levels, girls have lower repetition and dropout rates and higher promotion rates. 5.13 A t the current level of internal efficiency, only two-thirds of children will reach grade four, and only half will eventually complete a full primary cycle.g Educational attainment for early dropouts i s limited and the prospects o f sustaining basic literacy skills poor. This has significant cost implications. The cost per student for six years o f primary education i s about US$300. The cost per graduate i s twice that due to high repetition and dropout rates. Every year the Ministry provides teachers, instructional materials, infrastructure, furniture, and operating expenses for more than 40,000 students more than it would need to in a perfectly efficient system. There are enough repeaters in the primary education system today to fill a thousand classrooms. 5.14 Improvements in efficiency will also be critical in determining future enrolment rates and the prospects of achieving the NDP’s goal of universal basic education. Figure 5.2 presents three enrolment scenarios based on a projection model incorporating estimated initial enrolment, age at enrolment, and various rates o f repetition and drop out in grades one to six for the period to 2015. In the first scenario there i s a steady improvement in age appropriate enrolment and reductions in repetition and dropout. In the second scenario, these characteristics change rapidly, and in the third scenario they are kept constant at 2002 levels. The highest enrolment levels in 20 15 would come from rapidly increasing the efficiency o f the system, while the lowest levels would come from doing nothing to change current efficiency levels. All three scenarios peak in the medium term and then begin falling until underlying population growth takes over as the main driver o f enrolment in about 20 10. 5.15 Enrolment scenarios suggest that there are currently enough places in the primary school system but further expansion i s needed in junior and senior secondary education. Since short-term expansion of the primary education system to accommodate the bulge in late- 9 World Bank, Timor-Leste. Poverty in a new nation: Analysis for action, 2003, p.70 55 starters over the coming years i s R g u r e 5.2: Primary enrollment scenarios to 2015 not feasible, current capacity o f (StuQnts by School Year) a around 185,000 i s likely to be 210,000 ,- --- -- 1 sufficient over the medium term. Consequently, there i s no need for further increases in numbers of schools and teachers to meet primary education access targets. This i s not to say that further construction o f primary schools i s not needed. The wide geographical variations in enrolment rates suggest that schools could be better distributed, and there i s a continuing need for upgrading of schools and a gradual shift to the Escola Basica with complete basic education at one site. However, a significant increase in the number o f junior secondary schools w i l l be needed if enrolment i s to increase from the 40,000 students today to cover the 70,000 children implied by full transition from Grade Six to Grade Seven. Current plans envisage fourteen basic schools that w i l l provide just 2,000 extra junior secondary places. Over the longer term, further expansion o f senior secondary education w i l l be needed to accommodate increases in children graduating from junior secondary school. 5.16 Although reducing repetition i s recognized as a priority by the NDP, the Government has not yet developed a clear strategy to achieve this goal. Policy options under consideration include: automatic promotion, remedial classes and in-service training of teachers. Automatic promotion reduces classroom overcrowding and enables teachers to focus more on effective teaching o f smaller groups o f students, thus raising quality. Very little research evidence exists to show that repetition has any positive effects on student achievement. However, in Timor-Leste, where language barriers may hinder effective instruction, this may not be a viable option. For relatively little cost, students who need to repeat can be taught over summer in special classes and then move on with the rest o f their class. Providing special training to teachers in diagnosing learning problems early and providing additional help to identify students in need o f help. These kinds o f interventions are likely to be a cost-effective means o f achieving the education-for-all objectives. 5.17 Greater attention also needs to be given to the demand side if the Government i s to succeed in increasing enrolment and reducing absenteeism and dropouts. According to the Timor-Leste Living Standards Survey (TLSS) o f 2001, 32 percent o f non-attenders aged seven to twelve from the poorest quintile and 26 percent from the richest quintile cited lack o f interest as the reason for never attending school. This finding contrasts with the high priority given to education in NDP consultations. Results o f the Primary School Achievement Survey also point to very high absentee rates: 39 percent o f students in urban public schools and 43 percent in rural schools reported that they were absent the previous week (attendance i s only slightly better at private schools).lo The average number o f days absent was 2.2 days, almost half the school week. Around 55 percent of reported absence was due to illness and 35 percent due to children staying to help their families. Inevitably, absenteeism feeds through into poor performance, repetition and dropout. loWorld Bank, Timor-Leste: Meeting the Challenges of Independence. The Way Forward. February 23, 2004. 56 In rural areas, where children are involved in farm labor at peak farm activity times, adjusting the school year to avoid those times can help reduce non-attendance. In Timor-Leste the long school holidays occur at one o f the lowest labor demand times in the agricultural cycle. Most southern hemisphere countries organize the long school break in December/January. Perhaps the most important policy response, however, would be to eliminate school fees, since this would remove a significant constraint to enrolment among the poor. Supply-side considerations may also impact on demand, enrolment and attendance. Distance to school i s one factor, but so too i s the quality and reliability o f services. D. IMPROVING QUALITY OF EDUCATION 5.18 Closely linked to the goals of improvement in access and efficiency, the NDP stresses the importance of improving the quality of education throughout the system. This requires that schools are adequately staffed with trained and motivated teachers working under appropriate management and oversight arrangements. Further work i s also needed in the development o f a relevant curriculum, transitioning in the language o f instruction from students’ mother tongues to the official languages o f Tetun and Portuguese, and providing adequate teaching and learning materials. 5.19 High student-teacher ratios, particularly in primary schools, prevent effective teaching and underline the importance of adequate staffing in the education system. Although primary school student-teacher ratios (STR) have improved significantly, with a current average o f 44: 1, as compared with 67: 1 in 2001, this remains significantly above the level o f 40: 1 considered as the limit for effective teaching. I n contrast, STRs for junior and senior secondary schools are relatively efficient in comparison with other low income countries. Improvements in educational efficiency should help reduce STRs over Table 5.4: Estimated Payroll Costs for Teaching Staff at the medium-term, though this may be various STR and enrolment rates against FY2004 Budget offset b y increases in enrolment, in US$ ‘000 particularly at secondary school levels. Over the medium term, increases in Enrolment Student Teacher Ratio FY2004 staffing levels w i l l be needed if the Primary 35 40 45 50 44 Government i s to simultaneously 185,594 7,827 6,848 6,087 5,479 6,461 achieve increases in enrolment and 200,000 8,434 7,380 6,560 5,904 improvements in the student-teacher Junior 25 30 35 40 34 ratios. The financial implications are 40,368 3,003 2,503 2,145 1,877 2,382 significant. Table 5.4 presents estimates 70,000 5,208 4,340 3,720 3,255 o f annual payroll costs for teaching staff Senior 25 30 35 40 31 at different STRs and enrolment levels 21,221 1,579 1,316 1,128 987 1,297 in comparison with FY2004 personnel 50,000 4,464 3,720 3,189 2,790 budgets and STRs (estimates are slightly Source: World Bank estimates, FY2004 personnel budget and reported STRs. lower than actual costs for comparable STRs owing to shortfalls on recruitment). These estimates illustrate the hard choices that w i l l have i o be made regarding the affordable level of staffing and trade-offs as regards the quality o f service. 5.20 These choices will have to be made alongside decisions regarding the appropriate hours of instruction and nature of the shift system. Officially schools are to provide five hours o f instruction daily for 180 days a year. In practice, about one-third o f schools use some form o f double shifting, often two hours for grades one to three and three hours for grades four and five. As a result students receive fewer hours o f instruction than required to achieve curricular objectives. While use o f shifts may resolve access problems and lower capital costs by reducing the need for 57 additional classrooms, regulation i s needed to ensure that students do receive the full five hours o f instruction. Changes in weekly schedules may be needed to accommodate morning, afternoon and possibly even weekend sessions. At the same time, decisions w i l l have to be made as to whether shifts should be delivered by two sets o f teachers, or by one set o f teachers paid additional benefits to teach two sessions. Again, these choices w i l l have significant financial implications for the education system. 5.21 Significant investments in in-service training are needed to overcome the lack of formal preparation of most teaching staff. Of the 3,000 teachers recruited through examination in 2000, the vast majority had mixed qualifications. The PSAS suggests that 70 percent o f the Grade Three and Four teachers surveyed had secondary or post-secondary qualifications, with an average o f over 10 years’ teaching experience, but fewer than 10 percent had pre-service teacher training. In-service training i s now provided through the Institute o f Continuing Education, both in content and in pedagogy. In 2003/04, 65 percent o f teachers received some form o f in-service training. Currently teachers are trained at D2 and D3 level through half-day courses while teaching. While this approach i s preferable to full-release schemes, a better long-term solution may be to introduce distance learning coupled with frequent face-to-face workshops, perhaps using the cluster schools as focal points, so that unqualified teachers could complete the course over perhaps three or four years. Uganda developed a system, since adopted elsewhere in Africa, that used tutors located in cluster schools, with distance leaning modules and weekly meetings, together with vacation residential schools to cover their two year pre-service course in three years. Over the longer term, the MECYS would like to ensure that teachers have a university degree. This objective can be met with current levels o f pre-service training in the four institutions currently offering courses, even if there are significant increases in STRs and enrolment. 5.22 Improvements in teacher performance will also require adequate incentives and supervisory and oversight arrangements. The fact that all primary school staff are on the same pay point-grade three o f a seven point scale-regardless o f qualifications, experience, location or position means that there i s no effective incentive regime in place. There i s n o opportunity to reward teachers for long service, postings to difficult areas, qualifications, or taking extra responsibilities in the administration or running o f schools. Implementation o f an appropriate career structure and associated pay regime, in the context o f broader public sector pay reform, would help address these concerns. Improved supervision and accountability mechanisms are also needed. The PSAS highlights the problem o f poor attendance. According to teachers interviewed, 14-16 percent o f rural teachers were absent from school in the previous week, for an average o f three days. Students reported even higher levels o f absenteeism, and noted that there are usually no substitute teachers to cover for those who are absent. At present, oversight i s provided by district superintendents, who undertake periodic visits to schools to address management issues and monitor teaching. However, the recent PSAS suggests that inspections are infrequent-under half o f primary schools reported that they were visited occasionally-and superintendents have played a limited role so far in addressing problems o f attendance and administrative matters, such as the supply o f teaching materials. This points to the need for oversight arrangements closer to the field level such as school cluster arrangements and involving parents in monitoring school performance. 5.23 There i s a pressing need for a national curriculum, supporting teaching and learning materials which address the educational requirements of Timor-Leste. The transitional curriculum i s s t i l l based on the 1994 Indonesian curriculum. While some minor modifications were made under UNTAET, i t i s no longer suitable for use in Timor-Leste. Steps are being taken to introduce a new national curriculum. Best practice points to the need for a curriculum management system and process within which curriculum reform can take place. This would allow for development support, assessment and review, so that the curriculum can be revised on the basis o f 58 experience. Progress has already been made in developing a national curriculum framework, with individual subjects for each grade at each level of the system, subject syllabuses and associated material for the primary level. The next step i s for teachers, teacher educators, parents and students to comment so that the content and approach o f the teaching and learning materials are properly fitted to the Timor-Leste context. 5.24 There i s also a need for a pragmatic, fully formulated language policy. The general policy i s clear: instruction i s to be in Portuguese and Tetun. Implementation began with Grade One and Two in 2000 and has now progressed to Grade Four. Significant inputs have been provided to support the introduction o f Portuguese as a language o f study while the transition takes place, including large numbers of language teachers. A well articulated policy must now reflect the significant debate on language at the National Education Congress. The Congress reiterated the need for an approach that takes account o f the mother tongue o f children in the early grades. I t also stressed the need to develop primary instructional materials in both Portuguese and Tetun with bilingual textbooks at primary level. This w i l l raise the level o f investment in textbooks, as it effectively doubles the cost o f each unit. Replacement texts w i l l cost US$1.4 million per year. If a transition to Portuguese i s to be effective, teacher fluency and literacy in that language must be seriously addressed. The recent commencement o f tertiary teachers’ courses to strengthen language s k i l l s i s part o f the plan to meet this need. Supplementary intensive training could cost well in excess o f US$1 million per year over the medium term. 5.25 Provision of teaching materials, textbooks and school facilities will also have to be improved. The PSAS indicates that more than half of students have n o books and that lack o f textbooks i s the problem most frequently cited by teachers in both urban and rural schools. Teachers also reported acute shortages o f teaching guides for mathematics and Portuguese. Just 13 percent o f rural schools had a library. Adequate provision o f teaching and reading materials i s critical for effective classroom teaching and for setting homework. A start has been made by providing supplementary Tetun materials distributed by an N G O to all primary students, with a separate set o f teacher’s notes. Plans are underway to expand both the frequency and coverage of this material. This w i l l require adequate funding, but also effective distribution mechanisms. Provision o f discretionary funding to schools directly, so that they can purchase supplies, may help address these problems. AND RESOURCE ALLOCATION IN THE EDUCATION E. FINANCING SECTOR 5.26 As the education system shifts from reconstruction to longer-term development, expenditure policy will have to accommodate a gradual reduction in external financing whilst aligning resources with sector policy objectives. The discussion o f policy options for achieving objectives in terms o f improving access, internal efficiency and the quality o f education illustrates that policy decisions regarding the appropriate means of achieving these objectives w i l l have significant financial implications. Formulation o f an Education Policy, clarifying objectives and the broad principles for development o f the education sector i s an essential f i r s t step. Once the policy objectives and broad strategy are defined, the education sector’s Sector Investment Program w i l l have to address the appropriate allocation o f public resources-both Consolidated Fund spending and extemal financing-between levels o f education, service providers, component expenditures and levels o f administration, as well as the appropriate levels o f parental contribution (if any) to education. 5.27 Total public spending on the education sector amounted to about US$106 million over the three year period from FY2001 to FY2003. Of this amount, 37 percent has been financed from the Consolidated Fund, 2 1 percent from the Trust Fund for East Timor and 42 from bilateral 59 Table 5.5: Financing of Public Spending on Education sources (see Table 5.5). Programmed FY07 financing from ~~ FYOl FY02 FY03 FY04 FY05 FY06 Source Act Act Est Act Budget MTFF FY2004 to FY2007 CFET 10,295 12,098 17,320 17,042 18,892 20,387 22,219 shows continuing TFET 9,910 6,210 6,240 10,440 1,700 growth in Bilateral 13,475 16,860 13,825 12,114 10,358 5,329 5,289 Consolidated Fund allocations for Total 33,679 35,169 37,384 39,596 30,950 25,716 27,508 education, though CFET 31 34 46 43 61 79 81 external financing TFET 29 18 17 26 5 and total spending Bilateral 40 48 37 31 33 21 19 decline sharply due Source: FY00-01 and FYOl-02 froni audited Financial Statements; FY02-03 from draft Financial Statements; FY03-04 to FY06-07 froni Budget Papers. E x t e m l financing from M P F External to the termination o f Assistance database. on-going projects. This fails to capture the pipeline o f projects pending finalization of bilateral agencies’ country programs (see para 2.5). 5.28 Although some reduction in external financing may be expected as reconstruction programs and emergency funding to support scholarships for students in Indonesia wind down, decisions regarding future external financing should take into account the need to sustain on-going services. Virtually all reconstruction costs were covered b y externally financed projects; Consolidated Fund allocations for capital spending have been negligible. Unfortunately, owing to the poor disaggregation o f data on external financing, i t i s difficult to assess what proportion o f total spending has been spent on reconstruction activities. One estimate, based on data presented in MPF’s external assistance database, suggests that reconstruction spending peaked at around U S 1 3 million (38 percent o f spending) in FY2001, dropping slightly to U S 1 2 million (34 percent o f total spending) in FY2002 and then dropping o f f to under US$6 million (less than 20 percent o f total spending) in FY2003. Significant resources have also been allocated to scholarship programs for students in Indonesia, allowing them to complete tertiary studies. Again, financing for these programs w i l l terminate as students graduate. On this basis, the level o f external financing o f on-going programs i s estimated at around US$15 million a year. 5.29 The Sector Investment Program, currently in preparation, should provide a basis for assessing future external financing requirements. Sharp reductions in combined sources education spending on on-going programs should be avoided. The challenge i s to ensure that future levels o f external financing are consistent with a sustainable level o f public spending and consistent with Government’s allocation priorities. 5.30 Perhaps the most important resource allocation decision to be taken in the education sector i s the appropriate balance between spending on different levels of education. Compelling cases can be put forward for primary, secondary and tertiary education to be funded from the limited resources available to the government. For example, there are arguments that primary education i s crucial to developing literacy, improving subsistence agriculture and health, and stabilizing the democratic process; that secondary education i s the foundation o f a formal labor market; and that technical and vocational education provide skills and jobs. In this high demand- low resource situation, allocation decisions are best made by channeling resources in proportion to the social benefits that they generate-reflecting developmental considerations-and the poverty reduction impact o f services. These considerations point to basic education taking the major share of public resources, with smaller allocations to secondary and post-secondary education. 60 Table 5.6: Structure of Education Sector Consolidated Fund Spending by Program % Program Actual Actual Budget MTEF FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 Policy, planning & management 7 9 11 10 10 9 Basic Education 70 66 63 65 66 67 Early childhood education 0 1 1 1 1 1 Primary education 55 49 45 46 46 47 Junior secondary 15 17 18 19 19 19 Post Basic Education 11 14 14 14 14 14 Senior secondary 8 10 10 10 10 11 Technical & vocational training 2 4 4 4 4 3 Tertiary education 11 5 5 5 5 5 Adult education 2 2 2 2 2 2 Teacher training 2 2 2 2 2 Culture, Youth & Sports 0 1 2 2 2 2 Total Education 100 100 100 100 100 100 Source: FY2002 and FY2003frorn audited Financial Statements; FY2004 to FY2007 from Budget Papers. 5.3 1 The allocation of Consolidated Fund resources i s consistent with the Government’s poverty reduction and developmental objectives, with basic education allocated two-thirds of public spending over the period FY2001 to FY2003. Data point to a gradual reduction in primary education’s share in the period to FY2004, to 45 percent o f Consolidated Fund spending, with growth resuming thereafter (see Table 5.6). Forward estimates point to steady growth in the share o f spending on junior secondary education, rising to 19 percent o f total spending b y FY2007, and somewhat slower growth in allocations to senior secondary education, rising t o 11 percent. Public spending on tertiary education, in contrast, i s effectively capped at around 5 percent of total Table 5.7: Allocation of Education Expenditures, FY2000 to FY2003 US$ ‘000 % External Program Consolid- External CF External Total Depend- ated Fund Finance ence % Policy, planning & management 2,558 4,645 7,203 8.4 5.7 6.4 64.5 Basic Education 19,992 47,062 67,054 66.0 51.6 59.9 70.2 Early childhood education 254 649 903 0.8 0.8 0.8 11.9 Primary education 15,410 39,815 55,225 50.9 48.1 49.3 12.1 Junior secondary 4,328 6,598 10,926 14.3 8.1 9.8 60.4 Post Basic Education 3,653 3,809 7,462 12.1 4.7 6.7 51.0 Senior secondary 2,931 2,832 5,169 9.1 3.5 5.2 49.1 Technical & vocational training 116 911 1,693 2.4 1.2 1.5 51.1 Tertiary education 2901 16,692 18,993 7.6 20.4 17.0 87.9 Domestic 2,301 8,556 10,851 1.6 10.5 9.1 78.8 Overseas fellowships 8,131 8,137 10.0 1.3 100.0 Adult education 614 3,835 4,449 2.0 4.7 4.0 86.2 Teacher training 894 1,896 2,790 3.0 23 25 68.0 Culture, sports facilities & equipment 263 86 349 0.9 0.1 0.3 24.7 Education unidentified 3,647 3,641 4.5 3.3 100.0 Total 30,275 81,672 111,947 100.0 100.0 100.0 73.0 Source: Ministry of Planning and Finance, Budget Papers and External Assistance Database. 61 spending. However, these data do not include financing from student fees, estimated at about US$350,000 a year. The share o f supporting programs, such as teacher training, remains extremely-perhaps unrealistically-modest. Allocations to policy, planning and management, on the other hand, are relatively large at around 10 percent o f total spending. This may, in part, result from charging of some service delivery functions against the central administration. 5.32 When external financing i s included the pro-poor orientation i s obscured owing to a much larger share of resources being allocated to tertiary. education. About 20 percent of external financing in the period FY2000 to FY2003 was allocated to the University and scholarship programs. Relative allocations to secondary education were significantly lower than allocations from the Consolidated Fund. All o f the key programs have high levels o f external dependence, with external financing accounting for 50 to 80 percent of total spending. While these allocations are expected to change over the medium term, the data point to the importance o f integrating external financing into expenditure plans, from the perspective o f ensuring sustainability o f services and policy consistency o f resource allocations. Table 5.8: Personnel share o f Consolidated Fund Education Spending by Program % Actual Actual Budget MTEF Program FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 Policy, planning & management 70 25 22 23 23 24 Basic Education 94 72 85 16 72 68 Early Childhood Education 3 71 74 75 75 Primary Education 94 72 86 78 74 71 Junior Secondary 94 75 82 71 66 62 Post Basic Education 90 64 16 73 70 66 Senior Secondary 91 65 75 71 66 62 Technical & Vocational Training 88 60 80 81 81 81 Tertiary Education 100 100 100 100 100 100 Adult Education 61 2 11 11 10 11 Teacher Training 6 6 6 6 Culture, Youth & Sports 25 21 21 21 Total Education 92 64 73 68 65 62 Source: FY2002 and FY2003fronz audited Financial Statements; FY2004 to FY2007from FY2004 Budget Papers. 5.33 The structure of Consolidated Fund spending i s skewed towards personnel inputs, though non-personnel allocations are expected to increase over the medium term. Personnel accounted for about 72 percent o f spending on primary education in FY2003, 75 percent o f spending on junior secondary and 65 percent o f spending on senior secondary education (see Table 5.8). Detailed information on the composition o f spending i s only available for the Consolidated Fund, and these data should be interpreted with caution because some goods and services allocations for service delivery appear to be programmed under central administration. More detailed information i s needed on externally financed inputs, including school books and teaching materials, before the adequacy o f Consolidated Fund allocations for non-personnel costs can be assessed. I t i s critical that forward estimates include sufficient funding to finance school supplies as external financing closes. The modest level o f personnel expenditures in teacher training i s due to the fact that teacher trainers are currently provided through bilateral assistance. Consolidated Fund allocations for tertiary education cover personnel costs, with goods and services financed from student contributions. 5.34 The low level of maintenance spending i s a matter of concern. Although some education facilities are not owned b y the government and presumably are not maintained from 62 public funds. Public school infrastructure has a minimum value o f US$25 million, and should be allocated a minimum o f US$1 million a year (i.e. 4 percent o f value), equivalent to as much as six percent o f the FY2004 Consolidated Fund budget to cover maintenance costs. Current allocations are around US$500,000 and actual spending i s much lower still. Clearly, greater attention needs to be given to the maintenance of assets and implementation o f mechanisms to ensure that these funds are actually spent. 5.35 There i s a need for a clear policy regarding the appropriate level of student contributions at different levels of education. One criterion for such policy decisions i s the relative social and private benefits from public spending on education services. As a rule, the social returns for public investments tend to be higher relative to private returns in basic education; while private returns are higher relative to social returns in post-secondary education. The implication i s that the public sector should bear all or a large part o f the burden o f basic education, while students should bear a significantly larger share o f the burden o f post-secondary education financing. 5.36 The application of fees for basic education raises concerns regarding equity, their impact on education-for-all objectives and the adequacy of oversight arrangements. Under UNTAET, school fees were abolished, along with requirements for school uniforms and shoes. TLSS data indicate that average monthly household expenditures on public primary school attendance dropped from US$1.55 in 1995 (at 2001 prices and exchange rate) to US$0.56 in 2001, with most o f this expenditure on school materials. As a result, there was a much weaker relationship between household income and enrolment in 2001 than seen in previous surveys, suggesting that reductions in parental charges contributed to the surge in enrolment. Although the Constitution clearly states a preference for free basic education, schools soon resumed the practice o f applying voluntary charges and in 2002 MECYS formalized the amounts that public schools could charge pupils, at US$0.50 a month for primary, US$1 for junior secondary and US$1.50 for senior secondary education. These funds are used to cover routine operating costs and the hiring o f “volunteer” teachers to complement publicly funded staff. There i s n o evidence that such charges are levied compulsorily, though there i s a risk that parental contributions could deter enrolment from poorer families. Such contributions place a significant burden on poor families with several children and limited cash incomes, particularly if associated with additional costs such as school materials and, in some cases, uniforms. Whilst not wishing to discourage parental contributions on a strictly voluntary basis, there i s also need for adequate regulation and supervision to ensure that there i s no discrimination against the poor who cannot pay, that parental contributions are used transparently, and that such contributions complement rather than substitute for public expenditures. In this context, the difficulties encountered by the Primary School Achievement Survey in collecting information on parental contributions indicate a need for further work on simple management and reporting arrangements. There is, moreover, a need to ensure that public resources are made available to schools to cover routine maintenance, basic operating expenditures and teaching materials. This can sometimes be better achieved through small block grants direct to schools than through centrally administered budgets with their attendant logistical and bureaucratic constraints. 5.37 Since private sector providers, particularly churches, play a significant role in the delivery of education services, clear policies are also needed to ensure that private schools are effectively integrated into the education system and subject to equitable public funding. Private religious schools account for about 12 percent o f total enrolment and private secular schools about 4 percent. Private education i s particularly important at the junior and senior secondary levels, accounting for 25 percent and 33 percent o f enrolment respectively. Church secondary schools in particular tend to offer higher standards, in part because teachers tend to be better qualified, in part because they are better resourced with contributions from the state, the 63 religious community and parents, and in part because their students are drawn from better-off families with literate parents. During the reconstruction o f the primary and secondary levels, no distinctions appear to have been made between Church and government schools in terms o f public financing: salaries are paid for some teachers in all schools, and instructional materials have been provided to all schools. However, data from the PSAS suggest that the private schools are granted much greater autonomy than those in the public sector, in terms o f setting working conditions for teachers, academic standards, setting parental contributions and conditions for exemption and in matters such as discipline. Private schools are subject to less frequent supervision, with around 45 percent reporting only annual visits. Further clarification o f the relationship between the public and private sectors i s needed, to ensure that private schools are effectively integrated into the national education system, whilst promoting diversity and competition between providers. Ideally, such relationships should be established on a contractual basis. Data from the TLSS indicate that twice as many children from the top quintile attend private schools as do the poor. Overall, the incidence o f public spending on public education i s progressive, whereas public spending on private education i s not. Since public subsidies are largely used to fund teachers’ salaries and STRs tend to be lower in private schools, private schools tend to benefit disproportionately from public spending. Use o f a capitation grant for funding o f private schools would link public funding to enrolment, thereby promoting expansion o f enrolment whilst improving equity. Table 5.9: Budget Execution FY2002 through FY2004 (as % of appropriations) FY2002 FY2003 FY2004 annualiied Component I Program Commit- Commit- commit- Cash Cash Cash ment ment ment Salaries & Wages 99 99 93 93 91 91 Minor Capital 70 54 96 21 127 0 Capital & Development 100 0 0 0 Goods & Services 79 78 98 67 57 24 G&S by selected program Early Childhood Education 50 44 90 54 99 19 Primary Education 71 71 98 42 84 0 Junior Secondary Education 64 63 100 89 43 2 Senior Secondary Education 78 77 100 94 71 1 Technical Vocational Education 70 59 96 so 66 4 Non- Formal Education 100 100 100 44 85 57 Tertiary Education 93 92 82 42 17 16 Culture 17 14 95 94 69 46 Administration & Management 89 89 99 90 53 49 Youth Welfare & Development 9s 38 15 1s Physical Education & Sports 93 19 24 24 Continuing Education 99 75 27 27 Source: FY2002 and FY2003 froin Financial Stateinents; FY2004 annualized execution on basis of second quarter execution report. 5.38 Whilst Consolidated Fund allocations to the education sector have increased steadily, budget execution has consistently fallen short of appropriations, particularly in the priority basic education programs. Table 5.9 illustrates the pattern o f budget execution in relation to the economic composition o f expenditures at year-end on both a cash and commitment basis, with further detail on the structure o f goods and services spending b y program. Shortfalls on personnel expenditures are related to difficulties in recruitment o f staff. Execution has been particularly slow in relation to capital spending, in several instances leading to the sequestration of appropriations during budget execution. However, i t i s the shortfall on goods and services spending that i s o f greatest concern, since these appropriations provide basic inputs-such as teaching materials-and services-such as maintenance-that allow schools to function. The fundamental problems appear 64 to be: poor expenditure planning, with program managers failing to prepare procurement plans for the execution of budget allocations at the start o f the fiscal year, leading to an end of year rush; inadequate processing and follow-up on procurement, with procurement often held up because specifications are incomplete; and the excessive centralization o f expenditures. 5.39 Greater attention needs to be given to the decentralization of Consolidated Fund resources to the school level. This could improve efficiency in spending, b y allowing those involved in service delivery greater say in pending decisions and avoiding bureaucratic delays in the delivery of inputs. Overall, 69 percent o f education spending was deconcentrated to districts in FY2003, with the highest levels o f deconcentration in primary and junior secondary education. However, this i s virtually all for salaries. In FY2003, just 2 percent o f the goods and services budget was deconcentrated. This issue i s addressed in relation to initiatives in support o f strengthened expenditure management below. F. STRENGTHENING MANAGEMENT EXPENDITURE 5.40 Progress in the development of management systems and capacity i s critical ifthe M E C Y S i s to achieve sector objectives. Areas where further progress i s needed include: development o f statistical capacity; expenditure planning; expenditure control and budget execution; development of decentralized funding mechanisms; strengthening o f district oversight and supervision; and establishment o f complementary school level management arrangements. 5.4 1 Availability of up-to-date information on education enrolment and performance i s essential for effective education planning and management. Until recently, even basic data were not readily available or stored in the ministry in electronic form. A school statistical system has now been put in place with assistance from UNICEF. A full set o f data for all teachers, students and schools at primary level for 2003/4 i s now being compiled. Compilation o f information on secondary education w i l l follow. Preliminary reports indicate that coverage and consistency has improved significantly over previous exercises. The challenge i s to ensure that reporting routines are established, with adequate follow-up on schools with delayed or inadequate returns. Administrative data should be complemented b y analysis o f census data and performance surveys. Finalization o f the 2004 census w i l l allow the h4ECYS to identify regional allocations and determine geographic variations in enrolment. Statistical information w i l l also need to feed into planning and policy development, as well as support functions such as deployment o f personnel, construction programs and distribution o f school books. This w i l l require strengthening o f statistical and planning skills, an area that has received little attention. There are s t i l l n o statistical personnel in post. Planning department and district personnel are now undergoing training on running o f routine queries o f the database. 5.42 Medium-term expenditure plans are needed to support implementation of the education sector policy and guide the allocation of the Consolidated Fund and external financing. The forthcoming Sector Investment Program should address these concerns. The challenge w i l l be to ensure that external financing i s aligned with Government priorities. Given the range o f stakeholders in education financing and service delivery, a sector-wide approach supported by sector working groups would facilitate coordination and agreement on priorities. Such working groups w i l l need to work at both a policy and operational level, to ensure that externally financed inputs are integrated into expenditure plans and tracked during implementation. Further, closer liaison with private providers i s needed at every level. Decisions b y the Church to open, close or expand schools could significantly impact on demand for places in government schools, just as expansion or contraction in the provision o f TVET or tertiary courses could be influenced by private providers in these areas. I f the Ministry i s to achieve a rational allocation o f i t s limited 65 resources i t w i l l need to factor in inputs to be provided b y external partners and private sector education providers. 5.43 Further work i s needed on the structure of the budget, to ensure that resources are allocated to program managers responsible for service delivery and that allocations for decentralized units are explicit. Centralization o f the allocations for goods and services under the Ministry’s administrative budget disempowers program managers. If program managers are to be responsible for prioritizing, sequencing and costing programs, they should also be responsible for management of the resources needed to deliver program outputs. T o do this they w i l l need management information-there i s an urgent need to introduce computerized financial systems- particularly to assist in planning and executing budgets. Some consideration may also be given to the definition of sub-programs to support critical functions, such as curriculum development and examinations. These do not appear in the budget structure, and so the responsible managers are currently unclear about the resources allocated to support their work. Similarly, district administration i s subsumed within central administration in the budget structure. Again, this could be dealt with internally by providing budget sub-programs for districts. This requires a much more sophisticated financial management system than the Ministry currently has in place, supported by a computerized information system. 5.44 Low levels of budget execution indicate that further work i s needed on the development of internal control and management systems. Much o f the difficulty arises from poor understanding o f required procedures on the part o f program managers and inattention to management systems for control and tracking o f expenditures. Significant improvements in budget execution could be made by: a) using the Ministry’s internal expenditure proposal form systematically, so that managers are informed about purchase requests; b) tracking Commitment and Payment Vouchers submitted to the Ministry o f Planning and Finance, so delays in the authorization o f expenditures are followed up; c) requesting monthly budget execution reports from MPF and a monthly internal review of the status o f budget execution b y a Ministry level management committee, so that program managers are aware o f the current budget position and delays in execution; and d) standardizing specifications o f commonly procured items, so as to avoid delays from MPF seeking clarification regarding MECYS requirements. Implementation o f such measures w i l l require further training in financial management and procurement procedures as well as investments in information systems. 5.45 Development of a personnel management system deserves particular attention. In the rush to ensure that staff were in place for the 2000/01 school year, only rudimentary records were kept o f the teachers recruited. Establishment o f a personnel registry for nearly 6,000 teachers i s a daunting task. The recently installed education management information system, includes biographical data on teachers. This, together with payroll, could provide the basis for a personnel register. However, hard copy files w i l l be needed. While the Ministry o f State Administration has recently defined the basic requirements for files across government, specific instructions may be needed for teaching personnel. Certainly, internal guidelines w i l l be needed to determine whether such files are to be maintained at the schools, in district education offices and/or in the central Ministry. 5.46 There i s a need to move elements of administration and supervision from the center closer to the point of service delivery. At present, formal supervision i s mainly through district education offices, which have a staff o f ten including a superintendent, a deputy superintendent, education specialists and administrative staff with responsibility for logistics and personnel management. The district offices have a small operating budget o f around US$550 per month. Much time i s spent interacting with the central office, partly because they lack telephone or 66 electronic communications: the PSAS survey reports that 69 percent o f superintendents made one to five school visits in the previous month, while 76 percent had made one to five visits to Dili. The use o f school clusters, with a focal school, as an intermediate level o f training and support between the district and the school, i s being piloted with support from UNICEF. This approach i s likely to improve direct supervision at the school level, and facilitate implementation o f policies on shift structure, hours o f instruction, and language o f instruction. 5.47 Additional resources could be channeled directly to schools to cover maintenance, operating expenses and basic supplies. While a case may be made for centralization of procurement o f commonly used items, such as textbooks and some school materials, and public works requiring technical supervision, spending decisions on operating costs and routine maintenance are best made at the school level. I t i s simply impossible for the central administration to make these spending decisions on behalf o f 900 schools. Inevitably, where the public sector fails to provide the necessary resources, schools have appealed to parents to cover operating and maintenance costs. Solutions lie in the adoption o f small block grants-perhaps around US$300- channeled directly to schools. The total cost o f such block grants would be in the order of US$230,000 a year. True, there i s a risk that these funds would be mismanaged, but these risks can be minimized b y ensuring that schools report the receipt and application o f these funds on school notice boards, through public announcements and to PTAs. The impact in terms o f improved service delivery by far outweigh these risks. One block grant system that worked well in a developing country was pioneered in the education Ministry in Uganda (see B o x 5.1). 5.48 Most of the elements for an effective delegated financial management system now exist in Timor-Leste. Cash i s already disbursed to district offices. Parent Teacher Associations are being set up and the provision o f maintenance or other funds to schools with operating PTAs would prove a strong incentive for schools and communities to act to establish their o w n association. As a further check funds could be disbursed on a quarterly basis with replenishment when accounted for. Box 5.1 Use of Block Grants in Uganda Uganda implemented a successfil approach to local accountability and transparency in 1998. The process began with a system of not$cation by Treasury of dispatches offinds to district ofices. A national newspaper listed monthly transfers for school operation and health units to the districts for distribution to individual service delivery points such as schools or clinic. While the circulation oj newspapers was limited in the country, district administrators found that head teachers soon learned about the publication and began to demand the allocation of finds for their school. This cut back sharply on the previous temptation for district administrators to receive the finds and use themfor other purposes, sometimesfor several months, before releasing them to the intended beneficiaries. I n turn district and sub-district ofices were required to publicly notify the general public of the amounts allocated to each school, by listing the amount for that school for each month. The list was required to be placed on a public notice board outside the district ofice and to be updated for each distribution. Thus all schools were aware o f their allocations and those for every other school in the area. Similarly, at the school level, not$cation had to be given to the local community, with details of amounts received and expended on a monthly based placed on a notice board accessible to any parent or community member i.e. not inside an ofice or room. This information was to be displayed along with the school budget and the names and salaries o f all teachers in the school. The notices were to be signed both by the head teacher and the head of the PTA. Even though only a few parents were literate in rural areas, the notice boards were suficient to provide checks on the actions of those in charge of the funds. f any person acquired resources they could not account In practice in small communities it was evident i for and in this way community social patterns could be used to provide an “audit” that was extremely effective. 67 A further safeguard, used in Uganda, would be to provide for random checks o f districts and schools. Each year a sample o f schools and each district office could be physically inspected for compliance. Box 5.2 Key Recommendations Education- D Review policy on parental contributions in basic education, to assess feasibility of eliminating voluntary charges, and if retained, ensuring regular supervision, to prevent discrimination against the poor, verify that parental contributions are used transparently, and that such contributions complement rather than substitutefor public expenditures. Provision o f out-of-term remedial classes, with additional payments to teachers, and training for teachers to diagnose and address learning dificulties to help reduce repetition and dropout. Clarification o f policy goals as regards target student teacher ratios by level of education as a guide to future recruitment requirements and placement strategies. Regulation o f school hours, structure o f shift-systemand payment supplement arrangements for teachers working multiple shifts. Institutionalization o f on-going curriculum development process with creation of a curriculum management system, to allow for development support, assessment and review, so that the curriculum can be revised on the basis of experience Review o f Consolidated Fund financing to ensure adequate and sustainable funding for teacher training, particularly in Portuguese, and other support activities, such as curriculum development, examination, school supplies and teaching supervision. 0 Provision o f funding for expansion o f block grant scheme for schools, to allow schools discretionary finds to cover maintenance, operating expenses and some teaching supplies. Regulation o f the relationship between the public and private sectors, ideally on the basis o f contract, to ensure that private schools are effectively integrated into the national education system, and use o f a capitation grant (up to specified STR) as basis for funding so as to promote expansion o j enrolment. 0 Establishment o f basic financial management systems in the MECYS, including i) register o f CPVs submitted to Treasury; ii) monthly review of budget execution status by budget ofice; iii) standardized specification o f all commonly procured items; and iv) establishment of personnel registry system and supporting administrative guidelines for Ministry stafi Establishment o f clusters of schools, with a focal school, as an intermediate level of training and support between the district and the school, as currently being piloted, so as to improve direct supervision o f staff attendance and teaching at the school level. 68 6. MAINTAININGA VIABLE ROAD NETWORK A. INTRODUCTION 6.1 “Having an effective system of physical infrastructure and services i s crucial for agricultural productivity and poverty reduction, a determinant of business investment, instrumental to human development, and the foundation for private sector development” (NDP, 2002, p. 263). Roads provide access to rural Timor-Leste, where the majority o f the poor live. They link rural communities to markets, to services and to participation in the wider society. Fortunately, Timor-Leste already has an extensive road network. Unfortunately, the extensive road network i s both an asset and a burden. 6.2 Implementation of a strategy that can lead to the sustainable provision of roads i s the principal challenge facing the roads sector. It i s the theme o f t h i s chapter. Section B demonstrates that the extensive road network i s in poor condition, subject to frequent closures, and that traffic volumes are low. Section C demonstrates the high cost o f maintaining the current deteriorated infrastructure and argues that a balanced program o f rehabilitation, and routine and periodic maintenance i s needed to bring the road network to a sustainable condition where life- cycle costs are minimized. A basic framework for prioritization i s presented. This gives maintenance and emergency repairs f i r s t call on limited resources, with rehabilitation being undertaken where i t can lead to a net reduction in road preservation costs; expenditure focused on roads where returns are greatest; ownership and responsibility for various road classes assigned to those best able to manage them; and service standards defined. Section D indicates that resource allocations programmed in the FY2004 budget and forward estimates generally constitute a credible strategy for maintenance financing over the medium term but that additional funding w i l l be required for complementary road rehabilitation. Financing strategies are reviewed in section four, including increased cost recovery from road users. Section E advocates increased use o f private sector contractors for implementation of works and highlights the risks o f implementing the maintenance and rehabilitation program through increased direct administration capacity. Section F makes a case for further investments in capacity building, particularly in sector policy and planning, and the improvement o f information systems, and steps that can lead to be better balance o f activities and interaction between the Ministry o f Planning and Finance and the Directorate o f Roads, Bridges and Flood Control (DRBFC) in the Ministry o f Transport, Communications and Public Works (MTCPW). NETWORK B. THEROAD 6.3 Timor-Leste’s national and district road network i s larger than the average for low income countries with comparable population densities (see Figure 6.1). The length o f the road network i s reported at 6,036 km, about half o f which i s comprised o f rural roads, one-third are national and district roads,” and the remainder urban roads (see Table 6.1). The “core network” o f national and district roads amounts to about 2,400 km. There are 7.2 road-km per 1,000 inhabitants and road density averages 417 km per 1,000 square km. On the basis o f pre-1997 information, The road network h as not been formally classified. National roads are considered those linking the district centers, and district roads those linking the larger administrative posts. 69 Table 6.1: Road Network by Class and Region, 2003 about 2,600 km o f the network is bitumen Road Density K m per: paved, 500 km i s gravel Region National District Urban Rural Total and the remainder is 1,000 Km2 1,000 pop. earth formed. While this Baucau 373 270 158 810 1,611 324 7.0 extensive network Dili 293 157 316 710 1,475 596 5.5 enhances accessibility, it Same 246 206 97 655 1,204 422 9.1 means that a larger Maliana 423 164 106 740 1,432 429 8.3 proportion o f national Oecusse 91 73 40 110 314 385 6.7 income has to be Total 1,426 869 716 3,025 6,036 417 7.2 allocated to road Structure % 24 14 12 50 100 maintenance if standards Source: MTCPW are to be maintained. The costs o f maintaining the road network are increased by the poor condition o f much o f the network and i t s susceptibility to damage from landslides and flooding. At the same time, the benefits from the network are reduced by l o w traffic volumes. 6.4 Much of the national road network i s in need o f rehabilitation. The Road Asset Management Survey (RAMS), undertaken in 2001 to 2002, holds data for 1,248 km o f the national road network, a l l but 65 km of which i s paved. The network has been built to Indonesian design standards, with pavement widths o f between Figure 6.1: Relation RoadDensity to GDP 3.5 and 5.5 meters, and design speeds up to p er capita @IC with Pop Density 30 to 80 60km/h on flat terrain, dropping to 20km/hr for narrow mountain roads. The paved r-- p erk d ) network has a non-structural macadam surface 250 overlay over a crushed stone base. While this surface i s suitable for light traffic, heavy vehicles can damage weakened sections. 8 150 Some sections have reverted to gravel owing to lack o f maintenance since the late 1990s. The results o f a survey by the Japan Engineering Group (JEG) o f the UNPKF in mid-2003 o f what was described as the “core” i road network i s summarized in Table 6.2. The 0 100 200 300 400 500 600 700 800 survey showed roads to be generally in poor GDP per Capita US$ condition. About 65 percent o f the length o f the core network could be restored to maintainable condition through resurfacing o f the road pavement and simple refurbishment o f drainage. More substantial rehabilitation i s needed for the remaining 35 percent o f roads t o restore them to a maintainable condition. Bridges are in somewhat better condition: o f the 3 17 bridges in the RAMS inventory, more than two-thirds o f which are under 20 meters long, 29 bridges are in “bad” condition, requiring early repair and possibly replacement. 6.5 Landslides and flooding cause frequent road closures. About 44 percent o f Timor-Leste lies between 100 and 500 meters and 35 percent above 1,000 meters. This steep mountainous terrain i s prone to erosion and landslides during heavy seasonal rains. In the coastal plains roads are affected by flooding. The 1999-2000 monsoon rains caused unusually severe damage. In February 2003, during a “normal” wet season, nine o f the 13 districts had one or more national and district roads closed or in danger of closure, while roads to at least 16 villages were closed and a further 13 were in danger-meaning only 4-wheel-drive vehicles could pass, so that the roads were /u effectively closed to other traffic. The R A M S inventory indicates that 592 km o f roads in hilly terrain are subject to landslides (47 percent of the inventoried network) and 124 km to flooding in the coastal plains. Damage from landslides and flooding considerably increases network maintenance costs. Table 6.2: Status of Major Roads, 2003 G 7 h m: AADT Width* Roughness Road No. Route Road Link (m) (IRI,1999) 2000) A01 Dili-Com 203 500 5.5 5.1 Good A02 Dili-Suai 178 125 4.5 9.8 Fair to very poor A03 Dili-Maliana 15 1 250 4.5 5.9 Good to fair A04 Tibar-Ermera 45 200 4.5 6.1 Fair A05 Aituto-Betano 54 100 4.5 8.7 Good to very poor A06 Baucau-Viqueque 63 100 4.5 6.0 Good to fair A07 Viqueque-Natabora 48 50 4.5 10.0 Poor A08 Lautem-Viqueque 154 15 4.5 10.4 Good to very poor A09 Manatuto-Natabora 86 50 3.5 11.0 Poor A10 Ermera-Hauba 69 50 3.5 12.1 Poor to very poor A1 1 Ermera-Maliana 63 50 3.5 11.3 Poor to very poor A12 Maliana-Zumalai 51 50 4.5 11.6 Fair to very poor A13 Aiassa-Cassa 25 50 3.5 11.9 Poor to very poor A14 Natabora-Betano 46 50 4.5 10.9 Poor TotallAverage 1,235 170 8.7 Source: RAMS, JEG. 6.6 Nevertheless, surveys indicate that most of the rural population live close to passable roads. Data from the 2001 village survey indicate that 90 percent o f the rural population live in villages with village centers less than half an hour from the nearest vehicle passable roads. Although vehicle passable roads may include tracks that are not part o f the recognized road network, about two-thirds o f the population live in villages with village centers less than half an hour from a paved road that i s part of the network (see Table 6.3). Road access in rural areas i s better in lowland areas than in the highlands, and better in the west o f the country than in the center and east. These data suggest that access i s not currently a major impediment to rural development. Indeed, simulations using household data suggest that road access i s not a major determinant of poverty or access to public services. Table 6.3: Distance of Vehicle Passable & Paved Roads from Village Centers, 2001 National Rural Rural High-LOW- East Center West land land Vehicle passable road % population less than 30 minutes 91.9 90.2 89.4 87.3 100 89.4 90.9 % population more than 60 minutes 6.8 8.2 7.3 11.7 9.4 7.4 Paved road % population less than 30 minutes 71.2 64.9 13.6 49.4 93.3 54.6 72.5 % population more than 60 minutes 24.9 30.8 23 44.2 6.1 31.7 25.7 Source: 2001 TLSS 6.7 The vehicle fleet i s very small. The Directorate o f Land Transport reports the registered fleet as 14,320 vehicles in 2002, including 6,490 motorcycles, 1,337 trucks and 1,093 minibuses. There are, additionally, approximately 2,000 unregistered vehicles and 3,000 U N vehicles. These 71 numbers are backed up by the 2001 household survey, which indicates that only 3 percent o f the population live in households with motorbikes and less than one percent in households with a car or truck. The registered public transport fleet i s small, with just 651 vehicles, o f which nearly 600 are minibuses. Most o f these are based in Dili and Baucau, with only 150 vehicles registered in the remaining eleven districts. Overall availability o f public transport i s 0.82 vehicles per 1,000 population. This compares with 1.65 vehicles per 1,000 population in Bali, Indonesia. However, the contrast i s much more marked than i t would first seem since nearly all Balinese households own a motorcycle and public transport accounts for just 10 percent o f motorized trips. 6.8 Traffic volumes are light. Various traffic counts have been conducted in recent years, but these are difficult to reconcile and have a wide margin o f error. The traffic flow estimates recorded in the R A M S database suggest that the heaviest traffic-in excess o f 400 vehicles a day-occurred along the northern coastal road from Dili to Batugade (on the border with Indonesia) and to Baucau, and sections to Aileu and Ermera. These routes account for most o f the heavy vehicle traffic. Only fifteen percent o f the inventoried network has traffic volumes in excess o f 500 vehicles a day, about one-third o f the network has traffic flows o f over 200 vehicles a day, and one- third o f the network has traffic flows o f under 50 vehicles a day. Traffic volumes on much o f the non-inventoried network are likely to be below 20 vehicles per day. Traffic volumes in 2000 were about one-fifth o f the levels prior to independence. Traffic volumes are directly related to the level o f economic activity, so volumes can be expected to double over the next ten to fifteen years. While growth rates may be significantly higher for links between economic centers, traffic volumes are likely to remain low for much o f the planning horizon over the majority o f the network. 6.9 Given the high road network densities, the accessibility of the network and low traffic volumes, it i s hardly surprising that roads and bridges were seen as low priority during the NDP consultations. Whereas education was considered one o f the top three priorities by 70 percent o f respondents, health by 49 percent and agriculture b y 32 percent, only around one in ten respondents considered roads a priority. Roads and bridges figured in the top three priorities in just two of the thirteen districts, Ainaro and Bobonaro, both in the east. I n the west, roads and bridges ranked fifth or sixth. The national results are repeated in an opinion survey conducted in late 2003 by an international NG0,l2 where just 11 percent o f respondents considered bad roads the major developmental problem facing Timor-Leste. The highest percentages identifying roads as the top priority were this time found in Viqueque (east) and Aileu (center). Notwithstanding the results o f consultative exercises, the quality and accessibility o f road network are critical development concerns. Recent evidence o f deterioration o f road standards highlights their importance and the need for a coherent strategy to ensure that sustainability o f the road network. c. DEFININGAND PROGRAMMING EXPENDITURE PRIORITIES 6.10 The National Development Plan presents the broad framework for road sector policy and strategy. The NDP’s overall sector objective i s to provide infrastructure in support o f economic and social development, whilst simultaneously stressing the importance o f equity between regions and urban and rural communities and the needs o f defense and national security. Rehabilitation and maintenance o f the national and district road networks are identified as priorities for the medium term. Beyond this broad framework, the NDP provides little guidance for operational and budgetary decision-making in the roads sector. The key issue o n which guidance i s required i s how to reconcile network maintenance requirements with the limited financing available. ’’IntemationalRepublican Institute, East Timor National Opinion Poll, November 2003, page 37. 72 6.1 1 Indicative aggregate-based estimates show that the cost o f maintaining the road network to an ideal standard i s very high. Annual expenditure needed t o maintain the road network in Timor-Leste was reported in the Transport Sector Master Plan in 2002 at US$18.2 million. The Road Map, published in 2003, indicated maintenance at US$13.5 million per annum. An updated estimate o f annual Table 6.4: Potential Annual Cost o f Maintaining Road maintenance costs based on a Network to Design Standards based on Historic Unit Costs simple, aggregate model suggests the cost o f maintaining the 6,036 km Type o f works National District Urban Rural Total network to design standard-“ideal” Unit Costs from an engineering perspective-is Periodic maintenance ($/km) 40,000 30,000 40,000 10,000 about US$19 million a year (see Routine maintenance ($/!an) 1,000 750 700 350 Table 6.4). This estimate i s based on Emergency works ($ per event) 7,830 7,830- 7,830 a budget planning model that Road s l i m ($ uer meter) 1.167 873- 873 Total Annual Cost (%’OOO) assumes historic unit costs, Periodic Maintenance 5,703 2,608 2,864 3,025 14,200 reflecting average costs in 2001 and Routine Maintenance 1,426 652 501 1,059 3,638 2002, for: periodic road maintenance Emergencv Repairs 370 291- 632 1.299 (entailing a complete surface overlay Total 1,499 3,556 3,365 4,716 19,136 and minor structural repair); routine Source: DRBFC Planning and PER Estimates maintenance (drain clearing and grass cutting, and spot surface repairs for national and district roads); and emergency repairs following landslides. It also assumes periodic maintenance every ten years, and ten landslide emergency operations with a total length o f 250 meters each year. The cost excludes bridge maintenance costs and assumes that roads have been rehabilitated to a maintainable condition. The cost o f maintaining degraded surfaces to their design standards according to this estimation i s likely to be even higher than shown. 6.12 While a road maintenance program of this size might be considered “ideal” from an engineering perspective, it i s not feasible given current financial constraints, nor i s it economically viable. The total cost o f maintaining the network to design standards amounts to more than one-quarter o f total Consolidated Fund expenditures in FY2004. This i s much more than most countries are able to allocate to their road maintenance programs. Furthermore, recent analysis o f the road network in eastern Flgure 6.2: Awrage Daily Traffic & Economic Indonesia has shown that periodic Internal Rate ofReturn - Eastern Indonesia maintenance i s rarely viable for paved periodic maintenance H D M IIanalysis I roads with traffic volumes under 500 vehicles a day. This i s illustrated by Figure 6.2, which shows an internal rate */ o f return o f less than ten percent for four out o f five roads with traffic densities o f fewer than 500 vehicles a day- less than 15 percent o f the Timor-Leste’s national road network has traffic volumes above this threshold. As a general rule, paved * * ** surfaces become viable once traffic volumes pass 200 vehicles a day. 500 1,000 1,500 Consequently, the economic returns o n Annual average daily traffic AADT periodic maintenance for much o f the current paved network in Timor-Leste could be l o w given current traffic. From an economic point o f view, it would make sense to allow some o f the network to degrade from paved to gravel surfaces, since the gravel roads remain economically viable at much lower traffic volumes (from 20 to 50 vehicles per day). 73 6.13 The challenge for the road sector in coming years i s to maximize the returns from the l i i t e d resources available whilst maintaining access across the network. This w i l l require careful prioritization o f public spending, with decisions and clarity regarding the allocation o f funds between maintenance and other interventions, the extent and structure o f the network, ownership and agency responsibility for network components, network standards, and the basis for allocating resources between network components. The key policy considerations in determining and programming expenditure priorities at an operational level are examined below. First, maintenance and emergency repairs take priority 6.14 Maintenance should be given priority in road sector spending because this i s by far the most effective and efficient use of funds. Unfortunately, routine and periodic maintenance i s not particularly glamorous and so i s commonly under-valued. Yet the costs o f deferred maintenance are very high, both for road users and for Government. Poorly maintained roads increase vehicle operating costs, since journeys are delayed and vehicles are damaged. On an annualized basis, every dollar not spent on road maintenance for a road with traffic volumes o f 500 vehicles a day w i l l increase road users' costs b y between US$3.40 and US$6.10. F r o m the Government's perspective, rehabilitation o f degraded roads every ten to twenty years i s more than three times as expensive, on a cash basis, than regular maintenance, and over 35 percent more expensive in terms o f net present value discounted at 12 p e r ~ e n t . ' ~ 6.15 The Transport Master Plan clearly identifies routine and periodic maintenance as the first and second priorities, with spot improvements and rehabilitation primarily geared to a reduction in future maintenance costs. This reflects the high economic returns to maintenance interventions. Emergency repairs should be considered part o f routine maintenance, since repairs to landslide and flood damaged road sections are critical to maintaining access. Once routine and periodic maintenance and emergency repairs have been funded, the Master Plan suggests that remaining funds can be allocated to the improvement o f unstable sections and sections susceptible to landslide and flooding. These spot improvements include short realignments and stabilization o f landslide prone sections, paving o f steep slopes, and installation o f culverts. Such investments are warranted by reduced maintenance costs over the longer-term and improved access through reduced road closure. More extensive section rehabilitation w i l l be worthwhile where i t results in a larger reduction in future road maintenance and road user costs. A risk management approach to maintenance planning w i l l support the effective use o f limited funds, and can reduce the incidence of road closure due to flooding and landslides to an optimal level. Second, define the core network based on the funding available for maintenance 6.16 The purpose of defining a core road network i s to align network size with available funding for maintenance. The more funding available, the longer the core network. Conversely, if the network cannot be maintained with the available funding, the core network may need to be reduced. This may entail relegating some national and district roads to a lower class. Road classification should define a core network o f the most important routes: for instance, access to all districts from Dili and to the main border crossings could be achieved with a national network o f less than 1,000 km, compared with the current national network o f 1,426 km. A secondary network might be maintained to a lower standard b y the national government, with remaining roads relegated to a functional classification for which lower standards and local rather than national responsibility are appropriate (see para 6.18). l3World Bank (1996), Sustainable Transport: Priorities for Policy Reform, p. 26 74 6.17 Initial analysis suggests a need to reduce the length of the core network. Average annual expenditure needed over the next ten years to bring the entire current road network to a maintainable condition i s considerably higher than the level o f funding that has been available in recent years and which i s currently expected to be available in the future. Unless additional funding can be secured, there w i l l be a need to focus expenditure where it can provide the greatest benefit- the core network-and accept a reduction in the quality o f the remainder o f the road network. Third, assign responsibility for network components 6.18 Responsibility for maintenance of the road network has to be clearly assigned. Responsibility for road maintenance i s usually divided between national agencies, local authorities and communities in accordance with the function o f roads and those best able to take responsibility for them. This needs to be supported by a formal assignment o f responsibilities for roads. A hierarchy o f responsibilities i s possible in Timor-Leste. The national government can take responsibility for managing maintenance o f the core, national network. Responsibility for lower level roads can be assigned to lower levels o f government and communities, with the five regional offices of DRBFC (noting that the five regions do not coincide with the thirteen administrative districts in Timor-Leste) providing support to these entities. Box 6.1: Improving Access beyond the “Core Network” While the MTCPW program has focused on the rehabilitation and maintenance of national and district roads, a number of projects have financed improvements in the ‘Ifarm-to-feeder ’’ roads of the rural road network. These include the TFET financed Community Empowerment Project and the Agricultural Rehabilitation Project, both of which have provided funding for community ident$ed and implemented initiatives. By December 2002, CEP funded some 214 km of roads, and 39 bridges were reported completed by local communities, at a cost of US$253,119 for roads and US$22,585 for bridges. The current CEP portfolio includes a further 87 roads projects, with an estimated cost o f US$449,500, and 8 bridges, costing US$36,000. A further 100 km o f ‘Ifarm-toTfeeder” community implemented roads have been funded by the Agricultural Rehabilitation Project, at a cost of about US$250,000. Analysis of the economic returns on a small sample of CEP road projects tends to confirm the marginal economic viability o f these investments, although the study argued that each of nineteen projects reviewed had a positive internal rate o f return, averaging 26 percent. Since the roads were narrow, unsealed tracks, most ofen used by pedestrians and motorcycles with rare vehicle traffic, savings in vehicle operating costs were minimal. Some benefits were generated from improved access to markets, however: “by far, the benefits of the roads came out of the employment benefit to the local economy where it was assumed that 50 cents to the dollar earned on the roads projects were spent on the local market”. Consequently, the rationale for financing rests largely on their employment generation impact rather than the benefits generated by the road itse6 This calls into question the sustainability o f such investments, since there is no provision for such subsidies for maintenance. While this kind of analysis fails to capture the intangible benefits of roads, notably an end to the isolation felt by many communities, the experience o f CEP tends to underline the importance of MTCPW focusing on its core network. Rural roads are better financed as community initiatives through flexible funding mechanisms such as CEP, where the funds can be channeled to the priorities that the communities identih, rather than directly from the roads budget. Jean Foerster, Community Empowerment and Local Government Project: Cost Effectiveness Study, March 2002. 6.19 Community responsibility i s appropriate for rural roads. Most rural roads under the current classification are “field-to-village” tracks and “village-to-feeder’’ roads. The DRBFC provides little support for these roads at present. Given the local function and remoteness o f rural roads, i t i s unlikely that DRBFC could maintain them in a cost-effective manner. In any event, since the beneficiaries o f rural roads are generally well defined geographically, i t makes sense for 75 local communities to assume responsibility for their maintenance (see B o x 6.1). This can be done through voluntary labor, with lower levels of government generally providing materials where needed. The national government could s t i l l assist with emergency repairs where this entails structural work on the most important routes in order to maintain access. Fourth, set appropriate service standards for network components 6.20 Definition of appropriate service benchmarks for each of the road classes provides a guide for appropriate design standards, maintenance planning, and budget management. Service benchmarks help make decision-making more transparent and accountable and allow stakeholders to assess whether adequate service i s being provided. Emphasis should be given to performance indicators that report output rather than inputs (the amount spent on road maintenance). In this context, there are two key considerations in terms o f road service standards: the first i s access-whether the service i s provided or not-and the second relates to service quality-usually defined in terms o f journey times. Both these criteria are closely related to road surface conditions. 6.21 Access standards are best defined in terms of the acceptable frequency and duration of road closure. The most frequent cause o f road closure i s wet weather, which can cause flooding and landslides that close roads and also weaken road foundations, making roads vulnerable to damage b y traffic. A high standard of accessibility w i l l be required for national roads, with “all- weather” access desirable. For district and rural roads, the acceptable access standard may require temporary road closures until surfaces have dried and use o f fords rather than expensive bridges. 6.22 Service standards can also be defined in terms of benchmark journey times. In the Timor-Leste context, for instance, benchmarks might be set at 50km/hr for the high volume national roads, 40 W hr for the remainder o f the national network and 30 km/hr for district roads. Such speeds are a surrogate for vehicle operating costs and travel time, and need to be calibrated to ensure that likely benefits o f higher standards than maintained at present can be justified in terms o f benefits to the economy. D. ALIGNING EXPENDITURES WITH PRIORITIES 6.23 In the immediate post-conflict period, priority was given to ensuring access through emergency works and maintenance. B y the end o f FY2003 about US$38 million had been spent on the roads sector, o f which US$33 million was financed from donor programs and US$6 million from the Consolidated Fund (see Table 6.5). The principal source of financing has been the US$21 million TFET Emergency Infrastructure Rehabilitation Project (EIRP), which has financed repairs to about 1,250 km o f national roads and 660 km o f district roads, together with community-based road maintenance covering about 1,445 km of roads. A grant o f US$4.7 million was provided by the Japanese Government through UNDP for urgent repairs to the Dili-Aileu-Ainaro-Cassa road (136 km). The Japanese Engineering Group has also cleared landslides and undertaken other road repairs. These works, estimated to have cost around US$3 million, are not included in Table 6.5. Nor i s the repair or improvement o f about 1,000 km o f rural road implemented through the Community Empowerment Project (CEP). Over the three-year period, about 70 percent o f reported expenditures were allocated to rehabilitation and 20 percent on emergency repairs. Priority was given to maintaining access by relieving critical bottlenecks, in particular bridge repairs, landslides and other pavement failure. This reactive approach has succeeded in keeping the road system open. 6.24 Forward estimates indicate a significant shift in spending from rehabilitation to maintenance as programmed external assistance winds down. Financing for the routine 76 maintenance program, set up in 2000 using TFET funding, has gradually been shifted to the Consolidated Fund, so that routine maintenance operations amounting to approximately US$2 million were largely drawn from that source. Under the FY2004 budget and MTEF, routine maintenance expenditures were programmed at US$2.5 million a year FY2005 and thereafter. Provision was made for periodic maintenance and emergency repairs from FY2005, at US$2.5 million, rising to over US$5.8 million by FY2007. This would have been sufficient to cover most o f the national and district network at current unit prices. However, it would leave little funding for the lower priority rural network. During the FY2005 budget process, Consolidated Fund forward estimates for road maintenance were cut back. Unfortunately, detailed composition o f revised forward estimates was not available at the time o f writing. Forward estimates o f domestic and committed external finance for road rehabilitation and upgrading, based on the FY2004 budget, show a declining program o f works, with the second phase o f the EIRP dominating programmed expenditures. Projects to upgrade the Aileu to Suai road and five bridges between Viqueque and Los Palos during FY2005 and FY2007 are currently under review. If these proceed, expenditure on rehabilitation w i l l be about US$17 million higher than current estimates. Table 6.5: Estimates of Actual and Programmed Road Sector Combined Sources Expenditure and Financing Application / Source FYOl FY02 FY03 FY04 FY05 FY06 FY07 Routine Maintenance 425 2,288 3,148 2,433 3,508 4,021 3,053 Periodic Maintenance - 2,519 2,980 3,061 5,808 Emergency Repairs & Rehabilitation 14,540 13,894 5,628 3,003 6,063 - Selected Road Improvements 200 600 800 1,000 Urban Roads, drainage, footpaths - 200 200 300 400 500 Total US$’OOO 13,082 16,182 8,976 8,355 13,451 8,282 10,361 Routine Maintenance 3 14 35 29 26 49 29 Periodic Maintenance 30 22 31 56 Emergency Repairs & Rehabilitation 111 86 63 36 45 - Selected Road Improvements 2 4 10 10 Urban Roads, drainage, footpaths 2 2 2 5 5 Total % 100 100 100 100 100 100 100 Consolidated Fund 4 18 41 66 56 100 100 TFET 62 66 30 34 44 - Bilateral Programs 34 16 29 - Total % 100 100 100 100 100 100 100 Source: RBFC and Road Sector Expenditure Review estimates. Note: Excludes work undertaken by PKF. Forward estitmtes include only cotiitnitted projects 6.25 Estimates prepared for the Transport Sector Investment Program call for higher levels of rehabilitation and maintenance spending than currently programmed. The proposed strategy entails targeted rehabilitation-completing bridges, improving road alignments, stabilizing slopes and restoring road surfaces-of about 35 percent o f national and district roads in order to restore them to a condition in which they can be sustained through routine and periodic maintenance. This strategy should reduce the risks o f closure and the life-cycle cost o f providing roads b y reducing the need for maintenance and emergency works. The program cost estimates also assume significant reductions in the unit cost o f road maintenance through efficient contracting and the use o f labor-based approaches where appropriate, bringing costs in line with other countries in the region. Two financial scenarios were considered for a ten-year period (see Table 6.6). The first “high-case” scenario seeks to restore the national and district network to maintainable condition, with a total cost o f around US$192 million (of which 46 percent i s allocated to rehabilitation and 54 percent to periodic and routine maintenance). During the early years, about 60 percent o f funding would be allocated to rehabilitation to prevent further deterioration o f the road network. 77 Table 6.6: Cost Estimates for Ten-Year Road Rehabilitation and Maintenance Program High and Low Case Scenarios (Constant 2003 prices) US$ millions Cost over ten years Average annual expenditure by period National District Other Total Yrs 1-3 Yrs 4-6 Yrs 7-10 Average Road Rehabilitation 44.7 19.8 - 64.4 10.0 6.3 3.9 6.4 Bridge Rehabilitation 24.6 - 24.6 2.7 4.0 1.2 2.5 Periodic Maintenance 28.9 5.4 39.8 74.1 5.0 9.0 8.0 7.4 Routine Maintenance 11.1 5.4 12.6 29.1 3.0 2.9 2.9 2.9 Total Huh Case 109.3 30.6 52.4 192.3 20.6 22.2 15.9 19.2 Road Rehabilitation 23.0 8.4 - 31.4 5.0 3.0 1.8 3.1 Bridge Rehabilitation 14.8 14.8 1.6 2.4 0.7 1.5 Periodic Maintenance 18.6 2.3 27.1 48.0 3.4 5.8 5.1 4.8 Routine Maintenance 8.3 4.1 12.6 25.0 2.6 2.5 2.5 2.5 Total L o w Case 64.7 14.8 39.7 119.2 12.6 13.7 10.1 11.9 Source: Transport Sector Expenditure Review estimates. The proportion o f funding allocated to periodic and routine maintenance gradually increases to about 70 percent o f expenditure by the seventh to tenth years o f the program. This would cover the whole national, district and urban road network as well as a substantial part o f the rural roads. Under the “high-case” scenario, programmed maintenance costs for the f i r s t three years are broadly in line with the allocations presented in the MTEF through to FY2007, increasing b y about 20 percent in nominal terms b y the tenth year. The second, “low-case’’ scenario seeks to arrest deterioration in the network but would result in a lower sustainable standard. Financing requirements are estimated at about US$120 million over ten years (of which 39 percent i s allocated to rehabilitation and 6 1 percent to periodic and routine maintenance). Again, rehabilitation expenditures are front-loaded, with periodic and routine maintenance gradually increasing to about 80 percent o f expenditure by the seventh to tenth year. Under the “low-case’’ scenario, programmed maintenance costs for the first three years are lower than those anticipated in the MTEF. I t should be stressed that these estimates have not been subject to economic evaluation or detailed engineering studies. 6.26 The scale of the rehabilitation and maintenance program implemented over the remainder of the NDP period will depend, primarily, on the Government’s ability to mobilize financing and, secondarily, on its ability to reduce unit costs (see para 6.32). Consolidated Fund allocations presented in the FY2004 Budget provided for increases in funding from US$5.3 million in FY2004 to US$10.5 million in FY2007. This corresponds to about 40 percent o f the total financing requirement o f the first three years o f the “high-case” scenario and 65 percent o f the financing requirements for the first three years o f the “low-case” scenario. Although additional funds can be mobilized from cost recovery measures (see para 6.31), external financing would be required to fully implement the proposed investment programs. On the basis o f FY2004 programmed Consolidated Fund expenditures, extemal financing requirements amount to about US$12 million a year for the first three years of the “high-case” scenario and a modest US$4 million a year for the first three years of the “low-case” scenario. Allocations were subsequently cut back during the FY2005 budget process, leading to an increase in external financing requirements. 6.27 Careful prioritization will be needed to ensure an appropriate balance of spending between rehabilitation and maintenance as well as among individual rehabilitation projects. Improvements in planning and evaluation are needed to establish a prioritized program o f road investment proposals that i s integrated with economic development plans in other sectors and 78 maximizes economic and social returns. In the absence o f sufficient funding to implement the proposed program, road expenditure w i l l have to be focused on the core network, where the returns w i l l be greatest. This may entail maintenance o f the remainder o f the network to a lower standard. AND MANAGING ROAD E. MOBILIZING SECTOR FINANCE 6.28 The critical considerations for road sector funding are that allocations should be predictable and sustainable over the long-term. Operational planning i s only practical when those responsible for managing road maintenance programs know how much funding w i l l be available well into the future. Once the resource envelope i s known, sector planners can define the appropriate length o f the core network and service standards, prepare the requisite maintenance schedules and enter long-term works implementation arrangements. Recent changes in roads sector financing have created uncertainty regarding future financing. Road maintenance allocations were cut in the third quarter o f FY2004, to offset allocations o f materials from non-project aid, effectively bringing community-based roads maintenance to a stop. Allocations to the roads sector were subsequently revised downwards during the FY2005 budget. I n this context, formulation o f a realistic long-term financing strategy for the roads sector i s a matter o f priority. 6.29 Sector allocations defined through the budget process, with forward estimates providing allocations over the medium term, should provide a reliable basis for forward planning. These allocations w i l l ensure a predictable flow o f funds as long as the forward estimates are reasonably “hard”-providing the basis for negotiation o f allocations for the following year’s budget-so that actual appropriations are closely aligned with the forward estimates. Appropriations for the sector are drawn from a single “Roads, Bridges and Flood Control Program,” corresponding to the administrative department. Program appropriations cover administrative overheads and routine maintenance activity. Appropriations for capital expenditures are identified separately as projects under the program (covering periodic road maintenance, road improvement, urban roads, flood control and public safety). The budget structure could be made more transparent by distinguishing routine maintenance as a specific sub-program, so that funding for these items can be tracked separately from administrative overheads. Nevertheless, the budget’s current broad structure i s adequate and, as the FY2004 budget demonstrates, provides a sound basis for programming allocations to critical road maintenance functions. However, i t i s important that road maintenance spending i s ring-fenced within the budget so as to ensure predictability in funding, protecting road maintenance from year-to-year and within-year changes in allocations. Changes in resource allocations, such at the sudden withdrawal o f funding in FY2004 and cuts in forward estimates in the FY2005 budget process, make i t almost possible to prepare long-term plans for the sector. 6.30 Earmarking of specific revenues to the roads sector i s unnecessary as long as programmed Consolidated Fund expenditures provide a reliable basis for planning. Revenue earmarking i s often employed in low-income countries to mobilize additional funding for the roads sector and improve the predictability o f resource flows. Typically, revenues generated by road users-such as levies on fuel, vehicle and driver licensing, and tolls-are statutorily assigned to the roads sector, thereby providing a permanent source o f financing. While earmarking i s probably not warranted in Timor-Leste, there i s a need for monitoring of revenue from motorists and expenditure on roads and traffic management to ensure that the level and structure o f charges on road users i s appropriate. 6.31 Nevertheless, there i s scope for improving cost recovery. Charges levied on road users help ensure that those who receive private benefits from use o f the road network pay for part o f the costs o f providing these services. This reduces the burden on the general public and the potential 79 for perverse subsidization o f road users. At present, cost recovery i s limited. In FY2003, the Directorate of Land Transport collected about US$180,000 from vehicle registration fees, as compared w i t h US$488,000 in FY2002. Improvements in vehicle registration management are needed to mobilize revenues from this source, potentially generating around US$ 1 million a year. Ideally, registration charges w i l l be related to the size o f vehicles, with much higher rates for heavy vehicles: the supplementary levy o f US$400 a year for heavy vehicles, proposed in the Transport Master Plan, would generate around US$0.5 million a year. A more significant source o f revenues would be f r o m the introduction o f a fuel levy, in addition to the current fuel excise. The retail price o f fuel in Timor-Leste i s not high by international standards. However, i t i s high given the low level o f taxes. Reducing the imported cost o f fuel to a level comparable with that in countries similarly situated to Timor-Leste (i.e. countries that import their fuel, and are distant from the sources o f the fuel) and an off-setting increase in fuel tax would leave retail prices unaffected and could raise additional revenue to the Government o f about US$1.5 million per year. Allowing for growth in the number o f vehicles in Timor-Leste, i t should be possible to generate US$5.8 million in 2007 from fuel taxes and registration charges. This would meet 70 percent o f the cost o f road maintenance in that year. A longer term objective should be to recover the cost of all road maintenance costs from road users. F. WORKS IMPLEMENTATION 6.32 The Transport Sector Investment Program i s predicated on reductions in unit costs for both rehabilitation and maintenance activities. Selection o f the appropriate works implementation mechanism w i l l be critical in ensuring efficiency and value-for-money in the implementation o f the program. Sector planners have three options: community implementation; use o f private sector contractors; and direct administration-or force account-where works are implemented b y Government works depots. These options and alternative implementation strategies are reviewed below. Community-based maintenance 6.33 Community implementation i s preferable for maintenance of rural roads. For much o f the rural network, communities may be expected to provide free labor, with Government input limited to basic equipment and technical supervision o f engineering works such as road layouts or culverts. However, this i s not yet the practice in Timor-Leste, where labor on the rehabilitation and improvements o f “farm-to-feeder” roads has generally been paid-pay rates were recently increased from US$3 a day to US$3.50 a day. Over the longer-term, the cost o f rural road maintenance needs to be reduced significantly. Community ownership o f rural road links may be sufficient incentive for maintenance to be undertaken through labor contributions. 6.34 By far the most extensive use of community implementation to date has, however, been for routine maintenance of the core network. A Community Based Maintenance (CBM) Program was established under the EIRP, with a total o f 311 contracts awarded in 2000 and 2001for some 200,000 person-days o f community managed routine maintenance activities. C B M activities have continued with Consolidated Fund financing. Use o f CBM for maintenance o f national roads i s proving problematic. Contracts with communities are difficult to administer and supervise. Initially established as a means o f generating rural employment, the same objective could be achieved at lower cost by private contractors, as long as the labor requirements are specified in the contract. 80 Private contractors 6.35 F o r most rehabilitation and maintenance activities, use of private contractors will be more cost-effective than community implementation or direct administration. Competition between contractors during the procurement process i s vital to keep down costs. The services procured can be adjusted in line with funding availability. Development o f a local contracting industry w i l l also support the more general upgrading o f s k i l l s and entrepreneurship. The National Development Plan recognizes the importance o f private sector involvement: one o f the guiding principles for sector development i s “to utilize the private sector to the maximum extent possible in the cost effective delivery o f projects, programs and services, and support and promote the development o f the private sector in this role” (NDP, 2002, p. 265). 6.36 A competent contracting industry has emerged in Timor-Leste. The DRBFC has pre- qualified 153 contractors for roads works, 45 for bridges and 14 for flood control (see Table 6.7). Of these, 71 contractors classified under categories A to C1 are probably capable o f undertaking full routine maintenance, including culvert and small bridge repairs and pothole patching o f paved Table 6.7: Road Contractors by Class, roads. A further 82 COntraCtOrS may be suitable for February 2003 routine works, such as cleaning side and cross drains and vegetation control. There i s some international Maximum Bridge Flood involvement in the contracting industry-mostly the Contract Roads barriers larger firms-but the majority are locally-owned. ($OOOS) A >500 6 6 0 6.37 Furthermore, the performance of contractors B1 500 16 i s reasonable given the difficult operating B2 250 21 l8 environment. An assessment o f 66 contracts under the c1 150 28 EIRP,I4 o f which 14 were for class B and 37 for class C c2 15 39 works, indicated that 16 o f the contracts had poor work c3 < 25 43 cited and 18 poor progress. Cost overruns were Totals 153 45 14 substantial, at an average o f 42 percent, which may Source: RFBC. reflect difficulties in costing works. Significantly, performance o f international contractors was not noticeably better than that of local contractors. While offering the opportunity for improvement, the performance can be seen in the light o f being undertaken in transitional, and sometimes difficult, circumstances. 6.38 There i s potential to make greater use of private contractors for road maintenance. In FY2003, allocations o f routine maintenance funds between the five “road regions” were made on a formula basis, 50 percent o f funds allocated to community-based maintenance, 30 percent to private sector contractors, and 20 percent to depots. Some flexibility i s allowed, but there were restrictions on allocations to the private sector. Increases in the share o f funding for private contractors would be in line with stated policy. The FY2004 budget provided for just 21 private sector routine maintenance contracts, as compared with over a hundred qualified contractors. 6.39 The capacity of the local contractor industry can be further improved. Ensuring a continuing, steady program o f works w i l l facilitate the further development o f the industry, and w i l l reduce the cost o f projects by avoiding the high costs involved in maintaining teams for sporadic works. Reduction in the average cost o f works can be achieved through encouragement o f technical innovation and equipment investment, active competition for work, and effective supervision o f quality. Some training o f contractors in bid preparation, cost-estimation and contract procedures was undertaken under EIRP. However, experience has shown that many contractors are l4ADB Emergency Infrastructure Rehabilitation Project Completion Report, 81 s t i l l unfamiliar with bidding and contractual procedures. A survey o f local contractors, covering both s k i l l s assessment and equipment inventories, could help identify contractors’ needs, and serve as the basis for further training under future road projects. Development o f pre-qualification procedures and standard bid and contract management documents, such as those employed under EIRP, would also reduce the administrative burden for local contractors. Direct administration 6.40 The EIRP helped establish five regional depots, with basic works equipment, for carrying out small-scale emergency works and routine maintenance. Performance so far has been poor. In FY2003, the regional depots had spent just 2 percent o f their operating budgets by mid-year, w i t h very little operational activity recorded. The regional engineers who head the regional depots appear to be more closely involved in the supervision o f community-based and private sector contracts than in the implementation o f activities under direct administration. This i s unlikely to be an effective use o f the scarce skilled staff; besides, the depots have been unable to use much o f the equipment at their disposal due to difficulties in recruiting skilled operators. 6.41 Establishment of the Directorate of Equipment and Materials has shifted the balance of resources and incentives towards direct administration. W i t h the phased withdrawal o f the Japanese Engineering Group from March 2003 to June 2004, 26 vehicles previously used by the Japanese Engineering Group were transferred to a newly created Directorate o f Equipment and Materials (DEM). I t i s currently proposed that a further 61 items o f equipment, including 19 small dump trucks, 12 large dump trucks, 12 bulldozers, 4 cranes, 3 graders, and other assorted large and small equipment, w i l l be transferred to the Government when the JEG withdraws. I t i s likely that other Peacekeeping Force units w i l l seek to transfer additional equipment to the Government over the coming months. The DEM has a budget o f US$265,000 in FY2004, programmed as rising to US$474,000 in FY2007. There remains the risk o f yet higher costs as the cost o f maintaining ageing equipment rises and i s combined with the running costs o f an organization whose role w i l l evaporate within a few years as the equipment reaches the end o f i t s economic life and i s retired. The recent use o f equipment transferred to date by the DRBFC to construct a bridge at Natabora extends the Government’s role beyond the current focus on project identification and contracting. There i s greater merit in the DRBFC maintaining a focus on project management, and for options to be explored to make equipment available to the private sector, which i s likely to be better able to use it effectively. Options could include sale or leasing o f the equipment in Timor-Leste, with the proceeds being transferred to Government. 6.42 Although some direct administration capacity may be required to undertake emergency works and routine maintenance, private sector contracting i s generally preferable. Although public works depots are often justified on grounds o f cost-effectiveness, direct comparisons with private sector operators are not always valid. The administrative overhead costs and the value o f equipment and other assets are rarely fully reflected in the works depots’ budgets. Properly supervised private sector operators are actually more cost-effective and, for this reason, there i s a marked trend toward the use o f contracting for maintenance works in other countries. Samoa, for example, recently changed to contracting out all capital and maintenance works, transferring all equipment previously owned b y the government to the private sector. G. STRENGTHENING CAPACITY INSTITUTIONAL 6.43 The Ministry of Transport, Communications and Public Works faces pressing capacity constraints in engineering skills and, most notably, in the areas of policy, planning and management. The DRBFC has a staff o f 105 budgeted positions (of which about 70 are 82 Box 6.2 Key Recommendations Roads - Formulation of a roads policy, including a) definition of a core network of the most important roads to be maintained by national government; b) clar$cation of road maintenance responsibilities across levels of administration; c) definition o f clear expenditure priorities, focusing on routine (including emergency) and periodic maintenance expenditure, with careful targeting o f rehabilitation spending on areas most likely to reduce future maintenance needs and road user costs; and d ) adoption of combined sources expenditure framework as the basisfor sector expenditure planning. Definition o f a realistic, long-term financing strategy for the roads sector, ensuring predictable resource allocations by ringyencing roads sector resource allocations from further budgetary adjustments. Prioritization o f maintenance expenditure on the core network, allowing less critical portions o f the network to degrade from paved to gravel su$aces, which are more cost-effective at lower traflc volumes. Updating and institutionalization o f the RAMS database as a tool for monitoring road conditions and planning road works. Development and monitoring of clear, output-based performance indicators, including access standards (whether the service is provided or not, i.e. frequency and duration o f road closure) and service standards (i.e. benchmark journey times) Inclusion o f routine maintenance as a specific sub-program in the budget Promotion and increased use o f private contractors in road rehabilitation and maintenance, by: a) ensuring a steady and increasing stream of funding for roads maintenance; b) introduction o f sector- wide pre-qualijkation process, together with a streamlined competitive tendering process using standardized bid and contract management documents; and c) provision o f training for contractors. Integration o f project management staff into the routine work of the Directorate of Roads, Bridges and Flood Control (DRBFC). ~~ ~ ~~ filled). Of the fourteen posts at level five and above, all but one are engineers. There i s a small Planning Unit in the Secretariat o f State for Public Works, with a budgeted staff o f just four, but this has only recently begun operations. Furthermore, much o f the strategic analysis has been undertaken by consultants and the EIRP Project Management Unit, with little involvement o f national personnel in day-to-day operation and decision-making. Few o f the national staff were directly involved in the preparation o f the Transport Master PEan. Obviously, this i s an area where further capacity building i s needed. In the implementation o f future technical assistance activities, particular attention needs to be paid to the integration o f the project staff into the routine work o f the DRBFC. In addition to on-the-job-training and courses, consideration should be given to partnering with a skilled organization facing similar technical challenges from another country to provide a source of advice, backup, and staff exchange. 6.44 Strategic and operational decision-making has to be supported by up-to-date information on road conditions and sector performance as well as a prioritized plan for rehabilitation and maintenance. The R A M S database has not been updated or institutionalized. Upgraded data on road condition and traffic volumes are urgently needed to support an assessment o f the optimal level o f road investment and maintenance, the definition o f prioritized expenditure programs, risk management, and maintenance planning and programming. DRBFC staff should be supported in the updating and use o f R A M S . Most importantly, the information systems have to be used routinely in both operational and financial planning. Development o f a detailed roads sector rehabilitation and maintenance plan would be a useful f i r s t step in t h i s direction. 6.45 Management of the resources available to the roads sector has been hampered by multiple funding sources, each with its own decision-making and expenditure processes. Much o f the expenditure on roads has been implemented through project management offices 83 rather than being directly administered by the DRBFC. This has reduced the role o f the DRBFC in managing road development and maintenance and the extent o f i t s capacity building. The use of separate project management offices has also limited the development o f i t s contracting capacity. Accordingly, there i s a need to support the development o f s k i l l s in the DRBFC for contract packaging, bidding, tender assessment, and contract management. 6.46 Given the need to develop capacity for sector planning and works implementation, a strong case may be made for adopting a sector approach, with external funding channeled through Government systems. The roads sector will figure prominently in the Government’s investment program well into the future, with an increasing share o f financing from domestic sources. In this context, the development of national systems for works implementation, contracting and works supervision should be seen as a priority. Adoption o f standard bidding documents and contracts would facilitate this process. Ideally, standardization would encompass contracts financed b y donors as well as Consolidated Fund-financed works, with, preferably, donors increasingly providing support and oversight for their project management activities to be undertaken by line staff o f the DRBFC. As far as possible, funding should be channeled through budget systems so that personnel gain experience in managing higher levels o f funding. 6.47 The Ministry of Planning and Finance can play a useful role in ensuring policy consistency and value-for-money in the use of scarce resource allocations for the road sector. Perhaps the most important function o f MPF i s to balance the DRBFC’s input-oriented, engineering focus by directing attention to policy priorities, defining and monitoring o f transport outcomes, and supporting analysis o f the costs and benefits o f alternative uses o f funds. This should reduce the risk o f a failure to adequately prioritize between the allocation o f funds to road rehabilitation and maintenance and among various roads, and o f using higher design standards than i s efficient. 84 7 . IMPROVINGACCESS TO QUALITY HEALTH SERVICES A. INTRODUCTION 7.1 The National Development Plan (NDP) of M a y 2002 assigns high priority to the health sector in order "to increase access to services by making primary health care available and affordable to the people of East Timor, particularly the vulnerable groups, providing a sustainable health system focusing on priority health needs" (NDP, 2002, p. 3). The NDP also makes a commitment to the Millennium Development Goals (MDGs), which have been adapted to the national context (see Table 7.1). The health sector was the only sector to Table 7.1: Timor-Leste MillenniumDevelopment Goals develop a sector policy framework whilst implementing an ambitious Baseline reconstruction program. The Health Indicator 2001-02 Target2015 Policy Framework o f June 2002 Infant Mortality Rate 88 Reduce by 50% provides a guide for the future Vaccination with DPM (%) 56 Achieve >90 Maternal Mortality Ratio -800 Reduce by 70% development o f the health system in Births attended by skilled staff 24 Achieve 90% an independent Timor-Leste. The (%) policy framework emphasizes the Malaria deaths -200 Reduce by 80% TB cases 8000 Reduce by 90% following aims: building on the HIV prevalence (%) .01-.35 Maintain same achievements made to date in level Source: Draft Sector Investment Prograni, 2003. Annex Table 6. restoring public health and curative services; recognizing the importance o f MoH's stewardship role; delivering a basic package o f affordable, effective interventions through a system o f district health services that are able to respond to local needs; ensuring that basic services are provided to the poor, who remain primarily in rural areas; cooperating proactively with the private sector and non- governmental organizations (NGO); and exploring the development o f contracting-out options for some ancillary and basic services, such as health promotion, which may be better managed b y other providers. 7.2 The re-establishment of health service following the violence of September 1999, which led the virtual collapse of all health services and the destruction of seventy percent of government-owned health infrastructure, i s a remarkable achievement. The sector also faces the challenges of rapid population growth and a historically high burden o f disease (see Table 7.2). This chapter reviews the health sector's impressive progress in addressing these difficulties, as well as the challenges that remain ahead. Section B describes the configuration o f the public health system and the significant role played by both government and non-government health providers. Section C outlines key challenges for personnel management in the sector, including the continued reliance on international doctors and specialist staff in the face o f local capacity constraints and the increasing pressures to expand staff numbers beyond sustainable levels. Development o f a comprehensive human resource plan for the health sector i s advocated. Section D notes Timor-Leste's remarkable progress i s re-establishing a functioning health system, while highlighting several critical areas o f concern in health system performance. L o w utilization o f 85 Table 7.2: Health Status Indicators in Timor-Leste, 2002 health services poses risks for the country’s health status and leads Indicator Tmor- East Asia Low Post-conflict to inefficiently l o w levels o f Leste and income countries a/ outpatient consultations in relation Pacific countries Infant mortality rate (per 88 33 81 84 to staffing levels. A health- 1O OO live births) seeking behavior study is Male 99 proposed to better understand the Female 12 Maternal mortality rate 420 reasons for limited demand. (per 100,OOO live births) Section E argues that the health bl Undernutrition - Weight- 43 sector’s expenditure framework i s for-age under 5 years broadly in line with priorities, but (percent) w i l l need to adjust to reduced Life expectancy 51 69 59 51 Male 56 68 58 50 levels and changing allocations of Female 59 71 60 53 external financing. Section F a/ Average o f selected post-conflict countries (Burundi, Chad, El explores health sector costing, Salvador,Ethiopia, Guatemala, Mozambique, Nicaragua, Rwanda, and Uganda). b/ Modeled estimate; data are for 1999. arguing that the planned Sources: World Bank Poverty Assessment, 2003; World Development Indicators, configuration o f health services 2003. w i l l exceed Consolidated Fund budget allocations in the near term. Careful attention w i l l need to be given to the cost o f hospital services and medical supplies, including pharmaceuticals. Section G recognizes the recent improvements made in the sector’s program budget structure and internal budget monitoring system, but raises some concerns about coordination across departments and between the center and districts. Finally, Section H discusses mechanisms that could be put in place to enhance transparency and accountability for performance, including the strengthening o f bottom-up oversight mechanisms. FACILITIES B. HEALTH 7.3 The HPF seeks to increase the coverage and quality of health services through delivery of a standard minimum package of cost-effective curative and primary health care interventions. The stated policy i s that basic health services should be available within two hours’ walking distance from communities, with the referral system functioning to provide hospital services in the form of emergency obstetric and surgical care within t w o hours’ drive o f sub-district facilities. A target has been set to contain the expenditure o f tertiary health services (hospital care) to below 40 percent o f the health budget in order to free up resources for priority basic health care services. 7.4 Services at the sub-district level are provided by health posts staffed by a nurse and a midwife, supplemented by mobile clinics operated from community health centers. Mobile clinics provide regular visits to remote communities b y motorbike. Each sub-district has a Level 2 community health center with a staffing complement o f six paramedical staff. Each district has a Level 3 or 4 community health center (CHC) with a staff o f ten to fourteen, including a doctor, some in-patient capacity for stabilization o f maternity cases, and some laboratory facilities. CHCs have radio communication, each district has at least one ambulance, and in each district at least one ambulance or emergency vehicle i s equipped with a radio. A District Health Management Team o f four i s responsible for overall management of services, including an imprest account for financing operational expenses at the district level, and for district health planning within guidelines and resource constraints issued by the Ministry o f Health. 86 7.5 Consistent with a policy focus on district health services, the Government has rationalized the hospital system. Out o f more than 20 hospitals operating under the Indonesian occupation, MOH has rebuilt six including a National Referral Hospital in Dili, a regional hospital in Baucau (at a significantly lower capacity), and four small facilities with the capability for limited emergency (including obstetric) care, located with a view to ensuring that the vast majority o f the population i s within four hours of a facility (see Table 7.3). When all the facilities are built, Timor-Leste w i l l s t i l l have a low number o f hospital beds per capita at around 0.5 beds per 1,000 people, as compared with the low income country average o f 1.3 in the 1990s. I n making these decisions, the Ministry o f Health recognized the budget and personnel constraints in the foreseeable future and the importance o f maintaining capacities-financial and human resource-for public and district health programs. Table 7.3: Government Health Facilities 7.6 Alongside government health facilities, a significant proportion of health Facility Number Comments National Hospital 1 Dili (226 beds) services are provided by private Regional Hospitals 5 Bacau hospital practitioners, churches and other NGOs. In (ll4 beds) Plus 24 bedded 2002, the 74 staff-including three doctors and facilites.* 12 general nurses-of the Cafe Clinic Timor Community Health 65 Some still require network saw 127,000 patients in 5 districts and Center (CHC) rehabilitation Health Posts 174 Some for Dili through 8 fixed clinics and 24 mobile rehabilitation, clinics. Cafe Timor i s a coffee cooperative, others for which operates in the five coffee-growing replacement districts. I t s clinics receive a subsidy from * Oecussi, Maliana, Suai, Maubisse. Source :Ministry o f Health U S A I D which provides funding for the overall cooperative, but the network i s designed so that core financing i s from the cooperative’s profits. For the past year, the major part o f the clinic’s financing has come through funding to the cooperative under the Fair Trade Agreement. Together with the USAID funding, this has allowed the clinics to serve not only the members of the cooperative, but other residents o f the districts covered, under an MOU soon to be ratified with Government. When the U S A I D subsidy ends at the end o f 2004, the clinics w i l l be entirely self supporting through the Fair Trade Agreement, but w i l l be able to serve only their members, and possibly with a reduced range o f services. In addition, church agency services are significant. Caritas, the Catholic church’s health agency, operates 27 clinics across the country with 125 voluntary medical staff including four doctors. Caritas, together with the Government, i s also responsible for the national TB program. At least five clinics are operated by other churches, but information on services and utilization o f these clinics i s not available. A limited number o f private providers, including doctors and other health personnel, provide services mainly in the urban centers. Private pharmacies, the number o f which has expanded rapidly in the last year, are an increasingly important source o f health care advice as well as pharmaceuticals. Currently, only the public sector provides hospital services, including some temporary services provided b y the Peace Keeping Forces which are now closing down. 7.7 Utilization of non-government health facilities i s significant. Although estimates o f health service utilization are not particularly reliable, there i s a consensus that non-government health service providers supply at least 20-25 percent o f the total ambulatory care. Private and religious facilities are more heavily utilized b y the non-poor. The 2003 Poverty Assessment indicates that among those reporting use o f health services, 29 percent o f non-poor respondents used private and religious services as compared with 14 percent among the poor. 7.8 There i s scope for better coordination of non-government and government services. The Health Policy Framework i s open to increased private service provision, both not-for-profit 87 and for-profit. As above, the M o H has agreed with the provision o f services to non-cooperative members by Cafk Clinic Timor. If t h i s i s to continue, MOH could make contracting-out arrangements with CCT. M o H has also contracted with several NGOs to provide specific services-for example to implement HIV/AIDS programs funded by the Global Fund to Fight AIDS, Tuberculosis and Malaria. In addition, guidelines for FY2005 district health plans call for a focus on both government and non-government services. However, there i s some way to go in avoiding duplication o f provision and building service delivery synergies. C. HEALTH PERSONNEL 7.9 M o H has 1,472 employees on the payroll (excluding international staff), most of whom are at Level 3 (51 percent) or at Level 4 (19 percent). These two categories include about 600 nurses and 230 midwives (see Table 7.4). In 2003 there were 17 Timorese doctors employed by the Ministry o f Health, as compared to about 42 international doctors and medical specialists in 2003. Several national doctors are employed in M o H administrative and policy functions. A total o f 54 local doctors are training overseas at present, and i t i s expected that about 40 w i l l successfully complete their studies. However, many o f the new doctors returning from training are choosing to join the private or NGO sector, including Caf6 Clinic Timor. M o H estimates that there were at least 526 medical staff (10 doctors, 339 nurses, and 177 midwives) working in the non-government sector in 2003. This represents more than one-third o f the estimated total medical staff working in Timor-Leste. Since public sector health services w i l l continue to face shortages o f Timorese doctors in the foreseeable future, M o H cannot depend on doctors to deliver basic curative and preventive services, which w i l l need to be delivered by cadres o f paramedical professionals in the short- to medium-term. Table 7.4: Public Sector Medical Staff Numbers, September 2003 Government Non- Post-graduate Total government training Doctors* 17 10 8 35 Doctors in training** 54 54 Nurses 591 339 930 Midwives 227 177 404 Source: H R D Division, MOH * including the Minister of Health ** 14 may not complete training due to less than satisfactory academic performance 7.10 The majority of the doctors and specialists working in the publicly funded health system are recruited internationally and funded through sources outside the Consolidated Fund budget. Between FY2002 and FY2004, most o f the doctors supporting district health services have been funded by the Trust Fund for East Timor (TFET) as part of the planned transition from the unsustainably high cost o f international NGO-provided, internationally financed emergency services provision arrangements put in place in 1999 to more sustainable domestic financing. In FY2004, a core number o f these doctors are being transferred to the Consolidated Fund budget, with additional support being mobilized by the Government from Cuba and China through a range o f donor financing and contractual arrangements. 7.11 Health staff are concentrated in Dili (36 percent) and Baucau (13 percent), and there are considerable pressures for a major expansion of staffing in the districts. One plan presented during the FY2004 budget discussions, although ultimately not funded, i s illustrative o f these pressures. The proposal would have added 253 additional staff, increasing the staffing complement o f District Health Management Teams from 5 to 14 positions and significantly expanding the number o f health posts (adding a total o f 68 new health posts, or over one-third the 88 total number). The proposal appears to have arisen for several reasons: in response to the priority allocated by the Council of Ministers in the Stability Program to extend health coverage in rural areas; in a rush to expand staff to the approved establishment; due to dissatisfaction with the performance o f the mobile clinics; and because personnel planning was not subject to a clear budget constraint. 7.12 M o H has begun to contract out work handled by support staff. Catering and laundry services at hospitals, security at community health centers and hospitals, and cleaning services have been identified as suitable for contracting out. M o H has taken initial steps in contracting out ground maintenance, food supply and preparation, and laundry services for Dili hospital and has launched similar initiatives in other hospitals. Though contracting out may not reduce costs, it should provide scope for reducing overall staff numbers and increasing flexibility. Contract design, procurement and monitoring s k i l l s w i l l be needed. 7.13 Development of a human resources plan for the health sector i s critical. Such a plan needs to start from a clear understanding o f the policy and strategic framework for the health sector, and o f appropriate and feasible roles for each cadre. A human resources plan should also recognize the budget constraints on the public sector, and take into account both the existing stock o f human resource capacities and the supply constraints on specific scarce skills (especially doctors, medical specialists and specialist technicians). M o H recognizes the importance o f human resource planning and has made a number o f attempts to develop plans, but the most recent o f these failed to address budget constraints, supply limitations, and the role o f the private sector. SYSTEM PERFORMANCE D. HEALTH 7.14 The re-establishment of a functioning health service in Timor-Leste i s a remarkable achievement. Facilities have been renovated, staff hired, drugs purchased, and services delivered. Institutional building blocks have been put in place throughout the country, including a Ministry o f Health, a cadre o f health service providers, and a basis for district health services planning and management. A hospital configuration policy has been established, which calls for a broad range o f hospital services to be provided in the context of financial and human resource constraints. 7.15 I t i s estimated that, as of 2003 in all districts, 82 percent of the population are served by a rural health facility within 2 hours’ walking time, including mobile clinics, and that these facilities are within two hours’ driving time of a hospital with emergency obstetric care capabilities. However, the HPF’s definition o f access in terms o f travel time has important implications for the overall efficiency of health service delivery, as i t could potentially lead to the construction of a greater number o f health facilities than can realistically be staffed or utilized by the population in a given area. I t would be useful in future, therefore, to expand the definition of adequate access to include: a target service volume in terms o f the number o f patients to be handled by each facility,. and access to health facilities that are fully staffed w i t h trained workers according to the planned staffing complement. Mobile clinics could continue to provide outreach in remote areas. 7.16 The delivery of health care services i s gradually improving in terms of the use of health facilities, immunization, and mother and child. Since 2000, utilization o f health facilities has increased from less than 0.5 visits per capita per year to about 2 visits per capita, a total o f 1.4 million outpatient consultations in the public health system in 2003. M o H administrative data indicate that 38 percent o f expected births were attended b y a skilled health worker, though with marked variation between districts. Fertility i s among the highest in the world (above 7 births per mother). Use o f modem methods o f contraception i s very l o w (about 12 89 percent at the end o f the 1990s). An immunization program has been re-established, with increasing coverage overall. Health system data report DPT3 coverage to be at 59 percent and measles coverage at 55 percent. However, the national average disguises significant variations by district. DPT3 coverage ranges from 26 to 87 percent, and measles coverage from 29 to 87 percent. Furthermore, independent data from population-based household surveys show much lower coverage rates. The 2002 Multi-Indicator Cluster Survey (MICS) showed a DPT3 rate of only 18.3 percent. These discrepancies arise, in part, from uncertainty about the size and growth rates o f Timor-Leste’ s population. An expanding tuberculosis program, delivered jointly by government and an NGO, i s gradually introducing Direct Observation Therapy (DOTS) for tuberculosis nationwide, but operationalizing DOTS in many rural areas i s proving problematic. Table 7.5: Health Performance Indicators September 2003, by District Outpatient Maternity DpT3 Measles Access to Facilities visits per services health reporting no capita (OPD) coverage droput rate facility stock outs District % skilled % attendanceat (4) % % % birth Aileu 2.37 26 23 89 91 100 Ainaro 3.16 26 -9 195 93 100 Baucau 1.38 13 -1 88 71 100 Bobonaro 1.47 39 0 38 84 100 Covalima 1.95 65 0 101 81 Dili 3.67 72 -22 89 100 100 Ermera 3.55 41 29 58 95 100 Lautem 1.72 44 12 49 7 100 Liquica 2.06 38 -4 82 85 100 Manatutu 1.98 62 15 121 82 Manufahe 2.87 38 -1 39 92 100 Oecussi 0.85 21 14 129 96 100 Viqueque 1.07 42 -10 91 67 100 National 2.3 43 1 86 81 85 Source :Ministry of Health. 7.17 Alongside these important achievements, there are some concerns about the performance of the health system. Although the burden o f disease in Timor-Leste i s high, the demand for and utilization o f services i s low and inequitably spread throughout the population, from both a regional and a poverty perspective. 7.18 Annual outpatient visits, though recently increasing to 2 per person from 0.5 in the early part of 2000, remain comparatively low. I n the 199Os, the average number o f yearly outpatient visits per person was 5 in East Asia, 6 in Latin America and the Caribbean, and 4 in Sub-Saharan Africa. Outpatient consultations per health worker per day for districts without hospitals range from 3 in Aileu to 5 in Manufahe for 2002. This i s a very l o w workload and raises questions about the demand for services, quality o f services, and absolute staff numbers given utilization patterns. Utilization i s low despite the availability o f interventions for infectious diseases that are widely acknowledged to be effective, including immunization for childhood diseases such as measles and whooping cough, DOTS for TB, and multi-drug therapy (MDT) for leprosy. Moreover, as shown in the recent Poverty Assessment, only 8 percent o f those with health complaints sought health care. O f those who make outpatient visits, more than half say the primary reason i s to obtain medication. 90 7.19 There i s considerable variation across the country in both levels of utilization and the supply of health services (see Table 7.5). Urban residents rely mostly on hospitals and private facilities. Half the rural population rely on community health centers. Mobile clinics are most important to the lowest income quintile, 20 percent o f whom use this type o f facility for outpatient treatment. Urban areas are much better served than most rural areas, and those rural areas with higher population density tend to be better served than those that are more sparsely populated. Recent evidence that, in some districts, people are returning to traditional lands from villages and hamlets established during Indonesian occupation may increase this problem. The variation in the availability and utilization o f services i s also complicated b y geographical variation in the type and extent o f some diseases, such as malaria and some water-borne illnesses. The 2004 Census, combined with surveys o f health indicators, such as the Demographic and Health Survey completed in 2003, should provide a robust basis for planning the distribution o f health services. 7.20 While the high priority given to the basic package of services i s appropriate, it i s clear that cross-sectoral health concerns such as nutrition, sanitation and access to safe water also have a significant impact on health outcomes. Infectious diseases are the major contributor to morbidity and mortality, with the most common being malaria, acute respiratory infection, diarrheal disease and tuberculosis (TB). Although Timor-Leste i s located in the tropics, i t i s a dry land with a distinct drought-monsoon climatic cycle which, together with i t s geography, i s conducive to the transmission o f vector and water-borne diseases and, at the same time, hampers access to services-particularly in the wet season when roads become impassable in many areas. Food security, and as a consequence nutrition, i s emerging as a significant health issue. The 2001 Household Survey revealed that nearly ninety percent o f the population experiences inadequate food provision at some point during the year. The 2003 Multi-Indicator Cluster Survey reported that over 40 percent o f children are moderately or severely underweight. HIV/AIDS, already present in high risk groups, has the potential to spread rapidly (and increase the incidence of TB as well) in the absence o f a sustained and effective prevention program. There i s also a need to deal with major cross-sectoral issues, such as the need for improved water supply and sanitation in both rural and urban areas. Access to safe water (though not the direct responsibility o f MoH) has increased but has yet to reach pre-1999 levels. As reported b y the Government’s Water and Sanitation Sector Investment Plan, only 30-50 percent o f the rural population currently has access to safe water, and only 10-30 percent to safe sanitation facilities. In this context, close coordination between M o H and institutions responsible for agriculture, water and sanitation i s needed in the design o f programs that are most likely to improve health outcomes. 7.21 In further developing the core priorities for the basic package, it will be important to better understand the reasons for the low utilization of and demand for different types of services. A health-seeking behavior study could greatly help to understand why mothers do or do not seek services for themselves and their children, and what they do when they are sick. Opportunities exist to create demand incentives to seek key services: health promotion; mobilization o f communities in support o f their local facility, including efforts to bridge the community to first-level health facilities through programs like Pastoral da Crianca; and community risk-pooling arrangements. Such a study can also help to understand what clients feel and know about the services available, and what this may mean for the design o f effective interventions. The design o f services also requires a greater recognition o f the significant constraints on the supply o f services, in terms o f human resources, financing, and the structure o f provider incentives, as well as better integration o f publicly financed and managed services with the diverse supply o f non-government services. 91 EXPENDITURE E. HEALTH FRAMEWORK 7.22 The restoration of health services in Timor-Leste in the post-conflict period was funded by a major international cooperative effort involving multilateral and bilateral agencies and a range of non-governmental organizations. From the start, the embryonic M o H recognized the need to restore core services without cutting o f f future development options, and to establish a sound policy framework that recognized the critical importance o f planning services to be sustainable, from both a fiscal and human resource perspective. In this context, M o H developed a program budget structure incorporating the Consolidated Fund, TFET and major bilateral projects, which provided a broad overview of developments as well as a mechanism for strategic thinking about the incremental recurrent costs arising from donor-financed expenditure decisions. Table 7.6: Financing o f the Health Sector (US$ thousands) FY02 FY03 FY04 FY05 FY06 FY07 Est. Actual Est. Actual MYBU Estimate Estimate Estimate Consolidated Fund 4,984 7,786 9,071 10,083 10,752 12,177 TFET 7,754 7,952 3,922 0 0 0 MultilateraYBilateraI 7.398 5.968 7.971 4.878 1SO7 0 UN Assessed 829 140 70 0 0 0 Total resources 19,301 18,934 25,046 18,849 21,853 12,177 Note: There is considerable uncertainty about forward estimates from MultilateraUBilateral sources. Source: Estimated actual for Consolidated Fund from Abstract o f Aggregate Expenditure. Forward estimates for Consolidated Fund taken from FY04 Budget estimates. Forward estimates for T F E T and multilateral and bilateral donors taken from Drafl Sector Investment Plan for Health; UN Assessed budget taken from Budget documents and World Bank estimates. 7.23 Total expenditure on health was US$18.9 million in FY2003 and i s forecast to rise to US$25 million in FY2004 (see Table 7.6). The Consolidated Fund, the core recurrent budget for health, currently constitutes about 40 percent of total health expenditures, and i s expected to rise to about 50 percent by FY2006. External assistance dominates health sector financing, with allocations broadly in line with the health policy focus on providing accessible basic services. The Health Policy Framework notes that in 2000, external assistance covered approximately three-quarters o f Timor-Leste’s health spending requirements. In FY2003, bilateral and multilateral assistance accounted for 59 percent o f health sector resources, excluding the share of the Consolidated Fund which i s donor financed. However, since most bilateral agencies have not finalized their country programs, the overall level o f external financing for the sector for the outer years has not yet been defined. The TFETEC program, which finances rural health clinic and hospital rehabilitation and construction, technical assistance, training, medical supplies and pharmaceuticals, covers about 40 percent o f current expenditures on health. As the T F E T E C program winds down, other multilateral and bilateral programs w i l l assume greater importance. Many o f these programs w i l l be negotiated in FY2006, as bilateral partners prepare new country programs. I t i s crucial that new projects and programs are consistent with the sectoral priorities, and that they take into account the incremental recurrent costs to be covered by Government after project completion. 7.24 There i s an emerging concern that bilateral and some multilateral aid i s being directed to a broader range of activities than can be adequately sustained from the Consolidated Fund. These activities have, for the most part, always been integrated into the sector-wide planning process that preceded TFET support, but have received more support than originally anticipated. While activities such as ambulance programs, blood banks, oral and mental health, and expanded malaria activities are important, i t i s not clear that they w i l l be able to be 92 sustained in the future at the levels intended. M o H and donors w i l l need to work together in this direction in order to ensure that priorities are fully addressed before covering less urgent needs. 7.25 The Government has endorsed the development of a sector-wide approach to health policy reform. This type o f coordinated approach i s intended to ensure that assistance to the sector takes place under the umbrella o f a well-defined strategy and i s confined to priority areas as identified b y the Government, minimizing the risk that projects and technical assistance programs w i l l encourage unprogrammed investments that may lock in fiscally unsustainable recurrent expenditures in non-priority areas. A sector-wide approach w i l l become increasingly important as joint donor financing arrangements such as TFBT are phased out and bilateral and project-based funding mechanisms begin to form a greater share o f external assistance resources. Moreover, operating under a sector-wide approach i s important to avoid overtaxing the Government’s absorptive capacity in terms o f processing and effectively spending a large volume o f external resources, dealing with a variety o f donors with diverse bureaucratic procedures and often overlapping projects, and monitoring the sustainability o f new programs and projects in the longer term. 7.26 Total per capita expenditures on health are high by international standards, with budgeted Consolidated Fund expenditures at about US$9.5 per capita and Combined Sources expenditure at US$27 per capita. B y comparison, total health expenditures in low- income countries are estimated to be just under US$6 per capita, and in the East Asia and Pacific Region, which includes a number of middle-income countries, total US$16 per capita. Budgeted Consolidated Fund expenditures on health for FY2003 represent about 11 percent o f total planned Consolidated Fund spending, or the equivalent of 2 percent o f estimated GDP. Estimated combined sources expenditures amount to 5.8 percent o f GDP, as compared to average public expenditures on health o f 1.1 percent in low-income countries and 1.8 per cent in the East Asia and Pacific Region. 7.27 Although health has been given high priority in Consolidated Fund expenditure allocations, sector allocations are lower than anticipated in the National Development Plan and may not be sufficient to compensate for reductions in funding from external partners. The FY2005 budget programs increases in health sector expenditures from 11 percent in FY2004 to about 14 percent o f total planned Consolidated Fund expenditures in FY2008. Unfortunately comprehensive data on the FY2005 budget were not available at the time of writing. Tables 7.7 and 7.8 are based on data from the FY2004 budget papers, which programmed slightly higher levels o f health spending than the current budget exercise. Although expenditure increases over the medium-term, i t i s unclear whether the programmed growth w i l l be sufficient to compensate for reductions in other funding sources. From FY2006 onwards, the Consolidated Fund budget w i l l need to absorb expenditures o f about US$2 million on pharmaceuticals and medical supplies as well as costs for a new hospital. Moreover, M o H has not yet taken adjustments in the expenditure profile into account in i t s sector planning. Sector plans have been prepared on the basis o f the significantly higher levels o f Consolidated Fund spending presented in the National Development Plan-which anticipated growth o f health spending to 17 percent o f Consolidated Fund spending in FY2007-resulting in budget plan proposals for FY2004 that are well above sustainable levels, both from national units o f the Ministry and from District Health Management Teams. 7.28 Consolidated Fund forward estimates provide for a gradual increase in the share of spending on goods and services and reductions in the share of spending on personnel (see Table 7.7). The projected decline in wages as a proportion o f total Consolidated Fund expenditures from 32 percent in FY2004 to 26 percent FY2007, whilst goods and services 93 expenditures are programmed to increase from 55 percent to 64 percent over the same period. . Uncertainties (and likely decline) in future levels o f overall funding for the health sector, the difficulty o f reducing personnel expenditures once staff are taken on as permanent c i v i l servants and low workloads are strong arguments for containment o f personnel costs. However, in addition to charges for national staff against the personnel allocation, the FY2004 budget allocates US$1.2 million for contracted international medical staff, amounting to 23.5 percent o f goods and services spending. T w o factors w i l l strongly influence future budget needs for this purpose: the degree to which doctors are localized and the extent o f donor financing for doctors and medical specialists. Charges for international medical staff significantly reduce allocations for pharmaceuticals and medical supplies and other operational expenditures. Consequently, allocations may not be sufficient to maintain the level o f medical supplies as external assistance declines. Table 7.7: Consolidated Fund Expenditures on Health by Economic Classification (US$ thousands and Percent) FY02 FY03 FY04 FY05 FY06 FY07 Est. Actual Est. Actual Forecast Forecast Forecast Forecast ($'OOO) (%) ($'ooO) (%) ($'ooO) (%) ($'ooO) (%) ($'000) (%) ($'ooO) (%) Wagedsalaries 2,130 43 2,775 36 2,802 32 2,871 29 3,015 28 3,167 26 Goods & 2,616 52 3,929 50 5,101 55 5,862 58 6,736 63 7,743 64 Services Capital 237 5 1,082 14 1,168 13 1,350 13 1,001 9 1,267 10 Total 4,983 100 7,786 100 9,071 100 10,083 100 10,752 100 12,177 100 Note: Capital expenditure in FY2003 includes two projects funded centrally rather than through the MOH budget. Source: FY2002 and FY2003 Financial Statements, and FY2004 Budget. 7.29 Capital spending under the Consolidated Fund i s modest a t 14 percent, largely because investments are funded from external financing, but so too are allocations for maintenance. This raises concerns regarding the sustainability o f investments. M o H should continue to develop i t s asset register and use this as a basis to estimate an adequate building maintenance budget. At least 3-5 percent o f the value o f the infrastructure should be allocated for this purpose. Expenditure from combined sources continues to focus heavily on infrastructure. While relatively high capital expenditures are to be expected in Timor-Leste as destroyed infrastructure i s replaced, there i s a danger that the emphasis currently being placed on infrastructure w i l l lead to an unmanageable recurrent cost structure in future, skewed away from longer term priorities. The challenge in the next few years w i l l be to shift emphasis to service delivery, including health promotion and training. Table 7.8: Forward Estimates o f ConsolidatedFund Expenditures on Health by Program (Percent) Total Program FY2004 FY2005 FY2006 FY2007 FY05-07 Ministerial Offices 1 1 1 1 1 Permanent Secretary & Inspectorate 6 6 7 7 6 Hospital and Specialized Services 46 44 44 42 44 District Health Services 41 45 49 51 47 Special Capital Projects 7 5 0 0 2 Total 100 100 100 100 100 Source: FY2004 budget papers. 7.30 Planned Consolidated Fund spending by M o H program is closely aligned with policy priorities, though there are pressures to increase spending on hospitals and 94 specialized services. Unfortunately, owing to changes in the program structure i t i s not possible to compare Consolidated Fund expenditure allocations from FY200 1 through FY2003 with those presented in the FY2004 Budget and MTEF. The new program structure indicates that overhead administrative costs are modest, at around 7 percent o f total health Consolidated Fund expenditures. Further, unprogrammed growth in administrative overheads i s best controlled by limiting the number and size o f M o H departments dealing with specialized support services and activities. The Government has committed through the HPF to keeping hospital expenditures under 40 percent o f total recurrent expenditures in order to ensure that adequate fiscal space i s available for priority public health and district health services. Forward estimates suggest that expenditure allocations for hospitals and specialized services are currently slightly above this target, at 46 percent in FY2004, but are expected to decline to 42 percent in FY2007. This i s a laudable objective but i t i s going to require strict fiscal discipline on hospital budgets. There are already pressures to: (i) expand budgets and staffing for specialized services such as the blood bank and laboratory services; (ii) expand national training capacity; (iii)make increased provisions for specialist medical services in hospitals; and (iv) make room in the Consolidated Fund budget for the operation o f Maubisse hospital once i t i s constructed-an estimated US$290,000 per year based on the operational costs o f the similarly sized Maliana hospital. These policy issues are best addressed within the framework o f the Sector Investment Program process, when the relative merits o f alternative applications o f scarce funds can best be assessed. Table 7.9: Expenditure by District Consolidated TFET Total Total Fund Medical With Medical Planned Total Proportion Planned District Expend Supplies & Supplies & Expend DNgS DNgS Capita Capita ($'OOO) (%) (9 ($'OOO) ($'OOO) ($1 Dili 318 9% 2.07 130 448 2.92 Baucau 326 9% 2.80 65 391 3.36 Aileu 245 7% 8.18 45 290 9.67 Ainaro 25 8 7% 5.44 97 355 7.49 Bobonaro 290 8% 4.08 123 413 532 Ermera 309 8% 3.35 137 446 4.84 Lautem 344 9% 6.38 96 440 8.15 Liquica 222 6% 4.69 51 273 5.77 Manatuto 318 9% 8.48 91 409 11.35 Manufahi 299 8% 7.68 88 387 9.92 Oecussi 205 6% 4.37 88 293 6.23 Covalima 280 8% 6.22 102 382 8.49 Viqueque 310 8% 4.48 125 435 6.29 Total 3,723 100% 4.38 1,238 4,961 5.84 Source: Ministry of Health, FY2004 Budget Submission. 7.31 Although the M o H plans to increase the share of the Consolidated Fund budget allocated to district health services over the period FY2004 to FY2007, the allocation of funds between districts appears to be inequitable and may need to be revised. The district share o f the Consolidated Fund budget i s already significant at 4 1 percent, and i s expected to increase to 51 percent by FY2007 (see Table 7.8). As shown in Table 7.9, the share o f Consolidated Fund health expenditure across districts i s relatively constant at around 6-9 percent o f the total Consolidated Fund district allocation. Due to population variations, however, this leads to wide disparities in per capita Consolidated Fund expenditures, which range from US$2.07 in Dili to US$8.48 in Manatuto. Table 7.9 also presents expenditures on pharmaceuticals and medical supplies financed by TFET to give an overall picture of recurrent expenditures if all operational expenditures were covered b y the Consolidated Fund. Per capita 95 pharmaceutical allocations seem to be relatively high in a few districts, suggesting that prescribing practices or utilization rates may vary significantly. Taken together, total average per capita expenditures at the district level amount to US$5.84 in Timor-Leste, which i s only slightly lower than the low-income country average o f US$6. F. COSTING HEALTH SERVICE PROVISION 7.32 Leading up to the preparation of the FY2004 budget, the Ministry of Health has laid important groundwork in prioritizing and sequencing programs, and in costing the implications of proposed activities and policy changes. This process focused on identifying the costs incurred in individual districts and hospitals, and provided a firm foundation for the FY2004 budget. 7.33 I t i s estimated that, once rehabilitation and construction activities are complete, the configuration of health services currently planned in the NDP and HPF will cost approximately US$15.6 million per year. This figure exceeds the current Consolidated Fund health budget and FY2006 forecast by around US$5 million (see Table 7.6). These estimates were based on unit costs for each level of health service facility which were then aggregated to provide a total cost for the Ministry (see Tables 7.10 and 7.11). The model assumes that recurrent costs currently being picked up by donors-roughly US$5 million-will become part o f the Consolidated Fund budget, including salaries o f internationally funded doctors and specialists, pharmaceuticals and other medical supplies, and training. I t i s also assumed that MoH w i l l proceed with i t s plan to contract out several low-level services now being provided through the civil service. The costing model does not take into account alternative health financing strategies such as the introduction o f user charges, expansion o f non-government service provision, promotion o f health insurance or prepayment schemes at the community level. Developments in these areas have the potential to reduce the net cost o f the publicly funded health system. 7.34 Costing estimates suggest that hospitals will absorb 44 percent of health expenditures. This figure i s broadly in line with the declared policy to keep expenditure on hospitals below 40 percent o f the health budget, but underlines the need for expenditure control if the target i s to be achieved. Without pro-active cost control, the expenditure share o f hospitals could increase toward half the budget as more costs are assumed under the Consolidated Fund. Cost estimates include the cost o f internationally recruited doctors and specialists, estimated at Table 7.10: Annual Health Sector Unit Table 7.11: Annual Health Sector Unit Cost Cost Estimates by Facility Level Estimates by Expenditure Category (US$ (US$ thousands) millions) Facility Level Estimated Annual FaciIity Level Estimated Annual Unit Unit cost cost Mobile Clinic 3 Wages and Salaries 2.9 Health Post 14 International Personnel 1.8 Community Health Center Medical Supplies, including Drugs 2.9 Level 2 47 Other Operating Costs 4.5 Level 3 138 Maintenance of Buildings and 1.6 Level 4 165 Equipment Regional Hospital 492 Depreciation of Buildings and 1.6 Baucau Hospital 1,099 Equipment Dili Hospital 3,735 Total 15.6 Source: PER Estimtes Source: PER Estimates Note: Total does not add up due io rounding. 96 US$1.6 million per year for the foreseeable future. Progress in replacing these personnel with local medical staff would help contain costs, though i t i s clear that this w i l l take considerable time to achieve. 7.35 The cost of medical supplies, including drugs, requires careful monitoring. The purchase o f pharmaceuticals i s currently financed by external partners with distribution costs covered from the M o H central budget. Individual health facilities are currently not charged for the drugs that they use. Consequently there i s no incentive to control costs in this area. This situation w i l l change following establishment o f the Autonomous Medical Stores ( S A M E S ) in May 2004, with responsibility for procurement and distribution o f medical supplies. S M S w i l l charge medical supply costs against the Consolidated Fund, posting these charges against individual facilities. Health facility managers w i l l then be required to include medical supplies in their budgets. Hopefully this w i l l help discourage overuse o f drugs. Changes in prescribing practice w i l l also be needed. Anecdotal evidence suggests that health workers tend to prescribe b y symptom, leading to a number o f drugs being prescribed to treat one condition. This has led to an expectation among patients that a range o f drugs w i l l be prescribed, and a tendency to evaluate service by this yardstick. Some user charges for drugs may also be needed in the longer term to assist in managing drug usage and costs. Improvements in procurement practices w i l l also be needed. There i s some control over the type and quantity o f drugs used through reliance on the WHO essential drugs l i s t (adapted for Timor-Leste). However, drug procurement through international competitive bidding and international shopping i s based largely on historical records o f drug issue, which may not reflect the new approach to health service delivery set out in the HPF. 7.36 Although sensitivity analysis permits examination of the cost implications of other proposed policy changes, further analysis i s needed to determine the most cost-effective structure of service delivery. A 10 percent increase in the number o f health posts and mobile clinics, for instance, i s estimated to cost around US$260,000, suggesting that the policy priority to extend coverage does not have major financial consequences for the health budget provided that any expansion in health posts and mobile clinics i s incremental and well targeted. However, decisions regarding the district level service delivery structure require further analysis, particularly as regards the relative cost-effectiveness o f health posts and mobile clinics. I t i s estimated that the annual unit cost o f a “model” health post i s US$13,700, as compared with just US$2,700 for mobile clinics. While i t i s recognized that health posts provide a wider range o f services than the mobile clinics, given low attendance rates it i s not evident that health posts are more cost-effective than the mobile clinics in delivering health outcomes. G. HEALTH MANAGEMENT EXPENDITURE 7.37 The Ministry of Health operates in a challenging environment, in which the decentralized, service delivery oriented organization must function amid highly centralized personnel and financial management systems. This situation creates a range o f challenges for health sector management in a context o f considerable need and limited resources. 7.38 M o H has developed an impressive internal budget monitoring system, allowing allocation of costs to individual hospitals and managers. This provides a basis for more decentralized management in the future. Once the District Health Management Teams are established and operating effectively, they could assume greater autonomy and responsibility in managing health services at the district level. I t i s conceivable that, at least for District Health Management Teams who have demonstrated their management capacities, block allocations for 97 districts could then be piloted to further increase the flexibility and demand responsiveness o f health expenditure management. 7.39 M o H has modified the program structure for the FY2004 budget, so as to distinguish central administrative functions, hospital and specialized services, and district services. This represents a considerable advance from the previous structure, which failed to distinguish between levels o f service. The four programs are further divided into sub-programs and activities to be monitored internally b y MoH. This new structure i s closely tied to the MOH organization structure, which w i l l facilitate monitoring o f budgets b y individual managers, and o f the performance o f these managers in service provision. However, the four programs are not necessarily consistent with the HPF’s priority focus on basic services, as i t i s difficult to distinguish total spending on priority activities, such as primary health care or immunizations. Moreover, the processing involved in this analysis i s time consuming and appears to be dependent on continued technical assistance. I t may be possible to transfer more o f the processing burden to the central Financial Management Information System (FMIS) b y specifying one or two more programs and/or taking advantage o f the system’s capacity to identify expenditure by district. The complexity associated with transferring budget between programs i s advanced by MOH as a reason for limiting the number of programs specified in the budget. The 10 percent restriction o n within-program line item transfers reduces budget management flexibility and seems unnecessary in the context o f a program budget system that intends to focus on implementation performance rather than micro-management o f budgets. One approach could be to relax this rule in the case o f ministries with a good record in managing their budget, thus providing an incentive for improved performance. Restrictions on virements between expenditure categories (i.e. wages and salaries, goods and services, and capital) within programs could be retained. 7.40 The work undertaken by M o H in preparing for the FY2004 budget revealed inadequate coordination of planning and budgeting. Planning functions fall under the Director o f Health Policy and Planning, while budgeting tasks are managed b y the Director o f Administration, Finance and Logistics Services. This arrangement could work with close collaboration between staff in different sections throughout the planning and budgeting process. In practice, however, the process i s initiated by planning staff and handed over midstream to budget staff, who have not been directly involved in earlier stages. As a result, the budget circular was not received by budget staff until some time after it reached the ministry, and the structure being developed for annual action plans diverged for a time from the agreed program structure for budget preparation. Consideration could be given in the medium term to bringing some planning and budgeting staff together under one director, particularly in relation to resource allocation tasks. 7.41 I t i s important that the district health planning process i s undertaken with clear guidance on resource availability. Without a hard budget constraint, district health plans are likely to focus resource bids on expanding capacity rather than o n making existing facilities fully functional in delivering the basic package o f health services. District budget planning processes should also take into account the role o f regional hospitals in sharing patient loads in districts where these larger hospitals are located. I t seems, for example, that the availability o f regional hospitals in Oecussi and Covalima, which are funded outside the district health budget, are given insufficient consideration in setting budgets for these districts. 7.42 Operational planning activities within M o H are compartmentalized. Human resources planning i s not synchronized with micro planning for policy implementation, and neither are well coordinated with budget planning. These difficulties help to explain the emerging 98 gap between implementation plans for the HPF and the implementation process itself, as evidenced by movements toward the unplanned expansion in the number o f health facilities, particularly health posts, and unplanned growth in the staffing complement o f some health posts, community health centers and district health management teams. There i s thus a need to strengthen links between policy making at the M o H headquarters level and the service delivery arms o f the ministry, and the district health planning process i s a good opportunity to address this issue. 7.43 Budget execution rates in the health sector have been higher than those in other sectors, though requisition, payment and petty cash systems have been identified as factors that impede efficient service delivery. In FY2003, M O H spent 94 percent o f i t s final Consolidated Fund appropriation. Expenditure and commitments for the first half o f FY2004, to Table 7.12: FY2004 Health Sector Budget Execution end-December, totaled 3 1 percent of the As o f December 2003, Annualized Percentage budget, with an additional 15 percent already committed. Annualized rates, presented in Table 7.12, suggest a fairly ~ Cash & Cash Commitments accelerated pattern o f budget execution. Nevertheless, MoH still encounters Wages and Salaries 88 88 difficulties, particularly as regards Goods and Services 58 90 expenditures at the field level. Purchases Capital 8 106 made through the Consolidated Fund for Capital Expenditure 8 I54 amounts up to US$500 are handled via the Capital Developriient 8 64 petty cash system. Districts can purchase Total Expenditure 62 92 goods up to the value o f US$200 each from Source: FY04 Financial Statenients, December 2003. petty cash, but any purchases between US$200 and US$499 are routed through M o H -at -the center, and- processed through a Commitment and Payment Voucher (CPV). At present, all CPVs are endorsed b y the Minister o f Health and the Treasury department. This system works at M o H headquarters, which manages i t s own petty cash, but i s not working effectively in the districts. District health services do not have authority to manage petty cash themselves and must deal with the sub-district treasury office each time replenishment i s needed. Petty cash replenishments are lodged b y the district to MPFs District Administration Officer for approval, which i s often delayed until all agencies in that district have requested replenishments. Centralization o f approval for CPVs at Ministerial level aggravates these delays. In addition, the Autonomous Medical Supply System ( S A M E S ) manages a petty cash account o f only US$150, which i s consumed rapidly but with similar delays in replenishment as a result o f the CPV system. This constitutes a serious impediment to efficient service delivery. Solutions may lie in extension o f petty cash management authority to the health management team at the district level and for key departments, such as S A M E S . 7.44 Payment of wages and salaries i s made monthly in cash, though payroll i s not always corrected for attendance. Payment amounts are determined from payroll lists maintained by Treasury’s Payroll Section and confirmed monthly b y M o H ; these lists indicate staff to be paid, any allowances including overtime, and any deductions for absences from work. Staff in regional hospitals and the district health service are paid via sub-treasury offices in districts. It i s understood that not all M o H managers monitor staff attendance or process adjustments in pay for absenteeism, which could be leading to over-expenditure on personnel costs. 99 H. ACCOUNTABILITY AND OVERSIGHT 7.45 Publication of performance information could enhance accountability for results. Systems o f performance-oriented program budgeting and financial reporting provide a significant amount o f public information on the use o f public resources. Annual financial statements provide a public record of M o H s performance in budget implementation. However, the Ministry’s quarterly monitoring reports, which track performance across a series o f health indicators, are not publicly available. Releasing this information would help generate public discussion on health issues. While there does not appear to be a requirement for the preparation and dissemination o f an annual report on M O H activities, this would be desirable. Technical assistance in health legislation during 2002 has helped to draft several laws and regulations, including an Organic L a w for MoH, a Health Act and a Pharmacy Act. Publication and dissemination o f these laws and regulations would provide an important source o f information for the public o n M o H policy and responsibilities. 7.46 There i s scope to expand bottom-up community oversight of M o H activities. The Ministry’s engagement with churches and other non-government entities on planning and implementing health activities could be strengthened. The HPF calls for the establishment o f district health committees-to provide advice on health priorities at the district level, review draft district health plans, and monitor implementation in these areas-and supports community involvement in health provision at the village level, but neither o f these policies for community engagement have been implemented as yet. I t would be worthwhile, however, to pursue the development o f these channels for participation before the service configuration at the district level becomes too firmly entrenched to make adjustments for community feedback. 7.47 M o H could strengthen accountability for performance, improve utilization of critical health services and encourage a sense of community ownership in the operation of health facilities through a few simple steps. Possible measures for consideration include: (i) clear signposting o f M o H facility locations and hours o f operation; ( ii) more prominent advertising o f services provided b y each facility, particularly for primary and preventive services, in a form that i s readily understood b y the community; ( iii)staff listings indicating service delivery responsibilities and times o f availability, displayed on notice boards in order to increase public awareness o f what can be expected from the people involved in health service delivery; (iv) simplified equipment and stock registers for drugs and other medical supplies, copies o f which could be displayed on notice boards for public scrutiny, with the a i m o f reducing the potential for misuse; and (v) widespread notification that health services, including those offered by mobile clinics, are free o f charge (or, if user fees are introduced, explicit posting o f the charges involved) in order to reduce the potential for “informal” fees-a common practice in both administrative and service delivery positions under the Indonesian system, which may well have become entrenched in Timor-Leste. I.WHERETO N O W 7.48 Now that basic health services have been re-established and M O H i s close to finalizing its basic package of services, the Government can turn its attention to operationalizing health sector strategies. I t w i l l be important for this to take place within the fiscal constraints imposed b y the Government’s Medium-Term Expenditure Framework, particularly as they relate to the Consolidated Fund and the proposed Sector Investment Program currently being developed b y the Ministry o f Planning and Finance. This exercise also presents an opportunity to redefine the role of Government in meeting health needs, given limited funds, low numbers o f qualified staff, and the limited demand for and utilization o f health services. 100 Box 7.1: Key Recommendations - Health Development of a human resources plan for the health sector that recognizes budget constraints, limitations in the supply of human resources, and the role of the private sector. 0 Further prioritization of health service delivery to cover key primary health care needs and major cross-sectoral issues. Implementation o f a sector-wide approach to ensure that external assistance remains consistent with sector priorities and limited to areas with sustainable recurrent cost implications. 0 Maintenance of flexibility in the allocation of Consolidated Fund resources in order to respond to expected shifts in other finding sources. 0 Adequate provision in the budget for maintenance of health infrastructure (at least 3 to 5 percent oj the infrastructure value). Consolidation of M o H planning and budgeting staff under one director, in order to improve coordination of planning and budgeting and provision of clear guidance on resource availability in preparation for the district health planning process. 0 Extension of petty cash management authority to the dishict level in the short term, with a longer term focus on increased authority over financial resources at the district level through the implementation o f block grants. Increasingly, the Government i s recognizing the array o f resources and capacities in the private and NGO sectors that can be better tapped to enhance overall capacity to meet health sector objectives. 7.49 M o H also recognizes the importance of outlining a strategic framework to address critical organizational, financial and management constraints to service delivery, and ultimately health outcomes. While district health plans can be strengthened considerably, and criteria for resource allocation to the districts further developed, i t should be recognized that the Ministry o f Health i s to date the only ministry to have developed a district planning system - a considerable achievement. The district health plans provide the means for implementing the strategic directions set out in the Health Policy Framework, and the micro-policies currently being developed. More remains to be done to establish mechanisms for getting resources to districts and facilities, which enable staff to respond to local needs while ensuring sound financial accountability. The allocation o f staff according to workloads i s constrained by current personnel management systems. Incentive structures are not adequate to encourage staff, particularly midwives, to serve in remote areas, or to induce staff to participate in regular and timely outreach programs, including mobile clinics, though these activities are a core feature o f the health sector priority o f ensuring access to basic services. Prioritization o f spending in the health sector w i l l be essential to maintain the Government’s desired emphasis on cost-effective and pro-poor health care services that improve the health status o f its citizens. 101 REFERENCES ADB (Asian Development Bank). Emergency Infrastructure Rehabilitation Project Completion Report. 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