Report No. 49273-SC Seychelles Public Expenditure Review June 25, 2009 Poverty Reduction and Economic Management 2 Africa Region Document of the World Bank SEYCHELLES PUBLIC EXPENDITURE REVIEW Table o f Contents ACKNOWLEDGEMENTS .................................................................................................................................. i EXECUTIVE SUMMARY .................................................................................................................................. 11 I. MACROECONOMIC STABILIZATION AND FISCAL POLICY...................................................... 1 Background and Objectives o f the Report .......................................................................................................... 1 Recent Economic Developments ........................................................................................................................ 2 Impact o f Macroeconomic Reforms on Product and Labor Markets .................................................................. 6 Fiscal Policy and Recent Developments........................................................................................................... 11 Medium-Term Expenditure Outlook ................................................................................................................ 13 Conclusion ........................................................................................................................................................ 15 I1 . PUBLIC EXPENDITURESAND EXPENDITURE MANAGEMENT ............................................... 18 Trends in Public Expenditures .......................................................................................................................... 18 Public Finances and Economic Growth ............................................................................................................ 23 Lessons €or a Successful Fiscal Consolidation ................................................................................................. 25 Budget Preparation ........................................................................................................................................... 28 Budget Execution.............................................................................................................................................. 30 Recommendations ............................................................................................................................................. 30 I11 . PUBLIC ADMINISTRATION AND PUBLIC SERVICE REFORM ................................................. 34 Context .............................................................................................................................................................. 34 Reforms Initiated i n 2008 ................................................................................................................................. 36 Towards a More Strategic Approach: Organizational and Structural Reforms ................................................ 37 Public Sector Wage Structure Reform .............................................................................................................. 48 Conclusions and Implementation Steps ............................................................................................................ 54 IV . HEALTHCARE ........................................................................................................................................ 56 Health System Context ..................................................................................................................................... 56 Health Status ..................................................................................................................................................... 57 Health Spending ................................................................................................................................................ 58 Availability o f Health Care Facilities ............................................................................................................... 62 Availability and Productivity o f the Health Workforce. ................................................................................... 64 Utilization o f Health Care ................................................................................................................................. 67 Out-of-Pocket Payments in Form o f Co-Payments and Private Insurance ....................................................... 69 Social Security Benefits.................................................................................................................................... 71 The Case for Social Health Insurance ............................................................................................................... 72 Concluding Remarks ........................................................................................................................................ 77 Recommendations ............................................................................................................................................. 77 V . EDUCATION ............................................................................................................................................ 81 Education Sector Context ................................................................................................................................ -81 Education Outcomes ......................................................................................................................................... 83 Education Spending .......................................................................................................................................... 84 Co-Payments and Cost Sharing ........................................................................................................................ 90 Enrollment Trends ............................................................................................................................................ 90 Productivity o f Education Staff ........................................................................................................................ 95 School Autonomy ............................................................................................................................................. 98 Addressing Quality o f Education Concerns ...................................................................................................... 98 Private Education .............................................................................................................................................. 99 University (Degree-Level) Education............................................................................................................. 100 Summary o f Key Recommendations.............................................................................................................. 101 Annex 1: Summary Table o f the Empirical Research on Public Finance and Growth .................................. 103 Annex 2: Description o f the Legal and Institutional Framework for Public Financial Management (PFM) 104 Annex 3: Categorizing Functional Reviews ................................................................................................... 107 Annex 4: Ministry o f Community Development, Youth, Sports, Culture and the Arts Institutional Review 109 Annex 5: Ministry o f Employment .. and the National Human Resource Development Council Institutional Review ............................................................................................................................................................ 113 Annex 6: Ministry o f Finance Institutional Review ....................................................................................... 115 Annex 7: Ministry o f National Development Institutional Review ............................................................... 116 Annex 8: Department o f Public Administration Institutional Review ........................................................... 118 Annex 9: Department o f Environment Institutional Review ......................................................................... 120 Annex 10: Department o f the Police .............................................................................................................. 122 Annex 11: Department o f Defense ................................................................................................................ 124 Annex 12: Summary o f Government-Wide Potential Staff Reductions ........................................................ 125 Annex 13: Ministry o f Education Organagram.............................................................................................. 127 Annex 14: MOE Expenditures, 2007 ............................................................................................................. 128 Annex 15: Map o f Seychelles ........................................................................................................................ 130 REFERENCES .................................................................................................................................................. 131 APPENDIX ........................................................................................................................................................ 138 GOVERNMENT RESPONSE TO THE REVIEW ........................................................................................ 138 Public Administration and Public Service Reform: ........................................................................................ 138 List o f Boxes Box 1: Price Liberalization. Subsidy Reforms and Global Price Changes ............................................................. 8 Box 2: The Budget Process .................................................................................................................................. 27 Box 3: International Best Practice in Wage System Reform ................................................................................ 48 Box 4: Nolan Recommendationsfor Restructuring the Secondary School System ............................................. 91 List o f Figures Figure 1: Commercial Fuel Price Increases. 1998-2008.......................................................................................... 9 Figure 2: Government Revenues. Spending and Budget Deficits. 1988-2007 ...................................................... 18 Figure 3: External Debt and Extent o f Concessionality. 1980-2006 ..................................................................... 19 Figure 4: Primary Expenditures as Percent o f GDP, Seychelles and Comparators, average 2000-2005 ............... 20 Figure 5: Expenditure by Economic Classification, Percent o f GDP ................................................................... 21 Figure 6: Expenditure by Functional Classification, Percent o f ........................................................................... 21 Figure 7: Flows to and From the Central Budget to Parastatals, 2004-07 ............................................................. 23 Figure 8: Comparison o f Productive and Unproductive Expenditures .................................................................. 25 Figure 9: Overall and Primary Balance, ................................................................................................................ 26 Figure 10: Composition o f Fiscal Adjustment, 1999-2007 ................................................................................... 26 Figure 11: Budget Credibility: Budget and Outcomes 2005-2008 ....................................................................... 28 Figure 12: Hospitals per 100,000.......................................................................................................................... 63 Figure 13: PHC Units per 100,000 ....................................................................................................................... 63 Figure 14: Hospital Beds per 1,000 ...................................................................................................................... 63 Figure 15: Acute Hospital Occupancy Rate ......................................................................................................... 63 Figure 16 : Physicians and Nurses, Per 1000 Population, 2006/7 ......................................................................... 66 Figure 17: Sick-Leave by Day ofthe Week, 2008 ................................................................................................ 71 Figure 18: Seychelles Tax Wedge Compared to OECD, Europe and Central Asia .............................................. 74 Figure 19: Sponsored Students Studying Abroad (N=407) as o f October 2008 .................................................... 82 Figure 20: Some IGCSE Results, 2007 ................................................................................................................. 84 Figure 2 1: MOE Spending on Education, 2004-2007 .......................................................................................... 85 Figure 22: Public Spending on Education in Small Island Countries (latest available year) ................................ 85 Figure 23: Education Expenditure per Student, 2007 ........................................................................................... 86 Figure 24: Unit Fiscal Costs as Percentage o f Unit Fiscal Cost o f Primary Education 2007 ............................... 87 Figure 25: Unit Fiscal Costs Selected Countries (latest available per year) ......................................................... 87 Figure 26: School Enrollments by Cycle (Sub-Level) o f Education, 2004-2008 ................................................. 93 Figure 27: Projected Growth of School-Age Population Cohorts. 2007-2012 ...................................................... 93 Figure 28: Projected Growth in 0-4 Year Age Cohort by District, 2007-2012..................................................... 94 Figure 29: Student-Teacher Ratios in Small IslandCountries (latest year available)............................................ 96 Figure 30: Enrollments in Public and Private Schools by Level and Grade, 2008 ............................................. 100 List o f Tables Table 1: Key Economic Indicators. 2005-2011....................................................................................................... 5 Table 2: Structure of GDP, Percent of Total ........................................................................................................... 7 Table 3: Direct and Indirect Subsidies to be Removed in MEFP ........................................................................... 7 Table 4: Subsidized Core Commodities SR, 2008 .................................................................................................. 8 Table 5: Commercial Electricity Tariff Changes, 2008 ........................................................................................... 9 Table 6: Medium Term Budget Framework, 2008-2013 ....................................................................................... 12 Table 7: Revenue Raising Measures Agreed in the MEFP, 2008 ......................................................................... 13 Table 8: Potential Expenditure Savings, 2008-2011 ............................................................................................. 16 Table 9: External Debt Composition, 2002-2006, (US$ million) .......................................................................... 19 Table 10 : Seychelles and Comparators Public Spending, average 2000-2005 ..................................................... 20 Table 11: T h e 2007 Top 6 Parastatals Receiving Central Budget Transfers ........................................................ -22 Table 12: Functional Composition of Central Government Spending, 2002-7 ..................................................... 22 Table 13: Expenditure Adjustment Composition, 2003-2007 ............................................................................... 27 Table 14. Summary of Public Financial Management Next Steps....................................................................... 33 Table 15: Comparative Wage Bills of Small States, 2000-2005 .......................................................................... 34 Table 16: Estimates of the Wage Bill Savings Measures, ..................................................................................... 37 Table 17: Wage Bill and Primary Expendituresby Function, 2007 ...................................................................... 39 Table 18: Potential Wage Grid Structure under RestructuredPublic Service Model ............................................ 53 Table 19 : Health Outcomes Indicators for Seychelles and Comparators, Latest Year Available ......................... 57 Table 20: Total Health Spending, 2007 ................................................................................................................. 58 Table 21: Trend in Government Health Expenditures, 2005-2007........................................................................ 58 Table 22: Seychelles and Comparators, Health Expenditures, Average 2002-2004 ............................................. 59 Table 23: Government Recurrent Health Expenditures by Division, 2005-2008 .................................................. 60 Table 24: Government Health Expenditures by Economic Classification, SR Millions ...................................... 61 Table 25: Arrears and Debt Stock, October 2008 ................................................................................................. 62 Table 26: Public Sector Health Workforce, 2005-2007......................................................................................... 65 Table 27: Nurses per Occupied HospitalBed 2006/7............................................................................................ 66 Table 28: Health Sector Wages and Salaries Savings, 2008-09, SR millions ....................................................... 67 Table 29: Overseas Treatment, Expenditures and Patients, 2005-2007................................................................. 68 Table 30: Preventable Diseases with High-Cost Treatment, Number of Cases.................................................... 69 Table 3 1: Potential Annual Revenue fiom Co-Payments..................................................................................... -70 Table 32: Social Security Direct Benefits Expenditures, SR ................................................................................. 71 Table 33: Estimated Reduction in Expenditures for Sick Leave and Funeral Benefits, SR .................................. 72 Table 34: Comparing the Financing of Social Health Insurance Funds ................................................................ 72 Table 35: Scenarios for ContributionRates and Revenues for Social Health Insurance ...................................... 73 Table 36: Payroll Taxes and Tax Wedge across Sectors, In SR, 2008 .................................................................. 74 Table 37: Health Insurance Scenarios and Impact On Labor Costs and Tax Wedge, SR...................................... 75 Table 38 . Summary of Health Sector ImplementationNext Steps ....................................................................... 80 Table 39: Comparison of Education Indicators, Latest Year Available............................................................... 83 Table 40: Total Education Spending, 2007 .......................................................................................................... 85 Table 4 1: Recommendations for Education Subsidies ......................................................................................... 89 Table 42: School Enrollments (including Private School Enrollments) by Level and Grade, 2004-2008............. 90 Table 43: Enrollments by Level and Institution, 2004-2008 ................................................................................ 92 Table 44: MOE Staffing, 2008 ............................................................................................................................. 96 Table 45: Student-Teacher Ratios, 2008 .............................................................................................................. 97 Table 46: Proposed Reductions in Office and Support Staff ................................................................................. 97 Table 47: Recommendations and Estimated Impact on the Budget .................................................................... 102 Table A14 . 1: MOE Expenditure Breakdown by Division................................................................................. 128 Table A14 . 2: MOE Expenditure by Level of Education 2007 ........................................................................... 129 Table A14 . 3: Total Education Expenditure per Student by Level of Education, 2007....................................... 129 ACKNOWLEDGEMENTS This report was prepared by a World Bank team led by Tracey Lane (senior country economist) based on the team’s work with the Government o f Seychelles between 10* and 30th October, 2008. The Macroeconomic Stabilization and Fiscal Adjustment chapter was produced by Tracey Lane, Tony Verheijen (senior public sector specialist) wrote the Public Sector Employment and Wages chapter, Peter Moock (senior education consultant) wrote the Education chapter and Pia Schneider (senior health economist) wrote the Healthcare chapter. Andrea Purdekova provided research support to the whole team. Support was provided by Anne Khatimba and Dora Harris in editing the final report. The Government o f Seychelles provided excellent assistance to the team throughout. The initial analysis was shared with government counterparts, presented and discussed at the end o f the mission. In particular we are grateful to the following individuals and their staff for their assistance: Mr. Afif, Principal Secretary o f Finance; Ms. Esparon, Principal Secretary at the Department o f Public Administration; Ms. Simeon, Principal Secretary o f Education; and Ms. Berlouis the Chief Executive o f the Health Services Authority. Finance Minister Faure was the government’s client and interlocutor for the Bank team. Since this report was first shared with the Government, a number o f far reaching reforms have already taken place. As o f June 2009 prior to formal publication o f this report the Government continues to show a strong commitment to the macroeconomic stabilization program anchored in fiscal consolidation. To this end the Government has taken on many o f the recommendations contained herein and summarized in an Appendix to the main report. The team benefited from the insights and guidance o f Kathie Krumm, Sector Manager; Cevdet Denizer, Lead Economist; Michel Wormser, Acting Country Director and Harold Bedoya, Senior Economist in the Country Management Unit; and Paul Matthieu mission chief at the International Monetary Fund. The team i s especially grateful to the guidance provided by the peer reviewers: Sanjay Kathuria, Lead Economist, Felipe Barrera, Senior Education Economist, and Stephanie Medina-Cas, Desk Economist at the International Monetary Fund. 1 EXECUTIVE SUMMARY 1. Overall context. In 2008, afier many years o f unsustainable fiscal policy and a distorted and overvalued foreign exchange regime, the Government o f Seychelles embarked upon a bold economic reform program. This program aims to put the economy on a path toward macroeconomic stability, liberalize the economy and to allow the private sector to take over from the State as the driving force in the economy. Seychelles, a small open, middle- income island state with relatively low incidence o f poverty and near full employment, faced acute economic difficulties in 2008 as a result o f past economic management exacerbated by the rising global o i l and food prices and the downturn in the global economy. This resulted in missed debt-service payments and the subsequent downgrading o f i t s credit rating by Standard and Poors. Faced with current debt service difficulties and a historically poor credit track record, the authorities responded quickly by adopting a comprehensive reform program supported by a 2 year Stand By Arrangement with the International Monetary Fund (IMF) and commencing negotiations with Paris Club and other private and official creditors for debt restructuring. The government has embarked upon a comprehensive reform strategy aimed at restoring internal and external balances with the assistance o f the international financial institutions and development partners. The reform program includes: (i) the complete liberalization o f the exchange rate regime and float o f the currency (which was introduced in November 2008), (ii)tightened fiscal policy, including improved targeting o f the comprehensive social safety net and a privatization program to deal with the many state- owned enterprises. 2. Public Expenditure Reforms. This Public Expenditure Review (PER) i s the first in a series o f planned World Bank economic reports and analytical work in response to the government’s request for assistance to implement structural reforms. The PER’S focus reflects the government’s request to focus on the overall size and functions o f the public sector and in particular health and education sectors. We find that revising the role o f the public sector to focus on core government functions in order to address fiscal sustainability concerns, lies at the heart o f the policy reform efforts. This first phase therefore focuses on reforms in the civil service and efficiency improvements in the health and education sectors as based largely on a rapid assessment undertaken in the last quarter o f 2008 designed to provide timely inputs to the government’s policy agenda and in time for the 2009 budget preparation. It also provides the Bank with an analytical basis to inform i t s financial support in 2009. 3. Fiscal Background. The preference for high government spending i s linked to the country’s history o f welfarist policies (the public sector provides services from the cradle to the grave-including free pre-primary schooling and funeral benefits) as well as a well- established state role in commercial activities). This development model has not been without success: Seychelles has good health and education outcomes compared to other small island states and i s placed 50’ on the 2004 UN Human Development Index. However, weak financial management o f the public sector has led to inefficiencies and unproductive spending and a bloated public sector. The report cites many examples o f the government taking on too 11 many functions while not carrying out core functions efficiently, persistent budget overruns and budget practices inconsistent with fiscal targets, and lack o f incentives for efficiency improvements. 4. The debt crisis has meant the government has moved decisively and swiftly to redress the economic mis-management o f the past. Many o f the reforms recommended here have already been initiated by the government following the discussions the team had a s the analysis was commenced and the initial drafts shared with policy-makers in October 2008. The government has demonstrated exceptional commitment to the economic reform program underway, and has embarked on a communications campaign which has rallied support from the political opposition as well as business community and civil society groups. Already these steps have resulted in a more stable macroeconomic environment, reduced external and internal imbalances and improved the sustainability o f fiscal policy. Discussions with Paris Club creditors are due to take place in the first quarter 2009. 5. The adverse external environment, a result of the credit crisis in Europe and the United States has started to impact the Seychelles tourism sector. Tourism receipts were estimated to have fallen by 25 to 30 percent at the end o f 2008. So far this has strengthened the resolve o f the authorities to get through the transition. We encourage the authorities to continue the steps not only necessary for the fiscal consolidation (the main focus o f this report) but also to take the complementary steps to put in place a safety-net (currently underway and the focus o f a next phase o f the PER) as well as reform o f the business environment (see World Bank’s Investment Climate Assessment 2008) to enable the private sector to quickly respond to the improved macroeconomic environment. We recognize that the latest economic growth projections show a much deeper recession will take place in 2009 than originally envisaged, which may if prolonged make the transition-and the necessary reforms-more difficult and painful. It i s therefore important for the government to not lose sight o f these complementary reforms so that the economic bounce-back projected for 2010 (of positive 2.5 percent growth, followed by 5.0 percent growth by 2012) can be achieved. 6. As a high priority we urge the Ministry o f Finance to address issues o f budget credibility by (i) consolidating the budget consistent with the definitions in the IMF’s Government Finance Statistics Manual and (ii) strengthening capacity for developing macroeconomic forecasts and ensuring that there i s consistency with the fiscal framework at the beginning o f the budget process. Given the vulnerability o f the economy to external shocks and the recent global downturn, additional work to develop alternative scenarios will be undertaken as part o f the subsequent phase o f the PER in order to address concerns with respect to the volatility o f expenditures and revenues and adequate contingency planning. We also find that there i s a need to strengthen central government functions such as building capacity in the Ministry o f Finance’s budget department, and improving finance and human resource skills in government ministries. We also note that considerable progress has been made in terms o f public financial management, and commend the Ministry o f Finance’s successful efforts in 2008 to maintain fiscal discipline, as well as establishing improved public financial management practices which lead in the past to budget overruns without Parliamentary approval. 7. Public Administration and Civil Service. While a number o f public administration reforms focused on reduction o f posts were undertaken in 2008, their implied fiscal savings o f iii approximately 7.5 percent o f the wage bill by 2010 will not be sufficient to meet fiscal targets in the medium term nor to address the underlying concern o f improving public sector performance Considering the macro-fiscal context o f the Seychelles, and the contours o f the adjustment program on which the Government has engaged, a two pronged approach to public administration and civil service reform i s needed: one, a transition from emergency across the board staff cuts to a more strategic approach on the functions undertaken by the state and the way in which these functions are provided, and, two, initiating a wage system reform to ensure that the civil service attracts and retains qualified personnel within the sustainable fiscal targets. This should safeguard the impressive human development outcomes that the Seychelles has already achieved. 8. Further measures are encouraged over the course o f the next two years, principally to privatize non core functions, particularly those where the State plays a role in providing private goods and commercial activities in competitive markets, and also to halt the practice o f the public sector being the employer o f last resort. In doing so there should be active engagement by senior government leaders to encourage community responsibility for important aspects o f policies currently delivered solely by the state. Undertaking functional reviews o f each Ministry should be undertaken to rationalize the government’s role and identify core responsibilities, align posts and determine areas o f overstaffing. An initial review o f several ministries, including in detail in the health and education sectors, found examples o f unproductive service provision as a result o f too many people employed to provide services. L o w national unemployment rates (currently estimated at 2.5 percent) and a reliance on expatriates (estimated to be some 9,000 nationally) to fill jobs in the private sector (including unskilled and semi-skilled positions) provide a favorable context for successful management o f this reform including limiting negative household welfare impacts. That said, the global economic downturn that gathered momentum at the end o f 2008 will provide additional challenges in 2009 for implementing this program. The subsequent phase o f the PER will examine the effectiveness o f the reforms, already underway, o f the social welfare system and active labor market policies to enable the reform transition without detriment to the poverty profile. Clearly, the impact on expatriate labor (particularly low-skilled workers coming fiom countries such as Mauritius, India and Thailand), currently employed in the private sector in Seychelles i s also likely to be detrimental during the transition and even more so since the global recession has started to adversely impact the Seychelles tourism industry. We simply note here this concern, which lies beyond the scope o f the Seychelles PER. 9. The composition o f the public administration i s heavily skewed towards the provision o f support services: low-skilled workers make up around one third o f total civil service employment. This reflects in part an implicit strategy o f the government in the past to be the ‘employer o f last resort’, absorbing large numbers (including directly from unemployment schemes) into functions and positions that, based on international practice, should not be part o f the core public service. We find several functions which should be considered for contracting out to the private sector through either individual contracts that would generally be based on hours worked, or through contracting with private sector providers where a competitive service sector i s in place. In many cases the individuals currently employed by the public sector could re-organize themselves as a private sector contractor, with a government contract that would be subject to competition after an initial period. W h i l e contracting out might have a minimal aggregate fiscal effect in the near term-as expenditure shifts from the wages and salaries budget to the goods and services budget-over time with a iv competitive private sector and robust procurement practices this i s likely to both improve public sector service delivery and lower costs. International practice indicates that contracting out i s likely to lead to efficiency improvements and fiscal savings under these conditions. An initial estimate o f the potential civil service employment impact i s up to almost 3,000 individuals or 28 percent o f staff. Some o f the fiscal savings would need to be re-invested in other areas-such as social security and/or active labor market programs-which would have to be worked out in the course o f 2009. 10. Fundamental reforms o f the civil service wage grid are also recommended to ensure that the remaining posts in the public sector can attract and retain qualified staff. We also find considerable lack o f transparency surrounding wage-setting in Seychelles, through the use o f multiple allowance schemes which are used to effectively raise take-home pay for specified groups o f employees and/or individuals and recommend that these practices should be discontinued. In short these features arise from: (a) including a large a number o f categories o f staff; (b) setting artificially l o w base wage levels for senior staff, usually to give the impression o f egalitarianism; and (c) fragmenting pay composition. Such wage systems not only lack transparency, but are also costly to administer (as payroll needs to take into account o f ten or more pay components), open to abuse, and make pay levels unpredictable for staff. As a result the current wage system i s neither efficient nor transparent, nor necessarily provides for a competitive wage system to attract and retain qualified senior staff. The compression ratio for current real salary levels (lowest paid staff to the average Principal Secretary) i s approximately 1:6, which i s at the lower end o f what would constitute an acceptable compression ratio in international comparative terms. Establishing a durable wage grid may therefore require setting a higher compression ratio target, e.g. 1:7 or above. It i s proposed to have 6 grades for professional staff, while each grade should have at least 10 steps. Introducing a new wage grid should follow the reorganization o f the public sector and be preceded by a full fiscal impact assessment (aligning each post to their new position on the grid) to ensure that this i s fiscally feasible in the near future. Making a wage grid durable requires setting differentials and percentages rather than absolute numbers. 11. Another critical issue will be reforms o f Public Enterprises. W h i l e these will be looked at in more detail in the subsequent phase o f the PER, an initial review finds a complex group o f 44 enterprises with varying degrees o f government involvement, exposure and oversight. The sector has had increasing transfers from the budget in recent years (around 4 percent o f GDP) while dividends back to the government have decreased over the same period. We recommend adopting a standardized approach to governance and accountability relations. This would mean one for agency type institutions (regulatory and inspection functions), one for non-commercial state enterprises, one for commercial state enterprises with over 50 percent government ownership and one for commercial state enterprises where government has a minority shareholding, until such time as the government shares in these enterprises are divested. This would significantly reduce government exposure to risks and contingent liabilities and facilitate a more systematic approach to reforming the sector. We also recommend building capacity in the public enterprise monitoring unit and consider merging it with the privatization unit. As a priority, systematic financial reporting by, and monitoring of, the existing parastatals should be institutionalized, and over the medium term policies developed to guide government’s involvement in new commercial ventures. V 12. Health Care. Without jeopardizing progress on health outcomes, the Government could substantially reduce the health sector budget by identifying services where supply significantly exceeds demand and releasing staff in areas o f l o w productivity. H a l f o f government health spending i s for wages and salaries, which i s especially high given that expensive tertiary level care (with highly-paid medical staff) i s not provided in the Seychelles, but rather patients are sent overseas for treatment. The number employed in the health sector has been increasing in recent years and so too has the share o f ancillary staff (which i s also high compared to other countries). Furthermore, average monthly incomes for public workers in the health sector are high compared to the rest o f the public sector. Most telling, we found several examples o f medical staff and facilities which do not operate at full capacity. For example physicians in public hospitals see on average 4 hospitalized patients per week. In addition to areas for contracting out-such as hospital meals, the government should also fully examine these unproductive service areas and release staff in unproductive positions. Preliminary analysis conducted for the PER suggests such staff reductions could reduce the health sector wage bill by almost S R 13 million per annum or 6.4 percent o f 2007 government health spending. 13. W h i l e tertiary care i s largely not provided in Seychelles the rest o f the nationally provided health sector i s characterized by l o w utilization rates comparable to European levels. In fact we find, Seychelles has an oversupply o f health care facilities and more hospitals and beds per capita than other middle-income countries. There are extremely l o w occupancy rates in hospitals off-Mahe Island, as well as in wards within the main hospital in Victoria. To increase the average acute care occupancy rate in hospitals to 80 percent, the government i s advised to close around 50 beds initially. While the health sector has been dominated by public provision, a new private sector hospital i s scheduled to open in 2009 which should provide an opportunity for the government to contract specialized secondary and tertiary care in-country including open-heart surgery, renal transplantation, haemodialysis and cosmetic surgery, and this should dramatically improve access to such care and reduce spending on the overseas treatment. 14. As a result o f the overseas treatment program and the need to import all medical supplies, the health sector has become highly indebted particularly in foreign exchange denominated debt. Arrears have accumulated over the past six years and the stock o f arrears combined with outstanding debts as o f October 2008-in other words prior to the devaluation-amounting to 45 percent o f 2007 government health spending. N o w that the Seychelles rupee has depreciated, health sector debts are also exposed to exchange rate risk since the majority o f outstanding invoices are denominated in foreign currency. The government i s advised to clear the debts, and improve debt and arrears management in the health sector in order to improve the sector’s financial sustainability and relations with creditors thus opening-up opportunities with suppliers. There are potential cost savings from improving pharmaceutical procurement by larger bulk purchasing once the financial management o f the sector i s improved including the management o f foreign exchange. Furthermore, recent endeavors to use telemedicine technology to import health services from overseas are far more cost effective than sending patients overseas and should be further explored in the future. 15. Currently, all domestically-provided public health services are provided free o f charge, leading to excess demand in some cases. Patients co-pay for the use o f private sector vi care and treatment abroad. The government is encouraged to initiate a review to consider introducing small co-payments with exemptions to exclude vulnerable groups, initially for additional procedures such as physiotherapy, dental care and non-emergency visits at the emergency department. Introducing co-payments in many other countries has reduced unnecessary use o f care. Any co-payment policy, however, should be explicit and exemptions should be transparent and cost-effective to administer and/or enforce e.g. for specific groups such as children and adolescents under 18 years o f age or for specific services such as emergency services. 16. While a full review o f the social security system will be undertaken as part o f a subsequent phase o f the PER, an initial review o f the system found generous state-provided sick leave and evidence o f abuse o f the sick leave provision. The PER recommends therefore that sick benefits should be revised with the first thirty days paid by the employer rather than the state, with a maximum o f 100 days state-paid sick leave per person per year. We also recommend eliminating the funeral benefit-which i s a small non-targeted transfer. 17. Education. Like health care, the provision o f education in the Seychelles i s predominantly by the public sector, and centralized with both financing and provision largely in the hands o f central government. Degree-level tertiary education is not provided in Seychelles, and at some cost to the government those that are eligible are fully funded to study overseas. Recent reviews o f the education sector, have raised concerns about quality and examinations results: many candidates do not pass the internationally accredited IGCSEs and are particularly unsuccessful in technical subjects such as science and mathematics. 18. Given the relatively modest, and recently declining, government expenditures on education, and the relatively poor education outcomes, we do not recommend any major cuts in government spending and rather suggest that policy makers focus o n h o w to improve education services, and use expenditure savings to re-invest in sector reforms aimed at increasing quality o f education and education outcomes. As is typical, public education spending is principally o n personal emoluments for schools-based staff. This also i s where we find the most potential to improve efficiency o f spending by contracting out and removing unproductive posts. Staffing reductions should be made once core functions have been defined and non-core services contracted out. On this basis we recommend that the education sector can achieve a targeted reduction o f 12.5 percent o f the wage bill. There is potential to improve efficiency in the sector by also introducing contracting-out o f services. W e recommend prioritizing school cleaning and school meal provision for contracting out in the short term. 19. The centralized management o f the education sector allows the government to take advantage o f economies o f scale-which makes a lot o f sense given the small size o f the country and school population. However, in order to maximize the expenditure savings for contracting out at the school level, we also recommend decentralizing the authority for managing service provision to the schools themselves once (i) financial management capacity school governance institutions are established and ( i s raised at the school level, (ii) iii)once centralized contracting-out process guidelines are in place and well understood. 20. Equivalent to about X percent o f the Ministry o f Education’s budget is spent annually by the Social Security Fund on benefits such as education bursaries and pupil transportation vii subsidies. We recommend reconsidering this approach by phasing out non-targeted subsidies and replacing them with a needs-based scholarship program. This includes fixing bus subsidies for primary and secondary students at current levels and eliminating in a step-wise approach bus subsidies for post-secondary school students. I t also includes reducing bursaries for post-secondary school students who are effectively being paid by the State to stay on at school, which given the poor academic results i s a questionable investment by both the State and the individual. For overseas students we recommend introducing co-payments for tuition fees, based on family income, for students eligible to study abroad, as well as basing cost o f living support on means testing. We also recommend strengthening the alignment o f overseas study with national development priorities. 21. W h i l e education unit costs are not completely out o f line with comparators, we find that there i s room for improving value for money in both the overseas and local post- secondary school institutions. In the case o f the overseas program we support the government’s plans to further focus government resources on supporting training in key sectors such as health, education, financial sector and tourism. We also recommend greater scrutiny be levelled at whether or not students are returning from overseas and strengthening the enforcement o f the bonding mechanism which provides for the repayment o f fees if students do not return. In the case o f the post secondary institutions benchmarking the unit costs shows that there are considerable improvements possible in some institutions to bring these unit costs down. There i s also scope to better align the resources dedicated to these institutions with the government’s longer term strategy o f having a workforce geared toward management in toursm, financial sector and off-shore services. Sharing administrative costs across more than one post-secondary institution would make greater use o f economies o f scale. This could involve bringing the institutions (back) under a single administration, or in view o f plans now being developed by the Seychelles University Foundation for a national university, developing the schools as faculties or departments o f a future university. 22. The PER provides several examples o f how to deepen the public sector reforms initiated in 2008 through more structural reforms and efficiency gains in high spending Ministries. The Government o f the Seychelles i s taking a number o f important steps in this regard. Given the scope o f the problem and the ambitious nature o f the vision, this process will need to continue over the next couple o f years. In addition, the public expenditure reforms will need to expand i t s scope in other areas. To support the Government, the next phase o f the PER work i s expected to focus on the needed reforms in the social security system and public enterprise sector given the importance o f both o f these for a successful fiscal policy during the reform process. In addition, the work will support further analysis o f alternative macroeconomic and fiscal scenarios in light o f the improvements in commodity prices for a net-importer on the one hand, and the global slowdown in activity and i t s impact on Seychelles exports, including tourism, on the other, so as to help guide the authorities in their medium-termfiscal planning within an uncertain global environment. 23. The extent to which the government will want to move quickly on these fiscal reforms in 2009 will also depend on the macroeconomic environment. With near-full employment as an initial condition, under a relatively benign global outlook with limited impact on Seychelles tourism revenues there i s considerable potential to move excess public employment to the private sector quickly with a social safety net in place to ease the transition. However, the bulk o f the analysis in the Review was undertaken before the full viii implications o f the global slowdown were felt in Seychelles. With a global slowdown that impacts considerably on the Seychelles tourism industry the appetite for reforms could diminish rapidly and the opposition to the reform gain momentum. As we have seen in the past, Seychelles GDP growth has a history o f volatility the most recent downturn being in 2001 as globally tourism receipts f e l l in response to the shock o f the 9/11 terrorist attacks in the United States. At present, the global downturn has not dampened the policy-maker’s commitments to the reforms, and both the business community and civil society groups recognize the importance o f the transition-even though that transition might be more painful that previously envisaged. In response, the government has requested that the Bank assist them as the government places even closer attention to the policies required to ease the transition in the form o f social security reform; and to the policies required to improve the business climate so that the private sector can and will grow as the macroeconomic situation i s stabilized. ix I. MACROECONOMIC STABILIZATION AND FISCAL POLICY Background and Objectives o f the Report 1. I n 2008, after many years o f unsustainable fiscal policy and a distorted and overvalued foreign exchange regime, the Government o f Seychelles embarked upon a bold economic reform program. This program aims to put the economy on a path toward macroeconomic stability, liberalize the economy and to allow the private sector to take over from the State as the driving force in the economy. Seychelles, a small open, middle-income island state with relatively l o w incidence o f poverty and near full employment, faced acute economic difficulties in 2008 as a result o f past economic management exacerbated by the rising global o i l and food prices and the downturn in the global economy. This resulted in missed debt-service payments and the subsequent downgrading o f i t s credit rating by Standard and Poors. Faced with current debt service difficulties and a historically poor credit track record, the authorities responded quickly by adopting a comprehensive reform program supported by a 2 year Stand By Arrangement with the International Monetary Fund (IMF) and commencing negotiations with Paris Club and other private and official creditors for debt restructuring. The government has embarked upon a comprehensive reform strategy aimed at restoring internal and external balances with the assistance o f the international financial institutions and development partners. The reform program includes: (i) the complete liberalization o f the exchange rate regime and float o f the currency (which was introduced in November 2008), (ii) tightened fiscal policy, including improved targeting o f the comprehensive social safety net and a privatization program to deal with the many state- owned enterprises. 2. Following the repayment o f arrears to the World Bank in 2006, the government sought a more active engagement with the World Bank toward the end o f 2007 in the context o f the 2008 budget preparation. A new Interim Strategy Note outlining the World Bank and African Development Bank’s joint program o f support to Seychelles i s planned to go before the Board in early 2009. The Bank’s strategy i s to support the thrust o f the economic structural reforms. In particular to support the fiscal adjustment required and assist the improvements needed in the business and regulatory environment. Pending resolution o f the debt-sustainability and credit worthiness issues the Bank’s support to the Government o f Seychelles will likely include policy-based lending in 2009 in addition to demand-led analytical support. 3. This Public Expenditure Review (PER) i s the first in a series o f planned economic reports and analytical work responding to requests from the government for World Bank assistance to implement structural reforms. The first phase o f the PER focuses on reforms in the civil service and efficiency improvements in the health and education sectors as requested by the government. The PER i s a rapid assessment 1 undertaken in the last quarter o f 2008 designed to provide input to the government’s policy agenda as the government embarked upon the fiscal adjustment, and in time for the 2009 budget preparation. It also provides the Bank with an analytical basis to inform potential financial support in 2009. The specific objectives o f the Review are to: 0 Document the changing macroeconomic environment and issues that will impact the medium-term fiscal outlook. As the global slowdown gathered pace in the last quarter o f 2008 after the main mission, the implications for the Seychelles outlook will be investigated in the next phase as the situation develops. 0 Analyze key public finance reform issues, policy initiatives and reform proposals in the following areas: (i) education, (iii), civil service reform, (ii) and healthcare; and in a subsequent phase (iv) public enterprise reform and (v) social security reform. 0 Offer recommendations to the authorities regarding future policy actions that should be considered in the short and medium term. These policies will also be considered further in light o f potential policy-based lending in 2009. 4. The focus o f the PER reflects the fact that revisiting the role and functions o f government l i e at the heart o f the economic reforms that need to take place in the next two years. This chapter provides a survey o f recent developments, medium-term macroeconomic developments and their fiscal policy implications. Chapter 2 examines public expenditure trends and budget management issues. Chapters 3, 4 and 5 examine civil service reform, health care and education issues respectively. Recent Economic Developments 5. The Seychelles faced rising fiscal and external account imbalances throughout 2008, culminating in extremely low foreign reserves, missed external debt service payments in July and October and a subsequent downgrade in Seychelles’ credit rating to “SD” selective default. Despite a fiscal target o f a 3.7 percent o f GDP budget surplus in 2007, the actual outturn was a deficit o f 8.8 percent o f GDP. The authorities developed a new fiscal consolidation plan for 2008 and a commitment to address fundamental fiscal imbalances. However, fiscal sustainability concerns have been brought about by a history o f persistent budget overruns. An expansion in fiscal policy during the period o f parliamentary and presidential elections in 2005-7 caused high budget deficits (averaging 7 percent o f GDP per annum over this period). Coupled with the accumulation o f public debt in the 1990s and 2000s meant that at end 2007, Seychelles had a debt to GDP ratio o f 146 percent with approximately half denominated in foreign exchange. At the beginning o f the year foreign exchange reserves were at extremely l o w levels-less than one month o f imports-and the cost o f Seychelles imports, especially food and o i l were increasing rapidly. It became increasingly clear that the public debt situation was unsustainable, and international reserves would not be sufficient to meet external debt service obligations. This resulted in the missed external debt service payments in July and October and a subsequent downgrade in Seychelles’ credit rating to “SD” selective default. 2 6. The next few years are not likely to be easy as the economy i s steered through the transition. The government, however, has demonstrated it has a strong commitment to continue on this difficult reform path, to allow the possibility o f a better and more sustainable growth path. Responding the situation, the government embarked upon a comprehensive reform strategy aimed at restoring internal and external imbalances and quickly sought the assistance o f the international financial institutions and approached creditors for debt rescheduling negotiations. The reform program requires: Liberalization o f the exchange rate regime, elimination o f all restrictions and floating the rupee. Tight fiscal policy backed by public employment reforms and a reduction in direct and indirect subsidies. Improved targeting o f the social safety net. A reform o f the role o f government and a reduction o f the state in the economy through further privatization. A review o f the tax regime and elimination o f exemptions. A reform o f the monetary policy framework to focus on liquidity management based on indirect instruments. 7. By the time the PER was finalized, many o f these reforms had already been implemented o r were underway. In November 2008, the exchange rate was liberalized. The Seychelles rupee floated, and trading was SR16:$1 by the end o f the year representing a 50 percent depreciation, where it has broadly stabilized. The 2008 budget outcome showed that the government was able, through tighter fiscal controls, to keep to the 2008 budget aspirations recording an estimated primary fiscal surplus o f 4 percent o f GDP. The 2009 budget approved by Parliament at the end o f 2008, in line with the IMF- supported program continued the fiscal consolidation initiated in 2008 with a budgeted surplus o f 6.2 percent o f GDP. The 2009 budget speech committed the government to continuing the reform program: requiring public enterprises to start operating with limited or no direct subsidies; and budgeting for the public sector voluntary departure and early retirement schemes as part o f commitments to address structural reforms for fiscal sustainability. At the same time the government passed the new Welfare Act in November and established a new agency to administer a means-tested safety net for the existing vulnerable groups and those adversely affected by the reforms. 8. T o put public debt on a sustainable basis, the economic reforms will also need to be complemented by comprehensive public external debt restructuring consistent with Seychelles medium-term capacity to pay.-. Total public debt i s estimated to reach almost 143 percent o f GDP by the end o f 2008; external public debt to reach 9 1.4 percent o f GDP including arrears, mainly to Paris Club creditors, on privately placed amortizing notes, and on the Eurobond-the later two that the government stopped servicing in July and October 2008, respectively. Paris Club creditors have decided to treat Seychelles under the Evian approach and are considering alternative debt relief options. Formal negotiations with creditors are expected in Spring 2009. 3 9. The macroeconomic outlook for Seychelles was revised in early 2009, as the impact of the global economic slow-down began to impact Seychelles tourism receipts and medium-term outlook. The overall impact o n economic growth o f the macroeconomic reform program was initially (as o f November 2008) an anticipated fall in economic growth from 7.3 percent in 2007 to negative 0.5 percent o f GDP in 2009 with a rebound o f 3.5 percent growth the following year. However, the macroeconomic situation and the 2009-2010 macroeconomic scenario (consistent with the targets and policies agreed in the MEFP) were updated in early 2009 during the first IMF review, to take account o f the downturn in the global economy. As a result economic growth is expected to be a large and sudden drop to negative 9.5 percent o f GDP in 2009. The revised macroeconomic outlook i s summarized in Table 1. This i s largely a result o f the knock-on impact on Seychelles tourism industry that dominates Seychelles GDP. Tourism receipts continued to decrease in January and February 2009 and receipts from this sector are expected to decline by 25-30 percent in 2009.' Under this case the transition to positive economic growth i s projected to still be quick (but not quite as high) reaching 2.6 percent by 2010 and 3.8 percent the following year. The Stand-By Arrangement targets have been updated in light o f the more difficult external environment to maintain the fiscal adjustment, notwithstanding the much lower growth outlook o n the strength o f the fiscal structural reforms. The program continues to focus on implementing supporting policies for macro stabilization including continued fiscal (and monetary) prudence. Further work to update the Bank's macroeconomic medium term scenarios is currently being undertaken including and will be presented in follow-up work. 10. The exchange rate depreciation i s currently anticipated to pass through to domestic inflation averaging 37.0 and 38.9 percent for 2008 and 2009. The float o f the rupee has been successful and eliminated parallel market differentials. The rates have broadly stabilized (US$1:SR16 represents a 50 percent depreciation against the U S dollar). Domestic interest rates have risen markedly. High domestic inflation i s caused by the exchange rate regime changes feeding through to domestic price increases and o n into domestic interest rate increases. This will stress public finances in these years as both domestic and foreign procured goods and services and external interest payments rise in nominal terms, and domestic debt interest service payments will also increase. External balances improve as the terms o f trade improve under the new exchange rate. Official reserves are also expected to recover in 2010 to 2 months o f import cover. See World Bank P I 14822 Back-to-Office Report February 2009. 4 Table 1: Key Economic Indicators, 2005-2011 2005 2006 2007 2008 2009 2010 Actual Actual Actual. Est.. Proj. Proj. National income and prices YO change Nominal GDP (SR millions)) 4,861 5,342 6,113 7,925 9,632 I1,603 Real GDP (Percent change) 7.5 8.3 7.3 0.1 -9.6 2.6 CPI (Annual average) 0.6 -1.9 5.3 37.0 38.9 17.9 CPI (End-of-period) -1.6 0.2 16.8 63.3 16.1 11.5 GDP deflator average -2.1 1.5 6.7 29.6 34.5 17.5 Money and credit YO change Net claims on government 1.9 0.4 9.3 25.3 16.5 16.5 Net claims on public entities 1.7 3.0 -14.9 3.2 3.7 N e t claims on private sector 3.4 32.7 -23.1 0.6 -10.0 Broad money (M2(p)) 1.o 1.1 1.5 1.9 0.0 Reserve Money 4.5 3.5 3.6 3.7 13.6 Velocity (GDP/average M2) 1.9 0.4 9.3 25.3 27.7 Money Multiplier (M2heserve money) 1.7 3 .O -14.9 3.2 27.7 Savings and investment YO of GDP Gross national savings 14.6 14.2 9.1 32.1 26.8 24.7 O f which: government savings 6.0 0.5 -4.8 3.9 3.5 6.4 Gross investment 34.3 28.1 32.5 36.0 30.3 31.1 O f which: government investment 5.3 8.1 6.1 2.3 3.7 5.2 Government budget YO of GDP Total revenue 41.1 42.0 35.9 36.2 35.2 34.8 Expenditure and net lending 40.4 49.5 45.9 43.9 39.9 36.7 Overall balance, including grants 1.7 -6.1 -9.6 -3.7 -4.5 -1.9 Primary balance 7.3 -0.5 -2.2 4.2 9.8 8.2 Total public debt 147.1 139.5 146.0 149.3 165.9 144.8 Domestic 100.5 85.8 74.1 57.8 43.9 31.2 External 46.6 53.7 71.9 91.4 122.0 113.7 External sector Current account balance after official transfers -19.7 -13.9 -23.4 -32.1 -26.8 -24.7 Total stock o f arrears ($ millions) 184.0 123.5 160.4 309.6 ... ... Total external debt outstanding (% o f GDP) 55.0 53.8 77.9 91.4 805.6 858.2 Terms o f trade (= - deterioration) 4.4 -0.3 -1.2 0.4 -3.1 2.5 Real effective exchange rate (end o f period) -2.3 -4.0 -19.7 -8.5 Gross official reserves (SR millions end of year) 56.1 112.7 9.8 50.9 90.9 140.9 In months of imports 0.7 1.3 0.1 0.7 1.2 1.7 Exchange rate Seychelles rupees per US$l (end o f period) 5.5 5.8 8.0 16.6 ... Seychelles rupees per US$l (period average) 5.5 5.5 6.7 9.5 ... Source: IMF estimates, February 2009 5 Impact o f MacroeconomicReforms on Product and Labor Markets 11. This section provides a guide to the impact o f the reform program pending a more quantitative approach as a macroeconomic model o f the reforms i s developed. The introduction o f reforms to reduce direct and indirect government subsidies will contribute to the anticipated short-run contraction in overall output, a s the parastatals and private sector adjust to higher input prices. This i s o f course a partial analysis, as output i s also impacted by the changing (and in this case adverse) external environment. As a result o f the reform program, there i s likely to be a short-run adverse impact on output: Initially GDP growth was expected to fall to -0.5 percent o f GDP in 2009 from 7.3 percent o f GDP in 2007. This impact, however, has been overshadowed by the slow-down in global economic activity which i s having a knock-on adverse effect on Seychelles’ tourism and foreign direct investment projections. The latest projections from the IMF now show that GDP growth was almost zero in 2009 and i s anticipated to be sharply reduced to -9.5 percent in 2009. 12. As far as the effects from the reform program are concerned, output will contract both directly a s government consumption i s reduced, and indirectly as transfers to the public enterprise sector diminish; prompting a realignment in prices. For example, in the case o f the state-owned enterprises providing electricity, water and public transport the reduction in government subsidies i s leading to increased prices o f these goods and services. This in turn raises input prices and alters the cost structures o f other public and private enterprises. Output falls as some services and products are no longer profitable to produce or affordable to consumers (see Box 1 for several examples where prices will rise or have already risen as government transfers have fallen). Government policies to reduce subsidies and the timetable for their introduction are summarized in Table 3. 13. The exporting sectors including tourism a s well a s import-competing sectors, however, will clearly benefit from the new exchange rate regime and will see an increase in output, even if they used imported inputs. This gain i s likely to be quick as there i s a supply response, and could be sustained if these structural reforms allow for a meaningful supply response and if the nominal devaluation i s also a real one and not eroded by inflation. O n the other hand, non-tradable sectors will see a price increase (both on account o f domestic inflation as well as increase in rupee price o f imported inputs), and could witness a decline in output, depending on the elasticity o f demand. 14. We should not lose sight o f the medium term objectives-which o f course i s positive economic growth a s the private sector responds to the improved macroeconomic fundamentals. As subsidies to parastatals are reduced there should also be a positive reaction from the private sector as unprofitable enterprises go out o f business (dynamic creative destruction?) and the playing field i s leveled between the public and private sectors. The private sector accounts for around 71 percent o f GDP, parastatals contribute 14 percent and government remaining 15 percent o f GDP. The institutional breakdown o f GDP has not changed significantly over the period 2004 to 2007 and i s expected to shift now that the government intends to limit i t s involvement in commercial activities and to improve the climate for the private sector. More work on 6 how to improve the business environment i s currently underway by the World Bank in the form o f an Investment Climate Assessment. Table 2: Structure o f GDP, Percent of Total 2004 2005 2006 2007 2007of which Private Public Government Agriculture, Forestry and Fishing 2.9 2.9 2.7 0.0 Manufacturing 12.2 12.5 11.9 0.0 Services 76.5 79.0 82.4 15.1 of which Accommodation and Food 9.6 9.4 10.3 15.4 15.4 0.0 0.0 Professional Services 14.4 15.0 15.2 15.1 14.8 0.3 0.0 Transportation and Storage 9.8 12.3 13.6 13.6 3.0 10.6 0.0 Finance and insurance 6.0 5.8 6.3 6.7 3. I 3.6 0.0 Other 8.5 5.6 3.1 1.8 7.4 -5.6 0.0 Total 100 100 100 100 70.8 13.9 15.1 GDP SR (millions) 4653.6 4869.4 5366.7 6313.1 Source: National Statistics Bureau Table 3: Direct and Indirect Subsidies to be Removed in MEFP Action Timing Abolish fishermen fuel subsidy coupons. October 1,2008 Eliminate indirect universal product subsidies and replace with a targeted November 1,2008 social safety net by enacting the Welfare Agency Act. Eliminate SR90 per month electricity rebate for households. January 1,2009 Raise and maintain Seychelles Public Transportation Company bus fare at January 1,2009 operating cost-recovery levels. Eliminate implicit and explicit subsidies for A g o Industries, Hatcheries, January 1,2009 Seychelles Trading Company and Coevity Prawns. Eliminate LPG subsidy by the state oil company (SEPEC) (about SR3 per January 1,2009 15. The speed o f the economic rebound will depend on the speed with which dynamic small and medium-sized enterprises respond to the more stable macroeconomic outlook. Evidence from market reforms introduced in Eastern Europe in the 1990s would imply that the devaluation impact on output will be relatively short- lived as long as barriers to new business creation are low, dynamic new entrants will quickly revitalize growth. The economy i s predominantly service-based (accommodation and food), driven by the tourism industry (see Table 2). 16. Tourism has been a driver o f growth in the past two years resulting in buoyant related-service and construction sectors which should also respond well to the exchange rate devaluation and an end to foreign exchange restrictions, making Seychelles a more affordable high-end holiday destination. The off-shore financial sector i s another 7 potential driver o f growth in the short term, which has been growing in the short term and providing new jobs.2 Box 1: Price Liberalization, Subsidy Reforms and Global Price Changes The government has embarked o n several policies to liberalize prices, several o f which w i l l directly impact the average household’s food basket. For example, in October 2008 the government eliminated the fisherman’s f u e l subsidy which was expected to raise the fish prices in the market. From 2008, Seychelles Trading Company, a commercially-oriented publicly-owned enterprise with a social mandate to provide 15 core consumer products at affordable prices has been required to do so without government subsidies. It has thus far been able to do t h i s only through cross-subsidization from more profitable business units (such as the duty free store at the airport in Victoria). However, as Table 4 shows the expected in-store commercial prices are some 50 to 100 times the fixed retail prices (as o f July 2008), with the biggest price increases on rice varieties which are currently substantial loss-making items. Table 4: Subsidized Core Commodities SR, 2008 Current Retail Retail Retail Expected in-store Product wholesale price price price price mice Jan 08 Am408 July 08 Sunflower o i l 218.6 262.9 16.5 23.0 23 .O Milk powder 654.3 708.7 61.0 61.0 62.0 Long grain rice 456.1 238.1 5.0 5.0 5.0 Regular basmati rice 742.1 524.7 9.0 10.5 11.0 Premium basmati rice 1,012.1 1,023.8 16.5 18.0 21.5 H i g h protein flour 404.9 392.1 8.0 8.0 8.0 White sugar domestic 238.1 238.1 5.0 5.0 5.0 Iodized salt 91.1 113.8 1.3 1.3 1.3 Margarine 336.4 382.0 16.5 17.5 17.5 Potatoes 4.9 6.4 7.0 7.0 7.0 Onions 4.9 6.4 7.0 7.0 7.0 Garlic 14.6 16.4 18.0 18. 0 18.0 Ginger 16.9 18.3 20.2 20.2 20.2 Apples 16.0 18.6 20.5 20.5 20.5 Oranges 9.2 14.6 16.0 16.0 16.0 Source: Seychelles Trading Company From 2009, transfers to public enterprises w i l l drastically reduce resulting in further anticipated price increases in electricity, water and public transportation. From the beginning o f 2008 the Public Utilities Company was advised by the Ministry o f Finance that annual transfers from the central budget would no longer be forthcoming. As a result a new tariff schedule was introduced for electricity and water. Four electricity tariff hikes were witnessed in 2008; the latest in September 2008 raised the commercial tariff Agriculture, forestry and fishing comprise only 2.5 percent of GDP which, in the current environment causes concerns with respect to food security as the costs of food imports are adversely impacted by both the devaluation and the external environment. Agriculture could be a potential domestic growth area as it becomes more profitable to grow local produce rather than purchase expensive imports. As the government has already sold its own assets in farming new private operators have entered the market and are supplying eesh local produce. Manufacturing i s relatively low at less than 11 percent of GDP and has been static or in decline in recent years. As the cost o f new manufacturing capital goods will increase as a result of the devaluationthis i s unlikely to be a short term driver of a rebound in growth, but may well be a sector that in the medium term also responds positively to the new exchange rate improving the profitability o f local production. Fish and fish processing i s one potential growth area in which Seychelles has a large natural endowment 8 schedule as shown in Table 5 below. Such price rises were not solely due to the change in policy on subsidies however. Since f u e l costs are approximately 80 percent o f electricity generation costs, global fuel price increases were also driving up the electricity tariffs in 2008, see Figure 1: Table 5: Commercial Electricity Tariff Changes, 2008 First 500 units Next 500 units After which SR p e r K W h SR per K W h SR per K W August 2008 SR 1.6 SR 1.8 SR 2.2 September 2008 S R 2.2 SR 2.4 SR 2.8 Source: Public Utilties Company Also adversely impacted in 2008 by rising fuel prices as well as anticipated halt in government transfers to subsidize operations in 2009, the Seychelles Public Transport Company i s planning to introduce tariff increases to accommodate the policy to remove their annual operating subsidy o f around S R 15 million. For the public transport company to remain solvent, the bus fare w i l l likely increase from the current flat rate o f SR 3 per trip to a flat rate o f SR 6 per trip. This would become the f i r s t bus fare increase since 1994. Figure 1: Commercial Fuel Price Increases, 1998-2008 -Llight Fuel Oil -Heavy Fuel Oil Source: Public Utilities Company 17. However, the w o r l d wide economic downturn looks set to significantly affect economic outturn in 2009 far exceeding the impact o f the r e f o r m p r o g r a m alone, and making it imperative for Seychelles to put the economy o n a footing that will allow the private sector to weather the storm. While the fuel prices are now on a downward trajectory, the global slowdown in economic activity has resulted in a downturn in tourist arrivals and possibly a fall in previously buoyant foreign direct investment inflows. With the domestic agriculture sector being relatively small global food price increase have heavily impacted the non-fish food basket costs to the average household, which rose by 34 percent from July 2007 to June 2008. 18. W h i l e the downturn in economic growth i s likely to impact employment too in 2009, one o f the positive features o f the current situation i s the very low rates o f unemployment witnessed at the start o f the reforms, and the fact that Seychelles i s an importer o f labor, including unskilled and semi-skilled workers. The last Labor Force Survey in 2005 found only 5.5 percent to be unemployed and more recent 9 estimates put this in the range o f 1.9 to 2.5 percent. The total number o f employees in the formal sector improved by 5.2 percent in 2007 over 2006, and by a further 3.7 percent in the first quarter o f 2008 (latest available figures). Employment in the private, parastatal and government sectors all increased from 2006 to 2007, but f e l l in government and parastatals during the first quarter o f 2008. While the private sector accounts for 71 percent o f GDP it employs only 59 percent o f employees, while 15 percent are in the parastatal sector and 27 percent in the government. 19. There are certain skills shortages and labor supply constraints as evidenced by the number o f expatriates living in the Seychelles. In the government sector, expatriates make up 2.7 percent o f the workforce (down from 3.2 percent in 2007)-and are predominantly employed in the health and education sectors. Expatriates are also 5.6 percent o f parastatal employees (down from 6.2 percent in 2007) with the highest number employed in the fishing industry. The equivalent information from the private sector i s not available officially. Anecdotally private-sector expatriates are concentrated in the tourism and construction ind~stries.~ 20. Average nominal earnings have also been increasing in recent years, by an average o f 5.3 percent in 2007 over 2006; and 11.8 percent in the first quarter o f 2008 (a new, higher, minimum wage was introduced at the end o f 2007). Average earnings are highest in the parastatal sector (SR5,465 per month), followed by government (SR4,216 per month) and private (SR4,535 per month) sectors. Average earnings are highest in the education private sector (SR6,622) followed by parastatal and private sector earnings in the transport and financial sectors. 21. As reforms are implemented-particularly on the fiscal side we can anticipate a direct reduction in the numbers employed in the public and parastatal sectors. The l o w unemployment rates, sustained increase in private sector employment in 2007 and 2008, and the presence o f expatriate workers in the country provides some degree o f comfort that the private sector can continue to expand and provide jobs for those affected directly and indirectly by the anticipated short-term economic downturn. Welfare Impact 22. The impact on real incomes and hence household consumption are also likely to be negative in the short run, as employment falls with the slowdown in output, as real wages are initially eroded by high inflation caused by the devaluation and households cope with the immediate foreign exchange adjustment resulting in higher food costs. This should be a one-off adjustment, since households initially have Seychelles rupee denominated incomes, and predominantly import-related expenditures. W h i l e all households will be affected by the general price rises, those who work with (partially) indexed wages will be hurt less than those whose wages are more sticky in nominal terms (such as in the informal sector); and where real wages are more quickly eroded. Those working in sectors adversely impacted by the terms o f trade shift are also Anecdotally there are 9,000 expatriates working in the country out o f a total o f almost 40,000 employees. 10 more likely to be worse off. In addition to the price effects, those who lose their jobs (public sector, or other sectors affected) will o f course be even more adversely impacted. 23. I n the short-term the government should guard against high nominal wage increases in anticipation o f rising inflation as this will lead to a wage-price inflation spiral and prolong the adjustment. Instead the government should, and is, focused on improving the welfare system, turning a large non means-tested welfare system present into one better targeted at maintaining reasonable incomes for poor and vulnerable groups The government i s designing a new means-tested welfare system to mitigate the impact o f the reforms on the poorest. A new Welfare Act was passed by the Assembly in October 2008 and the detailed design work for implementation i s underway. The approach i s to protect the most vulnerable with monetary assistance, and to go beyond financial transfers to provide assistance in the form o f incentive-to-work schemes. A new welfare agency responsible for implementing the new legislation began operations in November 1,2008. The agency i s funded directly by the government budget rather than social security contributions. Social security contributions, however, continue to fund statutory benefit schemes as detailed in the Social Security Act. Further work to assist the authorities with the implementation o f the new welfare system, improved targeting, addressing fiscal sustainability and streamlining the existing statutory benefit schemes will be undertaken in the second phase o f the PER planned in 2009. 24. The impact on poverty o f the reform program i s difficult to ascertain at this stage. The most recent household expenditure survey data indicates around 13 percent o f Seychellois are living below a S R 50 (approximately US$ 3.5) per day poverty line. This survey done in 2006/07 shows that since the last survey in 1999/2000 poverty continues to be relatively l o w but that inequality has increased with the gini coefficient going from 0.28 to 0.42 over this period. Non-monetary measures o f poverty show that l i f e has improved and access to goods and services has increa~ed.~In order to help the government with responding to the impact on the poor, the World Bank together with UNDP are exploring possibilities to assist the government with analysis o f the social impact and impact on poverty o f the reform program in 2009. Fiscal Policy and Recent Developments 25. The government has committed to undertake several far-reaching fiscal policy reforms as part o f the MEFP, and these are central to the macroeconomic adjustment. Over the medium-term a large and sustained fiscal adjustment i s envisaged bring the public debt to a more sustainable basis. This will be achieved through a combination o f revenue and expenditure measures, as well as improved budget management. The Medium-Term Budget Framework (MTBF) under this scenario envisages a tightening o f fiscal policy and a targeting o f a primary fiscal surplus o f 6.2 percent o f GDP and 6.6 percent o f GDP in 2009 and 2010 respectively. The primary balance i s a critical fiscal policy target, since it represents the total amount o f government World Bank (2006) “Welfare Impacts o f Exchange Rate Adjustment and Policy Implications”. Earlier work undertakenby the Bank for the government in 2006, estimated a 6.6 percentage point increase in the incidence of poverty as a result of the exchange rate devaluation at that time (SR5.5:$1 to SR8:$1). However, the paper also found that the effect would be short-lived, and that in addition to a targeted safety net the resumption o f growth would be necessary for poverty reduction. 11 saving in the economy that i s under the government’s direct influence. The primary surpluses would ease gradually over the medium term, allowing capital spending to double from 3.6 percent o f GDP in 2009 to 7.4 percent by 2013. The base case fiscal scenario i s given in Table 6. Table 6: Medium Term Budget Framework, 2008-2013 Projections (in YOof GDP) 2008 actual 2009 2010 2011 2012 2013 Total Revenue and Grants 40.2 35.4 34.8 34.3 34.5 34.0 1, Total domestic revenue 36.2 35.2 34.8 34.3 34.5 34.0 o f which Tax revenues 31.0 29.6 29.3 29.3 29.5 29.2 2. Grants /1 4.1 0.2 0.0 0.0 0.0 0.0 Total Expenditure and Net Lending 43.9 39.9 36.7 38.1 35.0 35.1 1. Current expenditures 31.6 37.1 31.9 31.2 27.6 27.2 o f which Wages and salaries 8.7 7.2 6.1 6.6 6.6 6.6 Goods and services 6.2 6.7 7.2 7.2 7.5 7.5 Interest payments 7.9 14.3 10.1 8.4 4.4 4.0 Foreign interest 4.3 5.4 4.1 3.8 1.2 1.1 Domestic interest 3.6 8.9 6.0 4.5 3.2 2.9 Transfers 8.7 8.8 8.5 9.0 9.1 9.0 Social programs and SSF 5.9 6.9 7.0 7.7 7.8 7.7 To rest o f public sector 2.8 1.9 1.4 1.2 1.2 1.2 2. Capital expenditures 2.3 3.7 5.2 6.9 7.3 7.8 3. Contingency 3.1 2.2 0.0 0.0 0.0 Overall Fiscal Balance (cash basis) -3.3 -6.7 -1.9 -3.8 -0.5 3.0 Primary Fiscal Balance 4.2 9.8 8.2 4.5 3.9 -1.1 Overall Fiscal Balance (commitment basis) -3.7 -4.5 -1.9 -3.8 -0.5 -1.1 Source: IMF February 2009 Notes: /1 an unexpected grant was received fkom Dubai at the end o f 2008. 26. Public spending reductions are planned by eliminating direct and indirect subsidies (see Table 3) and by significantly lowering the real wage bill, which i s targeted to fall from about 9 percent o f GDP in 2008 to 6.5 percent o f GDP in 2010. During 2008, government initiated several efforts to reduce the number o f staff on the payroll: such as an early retirement scheme, a voluntary departure scheme and tight controls over new hiring. The potential to achieve this wage bill target and several recommendations on implementing public sector reform i s discussed at length in Chapter 3. In addition to the fiscal implications o f social welfare reforms, the next PER volume will also address the policies required for a sustainable reduction in subsidies to the public enterprise sector. 27. Tax policy measures are also planned to raise revenues and remove distortionary exemptions. These measures are summarized in Table 7 below. Structural reforms will be undertaken to strengthen the tax administration, improve public 12 financial management, reform the role o f the public sector and further privatize publicly- owned enterprises. Given the revised macroeconomic scenario, it i s anticipated that tax revenues will be affected by the growth slowdown, and lower tourism revenues. This places even greater urgency on reviewing tax policy options and the need to ensure a tax regime that i s on the one hand consistent with fiscal targets, and on the other hand i s supportive o f the business climate reforms to help the private sector during the transition and downturn in global economic activity. Table 7: Revenue Raising Measures Agreed in the MEFP, 2008 Action Timing Raise and harmonize taxes on local and imported cigarettes to SR500 October 1,2008 per 200 cigarettes. Introduce 10 percent withholding tax on interest income for residents. October 1,2008 Extend General Sales Tax (GST) to all telecom companies. October 1,2008 Announce the introduction o f the GST o f 15 percent on residential October 10,2008 rental income, effective January 1, 2009. Announce the removal o f the exemption on interest income by November 1,2008 companies (Tax Act) effective January 1,2009. Reintroduce GST on locally produced soft drinks. November 1,2008. Raise GST on tourism services from 7 percent to 10 percent. November 1,2008 Raise specific taxes/excise tax rates for both locally manufactured and November 1,2008 imported alcohol to adjust for inflation. Raise environmental levy to SR25 from SRlO per month per January 1,2009 household. Adjust fees, fines, charges and rents and royalties for inflation. January 1,2009 Reinstate GST on LPG. January 1,2009 Raise GST on tourism services from 10 percent to 12 percent. November 1,2009 Repeal all provisions for discretionary exemptions in the Trade Tax January 1,2009 and Business Tax Acts Medium-Term Expenditure Outlook 28. The full impact and interaction between the macroeconomic and fiscal reforms, depends on the various linkages between the two as summarized in this section. The macroeconomic indicators and medium-term budget framework shown in Table 1 and Table 6 are consistent with the reform scenario envisaged under the MEFP agreed in November 2008, and updated in the first quarter o f 2009 as a result o f (a) the slowdown in global activity leading to a fall in tourism arrivals, (b) the fall in global commodity prices seen at the end o f 2008, and (c) a better than expected 2008 fiscal outturn. However, given the continuing uncertainties, particularly in the global environment and the impact on tourism receipts and FDI, the government will need to continuously monitor and evaluate outcomes on key targets as the program proceeds. The macroeconomic fiscal linkages are summarized below. Interest payments 29. The foreign exchange devaluation has increased the costs o f servicing external debt, in percentage o f GDP terms external interest payments in third quarter 2008 were x 13 percent o f GDP compared to first quarter 2008. While external debt workout and debt rescheduling will be required to ensure debt service obligations can be met in the medium-term without running up unsustainable arrears, the exact terms remain uncertain and so too will the required external debt service in the medium-term. Secondly the domestic interest rate will also adjust to the rise in inflation, and rising nominal rates will increase the costs o f domestic debt servicing. There i s a further implication o f large domestic interest rate increases, as the domestic banking sector i s adversely affected, and the government i s put under increasing pressure to “bail out the banks”. This has been accommodated in part by a contingency (equivalent to 3.1 percent o f GDP in the 2009 budget). By end 2008, the increase in interest on loans in the domestic banking sector has changed from 10 percent to 18 percent in one bank and from 7 percent to 13 percent in another. The rise in interest rates will also feed back into domestic economic activity as borrowers cope with rising mortgage and other loan payments. While the government’s initial estimates were that more than 50 percent o f borrowers would be able to meet the increase in monthly payments, a significant portion would not and this has already prompted concerns about housing loan foreclosures and homelessness. Goods and services 30. The rupee-equivalent costs o f foreign-currency denominated government consumption has increased by x percent in response to the 50 percent rupee depreciation. As the price o f imports will also feed through to domestic prices, higher inflation i s also reflected in the high cost to government for locally procured goods and services. With the current mix o f local and overseas procurement, the anticipated nominal goods and services spending could increase by 40 percent in 2009 or an additional 0.7 percent o f GDP should the average foreign exchange rate for 2009 be SR12:$1 and inflation reach 34 percent. An average foreign exchange rate o f SR14:$1 for the year, however, would increase the bill by afurther S R 50 million or 0.5 percent o f GDP at current procurement levels. Wages and salaries 3 1. Reforms underway to reduce government employment will lower the total number employed in the sector, and nominal wage increases below inflation would erode real wages and lower the real wage bill. However, as rising prices can lead to pressure on government to raise nominal wages this can lead to a rising wage-price inflation spiral and will delay efforts to reach the wage bill target as well as prolong the impact o f the reforms. Public employment reforms and effects on the wage bill are discussed further in Chapter 3. Subsidies and transfers 32. Reforms are also underway to privatize government assets and to eliminate subsidies to the parastatals-largely those that are commercially oriented but in many cases also have a social function. For many enterprises who continue to provide a public service, they will be required to cross-subsidize unprofitable business u n i t s from 14 profitable ones. When profitable business u n i t s are also in a competitive environment this will reduce the enterprises’ ability to do so without losing-out to competitors (e.g. the public transport company with private bus hire, and Seychelles Trading Company with the duty free store). Without a more strategic approach to reform in the sector, with an explicit contract between the government and service provider for social objectives; or an explicit acceptance that the social objectives i s no longer required, there will continue to be contingent liabilities arising from the sector and risks that the government will be required to transfer subsidies to ensure the institutions solvency. Parastatal governance and risk issues are discussed at a general level in Chapters 2 and 3 and more detailed work will be undertaken on the sector in the second PER phase. 33. In the case o f transfers to households through the social welfare system, this too will depend upon the full magnitude o f the macroeconomic reforms on output and employment levels and hence household incomes; as well as the re-design o f the social welfare net to improve targeting at the poorest and most vulnerable in society. With the forthcoming analysis on social security reforms, a more informed assessment o f the fiscal impact should be forthcoming. Revenues 34. The high CPI and foreign exchange devaluations will likely cause the nominal tax collected on domestic sales and imports to increase. Import duties are particularly high on relatively price-inelastic goods such as alcohol and tobacco. However, reduced demand (and hence reduced tax collection) might be anticipated in response to the devaluation on several high value goods-such as vehicles. A downturn in economic activity would reduce profits and related business tax collections. With a relatively narrow base the extent to which the overall tax revenue collection i s effected depends on the extent to which the downturn in output affects the construction, banking, telecommunications, brewery and o i l transportation industries. As we can see from table 1, public sector revenues are historically volatile as a result o f both the narrow tax base and the introduction o f both new taxes and levies and exemptions. With many more policy changes anticipated during the reform period over the next two years this i s likely to add to the volatility o f revenues. Conclusion 35. Chapters 3, 4 and 5 o f the Review analyze in detail the policies that will assist the government in i t s fiscal consolidation efforts as part o f the macroeconomic reform program. It i s clearly the case that for the reform program to be successful in the medium-term the government must make progress with not only debt restructuring but also the size and sustainability o f the government sector to avoid a resumption o f the credit problems faced in 2008. The potential wage bill savings and efficiency gains in the health and education sectors are examined in detail in this Review and various recommendations proposed. The key finding i s that there i s potential to make considerable wage bill savings consistent with the targets o f the medium-term budget 15 framework, and several efficiency measures in the health and education sectors could also be implemented. 36. The extent to which the government will want to move quickly on these fiscal reforms in 2009 will also depend on the macroeconomic environment. With near-full employment as an initial condition, under a relatively benign global outlook with limited impact on Seychelles tourism revenues there i s considerable potential to move excess public employment to the private sector quickly with a social safety net in place to ease the transition. However, the bulk o f the analysis in the Review was undertaken before the full implications o f the global slowdown were felt in Seychelles. With a global slowdown that impacts considerably on the Seychelles tourism industry the appetite for reforms could diminish rapidly and the opposition to the reform gain momentum. As we have seen in the past, Seychelles GDP growth has a history o f volatility the most recent downturn being in 2001 as globally tourism receipts f e l l in response to the shock o f the 9/11 terrorist attacks in the United States. At present, the global downturn has not dampened the policy-maker’s commitments to the reforms, and both the business community and civil society groups recognize the importance o f the transition-even though that transition might be more painful that previously envisaged. In response, the government has requested that the Bank assist them as the government places even closer attention to the policies required to ease the transition in the form o f social security reform; and to the policies required to improve the business climate so that the private sector can and will grow as the macroeconomic situation i s stabilized. Table 8: Potential Expenditure Savings, 2008-2011 Projections (in SR millions nominal) 2009 2010 2011 Civil Service Reforms Wage bill savings (net) from VDS, MBE and early retirement 2008 reforms /a 2.3 74.8 89.8 Wage bill savings from additional medium-term structural reforms 48.7 12.7 26.6 Total wage bill savings 51.0 87.5 116.4 O f which Health care workforce reductions (posts reduced) 326 326 326 Education employee reductions (posts reduced) 380 380 380 Healthcare wages bill savings 12.9 15.5 18.6 Education wage bill savings 13 15.6 18.7 Healthcare Reforms Hospital efficiency improvements 4.6 6.4 7.5 Social Security Reforms Changes to sick benefit 5.1 5.7 6.7 Elimination o f funeral benefits 0.9 1.2 1.4 Education Reforms Education-related cash transfer savings 5 9.6 21.9 Education contracting out net savings 5.0 6.9 8.1 Source: Bank Staff estimates assuming nominal wage increases o f 20 percent per annum in 2009-1 1 and CPI consistent with Table 1 Notes a:In 2009 net wage bill savings assumes SR13.8 million saved fi-om the manpower budgeting exercise and payouts o f SR11.5 million for the voluntary departure scheme. 2010 and 201 1 combines total wage savings from early retirement and Voluntary Departure schemes incorporating nominal wage increases. 16 37. While there are already short-term policy measures underway to reduce the numbers employed in the civil service such as the voluntary departure scheme and early retirement scheme; critically more fundamental reforms (to realign roles and functions o f government and to contract out support functions) are required to meet wage bill targets. Expenditure scenarios associated with these reforms are shown in 38. Table 8 below. O f the wage bill savings more detailed recommendations in Chapters 4 and 5 identify which posts in the health and education sectors could be contracted out or reduced without impacting o n service delivery. The table does not show the net impact o f the expenditure savings, and some increase in goods and services spending associated with contracting out support functions in health and education sectors can be anticipated. 39. We also find that in general the health and education sectors have potential to make considerable improvements to efficiency. This can be achieved by reducing spending o n service delivery areas that are underutilized (see for example the underutilized maternity wards discussed in the healthcare chapter), and reducing expenditures o n cash transfers that are not well targeted (such as bus fare subsidies for post-secondary school students outlined in the education chapter). However, expenditure savings within the sector should not automatically imply a reduction in overall spending in the sector since a healthy, well-educated labor force is critical for long run growth. In education in particular, the chapter documents the poor education outcomes and l o w value-for-money o f investment in this sector which must also be addressed for Seychelles to develop and achieve its developmental aspirations. Therefore, any savings additional to the wage bill savings envisaged above should be invested in improving outcomes in these sectors. 17 11. PUBLIC EXPENDITURESAND EXPENDITURE MANAGEMENT Trends in Public Expenditures 35. Seychelles has a history o f a high spending government that it has not been able to finance from domestic revenues-resulting in a high and unsustainable public debt stock. (See Figure 2). While in the 1980s, development grant assistance helped to finance fiscal deficits, as grants have ceased, the government increasingly turned to loans, including commercial and short-term debt, to finance spending. (See Figure 3 and Table 9). Figure 2: Government Revenues, Spending and Budget Deficits, 1988-20( 1 80 1 , 5 I+F'ubtic E v e n d i t u r e s -Government Revenues ---x---.OveraUbalance I Source: IMF 36. Seychelles i s now one o f the most highly indebted countries in the world with a debt to GDP ratio o f 160 percent. Roughly half o f the debt i s domestic, and half external, including arrears and sovereign bonds, totaling US$230 million. Debt service i s now over 10 percent o f GDP annually, and depending on the rate o f growth it could stay at this level for the next seven to eight years, indicating that the past development model i s unaffordable and unsustainable. The debt situation i s unsustainable. As o f end 2007 the country was in arrears in the amount o f about US$147.9 million. During 2008 Seychelles reserves f e l l to extremely l o w levels and the external debt situation resulted in a default on external debt service payments in the latter half o f the year. 37. While studies o f small states show that on average they tend to spend more on public services, Seychelles i s also at the top-end o f this group. Government consumption to GDP i s around 19.4 percent on average in small states compared to only 15.7 percent in larger states.s The gap reflects the higher costs o f producing public goods Favaro (2008). Small states are defined as those with less than 2 million people. 18 as a result o f indivisibilities in production and the small size o f the domestic market results in fewer government suppliers and a lack o f competition (Alesina and Wacziag 1998). Small states are also characterized by a much closer interaction between individuals in the public, parastatal and private sector that tends to blur roles and potentially lead to sub-optimal decision making. Small island states additionally suffer from high transportation and telecommunication costs related to their remoteness. In the case o f Seychelles, however, we find that the higher costs o f producing public goods only explains part o f the large public sector story, and that even compared to other small island states at similar per capita incomes, spending i s high. This reflects both a high, historic social preference, and development model for public sector provision (or a welfare state). In more recent years it i s also a reflection o f high interest payment associated with the stock o f debt that has arisen from these aspirations. r e 3: External Debt and Extent o f Concessionality, 1980-2006 0 Cancossionaldebt(%oftotalc~maldebt) Memaldobt (“/.afCM) Table 9: External Debt Composition, 2002-2006, (US$ million) 2002 2003 2004 2005 2006est Public sector external debt (end o f period) 392.3 361.5 380.7 41 1.5 577.7 Multilateral 100.7 73 77.8 83.3 47.1 World Bank 3.5 3.2 3.6 2.7 0.6 African Development Bank 82.7 55.8 57.6 63.2 28.7 Other 14.5 14 16.6 17.5 17.9 Bilateral 176.3 72.9 199.5 240.9 218.4 Paris Club 118.5 119 139.2 177 168.8 Other 57.8 53.9 60.3 63.9 49.6 Commercial 115.3 15.6 103.4 87.3 3 12.2 Source: GOS, WDI (2008) 38. Comparing the 2000-2005 pattern o f spending in Seychelles with other small economies we find average government expenditure o f 36.1 percent o f GDP that i s 6.6 percentage points o f GDP higher than the average (Table 10). Comparing primary expenditures only (i.e. without interest payments), and taking account o f Wagner’s L a w (i.e. countries with a higher per capita income tend to have higher public spending in proportion to GDP) we find that Seychelles lies above the observed correlation between size o f government and per capita income (Figure 4). 19 Figure 4: Primary Expenditures as Percent of GDP, Seychelles and Comparators, average 2000-2005 55 50 1 .................................................................... .. ...................... s I 45 a 8 40 8 n 35 3 8 2 25 30 20 15 .......................... ?............................................................ 10 6 7 8 9 10 11 LN GDP per capita, PPP Source: GFS, WEO, WDI and ECA Fiscal Database 39. Relatively high social welfare spending, in part, explains L e large p~,..c sector. Compared to Organization for Economic Cooperation and Development (OECD) and Eastern Europe and Central Asian (ECA) countries, both groups which also have high social welfare expenditures, Seychelles i s again, above the norm given i t s per capita income. In fact, average primary spending in Seychelles over 2000-05 was higher than two thirds o f OECD nations. The IMF’s Fiscal Affairs Department recently conducted a similar exercise using a different small island state comparator group and found that in 2007, primary spending in the Seychelles was 20 percentage points o f GDP higher than the average.6 While data limitations prohibited a greater analysis o f small island state comparators, we note that primary expenditures on average over 2000-2005 was more than twice that o f neighboring Mauritius. Table 10 : Seychelles and Comparators Public Spending, average 2000-2005 Percent o f Expenses Government Recurrent Subsidies ComDensation Goods Interest Expenses and of employees and (% of GDP) Transfers Services Barbados 21.1 18.5 43.0 16.5 14.0 Estonia 24.3 43.7 21.3 17.3 0.0 Fiji 26.7 22.5 43.0 16.0 10.0 Maldives 33.3 3 .O 24.8 67.5 5.0 Mauritius 28.2 33.0 38.8 12.8 13.0 Seychelles 36.1 29.8 29.3 21.5 15.3 Trinidad and Tobago 36.6 31.7 36.0 16.0 15.3 Group average 29.5 26.0 33.7 23.9 10.4 Source: WDI 2008 IMF (2008) 20 40. As a share o f government spending, public spending on more discretionary expenditures such as goods and services and capital projects have been squeezed in recent years. This is despite the step devaluations in the foreign exchange rate in 2006 and 2007 which would have led to increased costs o f foreign-procured goods and services. The goods and services and capital spending squeeze i s most evident in the case o f the 2008 expenditure consolidation. Discretionary expenditures have the advantage o f being relatively easy to reduce in the short run, but the disadvantage that spending cuts are less likely to be sustained (for the simple reason that they are also easy to increase again). Furthermore, squeezing capital spending can eventually result in an erosion o f the capital stock and build-up a back-log o f maintenance expenditures that will need to be settled in the future. Figure 5: Expenditure by Economic Classification, Figure 6: Expenditure by Functional Percent of GDP Classification, Percent of Total 2000-2008 60 100% 50 80% 60% 30 40% z $ 20 20% L IO 0% 2000 2001 2002 2003 2004 ZOOS 2006 2007 0 2003 2004 2W5 2006 ux)7 2008cst Other 8 Health Ewnomio affairs 0 Defense, public order and safety Capital Spending Goods and Services OTransfen Edwation 0 ?acid protection 0 Wager and Salaries InterestPayments Gonerd Publio Scrviws Source: IMF Source: MoF Note: Primary ExpendituresOnly 41. At the same time non-discretionary expenditures-such a s wages and salaries and transfers have remained high since, until 2008, more fundamental and structural reforms o f public spending have not been on the government’s agenda. Wages and salaries have remained at around one third o f spending per year. Now, in addition to the debt restructuring, structural reforms are envisaged: o f the civil service (Le. wages and salaries spending), the social welfare system (i.e. transfers to households) and public enterprise reforms (i.e. subsidies and transfers to the rest o f the public sector) which will start to address more fundamental spending pressures and bring these under control. Wage bill spending trends are addressed in detail in Chapter 3. 42. Comparing the trend in spending by function over time we find that social protection spending has been gradually increasing between 2003 and 2007, although this has not led to an improvement in equity. (Figure 6). Social security spending, (an average for the period 2000-05 o f 29.8 percent o f expenditures or 8 percent o f GDP) i s o n a par with European countries, at the top end o f middle-income countries, and higher than a comparator group o f small island developing states averages. Redistributive policies can have a positive impact o n equity. Seychelles has a relatively l o w gini coefficient provisionally estimated to be 0.40 in 2007; however, this has increased since 2000 when the gini was only 0.28 in 2000 and so the recent increase in social security spending has not been associated with an improvement in equity. Spending on socially- provided housing and community amenities has also been increasing in recent years-in 21 response to pledges made by the government to increase the availability o f social housing in the run up to the 2007 election. Table 11: The 2007 Top 6 Parastatals Receiving Central Budget Transfers 2004 2005 2006 2007 Public Utility Corporation 59,715 77,000 Seychelles Marketing Board (now Seychelles Trading Company) 68,000 Seychelles Tourism Marketing Authority 23,399 29,641 32,362 43,477 Seychelles Broadcasting Corporation 3,000 18,448 20,694 25,000 Indian Ocean Tuna 22,500 Seychelles Public Transport Company 17,000 9,635 18,700 15,000 Total Top 6 in 2007 43,399 57,723 131,471 250,977 As Percentage o f Total Outlays 51 54 70 78 Source: MOF 43. Several functional categories o f spending have increased in the 2005-7 period including health and education. The functional breakdown o f central government expenditures (see Table 12) shows that over 20 percent o f non-interest government spending is on general public services, and defense and public order and safety combined make up 14 percent o f spending. There has been a gradual increase in both defense and public order and safety spending since 2000 o f 78 percent and 74 percent to 2007 in nominal terms. Health and education spending has also been o n the rise in the period 2005 to 2007, and as discussed further in Chapters 4 and 5 there are several policy measures that should be considered to improve efficiency in these sectors. Table 12: Functional Composition of Central Government Spending, 2002-7 2002 2003 2004 2005 2006 2007 General public services 24.9 30.9 28.9 31.9 20.9 20.6 Defense 4.2 5.2 6.5 3.8 4.0 6.3 Public order and safety 4.3 6.1 6.1 4.9 4.9 7.8 Economic affairs 8.9 9.6 11.3 5.5 6.5 11.7 Housing and community amenities 2.9 1.4 1.1 0.9 2.1 4.0 Health 7.3 12.2 12.7 9.9 8.2 11.4 Recreation Culture and Religion 1.3 5.3 4.2 3.2 3.7 3.0 Education 11.4 12.4 11.9 9.2 9.1 16.0 Social protection 16.2 16.9 17.2 16.8 31.4 16.3 Total (after statistical discrepancies) 100.0 100.0 100.0 100.0 100.0 100.0 Source: GOS 44. I t i s clear that further investigation o f the public enterprise sector i s critical to a successful fiscal policy. N e t transfers to the parastatal sector are large and erratic, and have required an increase in public spending in recent years. Furthermore the amount o f dividends paid to the government has been decreasing (Figure 7). The state has provided significant subsidies to commercial and non-commercial enterprises, which as recent as 2007 amounted to 8.6 percent o f public expenditure or over 4 percent o f 22 GDP.7 As shown in Table 11, in 2007, the top six parastatals receiving budget transfers accounted for 78 percent o f all transfers to the sector. N o t only i s the work critical from a fiscal policy point o f view, but also in light o f the fact that the parastatals dominate the economy would reiterate the importance o f studying public enterprises as soon as possible, given their impact on the economy, such as their role as providers o f inputs to the private sector (in the case o f the utility and o i l companies), significant employers with higher wages and (until very recently) subsidized suppliers in potentially competitive markets (e.g. Seychelles Public Transport Company and private bus hire). A framework for dealing with the parastatals should be developed as part o f the PER follow-up work. Figure 7: Flows to and From the Central Budget to Parastatals, 2004-07 I 0 Expenditures Dividends 1 200 100 I - 2 .- 0 E -100 8 -200 -300 Source: MOF Public Finances and Economic Growth 45. Can public spending be good for growth? Evidence from the fastest growing countries in the world show that the overall size of government tends to be relatively There have been a number o f studies investigating the relationship between fiscal policy and growth. Robust empirical relationships, however, have been difficult to establish despite the analytical rationale that public spending can influence growth. Annex 1 summarizes the empirical findings on size and composition o f growth. The size o f government can affect growth in two main ways. First, public spending needs to be financed. Tax revenues reduce the returns to private sector activity and can therefore lower new investments if the tax burden on the private sector i s high to finance government activity. Alternatively, government borrowing raises the costs o f capital to the non-government sector, and as interest rates rise, the threshold rate o f return on new investment also rises and reduces new private sector investments (i.e. government spending crowds out private investments). The empirical literature consistently finds private sector investment i s positively correlated to growth. Secondly big governments are more likely be less-flexible to respond pro-cyclically, since the size o f non- discretionary expenditures are tend to be high. Finally, big governments tend to also ’ A recent IMF report (IMF, 2008b) provides an overview o f all public enterprises, and evaluates the fiscal risks that these organizations pose to the state. World Bank (2008a) 23 have larger fiscal deficits which are not good for growth. Empirically, fiscal surplus in proportion to GDP i s positive and statistically significantly correlated with growth. 46. There are mixed results on the composition o f public spending and the effect on growth; but productive spending such as human and physical capital investments are generally found to be positive, through both their direct effect on factor accumulation and indirectly by increasing the marginal productivity o f public and private production. Perhaps the most consistent conclusion from the literature i s the positive correlation between public spending on education and growth and public investment and growth. Additionally, Bloom, Canning and Sevilla (2001) find good health has a positive, sizable, and statistically significant effect on aggregate output. 47. Seychelles i s at the bottom end o f the comparator group in terms o f the mix o f productive and unproductive public spending. Based on the typology put forward in Bleaney Gemmel and Kneller (2001) we compare the available data on “productive” (Le. good for growth) and “unproductive” public spending in Seychelles with a comparator group. Productive spending defined as spending on health, education, environmental protection and transport, and i s more than one third o f public spending in Barbados, Fiji, the Bahamas and Trinidad and Tobago; while in Seychelles it accounts for around 18 percent o f total outlays. Unproductive expenditures, on the other hand, defined as social security and welfare payments as well as spending on recreation, culture, religion, and public debt are significantly higher in Seychelles accounting for more than half o f all spending.l0 This illustrates the challenge in Seychelles o f finding fiscal space to finance productive spending. Undertaking a fiscal consolidation should keep in mind the requirement not only to improve technical efficiency and productivity within sectors-which the chapters on health, education and public administration provide specific recommendations on, but also how to improve allocative efficiency across spending categories to improve the overall contribution o f public spending to growth. 48. Good practice on determining appropriate government spending i s consistent with positive economic growth. Focusing expenditures on core government functions such as the provision o f public goods i s consistent with a positive impact on economic growth. The government should also ensure good spending practices across all sectors: such as determining whether there i s a market failure requiring government intervention, considering options for government and private sector provision and the relative efficiencies and risks involved (e.g. considering whether there i s potential for collusion on the part o f the private sector providers, and government failure on the part o f state actors), understanding the costs and benefits o f government provision and where possible Most recently, World Bank (2008) concludes (i) private capital accumulation h as been one of the main engines of growth in the seven fastest growing developing countries: Korea, Singapore, Malaysia, Thailand, Indonesia, Botswana and Mauritius which have been among the top performers in terms o f GDP per capita growth during the period (1960- 2006); and (ii)the fiscal surplus to GDP ratio i s always positively correlated with GDP growth. loThere i s some debate over what should be counted as productive and what as unproductive spending in the literature. The finding that Seychelles has a low productive to unproductive spending ratio i s not sensitive to some o f the potential changes in definition. For example including housing in productive spending, or general public services in unproductive spending. The definitions used here depart somewhat from the definition in Bleanny et a 1 given the specific nature of these economies. We do not include all general public services in the definition of unproductive spending- only the sub-category of public debt transactions. Also we do not include housing in the category of productive spending, but we do include environmental protection. Defense and public order are in the “other category”. 24 quantifying these and allocating spending to areas with a positive net present value. Where quantification o f benefits i s not possible or problematic, policy makers should analyze cost effectiveness to ensure that the least cost alternative i s chosen. Figure 8: Comparison o f Productive and Unproductive Expenditures Unproductwe Spendmg Other 0 Productwe Spendmg Source: GFS (2008) Notes: Data are for latest year reported in GFS. Maldives (2007), Fiji, Jamaica, Mauritius and Seychelles (2006), Bahamas, Malta, Trinidad and Tobago (2005), Barbados, St Kitts and Nevis and St Vincent and Grenadines (2004). 49. The way in which the government chooses to finance public spending (inflationary financing, taxation and public borrowing) can result in crowding out private investment which in turn has a negative impact on growth. The literature i s more consistent on this finding and most recently, World Bank (2008) found that total fiscal revenue to GDP i s negatively (and statistically significant) correlated with GDP growth. Lessons for a Successful Fiscal Consolidation 50. An attempt to reduce the fiscal deficit during 2003-5 was successful but short-lived as spending increased in 2006 and 2007 in response to political pressures and pending elections. The sizeable 2003 adjustment was achieved through a simultaneous reduction in expenditures (by a significant 11 percent o f GDP) k d an equally impressive but not sustained increase in revenues (by 7 percent o f GDP). The expenditure cut was largely reversed in 2006, and the revenue increases were not sustained beyond 2006, causing public debt to increase exponentially that year. The projected path o f the debt i s estimated to be fiscally unsustainable. 51. Success at sustaining fiscal adjustments (at least until the impacts can be positively seen o n economic growth) and limiting the adverse impact on vulnerable groups, depends on the way in which the deficit i s reduced. W h i l e the appropriate combination o f fiscal adjustment measures depends on country-specific circumstances o f course, the following stylized facts based on international experience describe more 25 successful fiscal adjustments, associated with a positive growth response, which can help Seychelles in charting its own course o f fiscal adjustment." Fiscal adjustments based o n expenditure reductions are more likely to be successful and sustained than those based o n revenue increases.i2 A fiscal consolidation that persists over time has the greatest positive effect o n growth. Expenditure composition matters, shifting f r o m non-productive to productive spending will have the greatest impact o n growth, and shifts from current to capital spending are associated with longer periods o f fiscal consolidation. Expenditure consolidation is more likely t o be sustained when a result o f structural reforms (e.g. c i v i l service and social security reform) rather than cuts in discretionary expenditures. The size o f adjustment matters: large cumulative reductions in the deficit are more likely to be sustained. Figure 9: Overall and Primary Balance, Figure 10: Composition o f Fiscal Adjustment, 1999-2007 1999-2007 I I m IS IO @ 5 lo 5 -IO U -IS Source: IMF 52. The current government can also learn from the previous 2003-5 fiscal adjustment, which was largely drive by short-lived expenditure cuts. This i s to be expected when the initial size o f government i s already large. Looking at the composition o f the adjustment we find that almost 65 percent o f the 2003 expenditure cuts were in capital spending, while the reversals in 2006 were largely a result o f a massive increase in transfers to the rest o f the public sector (Table 13). T o sustain the adjustment o n the expenditure-side the government will need to address the structural reforms required to bring down wages and salaries spending, and limit the claims o n budgetary spending f r o m the parastatals. " See Baldacci, Clements and Gupta (2003), Bladacci, Hillman and Kojo (2003), World Bank (2007) l2Purfield (2003), Afonso, Nickel and Rother (2006) 26 Table 13: Expenditure Adjustment Composition, 2003-2007 2003 2004 2005 2006 2007 Expenditure and net lending -1 1.2 4.6 -1.8 12.5 -5.0 Current expenditure -2.9 2.5 -3.9 9.0 -1.6 Wages and salaries 0.4 1.o -1.3 1.1 -0.6 Goods and services -0.6 2.1 -1.8 -0.9 -0.1 Interest payments due -0.7 0.8 -0.9 0.1 1.7 Foreign interest -0.3 -0.1 0.3 0.2 2.0 Domestic interest -1.8 1.o -1.2 -0.1 -0.2 Transfers -2.1 -1.4 -0.1 8.7 -2.7 Social programs o f central government -0.8 0.3 -0.1 0.3 0.7 Transfers to public sector -2.3 -1.2 0.3 8.1 -2.8 Benefits and Social Security Fund 1.o -0.4 -0.4 0.4 -0.6 Other 0.0 0.0 0.1 -0.1 0.1 Capital expenditure -7.2 2.1 2.1 3.6 -2.2 N e t lending -1.1 0.0 0.0 -0.1 -1.2 Source: IMF 53. Strengthening the public financial management framework and the budgetary process will be necessary to implement the proposed fiscal consolidation since budget credibility i s weak. Budget outcomes have tended to exceed the approved appropriation at the start o f the fiscal year, by on average 22 percent per annum in the period 2005 to 2007. Figure 11 below shows the deviation between spending patterns and the original intentions by the main economic categories o f spending. With the exception o f wages and salaries spending in very recent years, across the board the budget i s exceeded. 54. The poor budgetary performance i s a result o f a variety o f problems with public expenditure management that have been well-covered in assessments carried out in 2008. The first, a Public Financial Management Review (or PEFA assessment) was undertaken in April financed by the European Commission. Second, a review o f the budget process was undertaken by IMF’s Fiscal Affairs Department in June and as part o f the structural reform program, the government has committed themselves to undertaking the reforms recommended in the I M F report (see Box 2). To avoid duplication therefore we summarize key concerns and highlight recommendations which we would propose should be prioritized. Box 2: The Budget Process The starting point o f budget formulation i s an internal assessment-primarily based on the execution o f the current year’s budget-by the Financial Planning and Control Division o f the MoF o f what i s a reasonable financing o f each ministry and authority. These proposed ministerial budgets are sent out together with the budget preparation circulars in late July. Budget submission ftom ministries and authorities are sent to the MoF approximately one month later, Le. in early September. On the basis o f these draft estimates, bilateral meetings between the MoF-the Minister o f Finance andor the Principal Secretary-and the minister, principal secretary and the accounting officer o f the line ministry or authority are held, where the allocations for the upcoming year are negotiated. Following this, the MoF prepares a consolidated budget, which i s evaluated against the Government’s fiscal objective o f a surplus corresponding to 5.0 per cent o f GDP. If necessary, the MoF will make adjustments in the proposed revenue or expenditure policies, after which the budget i s submitted to the President for approval in mid November, and to the Cabinet shortly thereafter. The Government’s draft estimates o f revenue and expenditure .are submitted to the National Assembly in late November or early December, and are adopted by late December. 27 Expenditure for major capital projects13 is budgeted separately from current expenditure. The capital budget i s not presented for approval by the National Assembly, but i s included in the summary of budget estimates in the budget document. The Social Security Fund is organized as an entity fully separate from the budget. I t collects revenue through employer and employee contributions, and bears the responsibility for social security expenditure and for special projects commissioned by the Government. In the event of a surplus, a transfer-the size of which i s determined discretionally by the Government-is made to the budget. Any remaining surplus i s invested by the Fund. The MoF i s not involved in the preparation of the budget for the Social Security Fund. The Pension Fund-also set up as an extra-budgetary fund-makes payments for old-age pensions. It i s financed by transfers from the Social Security Fund. Source: Reproduced from IMF (2008) Figure 11: Budget Credibility: Budget and Outcomes 2005-2008 Wages and Salaries Transfers 800, 1 a00 900 700 - 600. 500 600 / - 400: 400, 300. 200. 100 DO. : 0 2005 2008 , 20007 2008 1 O * 2005 2W6 ~ 20007 2W8 Capital Spending Goods and Services I: 0 2005 , 2006 , 20007 , 2008 , 2005 2008 20007 2008 Source: IMF, MOF Budget Preparation 55. The macroeconomic assumptions underpinning fiscal policy analysis and budget preparation are not prepared systematically nor used in a consistent fashion. There i s no unit with central responsibility for preparing projections o f relevant macroeconomic variables such as GDP-growth, the inflation rates, exchange rate, interest rates, unemployment, etc. As a result: (a) the macroeconomic framework ad budget l3Minor capital outlays, such as the purchase o f ofice hrniture, computers and vehicles, are included in the current budget. 28 framework are not internally inconsistent and (b) various revenue and expenditure items are not prepared on the basis o f consistent macroeconomic assumptions. 56. Budget targets are focused on aggregate fiscal surpluddeficit targets but do not drive strategic expenditure allocations. Disaggregated budget ceilings are prepared by the Ministry o f Finance on the basis o f an increment over the previous year, they take only limited or no account of: (a) spending pressures from non-discretionary items, (b) the implied resource available (c) consistency with the macroeconomic variables and fiscal balance targets and (d) the alignment o f spending with strategic priorities within the overall fiscal framework. Only after individual budget submissions are received i s total expenditure consolidated and compared to the revenue pr~jections.'~ The budget also has a one year time horizon and this further inhibits any forum for policy discussion over medium-term priorities and the use o f the budget as a tool to implement those policies. Furthermore, policies even for the upcoming year are not set by Cabinet in a comprehensive process. 57. The budget i s not focused on measuring performance or results, and no assessment i s done of productivity, efficiency or value-for-money in the allocation of funds. The annual exercise o f allocating resources does not take into account the performance o f various sectors in delivering against agreed upon targets (such as primary school enrollments for example). Neither i s any assessment o f cost-effectiveness o f efficiency taken into consideration to assess whether there i s room for delivering results with less. With a small budget department in the Ministry o f Finance, there are few resources in the M O F to engage more actively in the discussion o f budget estimates and preparation by the line Ministries which could drive the inclusion o f these aspects to the budget process. 58. Separate budget circulars are currently issued for recurrent and capital budgets and, given the annual time horizon for the recurrent budget, there i s no requirement to ensure recurrent cost implications of capital projects can be afforded. The process for new capital project i s initiated by the line Ministry with the submission o f a policy paper to be discussed at Cabinet level. There are no centralized guidelines on what sort o f information should be contained in the project proposal and robust and consistent capital project economic appraisal techniques are not used. As a result the economic benefits o f the project may or may not exceed their costs; and the project may or may not be adequately funded depending on the degree o f uncertainty surrounding cost estimates. If Cabinet approves the project, the details are passed on to the MOF to finance andor co-finance the project. If the budget does not allow the additional capital expenditures frequently a token amount i s allocated toward the project and the time horizon i s stretched to fit the likely availability o f resources. The end result i s o f course significant cost and time overruns, and a back-log o f incomplete capital projects. I4Itis, however, not consolidatedwith the budget o f the Social Security Fund and the Pension Fund, which make up a significant part o f total government expenditure. 29 Budget Execution 59. There i s a reasonable system for monitoring and controlling spending during the course o f the year. The considerable cost overruns witness in the last few years have largely occurred as a result o f new budget outcome approvals made during the course o f the financial year, which up until 2007 were not approved by the Assembly as supplemental budgets. The financial information system i s available in line Ministries too so they can keep track o f their commitments and expenditures. 60. I n order to enhance oversight over parastatals and publicly-owned enterprises, the Ministry o f Finance (MoF) established a Parastatal Monitoring Unit in 2008. The Unit i s currently managed by just one expatriate staff. Discussions with the Unit for the PEIR revealed the lack o f information currently available to government over the operations and financial position o f many o f the enterprises which the government manages or has a stake in. For example, regular financial reports are generally not available. Even though Government intends to phase out subsidies in the course o f the year 2009, it i s clear that the government will continue to be exposed to serious contingent liabilities and fiscal arising from the operations o f i t s enterprises which highlights the need to have a more standardized approach to the governance and more active oversight, particularly o f the financial positions. Recommendations 61. To achieve the fiscal adjustment required we recommend the government tackle structural reforms required to lower spending, particularly in the wage bill. This requires the government look systematically across the public sector to determine the core functions o f government and align jobs with these roles and responsibilities. Recommendations on how to implement such a plan are provided in detail in the next chapter. This requires the policy makers to go beyond the short-term measures that have already been undertaken such as the voluntary departure scheme. 62. We also find that the gradual increase in social security spending i s not associated with improvements in equity outcomes. At the same time the high public spending i s also not associated with the experience o f fast-growing. economies. There i s therefore potential to reduce transfers to households in general, and as highlighted in chapter 1 a need to improve the targeting o f the welfare system since there will be groups who will be adversely impacted by the macroeconomic reforms underway. Detailed recommendations to assist implementation will be forthcoming in the next volume. 63. W h i l e we commend the commitment o f the government to reduce subsidies to the public enterprise sector, we note the need to address more fundamental issues o f the role o f the public sector particularly in commercial activities and urge the rapid implementation o f the privatization program. Furthermore, there i s a need to address the more complex roles o f individual parastatals and separating commercial, regulatory and social functions. In addition to improved monitoring o f the financial performance o f the parastatals this needs to closely feed into the budget department to ensure appropriate contingency planning i s undertaken. 30 64. A functional breakdown o f spending shows a relatively high level o f military and defense spending for a small island economy with only limited historical precedent o f social and political unrest. This should be an area for future consideration by the policy makers but lies beyond the scope o f the World Bank’s technical advice. 65. In other functional areas, the emphasis should be on how to improve value-for- money and maintain or improve public service delivery levels with lower public spending. Chapters 4 and 5 provide detailed recommendations on how to achieve this in the health and education sectors. 66. To sustain the fiscal adjustment, the government should concentrate on the expenditure consolidation required, and ensure that the measures are based on deep- seated reforms, rather than short-term reductions which in the end cannot be sustained since they are driven by external factors which continue to l i e beyond the government’s direct control. 67. In addition to the full set o f recommendations captured in the IMF (2008) report we highlight the following budget process reform priorities: Near-term priorities 0 As a high priority the Ministry o f Finance should develop scenario planning and ensure adequate attention i s paid to the macroeconomic forecasts and consistency with the fiscal framework at the beginning o f the budget process. The 20 10 Budget guidelines should provide sufficient information on the macroeconomic assumptions underpinning the framework to ensure internal consistency and a consistent approach to budget preparation across government ministries and agencies. The budget department should continue their efforts to consolidate the budget and present a comprehensive budget consistent with the definitions in the Government Finance Statistics Manual. 0 A multi-year outlook to the budget should be provided to indicate the direction o f inter- and intra-sectoral policy shifts-such as a decline in subsidies to the parastatals, and a shift from wage bill to goods and services spending within sectors where there i s an agreement to contract out large support functions. 0 Ensure the P E M U i s adequately staffed and financed so that more active financial monitoring o f public enterprises i s done and the risks and contingent liabilities associated with the sector better understood and integrated in the budget process. We strongly support the external audits o f the parastatals to be undertaken as part o f the reform program. Integrate the monitoring function with the unit responsible for public enterprise restructuring and privatization so that scarce skills are concentrated on the comprehensive reform o f the sector. We would recommend the combined Unit have at least four experienced professional staff and a budget that i s sufficient to hire in the industry-specific expertise for financial auditing and monitoring, as well as advice on industry structure and parastatal restructuring prior to privatization. 31 A strategy for dealing with the public enterprises should be drafted and presented to Cabinet, and as necessary the appropriate legislation and regulations put in place to give the Minister o f Finance the authority to deal with public assets and liabilities as per the strategy. As the government adjusts capital spending as part o f the fiscal consolidation, this should give the policy makers space to define new capital project planning processes and investment priorities consistent with Vision 2030. The back-log o f capital projects that are receiving on-going small and s t i l l insufficient funds in each budget year should be reviewed and sunk costs re- examined to determine whether the capital project s t i l l has a positive economic return, should s t i l l be a national priority, and/or can be afforded at this time. Non-priority and projects that no longer have positive economic returns should be halted and capital funds be focused on fewer high priority projects. Priorities for the next 2 years Initiate the budget process with a policy discussion at Cabinet on the macroeconomic environment, short term spending targets and medium-term development objectives to drive policy priorities, spending ceilings and allocations. The development o f a policy paper to prepare the Cabinet and Assembly prior to budget discussions should follow once the government has developed macroeconomic forecasting capacity and has consolidated the budget. 0 Ensure that there i s an adequate contingency budgeted for to account for the volatility o f revenues and expenditures and the medium-term fiscal risks that can impact upon these. Further work should be undertaken on this aspect to determine appropriate planning for both global implications and domestic impacts on revenue and expenditure volatility in the subsequent phase o f the PER. 0 Prepare guidelines for the preparation o f capital investment projects, requiring minimum standards o f cost information, and economic appraisal based on consistent assumptions (e.g. economic rate o f return, CPI projections). Capital projects should primarily be considered at the start o f the fiscal year and should only be approved if sufficient financing (from all sources) i s available for the project to be completed. This will necessitate a multi-year approach to budgeting since capital projects typically require the capital and recurrent costs to be considered over more than one budget cycle. Integrate the budget circulars so that capital and recurrent implications are considered comprehensively. 32 Table 14. Summary o f Public Financial Management Next Steps. Implementation Step Timeframe Budget circular for 20 10 budget contains June 2009 information on macroeconomic forecasts and assumptions for budget preparation purposes. 2010 Budget i s comprehensive and publicly December 2009 presented using GFS guidelines. 2010 Budget i s presented with forward estimates o f December 2009 broad aggregates (at least: revenues, expenditures - recurrent (wages, interest, other) and capital) into the medium term 2010-2015. External Audits for Parastatals conducted On-going throughout 2009 Revise capital project planning procedures. January 2010 Introduce new procedures and multi-year costing o f December 20 10 capital projects. Initiate budget discussion in Parliament with December 20 10 presentation on economic program and achievements, expectations and policy priorities. Undertake work on volatility of revenues and December 20 10 expenditures and update budget preparation process to take into account risks and contingency plans. 33 111. PUBLIC ADMINISTRATION AND PUBLIC SERVICE REFORM Context 68. One of the key elements o f the economic reform program i s to change the role o f the state, which historically has provided a package o f services that i s literally ‘cradle to the grave’-ranging from free pre-primary care, management o f playgrounds to funeral benefits and burial services. The emphasis on public provision extends to the provision o f many services that are often provided by the private sector such as housing, o i l shipment, food imports and distribution. Currently, services are provided either directly by central government or through one o f the 44 parastatals (used here to refer to all regulatory or statutory bodies and publicly-owned enterprise^)^^. This chapter examines in some detail the steps to be taken to take forward the reform o f public administration, and details the cost-savings associated with these reforms. Notwithstanding the strong commitment o f the government and the support o f the business community and civil society to take these forward, we recognize that should the adverse external environment result in a slower economic recovery (beyond the current rebound projected in 2010), this may make the reforms more difficult to introduce in the near term. Table 15: Comparative Wage Bills of 69. Reflecting the size o f the state, total Small States. 2000-2005 public spending and wage bill expenditures as a percentage o f GDP are high, and beyond Percent o f Government what i s generally considered good practice. Expenses Public sector employment levels are similarly very high at about 11 percent o f GDP and have .Barbados 43 .O been falling in recent years (down f i o m 14 Estonia 21.3 percent o f GDP i112003).~~In 2007, total public Fiji 43 .O Maldives 24.8 sector employment accounted for 46 percent o f Mauritius 38.8 total employment (estimated to be at 41 percent Seychelles 29.3 as at mid-2008) including those employed in Trinidad and Tobago 36.0 agencies and commercial and non-commercial Group average 33.7 parastatal organizations, which alone account for Source: WDI 2008 close to 15 percent o f total employment. 70. The public wage bill i s high, partly as a result o f economies o f scale challenges in providing services to a small population residing on multiple islands (which automatically entails a certain level o f administrative overheads). A IsThe total number of parastatals varies according to definition. Here we include companies in which the government has a minority shareholding and the total number i s based on the number being monitored by the newly established Public Enterprise Monitoring Unit. l6Overall benchmarks that are generally applied i s that public sector wages should not exceed 10 percent of GDP and 30 percent of public expenditure if these expenditures are not to crowd out private sector activity through excessive taxation and limit the scope for public investment in infrastructure 34 comparative table reflecting the high wage bill as a percentage o f public spending in other states with similar challenges is shown in Table 15. This illustrates that while Seychelles is on a par with other several countries there are also countries whose wage bill is a lower proportion o f government expenditures. The government is estimated to have spent 8.7 percent o f GDP on wages and salaries in 2008, down from a high o f 14.4 percent o f GDP in 2003.17 In terms ofprimary public expenditures, more than 30 percent o f public expenditure goes towards the payment o f wages and salaries. 71. The chapter i s organized in three main sections to address the following questions: Reforms underway What i s the impact o f the public employment reforms introduced in 2008 and i s this likely to be sufficient to meet wage bill targets in the medium-term fiscal framework? Organizational and structural reforms In what aspects do the functions o f government in the Seychelles deviate from international good practice on core government functions? What are the main areas o f state involvement in the economy where privatization o f contracting out is recommended? H o w could the remaining core government institutions be reorganized to more efficiently provide services? What would be the combined fiscal impact o f these reforms? Wage structure reforms H o w can the public sector wage system be made transparent and efficient so that it creates the right conditions to attract and retain qualified staff and thereby allow the state to effectively deliver i t s core functions? 72. I n short we find that the reforms undertaken in 2008 will produce fiscal savings o f approximately 7.5 percent o f the wage bill by 2010 through the lower number o f posts. However, this i s not sufficient to meet fiscal targets in the medium term or to address the underlying efficiency and overall size o f government that is hampering public sector performance and economic growth. Further measures are encouraged over the course o f the next 2 years principally to privatize non core functions (essentially commercial activities producing private goods that can be self-standing business units) and contract out services which will lead to a reduced wage bill and a compensating increase in the goods and services budget which experience indicates will likely decline over time as long as there is a sound process for contracting services Furthermore, the practice o f the public sector as the employer o f last resort needs to IMF Article I V (2008) 35 change and the intake o f a large number o f employees from the Unemployment Reduction Scheme in 2006 needs to be reversed. Active labor market policies will be considered in the next phase o f the PER to provide further advice on how to transition the excess public workers to the private sector. Finally fundamental reforms o f the wage grid are recommended to ensure that the remaining posts in the public sector can attract and retain qualified staff, and that the lack o f transparency surrounding wage-setting through the use o f multiple allowance schemes be discontinued. Reforms Initiated in 2008 73. The government’s reform program initiated in 2008 has already brought about wage bill savings. The reforms have brought about a reduction o f posts in the public administration through the elimination o f vacant posts, and the introduction o f early retirement and voluntary departure schemes. The subsidy reductions to publicly- owned enterprises have prompted employment cuts in several o f these too. In terms o f wage bill expenditure, the main savings have come through the Manpower Budgeting Exercise (MBE), which was conducted at the end o f the first quarter (in 2008), to reduce the projected wage bill ‘overrun’ o f SR 17.8 million (3 percent o f the 2008 budgeted wage bill). Following the MBE exercise, a projected ‘deficit’ o f only SR 4 million or 0.62 percent o f the wage bill remained.’* It i s proposed that in 2009 the MBE exercise to be replaced with a strategic review o f functions that would generate additional savings in 2009-20 11. 74. Secondly, an early retirement scheme was introduced at the beginning o f the year for civil servants over the age o f 55 years. The scheme has remained open for the remainder o f 2008. Those eligible can apply for the scheme which pays 40 percent o f salary until the official retirement age o f 65 years. Since, the scheme i s s t i l l active, a full impact assessment cannot yet be calculated, as this would require the final l i s t o f retirees and their specific salary information. While the early retirement scheme may be continued into 2009, it i s recommended instead that more targeted packages be devised in i t s place. 75. The next phase o f public employment reforms was introduced in October 2008, which consists o f a freeze in non-essential vacancies (which will remove an estimated 503 posts) and the introduction o f a voluntary departure scheme O S ) . The VDS i s expected to remove approximately 927 staff currently in post.19 The VDS offers to pay a voluntary redundancy payout in two installments the first at the end o f December 2008 and the second in mid 2009. At the time o f writing, it was not possible to assess the net impact o f the VDS (considering the application deadline i s 21 November 2008)’ however, based o n the Department o f Public Administration’s (DPA) preliminary calculations we estimate net savings for 2009 o f SR 36 million20,or 5.8 percent o f the ’*This compares to an execution ratio of 99 percent in 2007 and 110 percent in 2006 The full estimate o f 1274 staff includes staff of Coetivy prawns and the Public Utilities Corporation, which are no included in the public sector wage bill *’Based on the assumption that 2/3 of voluntary departures would be from the low skilled staff while 1/3 would be professionalstaff. In addition, for VDS participants, 3 months of the departure allowance will be paid from the 2009 budget, which reduces relative savings 36 current wage bill and permanent annual savings would be approximately SR 48 million, or 7.9 percent o f the wage bill.” 76. Given the magnitude of the fiscal adjustment required, a s discussed in chapter 1, continued efforts to reduce wage bill spending will be required, particularly if the government i s to achieve its medium term targets o f a wage bill in proportion to GDP down o f 7.2 percent o f GDP by 2012, down from 11.2 percent in 2008. A preliminary estimate o f the cumulative effect o f the MBE exercise, V D S and early retirement schemes is an approximate a permanent net saving o f 10 percent o f the wage bill or 3 percent o f primary public expenditures.22This implies significant further reform measures will be needed for a wage bill reduction o f 4 percent o f GDP or 12 percent o f primary public expenditure. Table 16: Estimates of the Wage Bill Savings Measures, SR millions (nominal) and Percent of the Wage Bill Savings from M B E Savings from Early Savings from V D S /b Retirement la Year SR YOo f wage bill SR YOof wage in SR YOof wage bill bill 2008 13.8 2.3 ... -11.5 -2.0 2009 14.4 1.9. 34.5 4.5 2010 14.4 1.9 46 5.5 Source: World Bank Staff estimates based on 2008 wage bill levels, MOF data. Notes: a/ Whereas complete numbers on early retirement are not yet known, the number o f requests received up until mid October i s approximately 250, and may reach 400 by the end of the year. More than 80 percent o f these are low skilled workers b/ 44 staff in the Department o f Community Developmenthad been double counted in 2009 and i s corrected for here. Towards a M o r e Strategic Approach: Organizationaland Structural Reforms 77. Whereas ongoing reforms measures are both necessary and appropriate, and represent ‘quick win’ measures, it i s important that future reform steps be based on a more strategic approach to public sector reform. This is required both to achieve the significantly higher wage bill savings required to meet the fiscal and macroeconomic objectives as well as to ensure that the quality o f governance and service delivery does not suffer. 78. There are two risks inherent in the current staff reduction approach to the reforms being implemented. First, cutting vacant posts poses the risk o f eliminating posts that are difficult to fill, but nevertheless core to service delivery. Second, voluntary departure schemes, based on experience in other countries and institutions, tend to be taken up by those who would most easily find employment elsewhere or have the entrepreneurial spirit to set up a business, thus reducing overall capacity in the administration and service delivery institutions. 23 Similarly, across the board reductions 2’ The SR amount saved i s likely to be higher as wages will be increased to offset the impact of currency devaluation, though the relative amount i s likely to remain the same 22 This number does not yet take into account additional pension payments. However, it also does not account for wage increases 23 World Bank (1999). 37 in subsidies and other government support measures can have an adverse effect o n public service quality, if not properly designed and targeted. 79. Therefore, whereas the early retirement and VDS should be one-off exercises, it would be desirable to transform the MBE exercise, which was an ad hoc process in 2008, into a more strategic review of functions and related staffing numbers. This would aim to re-allocate functions to the private and voluntary sectors, seek organizational efficiency gains as well as reducing civil service staff numbers accordingly. A strategic process o f reflection o n the core role o f the state in the Seychellois economy and society, and the introduction o f a program o f targeted reforms should replace the ‘emergency measures’ o f 2008. Such a process would not be unlike processes undertaken recently in Central and Eastern European transition states, (such as the Baltic States and Slovakia), which all faced similar fiscal challenges to the Seychelles. 240ther examples include the strategic reflection o n the role o f the state carried out in Cape Verde in 2005-06, which led to a fundamental re-orientation o f the role o f the state, paired with the implementation o f an alternative vision for the development o f the country, towards a technology-based and investment friendly economy and an emphasis o n the development o f tourism-related i n f r a s t r ~ c t u r e . ~ ~ Defining the Core Functions of Government 80. The re-definition of the role o f government i s a complex undertaking as, contrary to what i s often assumed, there i s no clear ‘menu’ o r recipe for defining the ‘core’. Whereas there is largely no dispute on sovereign functions such as defense, police, finance, the environment and other generally recognized public goods, in which the state tends to be the exclusive guarantor and provider o f services. However; the extent to which the state engages in service delivery in other areas is subject to much academic and political debate. Even in traditional public service areas such as health and education there is more consensus o n the need for the state to guarantee access to services, but not necessarily on the degree to which the state itself should provide those services. Traditionally, discussions o n the role o f the state use certain standard comparators, e.g. OECD practices, which define a minimum threshold o f service delivery, or the EU system which also sets certain minimum requirements for state involvement, through regulation or service provision. Other methods o f assessing minimum levels o f service provision include cross-country comparisons focusing o n countries with a similar size or level o f economic development and orientation. However, in the end the limits o f state provision depend both o n the strategic orientation o f the government, based o n citizen preferences, and fiscal capacity. In this context it is important for the GOS to rapidly translate i t s strategic vision (2017) into a reform program for the public sector, since many o f the principles outlined in the vision statement are clearly at odds with the s t i l l over-extended system o f state-provided public services, which the country can ill-afford. 24 See Verheijen (2007). A review of civil service and administrative reform processes in the eight new CEE member states of the EU highlights the performance of Latvia and Lithuania in particular as states that achieved a radical and successful transformation of public sector management systems, in contrast to the performance of other states in the same region that did not engage in deep public sector reforms. 25 World Bank (2006), Cape Verde, Re-Defining the Role o f the State 38 81. I t i s important to ensure that the public sector reforms take into consideration the quality of development outcomes, including health and education outcomes; and ensure that these outcomes do not decline. Overall spending decisions related to these outcomes should be based on improving efficiency and productivity improvements rather than across the board cuts. As noted in the following chapters, spending on health and education, which together constitute the majority o f primary public expenditure, does not exceed patterns observed in states o f similar size or level o f economic development. Education expenditures are approximately 5 percent o f GDP and 8 percent o f public expenditures, while health expenditures amount to 4 percent o f GDP and 9 percent o f total public expenditure. (Spending on health and education as a proportion o f primary expenditures i s 22.3 percent which i s also in line with comparator states). 82. The evaluation o f expenditure composition in health and education sectors (see Chapters 4 and 5) draws very different conclusions with respect to the wage bill. In the area o f education, considering the relatively poor quality o f learning outcomes, it i s recommended that teaching staff should be retained at current levels, though significant cost savings could be generated by rationalization o f support functions and office staff, some o f which could be re-invested in developing teaching capacity in areas where education outcomes are currently weak (mathematics, science etc.). In the health sector on the other hand, the share o f wages in total government spending on health care i s 50 percent. This i s considered excessive considering (i) there i s no tertiary care sector and (ii) utilization rates; (inpatient and out-patient visits per doctor) are very l o w when compared with even Western European countries. The proposed strategy here i s to re-invest some o f the saved wage bill resources in upgrading primary care capacity. Table 17: Wage Bill and Primary Expenditures by Function, 2007 Proportion of Wage Bill Proportion of Total Spending Primary Expenditure Defense 9.6 6.3 Police 8.2 6.1 Community Development 6.6 ... Youth, Sports, Art and Culture 4.7 6.1 Economic Affairs 9.6 11.7 Environment and Natural Resources 5.6 ... Health 17.4 11.4 Education 24.4 16.0 Source: Bank staff estimates based on MOF data 83. Priority policy areas for lowering wage bill spending include economic management, community development and youth sports and culture police and defense. Table 17 shows each policy area that accounted for more than 5 percent o f total wage bill expenditure or more than 5 percent o f total primary expenditure in 2007. In terms o f the wage bill, these categories combined accounted for over 85 percent. Therefore, any further wage bill savings would have to come mainly from these sectors and a pragmatic approach to public sector reform would need to consider these sectors as priority areas for reform. 39 Reviewing Sector Functions: An Initial Assessment 84. One o f the main methods for reviewing government functions and matching organizational structures to strategic priorities i s a functional review (see Annex 3 for types o f functional review). Functional reviews are essential to organizational reform, especially in public sector organizations. They typically distinguish between (a) strategic and policy-making functions, (b) regulatory and licensing functions; (c) supervisory functions, (d) inspection functions, and (e) service delivery functions. Each type o f function brings with it specific requirements for accountability and reporting relations, legal status and management systems. The main purpose o f the initial review undertaken here i s to examine core government functions and ways to enhance efficiency in public sector operations. This section provides: (a) an overall assessment o f inter-institutional relations between core government institutions, parastatals and commercial and non- commercial enterprises; (b) a review o f arrangements for the systemic functions o f personnel and public financial management; (c) a basic review o f common support functions, (over 30 percent o f all public sector staff work in these roles which i s highly unusual); and (d) a basic review o f the functions and organizational structures of: the Ministries o f Community Development; Youth, Sports, A r t s and Culture; Employment; Finance; as well as o f the structure of: the Departments o f Environment; Employment; Public Administration; Police and Defense; and a selected number o f subordinate bodies.26 27 Core Government and the Public Sector 85. The administrative structure o f the Seychelles public sector i s highly complex. I t includes a large number o f parastatals (including here, statutory and regulatory bodies, commercial and non-commercial publicly-owned enterprises). This section reviews parastatals and state owned enterprises from an accountability and governance perspective, while fiscal risk issues are addressed in Chapter 1 and trends in transfers to the public sector in Chapter 2. 86. A review o f the parastatal sector reveals the lack o f a clear pattern o f accountability regimes. Whereas all bodies in which there i s a significant level o f government participation should have government representation on their Boards o f Directors, in reality government i s often not represented. Where government i s represented, this tends to be by the Principal Secretary o f the Ministry o f Finance, who does not (or should not) have the necessary time to fulfill this finction in an appropriate manner. Occasionally, representation i s by the Central Bank, which as an independent institution should not normally fulfill this role. 87. The fiscal risks inherent in governance arrangements concern mostly the non-commercial and commercial publicly-owned enterprises. Most other parastatals are agency type institutions, which tend to function under the strict budgetary control o f 26 Bank reviews usually do not address police and defense issues, but in view o f the specific context it was agreed to conduct a limited organizational review o f these institutions 27 Other public administration bodies have been reviewed in parallel by the DPA. 40 their parent ministry, and are required to fully apply public service employment rules.28 Whereas agency-type parastatals have greater flexibility in budget management than the ministries and core public sector organizations, this does not apply to setting their establishment numbers or to wage setting, in which they are obliged to seek permission o f the D P A as well as their parent ministry. In relation to these institutions, it might be desirable to design a more arms length accountability relationship, as they are engaged in sensitive functions such as regulation and licensing. 88. The adoption o f a standardized approach to governance and accountability relations would significantly reduce government exposure to risks and contingent liabilities. Each agency or enterprise i s established based on i t s own Act. Reporting requirements differ according to the Act causing a potential lack o f transparency in their operations. Furthermore, government currently lacks the manpower and capacity to effectively monitor the operations o f these institutions, which until recently received subsidies in the order o f close to 4 percent o f GDP. Although the newly established Public Enterprise Monitoring unit goes some way to addressing this concern, it i s currently insufficiently staffed and lacks the legal framework to improve financial monitoring, governance and oversight. 89. Standardizing the accountability regime will facilitate a more systematic approach to reforming the sector. Four different types o f oversight relations should be developed based on the type o f institution and relationship with government. This would mean one for agency type institutions (regulatory and inspection functions), one for non- commercial state enterprises, one for commercial state enterprises with over 50 percent government ownership and one for commercial state enterprises where government has a minority shareholding, until such time as the government shares in these enterprises are divested. This would allow a more systematic approach to introducing public sector reforms, such as: privatization, bringing in firms under management contracts, splitting regulatory and commercial functions, and sale o f minority interests. Furthermore, the current lack o f clarity in accountability and oversight regimes would likely detract serious private sector interest in many o f the sectors. 90. The accountability regime would need to define the extent to which government policies on wages and hiring and firing would apply. Whereas the Seychelles has a public service employment regime that i s very close to the private sector employment regime, there are a number o f specific regulations that apply only to the public sector, like the Public Service Orders. Whereas these rules do not fully apply to non-commercial publicly-owned enterprises and generally do not apply to commercial publicly-owned enterprises, the extent to which they apply again depends on the specific Act o f establishment o f each enterprise. This includes the extent to which management has to seek approval from the D P A on the level o f additional supplements that can be paid to staff. In the context o f the move to put all commercial and non commercial publicly-owned enterprises on a cost-recovery mechanism, it i s desirable that all public 28 The main exception i s the Health Service Authority, which has a large number o f senior management positions to which wage limits do not apply. 41 service rules (including wage setting), are abrogated for these institutions and that accountability for budget management practices i s exercised through the Boards only. 91. In the short term government should: (a) significantly strengthen governance arrangements, including consistent government participation on Boards; (b) categorize and standardize establishment acts, at least as far as accountability and reporting relations are concerned and; (c) define a coherent policy on personnel and wage management, which should include the abrogation o f public sector rules for all enterprises. With time, the introduction o f more flexibility on wage setting and personnel management practices in agencies could also be considered, though in the current context o f fiscal adjustment this i s not yet recommended. An exception may be made for Chief Executive Officers o f such organizations. Systemic Functions o f Personnel and Financial Management 92. There i s a large discrepancy between Human Resources Management (HRM), which i s relatively well staffed, and the budget support function at the Ministry o f Finance, which appears to be staffed well below what i s required.2g In terms o f HRM, the D P A provides central support and guidance on job evaluation and grading, on the negotiation o f performance contracts (Public Service Commission contracts), it reviews and approves schemes o f service and controls wage setting for individual staff, except for the police and the defense department, and for agencies with delegated authority. Concerning the management o f the budget function, central support for the budgeting function i s not only poorly staffed, with only some 8 staff in the two u n i t s engaged in budget preparation, but also diluted by the separation o f the management o f the capital and recurrent 93. There i s a relatively good degree o f consistency in the way HRM and budget management functions are organized. They are usually placed under a Director o f Corporate Services who reports directly to the Principal Secretary o f the institution. The Health Services Authority has a special status, as it executes i t s own payroll, and therefore has important additional discretion on administering the allocation o f allowances and supplements. Whereas the task o f the DPA i s complicated by the complex and convoluted process o f wage setting, DPA i s seen as providing adequate support. However, HR units in ministries tend to be weak, which enhances the role o f the DPA in providing guidance and support, yet takes away some o f i t s capacity to engage in strategic planning o f HR policies or, indeed, in the management o f HR reform p~ocesses.~~ 94. There are two key issues that negatively affect the performance o f cross- cutting functional units: (a) shortage o f skilled staff and (b) overly complex 29 The Department of Public Administration has a staff number of approximately 80, including support staff, while it has 100 positions. See IMF (2008) with respect to the Budget Department’s 30 This, for instance, i s one of the reasons why the MBE exercise has to be conducted only three months into the budget year, salary increases and decisions on supplements had not been adequately reflected in line ministry budgets 3 1 The fact that the Management Audit department, responsible for the MBE exercise and the current functional review work has just one staff i s an illustration of the kind of problems experienced. 42 processes. The limited professional staff able to conduct HR and budget management functions tends to be based at the central ministries responsible for these functions, the D P A (which i s part o f the Office o f the Vice President), and the MOF. Ministry level units are often considered to be little more than mailbox functions. The main solution to this problem lies both in considering re-grading these positions, as well as in the development o f targeted training programs. The Seychelles Institute o f Management i s intending to offer a targeted training program on HRM in the public sector, but this i s s t i l l under development. This would be the best possible solution to the capacity constraints. Overly complex processes, in particular on public sector wage management and, to a lesser degree, on budget management are another constraint. The public sector wage system will be discussed in the next section, it i s comprised o f an unwieldy system o f allowances, some o f which are general, some based on the “scheme o f service” and others periodic. Each o f these areas requires policy guidance and control. A significant simplification o f the wage system would not only bring benefits in terms o f enhanced transparency and predictability o f the wage system, but also allow for the D P A to shift i t s attention fkom control and guidance to strategic direction and capacity development. 95. Budget management itself i s another example o f a process that should be simplified. The separation o f recurrent and investment budget planning dilutes the already limited capacity for budget planning in M O F and reduces the amount o f guidance and support that can be provided by the Ministry. A reform o f budget preparation and execution procedures, with an integrated budget preparation process, would significantly enhance the effectiveness o f the central support function o f the ministry. 96. Addressing the above concerns would require the government to initiate a three-pronged rationalization process. First, strengthening central functions. This implies staffing-up the policy planning department in the M O F to an appropriate level, as well as investment in the training o f staff o f finance and HR u n i t s in the line ministries. Second, and in parallel, design a program o f process reforms. In the area o f budget management this would imply integrating capital and current expenditure budgeting processes and building up clear manuals and guidelines for budget preparation for line ministries, including in capital budgeting, as well as on the job coaching o f budget units in line ministries. In HRM this would imply a drastic simplification o f the public sector wage system, along the lines proposed in the next section, as well as a rationalization o f the scheme o f service and performance contracting system. A third phase o f the proposed plan o f action would require a re-alignment o f the organization o f the budget department, which would gradually need to build up strategic, and eventually results based budgeting capacity, and o f the DPA, which would need to re-allocate internal resources to engage in strategic human resource planning and, eventually, deepening the current approach to performance contracting. Streamlining Support Functions 97. The Seychelles administration i s heavily skewed towards the provision o f support services: low-skilled workers make up around one third o f total public 43 ~ ~ reflects the implicit strategy o f the government to be the service e m p l ~ y m e n t .This ‘employer o f last resort’, thus absorbing large numbers o f staff into hnctions and positions that, based on international practice, should not be part o f the core public service. W h i l e the debate on what i s “core” in terms o f the public service does not have a single answer, there i s consensus that basic support functions should where possible be contracted out, either through individual contracts that would generally be based on hours or through contracting with private sector providers where a competitive service sector i s in place. 98. T h e r e a r e three types o f support functions that rely on low-skilled workers, requiring individual strategies to b e designed: classic support function; office clerks and employees formerly f r o m the employment scheme. The ‘classic’ support functions are those that administrations tend to contract out, such as cleaning, cooking, security, and laundry. The number o f staff currently holding such positions in the administration i s estimated to be approximately 70 percent o f the total number o f staff in 34the bottom wage bracket. This estimate i s based on a review o f the payroll and HR databases, the PEIR analysis on health and education (see Chapters 4 and 5) and discussions held with counterparts. Parastatals employ similar or in some cases higher proportion o f l o w skilled workers. 99. W h i l e the small scale o f the Seychelles economy and relatively under- developed role o f the private sector poses challenges to any attempts to contract out services, this does not m e a n that the option should not b e further d e ~ e l o p e d . ~ ~ Recent experience with contracting out support functions has not always been positive. For instance, the contracting out o f the laundry service in the Ministry o f Health i s considered a success by the Ministry, (although it has not undertaken a detailed cost comparison analysis). However, contracting out o f kitchen services in Victoria’s main hospital, i s estimated to have increased costs by almost 50 percent in the last two years36 Attempts to contract out security services, for instance by the Ministry o f National Development, failed as no competitive bids were received. However, there are three over-arching reasons why contracting out services (to individuals or companies) should be an important strand o f the reform program. First, contracting out i s likely, over time, to lead to cost savings. In this regard it i s important to pair the implementation o f a contracting strategy with measures that facilitate the establishment o f small and medium-sized 32 According to DPA data in 2008. 33 Contracting services such as security cleaning, cooking and landscaping to individual was for instance successfully completed in Tajikistan in 2006-2007, and took 20 percent o f all previous public service positions off payroll. Even though the country does not have a well developed service sector, estimates show that even through individual contracting important saving levels were achieved. 34 T h i s might not apply across the board as the education sector has support services that are relatively easy to contract out. 35 The business environment i s currently not conducive to setting up small business and large foreign investors (resorts and hotels) drive up contract cost, finally the service sector i s not well developed 36 Based on discussions with the Principal Secretary Health, instead o f asking a contractor to provide kitchen services while using the existing facilities in the hospital, a catering solution was opted for, which entails significantly higher cost. The ministry i s exploring ways of getting out of the contract and to re-contract the service to a firm that would provide kitchen services using the hospital’s facilities 44 enterprises, which would be likely to bid for contracts. Initial estimates for contracting out education services, as presented in the education chapter, show that savings o f up to 30 percent o f current costs could be possible. 0 Second, even if cost savings may be limited initially, contracting provides the government with flexibility to respond to fiscal constraints, as services contracted as part o f the goods and services budget can be more easily revised downwards than personnel. 0 Third, without a rationalization o f support staff functions it will be impossible to implement wage system reform measures, due to the over-extension o f the public service system. 100. Taking into consideration the economic context and the mixed experience in implementing contracting reforms thus far, the following strategy for contracting out classic support functions i s proposed. First, to take a government wide decision on contracting out certain categories o f services, including at least kitchen services, cleaning services and warden services. Security services for l o w risk objects and buildings could also be included in this category. Secretarial support services, in particular in core ministries, should remain within the public service, but more effective ways o f providing these services could be sought. Second, define common parameters for contracting (e.g. for kitchen services, in house facilities should be used, cleaning services should generally be contracted to firms, in view on security concerns, a specific study on how security services might be contracted out would need to be conducted). Third, test contracting mechanisms for a representative set o f services in each area. Fourth, launch a parallel communication campaign o n the type o f services government i s likely to contract, and provide fast track business registration services to facilitate the establishment o f new enterprises in these areas. Fifth, where possible, use pooled contracting arrangements, that are likely to make contracts more attractive for bidders. It i s important to phase-in contracting measures in an appropriate time frame, e.g. over a 1 year period, to avoid the kind o f negative experiences accumulated thus far. 101. A second set o f low-skilled workers comprises mainly office clerks, charged with filing copying, and typing. These are different fiom the more-high end office management skills that the government would need to retain, but are classified often at a similar level. In discussions with different ministry representatives it was revealed that there i s significant scope for reducing staff levels among this group through rationalization and a change in the current ‘presumptions’ that each member o f senior staff has access to at least one or more clerks that can collect and re-file documents, type up reports and do copying and other tasks. In reality, most office clerks are not fully occupied and even where they are, much o f the work they do i s l o w value-added. 102. A third set o f low-skilled workers constitutes a very specific case: these are staff recruited from the former social employment schemes (e.g. the beautification andor Unemployment Reduction Scheme). It i s estimated that in the Department o f Community Development alone there are some 550 staff in this category, and another 203 staff work in the remainder o f the administration. I t i s estimated that this category makes up the remaining 30 percent o f l o w skilled workers. In discussions with the 45 Department o f Community Development it was emphasized that o f the 984 district level positions currently existing in the Ministry (178 o f which are vacant), approximately 730 are low skilled posts (550 occupied) and that district offices could be run with as little as 120-125 staff. Productivity o f these workers i s said to be negligible, and they therefore represent a clear burden on the budget. 103. I t i s recommended that government at the highest level take a strategic decision to terminate their employment relationship. At the same time government should review options to assist all those facing redundancies in seeking alternative employment (and other active-labor market policies), in light o f the extent o f expatriate labor relied upon in the country. Active labor market policies and social security issues will be considered in more detail in phase two o f the PEIR. N e t savings to the government could amount to over SR 28 million per annum, or 4.7 percent o f the public sector wage bill, which would give the government options to re-invest part o f these resources into active-labor market programs.37 Review o f Selected Institutions 104. Based on discussions with the authorities, and an initial review o f public expenditure composition, more in-depth reviews o f the following institutions was conducted: Department o f Community Development; Department o f Youth, Sports, Culture and the A r t s ; Ministry o f National Development; Ministry o f Finance; Department o f the Environment; Ministry o f Employment and the National Human Resource Development Council; Department o f Public Administration; Police and Defense departments under the President’s Office. The details o f the individual organizational reviews can be found in the Annexes. 105. T o summarize, these in-depth reviews together with the education and healthcare chapters, provide evidence that there i s significant scope for rationalization measures in the administration. A strategic approach to restructuring and rightsizing should involve: Changing the role o f the state from provider to facilitator. This i s the most complex area o f the process, and should include e.g. provision o f social housing. Design and implement a program o f gradual transfer o f functions to other actors (communities (e.g. youth programs), not-for profit institutions (e.g. homes for the elderly) and, private sector (e.g. burial services). Design and implement a program o f contracting-out support services that would apply across the board where feasible. Suggest phasing this with a focus on catering, landscaping and cleaning services in the first half o f 2009 and more complex functions (security) later. Strengthen core functions such as budget management and HRM functions, where needed by adding or training additional staff. 37 Not including potential retirement cost where applicable. 46 0 Build capacity to manage the public sector reform programs. 0 Implementation o f ‘quick win’ solutions such as departmental mergers and phasing out staff that do not fulfill core functions. 0 Phase out the superfluous staff at the District Offices. Estimated Fiscal Impact o f Structural Reforms 106. An initial and conservative estimate o f the potential employment impact i s up to 2,939 staff which i s close to 28 percent o f current total staff. (See Annex 5). This estimate does not take into account all institutions, but does comprise all main mini~tries.~~ Most o f these staff are low skilled and earn below the average monthly public service salary o f SR 4,292. Potential permanent annual savings would amount to SR 107 million. Whereas some duplication with VDS and early retirement numbers i s likely, additional savings will also come from reviews o f other organizations that are being conducted by the DPA, and real wage bill savings are therefore likely to amount to at least SR 150 million per annum or 26 percent o f the wage bill. However, some o f these savings would need to be re-invested in the contracting o f goods and services and spending in other areas might also increase-such as social security and/or active labor market programs-which would have to be worked out in the course o f 2009. 107. There are some important conditions that would need to be respected if the reform program i s to be successful. First, a communication strategy to engage with communities o n their role and responsibility in partnering with government on the delivery o f programs i s essential. This may pose problems as it requires a change in mentality, which, based on experience in CEE transition states, may take several years to come about. However, given the small size o f the Seychelles and the closely interwoven nature o f society, this may be less problematic in this case. Second, the government needs to move away from ad hoc initiatives and instead plan carefully reform measures. Many o f the measures outlined are complex (e.g. housing sector, but even straightforward areas such as burial services will need to be thought through carefully) and will require a serious effort to be designed. External technical assistance would certainly be needed. Third, accompanying policy frameworks in areas such as insurance policy, small and medium-sized enterprise development and others will need to be designed if any contracting or transfer effort i s to be successful. 108. Finally, care would need to be taken that reasons for redundancies are clearly formulated and argued. The independent Public Service Appeal Board, which i s an impartial body with a strong track record in handling public sector employment disputes, i s unlikely to accept collective dismissals, unless in the context o f agreed programs (such as VDS and early retirement). Individual dismissal notices would therefore be formulated in a way as to not leave these open to contestation. An alternative approach 38 Numbers on the police and defense forces cannot at this point be established. 47 would be using other instruments (voluntary redundancy and early retirement) also in 2009, which would avoid the risk o f contestation, but the former o f course brings with it significant cost. Public Sector Wage Structure Reform 109. This section reviews the public sector wage system and examines what measures could be taken to bring it into line with international best practice. Reforming the wage system as such i s unlikely to lead to cost savings. Experience from other states shows that if anything it leads to an increase in wage costs as: (a) the re- alignment o f wages usually implies that some staff will need to be ‘bumped up’ to fit into new categories, while those that are above grade are grandfathered, and (b) the integration o f bonuses and allowances into base pay, which i s an essential element o f wage system reform, usually brings with it additional costs as there i s an alignment o f staff along the highest Nevertheless, wage system reform i s essential if the government i s to ensure that the core o f state functions that remain after the adjustment program i s completed, are executed with high quality and that the skills needed for the fulfillment o f these functions are retained. Box 3: International Best Practice in Wage System Reform Based on the experience o f OECD countries, best practice in wage system reform can be summarized as follows: Base pay i s the main element o f total pay, typically forming at least 80 percent (and usually more) o f total Pay. Bonuses are not common-it i s generally considered difficult to devise bonus schemes in the civil service environment that are objective and that motivate staff. Where bonuses exist they are usually on an annual basis, taking account o f performance over the full previous year. Benefits in kind (Le., housing, cars, mobile phones) are not common-benefit schemes are regarded as expensive to administer and potentially divisive, i.e., some people get greater value from the benefits than others for whom the benefits may not be relevant. Total pay levels in the civil service are typically 80 percent to 90 percent o f private sector pay levels. This recognizes that civil servants usually have greater job security than in the private sector, and civil service pension schemes are generally comparable with those in the private sector. Pay structures are usually based on a series o f grades that reflect relative job levels. The grade o f a job i s usually decided by means o f a job evaluation system that allocates jobs to grades on the basis o f an assessment o f relative job outputs, accountability, knowledge and skills required, management responsibility, the extent and nature o f contacts inside and outside the department, etc. For each grade there i s usually a pay range that allows staff at each level to receive an annual salary increase each year (up to the maximum o f the pay range) to reflect increasing ability and performance at that job level. There i s a significant differential between pay levels at successive grades, normally at least 12 percent (and often more). This provides the financial motivation for staff to accept a higher level o f responsibility. There i s a common grade and pay structure, at least across the public service, which reflects the critical HR principle o f “equal pay for equal work.” Having a common structure and common pay levels facilitates the movement o f people between institutions, opens up career and promotion prospects on at least a sector-wide basis, and helps to foster a corporate identity.40 39 Some good recent examples o f wage system reforms include Serbia and Latvia. Among island states Cape Verde has engaged in an important wage system reform exercise, but this has not yet been completed. 40 Higher pay levels are sometimes provided for specific jobs that are at a premium in the market, Le., high level I T or financial skills. (Such pay levels are regarded as exceptional, require specific justification, and are subject to regular review.) Also, agencies that are created as separate entities generally have more freedom to decide their own pay levels but in practice tend to be fairly consistent with general pay levels. 48 Main Features o f the Current Wage System 110. The main features o f the current system are:41 A highly compressed base pay system, which is less so when allowances are taken into consideration. Base pay compression ratios are approximately 1:2.7, while a minimum o f 1:6 i s considered essential to retain staff. However, when all supplements and allowances are taken into account, compression ratios actually go up to 1:7. A large number o f allowances and supplements. These include: (a) ‘schemes o f service’ which provide specific allowances for specific professional groups andor institutions, (b) performance contracts, (c) ‘inducement supplements’ for hard to recruit posts, and (d) periodic allowances, such as overtime payments, reimbursement o f personal telephone costs etc.. Staff can receive up to 14 different types o f supplements and allowances. A partially integrated system, covering most o f the public service, except for the police and defense sector. This is not uncommon. However, in terms o f payroll management the health sector i s administered separately from the rest o f the public service, which poses certain risks as controls o n the proper application o f rules are limited. A wage grid that has a relatively small number o f grades and steps compared to the range o f positions it i s expected to cover, e.g. from cleaners to principal secretaries. 111. Several reform steps have been taken over the last two years with the aim to make the wage system more performance based, including the use of performance contracts for certain categories o f staff. The posts to which performance contracts apply are defined through a j o b evaluation system which was designed with the assistance o f the Commonwealth Secretariat. However, so far the j o b evaluation system has been used only for this specific purpose. Real Wages, Allowances and Supplements 112. The current salary structure includes 5 non-graduate grades and 4 senior (graduate) grades, with 6 salary points (steps) in each, except for the two lowest grades that have 4 and 5 points respectively. The structure is heavily skewed towards the l o w skilled and support office staff that make up 35 percent o f the public service. In addition it establishes salary levels rather than distance percentage points, which makes the system inflexible and subject to subjective wage setting. The salary structure sets base wages only, between SR2,200 and SR6,400 per month.42 4’ This section i s based on Kwami, E. (2006), Public Sector Salary Review, Summary Final Report, Commonwealth Secretariat. 42 A few staff in the Youth department are listed as earning SR 1,864 per month, which i s lower than the minimum wage in the public service. 49 113. Base pay can be as low as one third o f real wages. The basic features o f the system o f allowances and supplements are discussed at length in Kwami (2006); we draw upon this work to highlight a few key features o f the system here. The first important feature o f the current system i s the discrepancy between base pay and real pay, and the asymmetric nature o f this discrepancy. Base wages bear no relation to real take-home wages, which range from about SR 2,400 (low skilled worker) to SR 18,000 (e.g. a Principal Secretary) for most o f the public service, and even higher for a few outlying agencies. The average real wage in the public service as o f August 2008 was SR 4,292. 114. The wage system has a multitude o f schemes o f service and periodic allowances. The first in particular i s problematic. Whereas schemes o f service had been designed to determine professional requirements for specialized positions and the related rate o f career advancement, they have become an instrument to address the shortcomings o f the current wage system without addressing the root cause. Schemes o f services, which have mushroomed in recent years, basically provide additional salary supplements based on qualification levels o f staff. However, in a well-designed wage system, qualification levels should be reflected in the job evaluation process not assessed separately. Therefore, schemes o f service as currently used present a clear break with best practice. In addition, some schemes o f service, in particular those for health sector staff, include a number o f factors, which are subsequently lumped together as one category in the payroll system. N o t only i s this inappropriate from the point o f view o f good practice in wage policy, it i s non-transparent and open to potential abuse, particularly since the health payroll i s administered separately from the general payroll. For particular categories o f employee or professional it might be necessary to review the salary system and provide a separate wage grid. This might apply for example to medical professionals and teachers. However, a decision on this issue would depend on the final design o f a new wage grid. 115. Periodic allowances are a common feature o f many .public service systems, though the global trend i s to move towards consolidating such allowances into base pay. The reasons for this are that they are; (i)costly to administer and; (ii) open to abuse and mismanagement. Periodic allowances in the Seychelles include the ‘classical’ categories such as overtime, transport, telephone cost, on-call etc. 116. Public Service Commission Supplements are large and beyond what i s established good practice. Whereas the mechanism o f performance contracts for defined positions i s in line with modern principles o f public management, and the method o f identifying the posts i s transparent (i.e. based on a job evaluation process) the size o f such supplements goes well beyond what i s good practice (see the principles listed above). Similarly, the ‘inducement allowances’ for posts for which skills are in short supply are a feature o f many pay and grading systems, but also in this case appear to be applied to many more positions than would normally be the case, i.e. they should be the exception and not the rule. 117. Top salaries are significantly higher in agency-type institutions (such as Boards and Authorities). For example, in the Revenue Commissioners, the top salary i s 50 SR 4 1,000 per month; and in the Health Service Authority (HSA), three senior staff earn monthly wages o f between S R 31,000 and 32,000 compared to the Principal Secretary wages o f around S R 18,000.43 (While the inclusion o f expatriate employees on payroll i s an anomaly-these should be hired under service contracts since they are temporary services contracted in and not public service permanent staff-it i s striking that the HSA has top salary levels for local employees 70 percent higher than the average for a Principal Secretary.44 118. There i s a trend to public sector wage increases by establishing ‘Authorities’ to take on elements o f state functions. While moving certain regulatory and service delivery functions to agency-type institutions make sense from the point o f view o f effective public management, at the same time wage levels for managers in these units appear to have skyrocketed (e.g. in the HSA which previously had a top salary o f S R 23,000). While it may be necessary to pay higher wages for (temporary) management o f these bodies, care should be taken that ‘Authorities’ are not proposed solely for the sake o f circumventing pay policy principles. 119. As a result, average wages per core public sector institution vary significantly. Among the ministries and institutions review, the average monthly salary ranges from SR 3,119 in the Ministry o f Community Development, Youth, Sports, Culture and A r t s (MCDYSCA) to SR 4,865 in the Ministry o f Finance. By comparison, the average wage in the public health sector i s SR 4,578 and in public education S R 4,231. Public sector health and education wages are relatively high due to scheme o f service allowances (see below) and in the health sectors, as discussed a result o f the outlying senior management salaries. The MCDYSCA on the other hand has few schemes o f service and a large proportion o f low skilled workers. 120. In sum, the wage system i s neither efficient nor transparent, nor necessarily provides for a competitive wage system to attract and retain qualified senior staff. In short these features arise from: (a) including a large a number o f categories o f staff; (b) setting artificially l o w base wage levels for senior staff, usually to give the impression o f egalitarianism; and (c) fragmenting pay composition. Such wage systems typically lack transparency, are costly to administer (as payroll needs to take into account o f ten or more components), open to abuse, and make pay levels unpredictable for staff. Establishing a Functioning Wage System. 121. The establishment o f a functional wage and grading system will need to be based on an in-depth fiscal analysis, as it will need to reflect the budget constraints which the government will continue to face for at least the next five years. Nevertheless, this reform i s an essential element o f a reform process that aims to reduce the size o f the’ public service while retaining the quality o f development outcomes. Putting in place a new wage system with the 2010 budget would therefore be an important reform objective. Here, we set out the overview o f a reform agenda that would 43 The posts are for expatriate and Seychellois employees. 44 In fact, H A S has ten positions with a monthly salary in the range o f SR23,OOO to SR32,OOO. 51 subsequently need to be followed up by detailed technical work. The government should continue to draw upon the technical expertise provided by the Commonwealth Secretariat on job evaluation and process design. Additional technical expertise should be sought to conduct a detailed fiscal impact assessment which, based on experience in other states, i s likely to take a few months to complete. 122. Bringing the pay and grading system in line with international principles would require: a revision o f the current salary structure, bringing schemes o f service back to their original purpose and phasing out periodic allowances and limiting PSC supplements. A revision o f the salary structure should integrate most allowances and supplements into base pay, and therefore reflect an appropriate compression ratio. The new structure should be permanent, and be defined in fixed percentage steps that would automatically change with each increase o f the base salary level (the lowest pay grade). This would prevent the erosion o f senior salaries that tends to lead to the invention o f additional supplements and allowances. The new wage structure should also reflect the new structure o f the administration and an emphasis on retaining essential and professional staff, as well as be fiscally viable. 123. The compression ratio for current real salary levels (lowest paid staff to the average Principal Secretary) implies o f approximately 1:6 i s at the lower end o f what would constitute an acceptable compression ratio in international comparative terms. Establishing a durable wage grid may therefore require setting a higher compression ratio target, e.g. 1:7 or above, though this should be determined following a fiscal impact assessment to ensure that this i s feasible in the near fbture. This does not take into account a small number (up to 14 posts in total) o f outlying salary levels paid to senior management in agencies. A policy on pay o f senior executives o f Authorities and Agencies should be adopted which could be based on negotiated contract levels if their Act o f establishment so provides. It i s also recommended to review the specific case o f the HSA, which appears to have set exceptionally high supplements for senior staff compared to other state bodies, to establish whether there i s a necessary justification on technical grounds. Making a wage grid durable requires setting differentials and percentages rather than absolute numbers. 124. The new wage grid should reflect the changed profile o f public sector organization following restructuring. Based on the conclusions o f the review conducted in the previous section and i t s conclusions on the need to reduce l o w skilled and support service posts by two thirds or more, the grade structure equivalently should have no more than 2 grades for support staff (reflecting moves to contract out or eliminate most o f these functions by 2010). This should be sufficient to accommodate essential secretarial and clerical support and essential drivers. It i s proposed to have 6 grades for professional staff, while each grade should have at least 10 steps to ensure the possibility for career growth and to allow for the elimination o f the current practice o f paying experienced staff ‘off pay-band, (see Kwami 2006 reference). A wage grid based on these assumptions i s shown in Table 18. 52 Table 18: Potential Wage Grid Structure under Restructured Public Service Model Positions Grade Step: I 1 I 2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 I 10 1 Differential ChiefExecutive Grade 4.29 4.51 4.73 4.97 5.22 5.48 5.75 6.04 6.34 6.66 25.0% Senior Executive 1 3.43 3.6 3.79 3.97 4.17 4.38 4.6 4.83 5.07 5.33 25.0% Senior Executive 2 2.75 2.88 3.03 3.18 3.34 3.51 3.68 3.86 4.06 4.26 25.0% Senior Officer 1 2.20 2.31 2.42 2.54 2.67 2.8 2.94 3.09 3.25 3.41 25.0% Senior Officer 2 1.76 1.85 1.94 2.03 2.14 2.24 2.36 2.47 2.6 2.73 25.0% Senior Officer 3 1.41 1.48 1.55 1.63 1.71 1.79 1.88 1.98 2.08 2.18 25.0% Grade 1 1.13 1.18 1.24 1.30 1.37 1.44 1.51 1.58 1.66 1.75 12.5% Grade 2 1.0 1.05 1.1 1.16 1.22 1.28 1.34 1.41 1.48 1.55 Step Differential: 50% 125. The grid should apply only to budget-funded organizations and not to commercial and non-commercial publicly-owned enterprises. As an exception contracts outside the grid could be negotiated, but only for the heads o f Agencies and Authorities, as per their approved Acts o f establishment. For all other agency staff the grading system should fully apply, at least until the end o f the fiscal adjustment program, even though agencies should be given delegated authority to administer the wage system. Fiscal viability, the ‘bottom-up’ method o f setting the wage grid, should limit the fiscal cost o f this option. The proposed wage grid reflects the fact that supplements and allowances are currently skewed towards higher-end staff, by setting the grade differentials between grades 1 and 2 at a lower level than those between grade 2 and the subsequently professional grades. Nevertheless, costs o f introducing a new system will need to be assessed in detailed. Particularly, as a certain number o f jobs will need to be re-graded, due to the distortions currently introduced through different schemes o f service and allowances which may reflect only partially the degree o f post-holder responsibility and job complexity. This should be the starting point o f the job evaluation exercise. 126. A job mapping exercise can be conducted once decisions on the overall reform program are taken, and could be started in the second trimester o f 2009, so that fiscal impact on the 2010 budget could be assessed on this basis. For this the government will need to bring in a technical team, which could be led by the expert currently financed by the Commonwealth Secretariat, supported by sector specific reviewers for job evaluations in health, education, other social services (including community development, youth, arts and sports), productive sectors and environment, and a small team o f fiscal analysts. 45 127. . The proposed wage grid i s based on the assumption that most allowances and supplements would be eliminated and this will therefore require a fundamental re- thinking o f the approach to using schemes o f services. Instead, the grading system proposed would provide sufficient scope to account for complexity o f work (which i s one element o f the current scheme o f service supplements) for all professional groups through a job evaluation system. In order to arrive at a common wage grid, even if possibly with different mechanisms for determining placement and promotion according to professional 45 Job evaluations should be done by the respective institutions but externally reviewed. 53 groups if this i s needed, schemes o f service would, need to be brought back to their original purpose, which i s to determine professional standards. The D P A would therefore need to instruct all institutions that remain under the central wage grid to revise their schemes o f service accordingly. 128. Periodic allowances (yet another factor limiting transparency and predictability in public sector wage policy) would also be phased out under this model, and limits placed on the PSC supplement^.^^ It would be proposed to apply periodic allowances only to those positions in grades 1 and 2, and to tighten the monitoring system for their application. A rationalization o f all possible allowances i s also proposed. Finally, it i s proposed that the current system o f PSC posts be retained for certain categories o f posts, including all the chief executive grade and selected positions in the two senior executive grades, and that the method for identifying these posts (based on the j o b evaluation method designed by the Commonwealth Secretariat consultant) should also be retained (and the method should in fact be applied to the classification o f all posts). Performance contracts should also continue to apply. However, supplements for performance should be reduced to 15 percent or less o f base pay, based on a performance assessment (annual performance evaluation), to ensure that a base pay to real pay ratio o f at least 80 percent i s respected for these positions. Inducements for difficult-to-hire skills are an appropriate tool for personnel management and may also be retained. Their use should be based on a proper analysis o f labor market conditions in the sector concerned. These inducements should be revised on an annual basis. Conclusions and ImplementationSteps 129. In conclusion, considering the macro-fiscal context o f the Seychelles, and the contours o f the adjustment program on which the Government has engaged, a two pronged approach i s needed: e A transition from emergency across the board staff cuts to a more strategic approach on the functions undertaken by the state, and the way in which these functions are provided (e.g. direct provision or facilitation). e Initiate a wage system reform to put in place the conditions to safeguard the impressive development outcomes that the Seychelles has already achieved. 130. The two sections o f this chapter have set out a possible path towards achieving both objectives, with a tentative timeline along which these measures could be achieved. The review undertaken shows that turning around the current system, both in terms o f h c t i o n s fulfilled, delivery methods and incentives, i s possible in a medium term timeframe o f four years, the objective set by government. In doing so there should be active engagement by senior government leaders to encourage community responsibility for important aspects o f policies currently delivered solely by the state. Furthermore, there needs to be creative solutions for the issues that make the implementation o f ‘classical solutions’ such as contracting out, concessions, cost sharing more difficult to 46 They are also reviewed at length in Kwami (2006). 54 implement in a remote small island context, while recognizing that remoteness and size are not reasons for a lag in productivity. This means investment in those functions that are crucial to the operation o f the state, even in a difficult fiscal context, and resisting the temptation to see cost reductions as an ideology. At the same time, transparency and effectiveness o f public spending should be placed before political interests or counterproductive aspects o f egalitarianism, especially in public sector wage policy. If these basic principles, which are referred to throughout this report, are adhered to, the more technical solutions proposed in this Chapter are likely to be successfully implemented. ImplementationStep Timeframe Government decision on the structure and design o f the wage grid, it s scope o f December 2009 applicability (what organizations and what positions) as well as decisions in principle on schemes o f service, periodic allowances, PSC supplements and inducements. Undertake initial fiscal impact assessment December 2009 Issue mandatory instructions on revising schemes o f services January 2009, for completion by end February 2009 Conduct a review o f periodic allowances and scope for phasing out at least 50 by end February 2009 percent o f all categories, considering they w i l l no longer apply to professional and management staff. Revise regulations on PSC supplements and inducements in line with revised by end February 2009 wage policy. Initiate combined j o b mapping and fiscal impact assessment exercise, including by end March 2009 Proposals by individual institutions Initial costing exercise to be conducted based on proposals submitted April-May 2009, Review to be conducted. arbitration as needed in Final review o f cost based on changes introduced June 2009 Determination o f final base wage number for 20 10, based on fiscal scenarios, September 2009 real cost savings f i o m restructuring and projected wage growth, 55 IV. HEALTHCARE Health System Context 13 1. This Chapter examines issues o f financial sustainability, efficiency in the allocation of funds and productivity in the delivery o f care in the health sector; and proposes short-term and medium-term measures to improve the sector’s performance. The Chapter also aims to respond to the government’s request to present key-issues to consider if the health system were to move from a tax-funded health system (as it currently is) to one based on social health insurance. A complete overview on the subject social health insurance or any recommendations on i t s feasibility for the Seychelles i s not undertaken, as this would go beyond the scope o f the PEIR. 132. Following a brief description o f the health sector context, the Chapter examines the extent o f total funds for health and a breakdown o f public spending in the health sector to compare this as well as health outcomes, with other small island states. The broad overview leads into a discussion and recommendations in several specific areas where there i s scope for productivity and efficiency improvements. Since we do not find that the total amount o f public resources spent in the health sector i s particularly l o w by international standards, these funds could be reallocated within the sector in order to ensure even better health outcomes (which are for the most part are quite good) and improved financial viability o f the sector. 133. The system i s characterized by successful health outcomes, and low utilization rates comparable to European levels. Seychelles has a tax-funded health system that offers primary and secondary health care in the public sector and provides for prioritized patients to travel overseas when in need o f tertiary and specialized care. The Ministry o f Health (MOH) has policy, strategic, planning and analytical functions and i s institutionally separate from the HSA which i s responsible for the management oversight o f the public health sector (including hospitals). Health facilities do not have any management autonomy 134. At the same time, the public health sector i s highly indebted and characterized by several inefficiencies in the allocation of funds and provision o f care. The health sector i s heavily indebted in foreign currency, as a result o f services procured for the overseas treatment program, and all pharmaceuticals and medical supplies are imported. The health budget i s primarily formulated on historical expenditures o f input factors. Funds are allocated from the Ministry o f Finance (MOF) to the Ministry o f Health (MOH); and funds and service provision are managed centrally. This has resulted in several areas o f inefficiency in funds allocation, and poor productivity indicators. The government has started to address overcapacity and inefficiency in the health sector and is committed to implement measures to reduce costs in line with the fiscal adjustment program. The impact o f reforms on the sector’s performance will need to be monitored and evaluated carefully, in order to identify any adverse effects, and to develop corrective measures as necessary. 56 135. The government i s interested in the possibility o f introducing social health insurance to raise additional funds for the health sector. To prevent any negative effect o f adding a payroll tax on the labor market, there i s a need to implement several measures before considering implementation o f a social health insurance scheme. First, the health sector needs to become more efficient to ensure the labor market does not have to pay for the current inefficiencies; second, there i s a need to streamline the social security system and consolidate current benefits to reduce the existing social costs borne by the taxpayer; and third, if the government wishes to introduce a health insurance payroll tax without increasing the overall labor cost, then the social security contribution rate should be lowered accordingly. Health Status 136. Health outcome indicators; including life expectancy, child and maternal mortality rates are better than many other small island states and are comparable to European levels. L i f e expectancy i s 73 years, and non-communicable and life-style related diseases dominate the country’s burden o f disease. Mortality rates are highest for heart diseases (13.2 percent), hypertensive diseases (8.9 percent), and pneumonia (6.8 percent). Diabetes and traffic accidents cause 3.7 percent and 2.5 percent o f all deaths, respectively, highlighting the need to invest in both healthy lifestyle and promotion accident prevention. (See Table 19). Table 19 : Health Outcomes Indicators for Seychelles and Comparators, Latest Year Available Trinidad Cape & Seychelles Barbados Mauritius Verde Tobago Fiji Maldives L i f e Expectancy, years 73.0 75.4 73.0 70.7 70.0 68.3 59.0 Infant Mortality, per 1000 births 11.0 11.0 13.0 26.0 17.0 15.7 75.0 Under-5 Mortality, per 1000 13.0 12.0 15.0 35.0 19.0 17.9 114.0 Maternal Mortality, per 100,000 births 0 24.0 150.0 .. 32.0 684.0 Percent of births attended by skilled health staff 98.0 99.2 92.0 41.0 Source: WDI (2008). Seychelles Annual Health Statistics (2007). 57 Health Spending 137. Total health spending, including from private and public sources, amounted to about 4 percent o f GDP in 2007 (Table 20). About 89 percent o f this comes from the government health budget, and an estimated 11 percent i s from patients in the form o f out-of-pocket payments.47 However, private spending i s expected to be much higher as this amount probably does not include out-of- Table 20: Total Health Spending, 2007 pocket spending o f patients who seek treatment SR millions abroad at their own cost. Private spending i s Public 214.5 mainly used to pay for private sector care and to Private 25.6 purchase pharmaceuticals, which averages SR 300 Total 240*1 per capita per year. In addition, there are some per capita (SR) 2,823 in percent o f GDP 3.9 percent small donor-funded investments in the health sector Source: MOF, MOH, NBS including capital investment; (for example, Anse Royale hospital renovation i s financed by a Chinese grant), and donor-funding o f expatriate physicians. These amounts should be added to the total health spending when a National Health Accounts (NHA), which are due to conducted later this year. Table 21: Trend in Government Health Expenditures, 2005-2007 2005 2006 2007 Public health expenditures, SR millions 174.7 203.7 214.5 in percent o f total expenditures 8.9 7.7 7.8 in percent o f GDP 3.6 3.8 3.5 Source: Ministry of Finance 138. Government spending on healthcare i s comparable with other small island states and countries at similar levels o f GDP (see Table 22). In terms o f the share o f total government spending, health care spending declined slightly between 2005 and 2007 from 8.9 percent to 7.8 percent o f total spending, and as a share o f GDP f i o m 3.8 percent to 3.5 percent (Table 21). 139. Government health spending i s predominantly for hospital treatment and primary health care (PHC) in community health centers. The share o f the total health budget spent on hospital care (46 percent) i s very high, especially when compared to European countries with much more sophisticated hospital care systems. For example, Portugal spends around half this, only 23 percent o f the health budget and Poland 29 percent on hospitals. Primary health care accounts for around 25 percent o f spending, while around 20 percent o f public health spending i s for “corporate services” (previously administration and planning) which i s mainly used to pay administrative salaries and wages (35 percent), some goods and services (21 percent) and vehicles (13 percent). The public/environmental health budget (4 percent o f spending) i s used to pay for the environmental health workforce, which i s quite sizeable. The largest increase in 47Note, the 2007 household budget survey (HBS) reports health expenditures by households for pharmaceuticals and private sector care in the amount SR12.77 million. However, HBS generally under-report private health spending; hence, we assume that households spend twice as much. The resulting amount i s still less than the WHO 2004 estimates for private health expenditures in Seychelles which i s 24 percent o f total health expenditures. 58 spending fiom 2007 to 2008 i s reported by the division for planning and information; (fiom SR 4 million to SR 19 million in the first six months o f 2008) and this increase should be further examined to determine the rationale and possible cost-reducing measures (See Table 23). Table 22: Seychelles and Comparators, Health Expenditures, Average 2002-2004 GDP per Private health capita Public health expenditure, in Health 2006 expenditure, percent of total expenditure per (current in percent o f health capita $) GDP expenditures (current $) Maldives 2,375 4.0 21.0 159 Fiji 3,826 3.4 36.5 128 Dominica 3,978 2.9 28.7 211 St. Vincent and the Grenadines 4,032 5.0 34.6 200 Belize 4,457 2.5 48.9 186 Grenada 4,796 3.6 26.9 288 Mauritius 5,105 3.9 46.9 190 St. Lucia 5,354 4.2 33.3 225 Seychelles 8,899 3.5 11.0 534 St. Kitts and Nevis 10,316 4.7 36.6 478 Estonia 11,238 3.4 23.3 3 64 Antigua and Barbuda 11,583 1.4 28.2 478 Barbados 11,751 2.2 33.8 712 Trinidad and Tobago 13,700 5.7 62.0 303 Group average 7,244 3.7 33.7 3 16 Source: WDI 2008 140. Half o f government health spending i s for wages and salaries, which i s high given the level o f care provided in-country. In 2007, the public health sector employed 12.8 percent o f the staff working in the public sector. The health workforce wage bill accounted for 17.4 percent o f the total government wage bill in that year (see Table 24). This i s very high compared to the EU average o f 29 percent, especially considering that tertiary care (with more specialized staff) i s not offered in the Seychelles but patients travel overseas for treatment.48 As reported in Chapter 3, the average monthly income in the health sector i s also high compared to elsewhere in the public sector and amounts to SR 4,213 o f which S R 3,386 (80.4 percent) i s salary and S R 827 (19.6 percent) allowances on average. 141. Expenditures for salary and wages could be reduced substantially by releasing staff in areas with lower productivity. The Government i s advised to substantially reduce the current wage bill by identifying and releasing staff in areas o f l o w productivity, and examine the possibility for reducing salaries and allowances for highly paid positions based on a ,comparison o f salaries and functions across the Government. 48 See WHO Euro: Health For All database. 59 Table 23: Government Recurrent Health Expenditures by Division, 2005-2008 2008 2005 2006 2007 (Jan-Jun) S R Yo of S R Yoof S R Yo of SR Division millions total millions total millions total millions Hospital Services 79.6 47.9 85.4 46.3 92.0 45.8 58.4 PHC 40.3 24.3 44.4 24.1 50.2 25.0 23.5 Corporate Services n.a. n.a. 36.3 19.7 41.5 20.6 7.7 Administration and Planning 34.0 20.5 4.8 2.6 Environmental / Public Health 5.3 2.9 7.9 3.9 1.9 Disease Prevention & Control 4.2 2.5 Home for the Elderly 3.1 1.9 4.0 2.2 4.5 2.2 1.9 Planning and Information 3.4 2.1 3.9 2.1 4.1 2.0 19.2 Minister's Secretariat 1.5 0.9 0.6 0.3 0.8 . 0.4 0.4 Total 166.0 100 184.6 100 201.0 100 112.9 Source: MOH 142. Pharmaceutical spending has been brought down by adherence to expenditure control measures introduced in the last couple o f years. MOH have already introduced several measures to improve the efficiency o f spending on pharmaceuticals, and these measures have led to a substantial decrease in pharmaceutical expenditures since 2004 (Table 24). These measures include procuring only generic drugs and least costly drugs on the essential drug list. This highlights the need for continuous tight expenditure control in tendering and procurement practices, price setting, and ensuring physicians' adherence to standard prescription protocols. 143. Pharmaceutical spending could potentially be more efficient still, by eliminating consumption tax, introducing co-payments for patients to avoid over- demand and reviewing the timely allocation o f foreign exchange to pay foreign pharmaceutical suppliers. There are two hrther measures to be considered. First, the rationale for charging consumption or sales tax on publicly-provided pharmaceuticals should be re-examined, since the government i s incurring an administrative cost to collect a tax on its own spending. Second, patients currently do not pay for pharmaceuticals provided in the public sector. In other countries this policy has led to over-prescription o f pharmaceuticals and escalating costs. The MOH i s advised to follow the example o f health reforms in other countries to share costs with patients by introducing a small co- payment. These measures are particularly important in a financially depleted health sector and will help to prevent over-demand which can lead to rationing and stock-outs- particularly where pharmaceuticals have to be imported and prepaid in foreign currency (the shortage o f which has constrained spending in the past). It i s also recommended to evaluate the system for foreign exchange allocation by MOF for pharmaceutical purchases to facilitate purchasing products in bulk (even larger than currently undertake) which would therefore be at a lower unit-price, and to ensure timely payment so as to establish a relationship with a broad range o f potential suppliers. 144. Capital expenditure commitments should be re-examined, prioritized and kept to projects which can be afforded in the medium-term (Table 24). In general, 60 capital expenditures are not too high, insufficient funds to pay for construction often leads to delays in project completion resulting in up to 30 percent cost overruns over time (see Chapter 2). Hence, to prevent such cost increases, the overall capital budget should not be spread across too many projects that cannot be completed or maintained-and the same i s true in the health sector. Several capital investments are often supported and financed in part by donors this can influence the relative priority o f capital projects according to the financing available. The M O H i s advised to monitor the financial flow o f these investments for the purpose o f the NHA; and conduct investment planning to prevent high maintenance costs, and ensure that new investments in the health sector can be run and do not add to inefficiencies that already exist. Table 24: Government Health Expenditures by Economic Classification, SR Millions 2004 2005 2006 2007 2008 Wages and salaries 45.6 94.2 106.7 106.0 55.8 Goods and services 31.8 35.1 40.5 51.8 31.9 Of which Pharmaceuticals 50.9 36.7 37.5 43.3 25.2 Maintenance 2.1 1.7 3.0 2.9 1.5 Vehicles 4.1 5.3 5.4 5.8 2.5 Capital n/a 8.6 19.1 13.5 8.0 Total 128.3 174.7 203.7 214.5 120.9 Source: Bank Staffestimates based on MOH and MOF data 145. There i s scope to lower incidental costs across the health sector through cost controls and improvements in contracting-out. The government i s recommended to examine expenditures in each division and in each expenditure category to identify unwarranted spending, particularly for non-medical costs. For example, in 2007 corporate services spent 6 percent o f i t s total expenditures on local telephone costs, which was considerably higher than other departments. Corrective action by the M O H meant that in the first six months in 2008, this amount has been reduced substantially. The M O H i s therefore encouraged to continue with tight cost control to reduce spending to lower levels. Another high cost item i s the food supplies contract for hospitals which has been outsourced to a private provider. Expenditures for hospital food increased radically from S R 6.8 million in 2005 to SR 10.8 million in 2007, comprising an astonishing 12 percent o f total hospital expenditures. Clearly, the M O H needs to re-examine the contract for food supplies and i s advised to conduct a comparative cost analysis to evaluate different food providers. Critically, t h i s should be done on the basis that the hospital kitchen (which i s currently being used as a store) could be used by the contracted out private provider which could considerably lower costs. In line with the recommendations in Chapter 3, instead o f each individual Ministry pursuing contracting- out for similar services to private companies; the government should also consider a more coherent approach across government possibly centralizing the contracting-out function for all Ministries at the Department for Public Administration. This would potentially allow the government scope to negotiate a lower price for a larger quantity o f goods and/or services. 146. The health sector i s highly indebted, mainly because o f the overseas treatment program and imports o f medical supplies. Arrears have accumulated over 61 the past six years and the stock o f arrears combined with outstanding debts as at October 2008 amounted to 45 percent o f 2007 government health spending. N o w that the Seychelles rupee has floated the highly indebted health sector i s also exposed to exchange rate risk since the majority o f outstanding invoices are denominated in US$, Euros and Indian Rupees. With an average exchange rate o f say SR15: U S $ 1 for 2009 for example, without clearing the stock o f external arrears the SR value will double from the estimates shown in Table 25. The domestic debt and arrears have also accumulated to a further S R 6.4 million. The main creditors are private companies o f services that have been contracted out, communication, transport, hotel service providers and parastatal companies. The M O H i s advised to clear these debts, improve debt and arrears management and implement measures to reduce expenditure in order to improve the sector’s financial sustainability. Table 25: Arrears and Debt Stock, October 2008 SR USD External arrears 90,044,628 11,116,62 1 Overseas treatment 79,251,302 9,784,111 Pharmaceuticals and medical supplies 10,793,326 1,332,509 Local debts and arrears 6,412,369 791,650 Total 96,456,997 11,908,271 In percent o f 2007 government health spending 45 percent Source: Ministry o f Finance; as o f Oct 15.2008 Notes: Exchange rate US$l= SR8.1 Availability o f Health Care Facilities 147. Seychelles has an oversupply o f health care facilities. With a total o f 5 hospitals49, the Seychelles has considerably more hospitals and beds per capita than other middle-income countries (Figure 12). The Victoria hospital i s the central referral hospital. Seychelles has currently 16 health centers and some outposts (Figure 13). Recognizing that there i s low utilization o f some o f these centers, M O H i s in the process o f rationalizing health centers down to 10 and phasing-out health posts. There are more hospital beds than needed by the small population (Figure 14). This i s evidenced by extremely low occupancy rates in L a Digue, Praslin and Anse Royale hospitals (which i s currently under reconstruction) (Figure 15). Upon further examination the low overall occupancy rate in Victoria hospital i s a result o f the particularly l o w at, occupancy rate in the maternity and female medical ward-at only 50 percent-pointing to the option to close hospital beds, merge wards and reduce staff to lower costs while s t i l l offering adequate access to facilities. 49Source: Annual Health Statistics 2007, including Victoria, Anse Royale, Praslin, La Digue, and North East Point. Silhoutte with 4 beds and L e s Canelles mental hospital with 45 beds did not report any activities in 2007. 62 Figure 12: Hospitals per 100,000 Figure 13: PHC Units per 100,000 52 8 7 35 8 s 30 0 0 5 25 $ 4 20 & 15 Q 3 - LR m 2 10 *" 5 2 1 0 2 0 Slovenia Seychelles Lithuania Hungary Bulgaria Figure 14: Hospital Beds per 1,000 Figure 15: Acute Hospital Occupancy Rate - A F 4.7 1 00% i 5 0 4 80% 5- 3 60% $ 2 40% 0. c n l 20% U a 0 0% Source: WHO (2006); Seychelles health statistics (2007) 148. T o increase the average acute care occupancy rate in hospitals to 80 percent, the government i s advised to close around 50 beds initially and an additional 10 to meet the productivity targets. This measure would result in a total o f 340 beds and a bedpopulation ratio o f 4, which should be set as a ceiling. The M O H plans to restructure hospitals into health centers and reduce hospital beds and staff. The M O H has already started reforms and i s currently redefining the required number o f hospitals and health centers through the regionalization strategy to reconfigure the Praslin and L a Digue hospitals into health centers, reduce the total number o f hospital beds, and also the number o f health centers from 16 to 10. The renovated Anse Royale hospital will continue to have 19 beds and house the health center in the same building. This will allow dismantling o f the adjacent old health center. 149. Closing a combined 50 beds in Baise St Anne, Logan and Victoria and maintaining a maximum of 19 beds in Anse Royale will result in around S R 4.6 million savings annually.5oThe number o f health posts will be phased out over time by reducing opening hours. The Islands o f Praslin, L a Digue and Silhouette could offer first aid and maternity care only, as the emergency referrals to the Victoria hospital i s already Annual savings based on 2007 hospital expenditures of SR 92.0 million projected to fall to SR 87.4 million after reforms, provided empty facilities are rented out and/or sold off. 63 assured by air transport. The Victoria hospital i s advised to close about 40 beds to increase i t s occupancy rate; particularly in anticipation o f the opening o f a private hospital and the re-opening o f the Anse Royale hospital. In 2008, hospitals are overstaffed with 742 staff resulting in 3.4 staff per occupied bed at an average occupancy rate o f 55 percent. In line with bed reductions, the number o f staff working in hospitals ought to be reduced (see below), empty buildings and rooms should be sold or rented out to the private sector or other health and social activities (e.g. private physicians, crhches, elderly day care etc). I t i s estimated that implementing these measures and reducing the related costs including staffing, utilities and maintenance could lead to a 5 percent reduction in hospital expenditures over time. Short-term cost increases to implement these measures may occur. 150. The health sector has been dominated by public provision, but in addition to several private health care centers, a new private sector hospital i s scheduled to open in 2009. This private hospital i s being constructed on the outskirts o f Victoria and will have about 90 beds. I t plans to offer specialized secondary and tertiary care including open heart surgery, renal transplantation, haemodialysis and cosmetic surgery. The hospital will largely cater for expatriates, tourists, and the local population who can afford paying private sector prices-including patients who would otherwise have to go overseas for treatment. Once operational the government could also consider contracting with the private hospital, as a more cost-effective solution to either providing these secondary and tertiary services itself, or sending patients for treatment abroad. The government i s thus advised to negotiate and if cost-effective contract selected services with the local private hospital to decrease the number o f patients on the overseas treatment program and improve access to care for patients in need o f specialized care. 151. Telemedicine should help to improve the availability of tertiary and specialized diagnostics. Since October 2008, a five-year telemedicine project commenced to connect the Victoria Hospital with hospitals based in India where Indian specialists can provide consultations, second opinions and interpret diagnostics. This project i s supported by EU funds and the Indian Government, who will sponsor all o f the operational costs for five years, after which the prices for telemedicine services will have to be negotiated by the Government o f Seychelles with individual suppliers. Availability and Productivity o f the Health Workforce 152. The numbers employed in the public health sector increased by 5 percent in 2008 over the previous year (Table 26). Most staff work in community health centers (30 percent) and hospitals (41 percent). Since 2006, the share o f ancillary staff (including drivers, clerks, assistants, cleaners, etc) increased considerably from 22 percent to 33 percent o f the total health workforce, a level that i s extremely high compared to other countries. E.g. only 13 percent o f health staff perform these duties in the UK. Seychelles has 95 staff working in environmental/public health, resulting in 11 public health specialists per 10,000 inhabitants which i s again very high-compare this to Mauritius where the ratio i s 1.9 per 10,000 populations'. A productivity analysis should be WHO data and statistics at www.who.org 64 conducted to identify an efficient target ratio for the health sector including ancillary and environmental health staff. 153. Physicians in the public sector are not working at full capacity. Mast physicians work in hospitals that only provide primary and limited secondary care), resulting in a ratio o f about 3.5 occupied beds per doctor and only 4 hospitalized patients per doctor per week, suggesting that hospital doctors do not work at full capacity. Forty- eight physicians work in outpatient care, based on the 2007 health statistics, they see on average 22 patients per day. These numbers compare with say 33 visits per doctor in the USA, a level that i s reasonable to apply as a standard for capacity.52 In the absence o f tertiary and specialized treatment, and given the rather l o w patient throughput per week and visit rate per day, the current ratio o f physicians to patients appears to be at the upper end o f requirements. Table 26: Public Sector Health Workforce, 2005-2007 2005 2006 2007 Yo of Yo of Y o of Number Total Number Total Number Total Physicians (GPs) 72 4.0 75 4.5 91 5.3 Consultant physicians 15 0.8 16 1.o 15 0.9 Dentists 10 0.6 15 0.9 16 0.9 Pharmacists 7 0.4 4 0.2 4 0.2 Other Medical Professionals 185 10.3 187 11.3 106 6.1 Para-Medicals 429 23.8 493 29.9 432 25.0 Nurses 390 21.7 414 25.1 41 1 23.7 Student Nurses 86 4.8 73 4.4 80 4.6 Ancillaries staff 607 33.7 372 22.6 576 33.3 Total 1,801 100.0 1,649 100.0 1,73 1 100.0 Annual change, (percent) -8.4 5.0 Source: Ministry o f Health. Annual health statistics 2007 154. Substantial cost reductions could therefore be achieved by reducing the number o f physicians in areas o f low productivity. With 106 physicians working in the public sector in 2007, Seychelles reports more physicians for i t s population than countries such as Mauritius and Maldives (Table 20). They are also predominantly from abroad. Expatriates account for 62 percent o f physicians and dentists in the public sector. 53 To increase the number o f local physicians, the requirement for Seychellois physicians and dentists who are trained abroad to return, should be enforced. Currently, many medical students are stay on for several years to practice and specialize following training, and there should be stronger incentives for them to return to practice in Seychelles to reduce the reliance on expatriate doctors. The government plans to invest into the training o f nurse practitioners who will be able to take over some o f the workload o f physicians, which could also help in this regard as long as they are not hired in I addition to the existing doctor and nursing staff. 52 The U S full capacity n o r m for P H C physicians i s 33 visits per day. See: US Department for Health and Human Services, http://bphc.hrsa.gov/ 53 M o s t o f them are from India, Sri Lanka and Cuba. 65 155. Seychelles also has more nurses for i t s population than other small island states and several European countries (Figure 16). Assuming that in each country a similar share o f nurses work in outpatient care, the productivity o f nurses can be approximated by calculating the total number o f nurses per occupied hospital bed (Table 27). Comparing across countries would imply that the hospital nurses in Seychelles are also operating at less than full capacity and seem to be less busy than, for example nurses working in Cyprus and Portugal. Furthermore, nurses Table 27: Nurses per Occupied Hospital Bed 2006/7 in the Seychelles do not have to Nurses Per take care o f work-intensive occupancy occupied tertiary care patients, and hence, Nurses Beds rate bed Cyprus 4.4 3.8 85 1.4 the average time a nurse needs Turkey 2.4 2.7 64 1.4 to spend with a patient i s likely Portugal 4.6 3.7 73 1.7 to be lower in the Seychelles. Seychelles 4.8 4.7 55 1.9 For every two nurses in the Bosnia 4.4 3 .O 71 2.0 Seychelles there i s also on Albania 4.1 3.0 54 2.5 average one health care Source: Bank staff estimates assistant, which i s rather high given the already very high number o f ancillary staff and nurse students. Reducing this ratio to 3 nurses per assistant would allow releasing approximately one-third o f nurse assistants and lead to substantial savings in salary expenditures. Figure 16 : Physicians and Nurses, Per 1000 Population, 2006/7 Physicans 13 Nurses 6 5 k 4 g 3 k 2 1 0 Source: WHO and Seychelles Annual Health Statistics 2007 156. The health workforce should be reduced in areas of low productivity. As part o f ongoing reforms to reduce the public sector by 12.5 percent o f total positions in 2008 the MOH has eliminated 85 vacant posts and offered the early voluntary departure with a compensation package to 105 positions. By the end o f 2008, this measure i s expected to reduce the health workforce by 10.4 percent to 1,638 positions, reaching a level similar to that established in 2006. The government i s advised to conduct functional productivity analysis in the health sector to examine departments where productivity i s l o w to propose sustainable staff reductions. The implementation o f this program should be monitored 66 carefully to prevent re-hiring in 2009 and 2010. Based on productivity analysis, departments should set new ceilings for their total positions. 157. Preliminary analysis conducted for this Review suggests staff reductions could reduce the health sector wage bill by almost S R 13 million reflecting 6.4 percent o f 2007 total government health spending (see Table 28). This sum could be reinvested to improve access to specialized and tertiary care for patients and improving targeting o f scarce funds to lower-income groups. Based on indicators o f l o w productivity, preliminary analysis shows the total number o f health carehurse assistants could be reduced by 68 positions (33 percent), ancillary staff by 216 posts to 20 percent o f the total health workforce or approximately 320 positions; and the number o f environmental/public health staff by approximately 5 1 to 42 positions to reach the target ratio o f 5 staff per 10,000 population. Table 28: Health Sector Wages and Salaries Savings, 2008-09, SR millions Potential Projected reduction in 2008 2009 expenditures Reduce number o f health care assistants by 68 positions (33 percent) to 139 positions 8.6 5.7 2.8 Reduce number o f public/environmental health staff by 42 positions fiom 95 to 5 1 5.3 3.0 2.3 Reduce ancillary staff by 216 to 2006 levels o f 360, or approx 20 percent o f total health staff 20.7 13.0 7.8 Total Savings 12.9 Source: MOH data for number o f staff and average income including salary and allowances Utilization o f Health Care 158. Hospital care i s being used adequately and inpatient and outpatient use i s at a level comparable to European standards. There i s an inpatient admission rate o f 15 admissions per 100 population per year, which i s comparable to Sweden. The average length o f hospital stay ranges from 2 days in L a Digue to 5 days at the Victoria hospital, and 7.8 days in Anse Royale. The length o f stay i s expected to be l o w as there i s no tertiary and specialized care in the Seychelles. The Seychelles report four outpatient doctor visits per capita per year, which i s similar to Finland and Denmark. Most patients seek care in the English River Health Center in Victoria. Some health centers and outposts are less busy than others. For example, the SMB health center in Central Mahe reports only about 7 patients per doctor per day, which i s extremely low. The M O H has already started evaluating the need for these health centers based on a productivity analysis and taking into account the growing private health sector, and plans to reduce total health centers to 10 and phase out health posts. 159. The growing private sector suggests that there i s a strong demand for private sector outpatient care. There are at least six private practices with each o f them employing around 3 to 4 physicians (generalists and specialists); in addition the private sector counts 4 dental practices. Private practitioners set their own prices and apply differential pricing to cross-subsidize care across their patients depending on their socio- 67 economic background. With the exception o f communicable diseases, the provision of care in the private sector i s not monitored. However, private practices appear to work near full capacity with a physician seeing about 33 patients per day54. The government i s advised to facilitate the growth o f the private sector, use the private health sector to supplement the public sector where shortages exist, and monitor and evaluate the use o f private sector care over time. 160. The Government rations access to tertiary and specialized care abroad by funding treatment for a small number o f prioritized patients. About 200 patients per year are transferred abroad (to L a Reunion and India) for specialized and tertiary care not available in the Seychelles, (e.g. radiotherapy, transplantations, hip replacement, open heart surgery etc). This i s a very small number o f patients and reflects only 1.6 percent o f total hospital admissions in 2007. Assuming that about 10 percent o f hospitalized cases would need tertiary or specialized care; this would result in 1,072 patients either having to pay out-of-pocket for catastrophic expenditures abroad, or not being able to receive care. Over the past years, total expenditures for the program as well as the unit cost per patient has increased substantially, reflecting 6.1 percent o f total government health expenditures in 2007 (Table 29). The M O H i s advised to monitor and evaluate all patients who need treatment overseas, including those who pay out-of-pocket or cannot afford to go, to assess total private overseas expenditures, and the rationing impact o f not offering these services in the Seychelles, and the limited public fund available for overseas care. Table 29: Overseas Treatment, Expendituresand Patients, 2005-2007 2005 2006 2007 Total overseas expenditures (US$) 847,344 1,043,302 1,525,775 Annual change, in percent 23 percent 46 percent Number o f patients treated abroad 181 23 1 199 Unit cost per patient (US$) 4,68 1 4,516 7,667 Source: Expenditure data from MOF; Number o f patients from MOH. 161. Access to the overseas treatment program i s rationed based on guidelines with priority criteria such as patient age and expected healthy life years gained. The program i s not officially means-tested; however the M O H conducts with each patient, a family conference to discuss possible cost-sharing options. A board o f five physicians proposes the selection which has to be approved by the Health Service Authority CEO. Board members are not allowed to present their own patients. As o f 2009, patients will be asked to pay transport cost and cost-share other expenses. W h i l e overseas treatment may be less expensive than investing in offering these limited specialist services in the Seychelles, the government i s advised to improve the transparency o f the selection process, introduce and publish explicit selection criteria and an official means test, but s t i l l supplement information on the household’s socio-economic background through family conferences. The patient composition on this l i s t i s expected to change with the opening o f a private hospital with specialized services being offered from 2009 (including renal transplantation and open heart surgery). 54 Based on interview with private practitioner. 68 162. Utilization of preventive care should be increased to reduce the number o f diseases that require high-cost treatment. Several high-cost diseases that are preventable rank highly in the country’s Burden o f Diseases among them cancer, led by breast cXncer and cervical cancer, heart Table 30: Preventable Diseases with High-Cost diseases and diabetes. While cervical Treatment, Number of Cases cancer prevention rates are rather high (59 percent), the government i s advised to 2005 2006 2007 improve breast cancer screening and HIV 45 42 43 evaluate the effectiveness o f the current AIDS 21 23 12 family program, The ratherhigh Source: Annual Health Statistics 2007 abortion rate (29 percent) indicates a need to improve access to modern contraceptives for teenagers and women to reduce the relatively high teenage pregnancy rate and abortions. Similarly, the HIV prevention program should be targeted to teenagers and high-risk groups including prostitutes, and drug users who share needles, to prevent an increase in HIV/AIDS (Table 30). Out-of-Pocket Payments in Form o f Co-Payments and Private Insurance 163. Introduce small co-payments with explicit exemption mechanism. According to the Constitution, primary health care i s provided free o f charge to the population. Currently there are no co-payments in the public sector for primary and secondary care, dental care and pharmaceuticals on the essential drug list. User fees are charged to expatriates, which are planned increase to cover full costs. The Victoria hospital offers a small number o f private rooms to paying patients. The M O H i s planning to introduce co- payments for physiotherapy, dental care and non-emergency visits to the emergency center. 164. European countries have some form o f co-payment for patients combined with exemption mechanisms that exclude vulnerable groups from paying. In the Seychelles, patients already co-pay for the use o f private sector care and treatment abroad. Many other countries have introduced co-payments with the objective o f reducing unnecessary use o f care and raising additional revenue for a financially depleted health sector. Co-payments are generally charged for pharmaceuticals; and they tend to be lower if a patient has a referral from a general practitioner before visiting a specialist or a hospital. The M O H i s currently considering introducing co-payments for specific services, and i s encouraged to follow the example o f other countries that introduced small co-payments for services such as curative care visits, dressings and issuing o f sick leave certificates at the community health center; pharmaceuticals and hospital stay. Using the utilization statistics from 2007, and assuming that 30 percent o f encounters will be exempt from paying, the government could raise approximately SR 8.5 million per year in form o f co-payments, equivalent to 4 percent o f the government health expenditures in 2007 (Table 31). To prevent leakages into private pockets o f staff, charging health facilities will have to follow professional accounting practice and need to be audited regularly. The government’s co-payment policy should clearly define the use o f revenues from co-payments in health facilities. 69 Table 31: Potential Annual Revenue from Co-Payments Utilization in Projected Revenue 2007 Co-payment SR la Outpatient visits, curative care, dressing (visits) 586,018 SR5 per visit 2,05 1,063 Cost o f Pharmaceuticals, in (SR) 43,251,584 20 percent 6,055,222 No. o f hospital night 56,542 SRlO per night 395,797 Total (SR) 8,5 02,082 Source: Bank staff estimates Notes: a Based on the assumption that 30 percent o f encounters are exempt 165. Transparent co-payment exemption policies aim to ensure access to care for vulnerable groups. As in Europe to protect the poor from the financial impact o f co- payments, the following population groups and services could be exempt from co- payments: (i) children and adolescents under 18 years o f age; (ii)homeless people; (iii) emergency services (the lack o f attending the patient in emergency status involves threat o f death or possibility o f permanent damage to health); (iv) preventive care services, public health services, pregnancy, obstetric and neonatal care services. It i s recommended to monitor and evaluate the effectiveness o f exemption policies regularly. 166. Private health insurance i s expected to grow as private healthcare provision increases. There are two private insurers and six branches with indemnity insurance and travel insurance to cover unexpected health risks during travel without covering pre- existing and existing conditions. The insurers also work as agents for international private health insurance institutions such as Axa and IMI Singapore and offer an overseas treatment policy. However, due to the small numbers and risk-rated premiums, uptake has been l o w and the population has limited incentive to purchase private health insurance , since care i s largely provided for free in the public sector and the probability to need high-cost tertiary treatment abroad i s relatively low. In the future, the growing private health sector for outpatient and hospital care will make it more attractive for private health insurers to provide insurance policies. The government i s advised to negotiate with private insurers to cover high-cost care not funded by the government and ensure appropriate regulation o f the sector. 70 Social Security Benefits - country’s institutional framework g bo./, including generosity o f sickness 3 &5% benefits, type o f job contracts and s30% = ?5% 10% strictness of protection legislation. employment In the 5% Seychelles, sickness benefits are 0% granted starting the first day o f MON TUE WED THU FRI SAT SUN sickness up to 130 days to individuals with a medical 168. Expenditures for sick, maternal and funeral benefit are very high, reflecting 6.7 percent o f total public health spending (Table 32). This i s higher than many Table 32: Social Security Direct Benefits Expenditures, SR countries, e.g. in Serbia before the benefit reforms. 2006 2007 In 2007, the social security Sickness benefit 1092719209 13269,759 fund spent 0.18 percent o f Maternity benefit 850,599 1,394,010 GDP o n sickness benefits. Funeral benefit 990,306 869,539 On average, about 4 percent Total in SR 12,112,114 13,533,308 o f the workforce i s on sick- Source: Social Security Fund Balance Sheet December 21,2007 leave at any given time. The English River health center in Victoria reports that 11.5 percent o f total visits are by patients w h o need a medical certificate t o qualify for sick leave benefits. While the number o f births per annum has not changed; maternity benefit payments increased by 64 percent f r o m 2006 to 2007. In 2007, funeral benefits were paid for 630 deaths resulting in an average payment o f SR 1,380, suggesting that the program pays a small benefit at rather high administrative costs, and does not serve any equity purpose. By adjusting the current social benefit system t o European standards, the Seychelles would be able t o realize immediate cost reductions in health and social security. 169. Direct benefits paid by the Social Security Fund could be reduced by almost SR 6 million. The government i s advised to change the Social Security A c t such that 71 employers cover the first 30 workdays o f sickness, and reduce the maximum numbers o f sick days per person to 100 days per year. Beneficiaries with more than 30 days should be audited regularly. In addition, sickness during maternity should be consolidated into the sickness benefit. Funeral benefits should be phased out completely and related administrative costs eliminated. These measures are expected to lead to about 40 percent reduction in related expenditure. Accordingly, the Social Security Fund could reduce expenditures for direct benefits by almost SR 6 million per year (Table 33). Table 33: Estimated Reduction in Expenditures for Sick Leave and Funeral Benefits, SR Potential reduction in 2008 Projected 2009 expenditures Sickness benefit. Pay as o f 31st day o f sickness only, maximum o f 100 days per year, audit long- term users 11,269,759 7,598,261 5,065,508 Eliminate funeral benefit 869,539 0 869,539 Potential cost reductions, in SR 5,935,047 Source: Social Security Fund The Case for Social Health Insurance 170. The MOH i s interested in introducing social health insurance to improve access to high-cost care and raise funds for the financially depleted health sector. Introducing an insurer who will take the function o f a purchaser o f care, would require decisions about the insurance features, including (i) financing, (ii) risk pooling, (iii) purchasing and provider payment, and (iv) the insurance benefit package. I t would also require changes in the current tax-financed health system which does not separate between the purchaser and providers. The following section raises some key-issues that need to be considered when moving towards a health system with S H I in the context o f the Seychelles. Table 34: Comparing the Financing of Social Health Insurance Funds Austria Germany' Franceb Switzerland' Contribution in percent o f gross earnings 6.9-9.1 14.3 average 5.25 Flat per capita - Employer share, percent o f contribution 50 50 94 0 - Employee share, percent o f contribution 50 50 6 100 Contributions, percent o f total 80.8 100 54.5 81.8 Subsidies from tax revenue 0 45.5 18.2 Other revenues 19.2 Source: Country specific reports Notes a): Germany: Government transfers to Social Health Insurance starts in 2004. Average contribution rates are 14.3 percent, but vary across funds. As of July 2005, financing shares are 54 percent for employees and 46 percent for employers; b) HIT France: In 2000, annual income threshold to be exempt from premium payment i s €6600; c) 2004: Households with annual income threshold below specific level pay social health insurance premiums and are reimbursed by the government when income i s assessed during the tax filing season. 171. Social health insurance i s financed by contributions from employers and employees as well as tax-funded government subsidies. In European countries, social insurers are financed from tax revenues (Latvia and Poland), payroll taxes (Germany), and most often from a mix o f the two (France). In Switzerland and to some extend in the 72 Netherland, people pay per capita premiums directly to the social insurer. The collecting agent in tax-funded and payroll funded insurance system i s generally the tax administration who transfers funds to the insurer, or the social insurer directly. Health insurance funds in Germany and Austria receive most o f their revenues from payroll contributions; in France, payroll contributions reflect only 54.5 percent o f total revenues o f the social health insurances, with the rest being paid f i o m government tax-revenues. Payroll contribution rates vary across countries and in France have also decreased over time (Table 34). Government transfers are either paid directly to the insurance fund as in France, or indirectly by reimbursing premium-paying households based on their tax- statement as in Switzerland. Table 35: Scenarios for Contribution Rates and Revenues for Social Health Insurance Revenue potential for insurance Contribution (SR lions) 2007 Annual workforce wageinSR 6% 8 YO 10% 6% 8% 10% Private 22,155 46,692 2,802 3,735 4,669 62.0 82.8 103.5 Government 13,537 42,792 2,568 3,423 4,279 34.8 46.3 57.9 Parastatal 6,142 54,336 3,260 4,347 5,434 20.0 26.7 33.4 Total 41,834 116.8 155.8 194.7 In percent o f Government 2007 health expenditures 58 77 97 Source: Workforce NSB, Seychelles in figures (2007); NSB, Statistical Bulletin, December 2007 172. The government i s currently looking into introducing a social health insurer with mixed funding from the government general revenues and payroll taxes as in most other countries. The government has an active and growing labor market with about 5.5 percent o f the labor force being unemployeds5. Depending on the average salary, contribution rates, administrative costs and contribution evasion, the introduction of payroll taxes could generate substantial revenues for the health sector. The revenue raising potential o f an insurer with a 6 percent contribution rate on payroll (same as in Bulgaria) and no contribution evasion i s estimated to be approximately SR 117 million reflecting 58 percent o f the 2007 government health expenditures. This amount could increase to almost equally as high as the 2007 government health spending if the payroll tax i s set at 10 percent (Table 35). However, social insurers in transition economies often report substantial contribution evasion, resulting in up to 40 percent revenue shortfall. Social insurers in Europe report l o w administrative costs: In Poland, the single insurance fund has 1 percent administrative costs; in Slovakia they are 3 percent, in Austria 3 percent, in the Netherlands 4 percent and in Switzerland 5.7 percents6. The formal sector i s too small to fund the entire health sector and introducing payroll taxes for health insurance does not mean the government should get disengaged from financing the health sector; however, payroll taxes will allow reducing health spending from government general revenues substantially. ss NSB (2005). s6 T h e World Bank (2008b): Health insurance and competition. Europe Central Asia Human Development. 73 173. The decision to introduce payroll taxes in the Seychelles to finance social health insurance will affect labor costs and the labor market. In the Seychelles, 72 percent o f the population i s economically active. There i s no income tax in the Seychelles but various consumption taxes are levied on goods and services. Payroll taxes are deducted for social security and a pension flat rate which combined with different average salaries results in a different tax wedge57across the sectors (Table 36). A high tax wedge on labor income can be expected to reduce employment in the formal sector. The tax wedge in the Seychelles i s lower than in other transition economies in Europe and Central Asia, and than in OECD countries (Figure 18). Table 36: Payroll Taxes and Tax Wedge across Sectors, I n SR, 2008 Private Government Contribution sector sector Parastatal Average salary, SR 3,891 3,566 4,528 Employer contribution (percent) Social security 20 778.2 713.2 905.6 Pension 50 50 50 50 Total labor cost 4,719 4,329 5,484 Employee contribution (percent) Social security 2.5 97.3 89.2 113.2 Pension 25 25 25 25 Take home pay 3,769 3,452 4,390 Tax wedge 20.1 Yo 20.3 Yo 19.9 Yo Source: Bank staff estimates Figure 18: Seychelles Tax Wedge Compared to OECD, Europe and Central Asia -0 GO 50 10 30 20 10 0 Sources: OECD, Taxing Wages 2002/03 for OECD and ECA OECD, except Slovenia (based on 2001); Bank staff estimates for others (using 2003 for ECA countries taken from World Bank ECA Labor Market Study, forthcoming, and 2004 for RS and FBH). Tax wedge calculated for non-agricultural AW worker without dependents in ECA and production A W worker without dependents in OECD. OECD groupings exclude ECA OECD: (i) low (less than 40 percent wedge) includes Australia, Iceland, Ireland, Japan, Korea, Mexico, New Zealand, Portugal, Switzerland, United Kingdom and United States; (ii) mid (40-50 percent) includes Canada, Denmark, Greece, Luxembourg, Norway, Spain and Sweden; (iii) high (51+ percent) includes Austria, Belgium, Finland, France, Germany, Italy and Netherlands. 57 The tax wedge on labor expresses the wedge between the employer's total labor cost and the individual's take-home pay and i s defined as follows: tax wedge = (total labor cost - take-home pay)/ total labor cost*100. 74 174. Adding a payroll tax for social health insurance without decreasing the contribution rate for social security and pensions, will increase the tax wedge. For each scenario in Table 19 it is assumed that social security and pension contributions remain unchanged; and health insurance contributions paid by the employee are 2 percent. In scenario 1, the employer part i s 4 percent (total 6 percent), in scenario 2 it increases to 6 percent (total 8 percent) and in scenario 3 employers pay 8 percent resulting in a total o f 10 percent with employees paying the difference. As a result, the tax wedge increases from currently 20 percent to 24 percent in scenario 1, to 25 percent in scenario 2 and 26 percent in scenario 3. Adding a payroll tax for health may therefore be politically difficult to introduce as it will increase labor costs to employers and may have a negative effect on employment. The government is thus advised to identify possible reductions in benefits and inefficiency in social security that would allow reducing the related contribution rate o f currently 22.5 percent to a level that will make the introduction o f social health insurance overall almost tax-neutral. T a b l e 37: H e a l t h I n s u r a n c e Scenarios and I m p a c t On L a b o r Costs and T a x Wedge, S R Scenario 1 Scenario 2 Scenario 3 Parastat Parastat Parastat Sectors Private Gov ai Private Gov al Private Gov al Average Salary 3,891 3,566 4,528 3,891 3,566 4,528 3,891 3,566 4,528 Employer Contribution Social Security 778.2 713.2 905.6 778.2 713.2 905.6 778.2 713.2 905.6 Pension 50 50 50 50 50 50 50 50 50 Health Insurance 155.6 142.6 181.1 233.5 214.0 271.7 311.3 285.3 362.2 Total Labor cost 4,875 4,472 5,665 4,953 4,543 5,755 5,030 4,614 5,846 Employer Contribution Social Security 77.8 71.3 90.6 77.8 71.3 90.6 77.8 71.3 90.6 Pension 25 25 25 25 25 25 25 25 25 Health Insurance 78 71 91 78 71 91 78 71 91 Take home Pay 3,710 3,398 4,322 3,710 3,398 4,322 3,710 3,398 4,322 T a x wedge 23.9% 24.0% 23.7% 25.1% 25.2% 24.9% 26.2% 26.4% 26.1% Source: Bank staff calculations 175. Risk pooling in most countries i s off-budget by one insurer if the population i s small. The small population size in the Seychelles will favor a single risk pool. Once S H I i s introduced, the MOF would have to redirect the financial f l o w to the health insurer, which will assume full responsibility for risk pooling and purchasing o f health care. Insurance revenue in the risk pool (whether generated by general taxation, payroll contributions, or individual premiums) seeks to cover a chosen package o f health care services as contracted with providers. Insurance risk-pools are generally managed and administrated by not-for profit private insurers or a public autonomous entity that reports to the government and contracts with the MOH and private sector providers. Poor financial management, lack o f guidelines for the investment o f insurance funds, weak banking systems, and incidents o f fraud and misappropriation o f funds aggravate performance o f the insurance systems. Therefore, insurers have to apply international 75 accounting standards, publish their financial and performance results on their webpage and undergo regular external audits. To ensure political independence, the legal form o f the insurer could be a public autonomous not-for-profit organization. At the beginning, the Seychelles may want to consider contracting out o f insurance management to an experienced international health insurance company that could also help build human capacity by training local staff on the job and provide the necessary I T investment (data bases are needed for claims, members, providers etc.). 176. Purchasing includes contracting between the insurer and providers and the provider payment systems. In the Seychelles the insurer would be expected to contract with accredited health care providers who offer a defined set o f services to the population against an established price. Service providers would be given increased autonomy to effectively produce these services and the defined benefit package and their performance evaluated against an established set o f performance standards. In other countries, insurers increasingly contract selectively and exclude providers with lower quality care and productivity from contracts. Payments are then made to providers for services provided to patients, based on the terms agreed upon in the contract between the insurer and providers. Around the world, provider payment reforms show a move from input- based payment based on the number o f staff and other expenditures, towards output- based payment. Consequently, outpatient providers are paid a capitation amount per person registered with the provider, which can be adjusted by some performance incentives (e.g. for quality o f care compliance); and hospitals receive a case-based payment to set them an incentive to increase the number o f patients hospitalized. 177. Mostly, social insurance benefit package generally covers all levels o f care in the public sector; and patients are charged co-payments to prevent overuse o f pharmaceuticals and medical care (moral hazard problem). Considering the importance o f the private sector in the Seychelles and the lack o f tertiary care in the public sector, it i s advisable for the social insurer to cover inpatient and specialist care in the public and private sector as well as catastrophic expenditures related to treatment abroad. Actuarial cost analysis o f the benefit package should be conducted to estimate the future funding needs, adjust the benefit package to an affordable level, and propose a composition o f funding from public and private sources that leads to equity in access to care and financially sustainable health financing. 178. Health facility directors will need greater autonomy and flexibility to respond to the new financial incentives set by S H I and improve productivity. Hospital and PHC facilities could be corporatized as nonprofit autonomous organizations, competing for patients with private for-profit providers. On the regional level, a community oversight body should be formed to supervise the functioning and performance o f the PHC center or hospital and ensure transparency in major financial and operational decisions. The responsibility and accountability for management and financial decisions rests with the hospital and PHC directors. Management autonomy involves expanding management responsibility for key areas including hiring and firing; determining the number o f staff and i t s skill mix based on the M O H guidelines; doing financial management, determining the level and scope o f activities, and deciding on 76 capital developments, the number o f beds, and technology mix. This autonomy needs to be accompanied by professional financial management in health facilities with annual financial and performance audits to prevent management failure. Managers must be equipped with the necessary resources and tools to make decisions, and kept accountable for performance results. 179. Introducing social health insurance will require investments in legislation, regulations, new governance and organizational structures, and information management so as to ensure proper accountability of all actors. The M O H would assume a policy-making and stewardship role, and implement reforms in quality assurance in the provision o f care, organization o f health facility management, and management o f resources including staffing and pharmaceuticals. The government w i l l need a clear vision about what kind o f health insurance would be financially and organizationally most feasible in the Seychelles and what the implications would be for the current financing functions. Such a vision and the related strategy should be based on the overall health policy goals o f the sector and taking into account the financial, institutional, organizational, and human resource situation. Concluding Remarks 180. In general, the Seychelles does not spend too much on health care; however, the way health funds are currently allocated across expenditures categories, does not lead to an efficient production o f care. Currently, there appears to be substantial room to reduce cost and improve productivity by reducing the number o f staff, examining the levels o f salaries paid to staff, reducing non-medical expenditures including for services that have been contracted out to the private sector and by closing overcapacities in hospitals and health centers. The resulting cost savings should be reinvested in the health sector by improving access to specialized and tertiary care for more patients either in the private sector in the Seychelles or at a lower unit cost price abroad; and by investing in the prevention o f high-cost diseases. The government i s recommended to implement first a series o f efficiency-enhancing and cost-reducing measures and revisit the current benefit structure o f the social security system with the objective o f a possible contribution reduction for social security, before giving any further considerations to Social Health Insurance. Recommendations 18 1. Based on the analysis presented in this Chapter, the following short- and medium- term measures are recommended to be implemented. 77 Short-term Reduce inefficiency in health care spending 0 Conduct a comparative cost-efficiency analysis for all contracts outsourced to the private sector (food, laundry, cleaning, etc) and identify less costly private contractors for these services. Instead o f each Line Ministry contracting-out similar services to private companies; the Government i s advised to centralize the contracting-out function for all Ministries at the Department for Public Administration. This would allow negotiating a lower price for a larger quantity. 0 Streamline and consolidate the current 266 job positions to fit into a wage grid, in line with overall public administration reforms; and revisit the levels o f salary payments by comparing across different Government functions. Conduct a productivity analysis o f the health workforce to identify the number o f staff needed at a level o f higher productivity particularly among health care assistants, ancillary services and environmental/public health staff. 0 Convert the Baie S t Anne (Praslin), Logan (La Digue) and Silhoutte district hospitals into triage health centers with approximately 8 beds in Praslin and 4 beds in L a Digue mainly for maternity and first aid care, which would allow closing o f about 40 beds. Emergency referrals to the Victoria hospital are already assured by air transport. The Victoria hospital i s advised to close about 20 beds on i t s maternity and female medical ward, and both wards should be reorganized or merged to increase the hospital’s ALOS to 80 percent. In line with the reduction o f beds and restructuring o f hospitals into health centers, and phasing out o f six health centers, the number o f health staff working in these health facilities needs to be reduced. Introduce explicit selection criteria and cost-sharing rules for specialized care overseas Ensure transparency, explicit selection criteria and guidelines for selecting patients and cost-sharing. Consider setting-up a fund to finance overseas treatment, against which patients can borrow money for treatment. Reimbursement by patients to the fund should depend on patients’ socio-economic background to ensure equity in access. Negotiate an attractive contract with the new private hospital to be opened in Victoria in 2009 to allow patients to be treated locally instead o f sending them overseas (e.g. open heart surgery, renal transplantation etc). 0 To maximize the number o f beneficiaries, the Government needs to negotiate a package at lower unit costs in neighboring countries (e.g. Nairobi hospital, Mauritius). 0 Introduce small co-payments on pharmaceuticals and inpatient and outpatient care. 78 182. Reduce inefficiency and abuse o f social security system: The Government i s advised to revisit the Social Security Act Chapter 225, and implement the recommendations o f the study conducted by the Social Security Fund o n the Overview o f Sickness Benefits in 2008. In addition, and based o n the experience from other countries, the following measures are expected to lead to substantial expenditure reductions for direct benefits, reduce social security administrative costs, and reduce the workload on the health workforce. First, Social Security should pay sick leave benefits only starting on the 3 1st sick day with the employer paying the first 30 days per year. In addition, the maximum number o f sick days should be reduced from currently 130 days to 100 days. Second, eliminate funeral benefits as a direct benefit and the related administration. Third, improve the monitoring o f sick leave by reporting annually the total number o f cases and the average number o f sick leave days per case; request second opinions for sick leave patients who report more than 30 days per year, and frequent sick leave users. Monitor and evaluate the flow o f funds and performance o f the health sector 0 Conduct a first National Health Accounts (NHA) and approve a plan to institutionalize NHA 0 Analyze the impact o f reforms on the performance o f the health sector based o n routine data collected in health facilities on utilization rates, occupancy rates and levels o f productivity Medium-term Clear all local debts and arrears and introduce cost saving measures in communication, transport and hotel expenditures to reduce future debts. 0 Reduce the capital budget to prevent cost increases due to delays in construction and payment. Improve the availability o f medical professionals 0 Enforce the requirement for Seychellois physicians and dentists to return within an agreed number o f years after having finished University to work at least five years in the Seychelles (public or private sector); or otherwise reimburse the Government for the total amount invested into their University education. 0 Do not allow public physicians to work in private practice while on public payroll, as they will otherwise refer public patients to their private practice 79 0 Introduce a nurse practitioner training program and adjust the j o b description o f physicians to delegate designated tasks to nurse practitioners. Invest into better availability o f preventive measures Ensure access for all population groups to preventive care such as modern contraceptives, cancer screening, early detection o f hypertension and heart diseases, and other life-style diseases. 183. The impact o f these reforms should be carefully monitored and evaluated to identify and correct for possible negative effects at an early stage. Some o f changes currently being implemented may lead to unexpected adverse effects that would have to be corrected, such as inequity in health financing, or substandard quality o f care. To monitor progress and detect negative effects, a monitoring and evaluation framework should be adopted that assesses baseline results before the introduction o f reforms and conducts regular follow-up surveys to measure progress. A baseline could establish results based on surveys on equity in utilization and financing o f health care, patient satisfaction and care seeking behavior, quality o f care and cost and efficiency levels in health facilities. Findings from the baseline could help to inform the reforms and identify progress as well as areas that would need strengthening. Table 38. Summary o f Health Sector Implementation Next Steps Implementation Step Timeframe Conduct a comparative cost-efficiency analysis for June 2009 all contracts outsourced to the private sector. Revise out-sourcing contracts as necessary. Conduct a productivity analysis o f the health June 2009 workforce to identify the number o f staff needed at a level o f higher productivity particularly among health care assistants, ancillary services and environmental/public health staff Convert the Baie St Anne (Praslin), Logan (La December 2009 Digue) and Silhoutte district hospitals into triage health centers with approximately 8 beds in Praslin and 4 beds in L a Digue mainly for maternity and first aid care, which would allow closing o f about 40 beds Clear all local debts and arrears and introduce cost On-going throughout 2009 saving measures in communication, transport and hotel expenditures to reduce future debts Reduce inefficiency and abuse o f social security January 20 10 system (see para 182 for details) Introduce explicit selection criteria and cost-sharing January 20 10 rules for specialized care overseas. Conduct a first National Health Accounts (NHA) December 20 10 and approve a plan to institutionalize NHA 80 V. EDUCATION Education Sector Context 184. This Chapter continues the analysis of how to achieve short term fiscal adjustment efforts, while maintaining, if not improving, public sector performance, with respect to the education sector. The chapter examines the funding for the sector, room for efficiency and value-for-money improvements and provides some recommendations o f how to allocate funds to improve learning outcomes. While the education sector appears to be reasonably well funded compared to comparator countries, learning outcomes need to be considerably improved if the Seychelles i s to achieve dynamic and modem economy vision laid out in Strategy 2017. 185. L i k e health care, the provision of education in the Seychelles i s predominantly by the public sector, and centralized with both financing and provision largely in the hands of central government. The Ministry o f Education (MOE) operates 29 kindergartens (“crbches”), 22 primary schools and 10 secondary schools. Crbche education covers two years (Crl and Cr2), and the official age range o f crbche pupils i s between 3.5 years and 5.5 years. Primary education covers six years (Pl- P6), officially for those between the ages o f 5.5 years and 11.5 years, and secondary education covers five years (Sl-SS), for those aged between 11.5 years and 16.5 years. Most schools in the Seychelles are situated on Mahe, the main island, where 87 percent o f the population lives. At least one school at each level can also be found on Praslin and L a Digue, the other two islands with significant year-round populations. There are only three private schools-the International School (the oldest o f the three), the Independent School and 1’Ecole Franqaise-all in Victoria, each offering classes from C r l to S5 and together enrolling about 7-8 percent o f all students at these levels (approximately 1.4 thousand out o f 19.2 thousand students). While not compulsory, government-provided crbche education i s free o f fees, and participation i s nearly universal.58 The Constitution o f 1993 and the Education Act o f 2004 guarantees education free o f fees through the secondary level and specifies ten years as compulsory, meaning that students cannot generally leave school before having completed S4. 186. Degree-level tertiary education i s not provided in Seychelles, and at some cost to the government, those that are eligible are fully funded to study overseas. Students can sit the Cambridge International General Certificate o f Secondary Education (IGCSE) examinations at the end o f S5, and performance here determines which students progress to the final two years o f academic study at the School o f Advanced Level Studies. There are nine post-secondary institutions, and all are government-r~n.~~ Selection o f students for tertiary study (whether overseas or in one o f the degree-level programs operated in the Seychelles in partnership with overseas universities) i s based on 58 In 2007, the population younger than 5 was 7,303 (data provided to the PER team by NSB), and the number of creche pupils was 2,835 (MOE 2007b). 59 In addition, there i s now one private post-secondary institution, the American Institute o f Medicine, an unaccredited institution with ties to education in the United States, but it draws nearly all of its students currently from outside the Seychelles. Just two Seychellois were enrolled in 2008. 81 student performance o n the Cambridge A-level exams. With the exception o f a few small degree-granting programs in some o f the nine linked t o overseas universities in Australia, Austria, Ireland, Kenya, Republic o f South Africa, Singapore and the United Kingdom, post-secondary training in the Seychelles i s entirely pre-tertiary, offering training only to certificate and diploma levels. For most degree-level education, students must go abroad. A number o f Seychellois (407 as o f October 2008) are studying abroad, most o f them with full funding from the Government (or, in a few cases, from the recipient countries) to cover tuition fees, travel and living costs. Figure 19 shows the breakdown o f the overseas training provided. Twenty-five percent o f overseas students were studying in Australia, and 14 percent in the United Kingdom. About three-quarters o f overseas students are recent secondary school graduates who passed the minimum A level grade requirements and the rest are in-service (Le,, within public service) candidates. Most are pursuing bachelor’s degrees. Figure 19: Sponsored Students Studying Abroad (N=407) as o f October 2008 Receiving Country Pre-Service or In-Service Malaysia-, Kingdom Gender o f Students Course Level Doctoral Male Femle Source: Data providedto MOE team by International Relations and Training Section o f MOE. 187. T h e Ministry o f Education has the responsibility for sector policy strategy and management o f the provision o f education services. An organizational chart showing MOE’s structure, which was modified slightly in 2008, is presented in Annex 13. The system i s highly centralized. Thus the government does have the potential to maximize economies o f scale, for example, in the purchase o f text books. However, schools have very l i t t l e autonomy and virtually n o responsibility t o manage resources in order to improve learning, which i s likely to impede optimizing resowce-use. 82 Education Outcomes 188. Compared with other small island states at similar levels o f development we find that Seychelles is doing relatively well in terms o f the enrollment rates as shown in Table 37. Recent reviews o f the education sector, however, have raised concerns about quality.60 As Figure 20 shows the results in IGCSE examinations are quite poor, particularly in mathematics. In the four subjects shown, exam results were considerably better in the private sector, establishing a potential benchmark to which the public sector can aspire. In English language, 88 percent o f the 45 candidates f i o m this one private school earned grades o f A* and A, while only 10 percent o f the 930 government school candidates did so. In geography, the percentage o f candidates earning either o f the top two grades was 51 percent and 3 percent in the private and public sectors respectively; in mathematics, 35 percent and 1 percent; and in history, 25 percent and 7 percent. Clearly private schools are selective whereas the government schools offer comprehensive education. However, there may well be more that the public sector can learn f i o m the practices in the private sector. Table 39: Comparison of Education Indicators, Latest Year Available. St. Kitts St. Vincent & Barbados Belize Fiji Jamaica Maldives Malta Mauritius Seychelles & Nevis Grenadines Gross enrollment rate, pre-primary (%) 94 34 16 92 82 97 101 109 99 88 Gross enrollmentrate, primary (%) 103 123 100 95 116 100 102 125 94 97 Gross enrollmentrate, lower secondary (%) 100 87 99 93 124 104 100 116 99 90 Gross enrollment rate, secondary (%) 102 79 84 87 83 99 88 112 105 75 Net enrollment rate, primary (%) 96 91 91 90 97 91 95 99 I1 90 Net enrollment rate, secondary (%) 89 67 79 78 61 87 82 94 65 64 Girls enrollment share, primary (%) 49 49 48 49 48 48 49 49 54 51 Girls enrollment share, secondary (%) 50 51 51 50 50 49 49 50 50 55 Source: UNESCO Institute for Statistics. 6o See Nolan (2008) 83 Figure 20: Some IGCSE Results, 2007 English (2nd language) Mathematics 50% """: . . . . . . . . . . . 50%j 40%' __ .... ................... .-....... ..-...... 40% -- - ... .. ."; I . -- - . 3 0% t ' 20% . . . . .............. 10% 0% ....................... A*A B C D E F G U A*A B C D E F G U -Government - 930 candidates -Government - 647 candidates .*.*..Private (Independent School) - 45 candidates .mm--m Private (Independent School) - 45 candidates Geography History oo/oa . ... ... . __ . . .. . .. . .. , .- 2oq a / - > ' - '. - e.... 1OO Y 0%' l .,.*.*.** ............... , ..... ._.__.._..,-,__ ~ . , A*A B C D E F G U A*A B C D E F G U -Government - 358 candidates -Government - 167 candidates Private (Independent School) - 45 candidates 'm's'' "...'Private (Independent School) .24 candidates Source: MOE (2008) Education Spending 189. Total public education spending i s around 5 percent o f GDP. Ministry o f Education (MOE) expenditure has ranged between 3 percent and 4 percent o f GDP between 2004 and 2007; and it fell f i o m 10 percent to 7 percent o f current primary expenditures over this period. Including capital spending on education and other education spending (e.g., education bursaries and foreign exchange payments for overseas tuition fees) education i s about 9 percent o f total government spending and 5 percent o f GDP. 190. A comparison with a selection o f other small island countries suggests that total public education spending as a share o f total government spending i s on a par with comparators. This i s despite the fact that education in the Seychelles i s predominantly publicly provided and free o f user costs and the fact that total government spending i s unusually high (50 percent o f GDP). Household expenditure surveys show some private spending on education - which amounts to an additional 1 percent o f GDP (SR 61 million by all households in 2007), and this brings total (public plus private) spending on education to about 6 percent o f GDP (Table 40). 84 Figure 21: MOE Spending on Education, 2004- Figure 22: Public Spending on Education in 2007 Small Island Countries (latest available year) - St. Kitts & Nevis 80 I loo 60 % '-\ +% ofcunent Pnrrari St. V i c e n t & Grenadines Malta Maldives Fiji +%oftotal govt Barbados expenditure Jamaica 40: -4-%ofCDP 20 1 Mauritius 111 AS % of C3lP 00 1 SEYCHELLES (all govt) uxli ZOOS Mo6 2W7 SEYCHELLES WOE only) ~ . - . ~ 0 5 10 15 20 25 Source: Ministry o f Education Source: U N E S C O Institute for Statistics 191. Given the relatively modest, and recently declining, government expenditures on education, we do not recommend any major cuts in government spending on education. Despite the fiscal situation at this time and an acknowledged need to reduce total government spending, we do not recommend increased spending but we do recommend making needed improvements in efficiency and using these resources to tackle the problem o f learning outcomes. Recalling the literature on public education spending on growth, we recommend ensuring that the public investment in education becomes more productive with a focus on outcomes for the longer-term growth strategy o f Seychelles. Table 40: Total Education Spending, 2007 1. Recurrent expenditures 282 (a) Spending by MOE 190 (b) MOF subventions to education institutions /a 10 (d) Spending by SSF on transportation subsidies and post-secondary bursaries 18 (e) Spending by MOF on overseas tuition and student bursaries 65 2. Capital expenditure by MOF on projects for education 25 As percent of government capital spending 7.4 3. Total government spending on education 307 4. Household spending on education (estimate from NSB) 61 5. Total public and private spending on education 368 As percent of GDP 6.0 Sources: IMF (2008), MOE, MOF, SSF and NSB Nofes: a/ This is to Seychelles Institute o f Management and Seychelles Qualifications Authority. 192. Government education spending i s principally on personal emoluments for school-based staff. M O E spending in 2007 totaled SR 190 million, 60 percent o f which was spent by the Schools Division to cover the personal emoluments o f crbche, primary and secondary school teachers. Around 16 percent i s allocated to Technical and Further Education (TFE), from whose budget post-secondary salaries are paid. Personal emoluments account for the vast majority o f MOE's budget (79 percent) as shown in Table A14-1 in Annex 14. The Finance, Administration 8 z Personnel Division accounts 85 for around 16 percent o f M O E spending. Given the structure o f the budget, it i s possible to allocate SR 139 million (73 percent) o f MOE’s expenditure in 2007 to the specific levels o f education and post-secondary institutions, as shown in Table A14-2. The remaining S R 51 million (27 percent) cannot be tied to specific levels or institutions, and for computing unit costs, therefore, these “overhead” expenditures are allocated on a pro- rated basis according to the allocations o f direct spending. 193. MOE spending accounts for only about two-thirds o f total government spending on education in the Seychelles. In 2007 a further S R 64 million was spent directly from the budget o f the Ministry o f Finance (MOF), to pay the tuition fees, travel and living expenses o f tertiary students studying abroad; SR 18 million was spent by the Social Security Fund on education-related benefits; and SR 25 million was spent on education capital projects from the M O F budget. Figure 23: Education ExDenditure Der Student. 2007 AU tertiary (post-secondary +overseas) overseas Sey Institute ofTecholoey School of Advanced Level Studies Seychelles Tourism Academy Nattional Institute of Health & Social Science MaritimeTrainingCenter National Institute of Education Seychelles Polytechnic Agricultural & HorticuturalTraining Centre Post-secondary secondary Primary (includingcreche) 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 SR Source: MOE 194. Total unit costs vary considerably across levels o f education, and particularly at the post-secondary level some institutions are more cost-effective than others. Combining recurrent costs across the public budget and allocating these to levels o f education gives us a good idea o f unit costs. The per student cost o f overseas tertiary- level training i s considerably higher than that at institutions based in Seychelles. The average per student cost o f overseas study i s approximately SR 99,655 per annum (approximately U S $ 12,500 in 2007 prices) for tuition fees and an additional SR 58,964 (US$ 7,400) for the bursaries that cover the students’ travel and living expenses. (See Table Annex 14-3 for more details o f unit costs). O f the post-secondary institutions based in Seychelles there i s also considerable variation in unit costs, ranging from the Seychelles Institute o f Technology (SR 5 1,263 per student) to the Seychelles Agricultural and Horticultural Training Center (SAHTC) (SR 15,960 per student). 86 195. Comparing across the system we find that the unit costs are only fractionally higher for secondary than for primary level schooling. This i s given that considerably more instructional materials and qualified staffing inputs are generally required in secondary education shows that the unit fiscal cost o f secondary education i s only 10 percent higher than that o f primary education, while the costs o f domestic post-secondary education and overseas study are three and twenty times higher. Tertiary education (the weighted average o f domestic post-secondary education and overseas study) i s six times higher. Figure 24: Unit Fiscal Costs as Percentage of Figure 25: Unit Fiscal Costs Selected Countries Unit Fiscal Cost of Primary Education 2007 (latest available per year) ‘ I Overseas 3 Tertiary GDP per capita Kenya , Swanland Secondary Teltmy (post-sec + overseas) 1 Botswana 7- Primary Pos t-secondary South Afnca Lesotho I Secondary 1 . 1 0 50 100 150 200 250 300 350 4 ‘ t l I . I 1 0.0 5.0 10.0 15.0 20.0 25.0 Unit Fiscal Costs as Percentages ofCdlP per Capita Source: MOE, WDI Source: World Bank (2005) 196. Compared with several other countries in the region, the ratio o f the tertiary- level unit cost to GDP per capita levels i s not high. To compare the Seychelles with other countries, unit fiscal costs can be “standardized” by expressing them as a percentage o f GDP per capita. By comparison with small African states such as Lesotho and Swaziland, which also rely heavily on overseas tertiary education provision, the relatively high tertiary level unit costs in Seychelles are less pronounced. South Africa and Botswana show similar relativite unit costs, although at a lower GDP per capita. 197. While unit costs are not way out o f line with comparators, there i s room for improving value for money in both the overseas program and in local post- secondary school institutions. In the case o f the overseas program, we agree with the government’s plans to further focus government resources on supporting training in key sectors such as health, education, financial sector and tourism. We also recommend that greater scrutiny be levelled at whether or not students are returning from overseas and that the bonding mechanism ensuring the repayment o f fees if students do not return be strengthened and enforced. In the case o f the post secondary institutions in Seychelles, a benchmarking o f unit costs shows that there are considerable improvements possible in some institutions to bring unit costs down. There i s also scope for better alignment o f the resources dedicated to these institutions with the government’s longer term strategy o f having a workforce geared toward management in toursm, financial sector and off-shore services. One possibility i s to consider sharing administrative costs across more than one post-secondary institution to make greater use o f economies o f scale. This could involve 87 bringing the institutions (back) under a single administration or, in view o f plans now being developed by the Seychelles University Foundation for a national university, developing the schools as faculties or departments o f a future university. 198. About 10 percent o f the education budget i s spent annually on education benefits in the form of bursaries and transportation subsidies. Primary (including crbche) and secondary students living more than 3.5 km from their schools are entitled to free bus passes to use the Seychelles Public Transport Company buses. These are funded by the Social Security Fund, which transfers the funds to the public transport company, which then provides the bus passes to the MOE. All post-secondary students also receive transportation subsidies giving them free travel .between their homes and where they study. Furthermore, despite the fact that the majority o f the direct costs asscoiated with continuing education i s covered by MOE, post-secondary students receive bursaries- ostensibly to offset the private costs o f their study (foregone earnings plus any direct costs they might incur). In effect, these students are being paid by the taxpayers. 199. We recommend reconsidering this approach and phasing out non-targeted education subsidies and replacing them with needs-based scholarships. From an equity point o f view the transportation subsidy at the post secondary level i s not well targetted since the subsidy i s given universally and since, in general, post-secondary education is better accessed by the middle-classes. Table 41 summarizes the recommendations and indicates the potential budgetary savings. In addition, to greater use o f co-payments (see next section) we recommend replacing the current system with a needs-based scholarship program to assist overseas students (who have already met the merit criteria) and who demonstrate an inability to meet increased cost-sharing obligations-in effect, allowing the bursary and tuition payments to vary between 0 percent and 100 percent o f current levels but equaling a 19 percent reduction in costs over current levels o n average. 200. Capital spending in education accounts for about 8 percent o f total education expenditures and fluctuates significantly from year to year. The separation o f capital and recurrent budgets means that these investments are not necessarily driven by maximizing education outcomes. Furthermore, the strong link between capital projects and the existence o f an external donor often drives the choice o f capital project. We recommend instituting a system within MOE to prioritize capital projects. This should be based o n an assessment o f critical rehabilitation and maintenance needs firstly and should take due consideration o f student number projections and the potential to share resources across schools so as to maximize beneficiaries. Principles o f cost effectiveness and cost benefit analysis should be applied. 88 Table 41: Recommendations for Education Subsidies Total Proposed amount annual in 2007 budget (SR savings Subsidy Recommendation Timing million) (SR million) Bus subsidies for Leave at current January 2009 2.3 primary and levels, even if bus secondary education fares go up in the students future Bus subsidies for Eliminate in two steps Leave at current levels in 5.0 5.0 post-secondary 2009 students Eliminate in 20 10 Bursaries for post- Grandfather students Reduce per student 10.5 4.6 secondary students entering in 2009 at amount by 25 percent in current levels. 2010. Reduce value by 44 Reduce per student percent by 20 11 amounts by a further 25 percent in 201 1. Bursaries and tuition Grandfather existing Reduce per student 64.6 12.3 payments for students in 2009 at amounts for students overseas students current levels. starting in 2010 by 10 Target 19 percent percent reduction on average Reduce per student through introduction amounts for students of co-payments and starting in 201 1 by a choice of training fixther 10 percent. program. “ Total annual savings when all recommendations have been fully implemented 21.9 Source: Bank staff estimates 201. Based on our analysis o f efficiency and equity in the sector, we find that major reallocations in government spending on education would achieve greater “value for money” in the sector. The unit cost analysis provides a basis for examining whether Seychelles i s getting good value for money for i t s education investment. Certainly, at the post-secondary level there are a number o f institutions that are expensive to run but that do not provide training in the economic sectors prioritized in Strategy 2017. At the same time the much lower unit costs for secondary education and academic post-secondary education are in line with the general observation that vocational training is generally more expensive, yet even here there i s considerable room to improve learning outcomes for this investment as we have seen above. Over time, increased total spending may be warranted, but certainly at the present time, this should not rely o n increased government spending. Greater cost sharing, together with better targeting o f government subsidies to reflect socio-economic differences o n the part o f students, will be needed t o raise the quality (learning outcomes) and relevance (labor market outcomes) o f Seychellois education. The remaining analysis will focus o n a number o f specific ways and make recommendations that could help the country t o meet these goals. 89 Co-Payments and Cost Sharing 202. Some level of cost-sharing (private financing) could address differences in government subsidies between students and other population groups; and also between students at higher and lower levels of the education system. At present, except for those attending the three private schools in Victoria, nearly all costs o f study in the Seychelles are financed by the Government. Some degree o f cost-sharing could also render the education system more efficient than it i s at present. When students are investing some o f their own resources, their incentive to learn i s greater, particularly at higher levels o f study, and they are more likely to seek training in skills that are valued by the economy. Many educators and government officials interviewed for this study were o f the opinion that students who pay practically nothing at all for their education today fail as a result o f not valuing their education adequately and that they are prone to making ill-considered decisions (e.g., on what to study and when to stop studying), resulting in a less than optimal allocation o f scarce public resources. 203. W e recommend a sharing of costs in those areas where subsidies will be reduced and also the introduction of a co-payment for examination fees. In addition to the subsidies already discussed, a proposal i s made to introduce some modest cost- sharing to help cover the fees (now paid in full by the government to Cambridge International Examinations in the UK) for students to s i t the IGCSE and A-level examinations. Enrollment Trends 204. The total student population has been relatively static over the last 4 years at around 21,000 students shows the number o f pupils in crikhe, primary and secondary education in the five years between 2004 and 2008 by level and grade. The diagonals shown are sample cohorts moving their way through the system. Sometimes we find more students in one grade than were enrolled a year earlier in the prior grade, suggesting either that there i s repetition in the system or that some students transfer into the system, perhaps arriving in or returning to the Seychelles from abroad.61 Table 42: School Enrollments (including Private School Enrollments) b y Level and Grade, 2004-2008 YO Academic year change Grade 2004 2005 2006 2007 2008 2004-8 Creche 2,812 2,833 2,823 2,835 2,923 3.9 Primary 9,504 9,173 8,9 10 8,998 8,744 -8.0 P1 1.1 P2 -5.9 P3 -8.8 P4 -9.7 P5 -16.0 6’ The Ministry has a policy o f “automatic promotion” and claims that little or n o repetition exists. 90 P6 1,679 1,546 1,577 I I -7.2 Secondary 7,827 7,852 7,756 7,852 7,542 -3.6 s1 -3.8 s2 -10.5 s3 -2.2 s4 3.0 s5 -4.0 Source: MOE 205. Relatively large numbers o f students leave the system (“drop out” to start w o r k o r enter a certificate course in one o f the post-secondary institutions) at the end o f secondary level f o r m 4. S4 marks the end o f the compulsory 10-year education cycle in the country. To have students leave secondary education after S4, just one grade before they become eligible to sit the IGCSE examinations, i s not a natural breaking point. Nolan (2008) has argued for a restructuring o f the education system as summarized in B o x 4. 62 Box 4: Nolan Recommendations for Restructuring the Secondary School System Dr. Nolan, a Special Advisor on Education to the President o f the Seychelles, in his 2008 report recommended that: (a) by 2012, the existing five-year program plus the additional two years at the “A” Level school be replaced by a common six-year secondary school program, to be offered by each o f the ten (1 0) Secondary Schools, which would get “added value” fi-om the number o f teachers already i n these schools who are qualified to teach beyond S5 level, but who, to date, have not had the opportunity to teach beyond that level, (b) the sixth year (S6) be regarded as a Pre-University Year, aimed at raising the entry standard for h t u r e Seychellois students entering the University o f Seychelles, or Universities and other third- level institutions overseas, or entering employment in the public and private sectors in Seychelles, (c) the five-year and a six-year comprehensive program eventually be reduced to a five-year Secondary School Cycle. In other words, Dr. Nolan’s proposal calls for a reduction in the length o f the post-primary cycle fi-om seven years (Sl-S5 followed by the two-year A-level course) to six years (Sl-S6) in step 1, and then, in step 2, to five years (S 1-SS). According to his proposal, students would continue to sit for the Cambridge IGCSE examinations (or a national examination introduced to replace the IGCSE) at the end o f S5, and Seychellois students would no longer s i t for the A-level examinations. Given concerns at present about the average performance o f Seychellois students o n both the IGCSE and A-level examinations, Nolan’s proposal to reduce the number o f years between primary education and (for those who qualify) tertiary education deserves some careful further research and debate. Nolan (2008) 91 206. Whether o r not secondary education i s reduced in length, there i s a strong argument for introducing a break in the cycle after S3 and marking a transition between what might be called “junior” and “senior” secondary education. This would require a redefinition o f the 10-year compulsory education cycle mandated under the Constitution, perhaps making Cr&che 2 (Cr2) the f i r s t year o f compulsory education. I t would probably also require the introduction o f a (national) examination at the end o f the S3 year. Table 43 shows post-secondary enrollments over the five-year period between 2004 and 2008. The analysis i s complicated by the fact that several institutions were redefined and/or renamed during this period, including bringing some that came under the authority o f other line ministries (e.g., the Ministry o f Health and Social Services in the case o f the National Institute o f Health and Social Science and the Ministry o f Environment, Natural Resources and Transport in the case o f SAHTC) under the umbrella o f MOE. In addition, some study programs were moved from one institution to another. For example, several technical subjects were moved in 2006 from the Seychelles Polytechnic to the Industrial Training Center, which became the Seychelles Institute o f Technology. Table 43: Enrollments by Level and Institution, 2004-2008 YO Academic year change 2004 2005 2006 2007 2008 2004-8 CrBche, primary and secondary 20,143 19,858 19,489 19,685 19,209 -4.6 Post-secondary 1,655 1,837 1,931 2,217 2,130 28.7 Seychelles Polytechnic 389 42 1 329 311 287 -26.2 Business Area 154 174 193 181 172 11.7 Visual Arts a/ 112 106 136 130 115 2.7 Technical Area b/ 123 141 48.7 Seychelles Institute o f Technology c/ 26 1 343 494 567 571 School o f Advanced Level Studies d/ 279 292 339 ,375 369 32.3 National Institute o f Education 204 223 243 274 231 13.2 Maritime Training Center 55 58 72 97 103 87.3 SAHTC 54 58 59 59 57 5.6 Seychelles Tourism Academy e/ 21 1 275 259 330 301 42.7 National Institute o f Health & Social Science 202 167 91 168 151 -25.2 International School (A-level students) 45 .- 36 - _ __ 60 All levels 21,798 21,695 21,420 21,902 21,339 -2.1 Source: MOE (2008) Notes: a/ Before 2006, operated as separate institution (National College o f the A r t s ) . b/ Transferred to n 2006, c/ Name changed in 2006: formerly known as Industrial Seychelles Institute o f Technology i Training Center. d/ Before 2006, operated as division o f Seychelles Polytechnic. e/ Formerly known as Seychelles Hotel & Tourism Training Center. 92 207. T h e observed trends in enrollment reflect b o t h demographics (fluctuations in cohort sizes in the case o f crkche, primary and secondary education) and m a r k e t d e m a n d (fluctuations in the popularity o f different post-secondary courses). In general, post-secondary education was the biggest education “growth sector,” with - 26: School Enrollments by Cycle (Sub-Level) of Figure enrollments across the nine Education, 2004:2008 post-secondary institutions 7,000 +C.2 P3-P6 rising by 29 percent over (-10.5%) the five-year period. While 6,000 --CC.3: S143 enrollments at the Maritime (-5.6%) Training Center and School +C.l@): P1- P2 (-2.6%) o f Advanced Level Studies grew by 87 percent and 49 3,000 percent, respectively, between 2004 and 2008, (+3,Yh) growth at SAHTC was not --+C.6: Pst-sc. quite 6 percent. Creche 1,000 2ML1 2005 2006 2007 2008 (+28.7%) enrollments also grew, Source: MOE reflecting higher labor- force participation rates, which n o w approach 100 percent, but also the fact that children born in the early years o f the new millennium comprised an unusually large cohort with the result that these children reached the age o f creche entry between 2004 and 2008. O n the other hand, primary and secondary school populations declined between 2004 and 2008, by as much as 10.5 percent in the case o f “cycle 2” (P3-P6). These differences can be seen in Figure 27 which shows changes projected for the next five years (2007-2012) o f different school-age population^.^^ Figure 27: Projected Growth of School-Age Population Cohorts, 2007- 2012 20.0 3150 E e %lo 0 v 5 s ‘ e, 50 8 00 9 e, Ages 0-4F’re- Ages 5-9Pnmary Ages 15-19Post- Ages 20-24 $-50 schl (population sec Univenrty s bulge) u*lo 0 -150 Age cohort and approx correspondmg education level Source: NSB 63 These projections are based on a recent study b y the NSB that updated earlier estimates reflecting the results o f the 2002 population census. The “population bulge” that hit crtche education earlier in t h i s decade w i l l n o w begin to affect primary education. Interestingly, this unusually large cohort follows an unusually small one that affected primary education in recent years and will n o w start to affect secondary education. 93 208. There i s considerable regional variation in student population growth with implications for demand on regional schools and resources. Figure 28 shows that, while the pre-school (0-4 years) age population i s projected to grow quite slowly on average (by 2.1 percent) over the next five years, there i s likely to be significant variation across the country’s 26 districts. At the two extremes, both o f which districts happen to be within the same geographic zone (Central Mahe), projections show that the pre-school age population o f St. Louis will drop by nearly 11 percent whereas that o f Mont Buxton will grow by over 82 percent. 209. New demographic patterns and changing preferences need to be factored into MOE planning and resource allocation decisions. For example, the Ministry will need to have more flexible arrangements to shift teachers and other inputs between institutions so as to avoid the emergence o f inefficient allocations. While achieving this should not require an increase in the budget for education, it definitely requires foresight and political will to adapt to trends particularly if this leads to downsizing institutions in some areas. Figure 28: Projected Growth in 0-4 Year Age Cohort by District, 2007-2012 100% 40% - 20% Note: CM=Central Mahe, EM = East M, NM = North M, WM = West M, LD = La Digue, P = Praslin. 210. T o improve the flexibility of education staff, adapting pre-service and in- service teacher training programs run by the National Institute of Education (NIE) i s recommended. The first curriculum change would involve a new requirement that all new students training to be certified as secondary school teachers qualify in at least two subject areas (a major subject and a minor subject specified in each trainee’s study program) in order to give secondary schools more flexibility in drawing up timetables and to ensure that all teachers carry full teaching loads. Single-subject teachers already teaching in schools would be encouraged to add a second subject through in-service training. The second curriculum change would involve an opportunity for those training to become primary school teachers to study multi-grade teaching methods which, while not needed in many primary schools, would be useful for those teaching in more remote schools with smaller class cohorts. The introduction or improvement o f multi-grade 94 teaching in these schools should prove cost-effectiveness, and some observers argue for multi-grade classes even in schools with adequate-sized age cohorts in light o f international research showing that younger students benefit f r o m exposure to and help from older students, while older students are not held back. The up-front costs o f curriculum change at NIE would not be great, but technical assistance might be needed, and international donor(s) should be sought t o provide this o n grant or concessional loan terms. 211. The teacher compensation package should be amended to encourage flexibility. T o encourage new as well as existing teachers t o acquire the desired attributes (such as qualification in two or more subject areas, multi-grade teaching skills, as well as qualification in subject areas currently in short supply e.g. mathematics and the physical sciences), the DPA and MOE should work together t o design and implement effective incentives. An obvious incentive would be t o reward teachers with the desired attribute(s), by placing them at a higher point o n the c i v i l service wage grid for example. This reform could be budget neutral if attention were given to ensure the reverse - that teachers without the desired attribute(s) are placed at a lower point o n the grid or even, given notice, declared redundant if they do not, within a reasonable time period, upgrade themselves in ways specified by MOE management and school heads. Productivity of Education Staff As with most education systems worldwide, staff costs dominate the budget o f MOE. 212. Table A14. 1 in Annex 14 presents the expenditure o n personal emoluments by division and section in 2007. Any effort to improve the efficiency o f government spending o n education must look at staffing issues t o see h o w teachers and other workers are being used and whether staff reallocations and/or reductions can lead to efficiency gains. O f the total number o f MOE staff (2,821), 71 percent are classified as instructional staff-teachers, lecturers, ancillaries and others who, in their current jobs, are in regular direct contact with students in classrooms. The remaining 29 percent o f staff are either office staff (administrators, accountants, secretaries, and messengers) or support staff (cleaners, maintenance workers, kitchen staff, watchmen, security guards and school wardens). The average monthly salary varies across and within these three groups, but office workers are the highest paid o n average, even though many secretaries, clerks, messengers and low-level office staff earn below the ministry average. Included also in this broad category are senior administrative workers, who in many (probably most) cases are former teachers promoted out o f the classroom. 213. Student-teacher ratios are low in the Seychelles, ranging from 9.9 in post- secondary institutions to 14.2 in cr&ches. L o w ratios are common in small island countries, but Seychelles i s still at the l o w end o f this spectrum. Figure 29 shows student-teacher ratios in a sample o f other small island countries. Mauritius reports student-teacher ratios in primary and secondary education o f 22: 1 and 17: 1 respectively - which i s significantly higher than those observed currently in the Seychelles (13:l and 14: 1,respectively). 95 Table 44: M O E Staffing, 2008 Staffing Payroll Average Salary. Yo of Yo of SR YO of Per Month Num. total Group ‘000 total (SR) Instructional staff 1,991 70.6 100.0 8,72 1 74.2 4,380 Teachers, lecturers 1,533 54.3 77.0 7,227 61.5 4,714 Head Teachers, principals 51 1.8 2.6 372 3.2 7,285 Ancillary teachers, lab technicians, 407 14.4 20.4 1,123 9.5 2,759 librarians, etc. Office staff 410 14.5 100.0 1,957 16.6 4,774 support s t a f f 420 14.9 100.0 1,082 9.2 2,575 Maintenance staff 113 4.0 26.9 296 2.5 2,6 17 Cleaners 202 7.2 48.1 50 1 4.3 2,482 Cooks, kitchen staff 14 0.5 3.3 45 0.4 3,214 Drivers 15 0.5 3.6 41 0.3 2,741 Watchmen, security workers 37 1.3 8.8 97 0.8 2,612 School wardens 39 1.4 9.3 102 0.9 2,613 - Total 2,821 100.0 -- 11,760 100.0 4,169 Source: MOE Figure 29: Student-Teacher Ratios in Small Island Countries (latest year available) B e h Mauntius Cyprus St Vincent and Grenadines Barbados - - --I 7 smCHEm’- Malta -. ..________+- -1 0 5 10 15 20 2s mP m r y Secondary Student-teacher ratio Source: UNESCO 214. Increasing student-teacher ratios should be goals f o r the medium-term, but emphasis in the short-term should be on upgrading instructional staff performance. Student-teacher ratios are especially l o w in primary education. Ordinarily we would expect to find higher student-teacher ratios in primary than in secondary education. The ratios are also particularly l o w in post-secondary institutions. However, in the short term, given the l o w education outcomes observed we would caution against introducing policies that would reduce the number o f instructional staff and, instead, introduce measures that include incentives for teachers to upgrade their skills. Also, greater attention should be given to the performance o f teachers and to greater autonomy, 96 including measures that would allow schools to encourage less productive teachers to leave the system. 215. Seychelles has recently introduced ancillary teachers to assist regular classroom teachers in the youngest classes (Crl-P2). We encourage M O E to undertake rigorous monitoring and evaluation (possibly through use o f case studies and comparative surveys) o f the initiative to determine whether this policy improves learning outcomes. Table 45: Student-Teacher Ratios, 2008 Level of education Students Teachers Ratio Creche 2,923 206 14.2: 1 Primary 8,744 670 13.1:l Creche and primary 11,667 876 13.3:l Secondary 7,542 547 13.8:l Post-Secondary-Polytechnics 11 326 34 9.6: 1 Post-Secondary-other /1 1,906 175 10.9:l Source: Bank staff estimates Notes: 1 Data are for 2007 216. Improved productivity o f the workforce would therefore concentrate on reducing the numbers o f office and support staff. M O F and DPA have targeted an across-the-board 12.5 percent reduction in staff under the VDS. Given the current staffing o f M O E this should be concentrated in the office and support functions. The numbers o f office and support staff seem quite high as compared with instructional staff. In 2008, three out o f every ten workers in M O E have no classroom duties currently (although many office workers in administrative positions were probably classroom teachers earlier in their careers. Table 46 presents our recommendations o n where to cut staff in MOE. Table 46: Proposed Reductions in Office and Support Staff 217. Office staff are C h ~ e n t Proposed proposed to be cut by Average staff new 12. percent, in line salary per staffing. month with the government- f SR) \---I Instructional staff 1,99 1 1,99 1 4,380 wide target. With Office staff (12.5 percent reduction) 410 359 4,774 respect to support Support staff (78.6 percent 420 91 2,634 staff, the ction) recommendation i s to Maintenance staff (contract out) 113 0 Cleaners (contract out) 202 0 contract out all Cooks, kitchen staff (contract out) 14 0 maintenance, cleaning Drivers 15 15 2,74 1 and kitchen staff to the Watchmen, security workers 37 37 2,612 mivate sector. The School wardens 39 39 2,6 13 effect of the Total 2,82 1 2,44 1 Source: Bank staff estimates 4’373 employment reduction i s estimated to be SR 13 million per annum saved from the wages and salaries bill. O f course, to hire in maintenance, cleaning and meal services from the private sector would result in increases in “goods and services” spending but, as argued in Chapter 3, this can lead over time to substantial savings and flexibility for the government. Although the cost o f procuring 97 these services from the private sector cannot be known in advance with certainty, the working assumption reflected in the table i s that the same levels o f service will initially cost 20 percent less and hence net savings would be S R 5.0 million annually, or 4 percent o f the current payroll budget. School Autonomy 218. Increasing school autonomy i s recommended in order to encourage greater oversight of funds and responsibility for efficiency improvements in the education sector to the first-line level of service delivery. This i s in line with the government’s own plans for schools to be “given greater autonomy from central government, reducing bureaucracy and fostering a greater sense o f school ownership amongst staff, students and parents. In addition, schools will be encouraged to seek private sector expertise and funding to enhance their education provision.yy64 Recent talks among the Department o f Public Administration (DPA), MOF and MOE have identified steps needed to implement this policy. In practice, school autonomy means that a part o f MOE’s budget allocation in the future will be deposited into school bank accounts and be used by local school administrators for on-time procurement o f approved categories o f school inputs. Certainly, for example, the contracting out o f maintenance, cleaning and meal services, discussed above, could be entrusted to individual institutions rather than procured centrally. To oversee the use o f funds, school boards o f governors should be elected by parents, teachers and other community members. Addressing Quality of Education Concerns 219. As discussed above, there i s considerable concern with respect to the quality of basic education in Seychelles as evidenced by the relatively poor examination outcomes. At present, the curricula for primary and secondary education seem crowded. There are 11 core subjects in primary education65and 14 in secondary education.66. Streamlining the two curricula would increase the focus (time given) to core subjects, including mathematics, languages and the sciences. This should improve quality o f learning in core subjects and reduce the need for specialized teachers, especially in secondary education, which results in the low student-teacher ratios. There i s a particular concern with respect to mathematics and the sciences, since poor instruction leads in turn to unacceptably l o w levels o f learning on the part o f students, who end up fearing and avoiding these subjects. As a result, o f those who decide to become teachers, too few choose to specialize in mathematics and the sciences, and so the circle repeats itself. 64 Republic o f Seychelles (2007) 65 English (7-8 periods per week, depending on the class (PI-P6) in primary), Creole (4-8), French (3-9, mathematics (7-8), science (2-3), personal and social education (3), art and music (2), physical education (2), religion (2), technology enterprise (2), social studies (0-3). 66 Required subjects in SI-S3: English (6 periods per week), French (9,mathematics (6), combined science (6), geography (3), history (3), technical enterprise (2), ICT and arts (2), personal and social education (2), physical education (2), religion (3). Required subjects in S4 and S5: English (9,French (4), mathematics (6), combined science (4), coordinatedscience (8), personal and social education (2), careers (I), physical education (2), religion (2). Optional subjects in S4 and S5: geography (4), history (4), technical enterprise (4), ICT and arts (4). 98 M O E recruits expatriate teacher^,^^ but these teachers do not usually stay in the country for more than one or two years. Moreover, even with expatriate recruitment, good teachers o f mathematics and the sciences are the most difficult to attract. 220. A strategy i s needed to retard and reverse the mathematics and science teacher downward cycle. One policy option to consider i s to develop, in consultation with NIE, a program o f master teachers, whereby the best specialists in these subject areas in the Seychelles, whether in MOE, elsewhere in government or in the private sector, are mobilized to design and deliver lectures aimed at students in different classes in primary and secondary education. NIE would record these lectures and make them available to schools on C D S . ~ ~ Inexperienced or less qualified teachers o f these subjects would help students to understand the lectures and complete follow-up assignments, and in so doing, these teachers’ own skills would grow over time, until at some point the recorded lectures would no longer be needed. This strategy i s relatively “low-tech” and would not be expensive, although some investment might be needed to place C D players andor ensure intranet connectivity in all schools and also to compensate the master teachers, at least those from outside the Government. The recurrent costs (for example, CDs and maintenance o f the system) would be small compared with the much higher costs o f recruiting large numbers o f new teachers from the private sector or from abroad. Private Education 221. One strategy to increase private spending on education i s to increase the number and student coverage o f private education providers. As indicated, at present only three private schools operate in the Seychelles. Figure 30 shows private and government enrollments by grade in crkche, primary and secondary education in 2008. Private education accounts for only 8 .percent o f enrollments in crbche and primary, and 6.5 percent in secondary. To ease the burden o f education and training on the budget, GOS may want to consider incentives to attract new private providers, at the academic levels where they now exist and also in vocational and technical education and training at both the secondary and post-secondary levels.69 Attracting private providers does not obviate the Government’s responsibility to assure quality and help consumers to make informed decisions in regard to the selection o f education and training programs. 67 In 2008, approximately 15 percent of secondary school teachers are non-Seychellois, with the largest numbers of expatriate teachers recruited from Kenya (5 percent of all secondary school teachers) and from Uganda, India (3 percent), and Sri Lanka and Uganda (2 percent each). Alternatively, the lectures could reside on a server in Victoria., making it easier to update and revise them, and schools could access them via an MOE intranet 69 Some private VOTECH establishments, for example, in ICT and foreign language training, do exist in the Seychelles, but a survey of this sub-sector was deemed to outside the scope of this PER. 99 Figure 30: Enrollments in Public and Private Schools by Level and Grade, 2008 1,800 1 1,600 ~ Private (Independent I Sch, International 1,400 1 I Sch, &ole Francaise) 1,200 1 1,000 I Government (32 800 1 creches, 25 600 , primaryschs, 13 400 secondary schs) 200 ~ 0 I l l C l l C 2 P1 P21P31P41 P5 P6 S1 i S2i S 3 1S4’S5 Creche Primary Secondary Source: MOE 2008 University (Degree-Level) Education 222. In June 2007, President Michel announced that he was setting up “a foundation to create a Seychelles University comprised o f local and international partners to develop a high-level institution o f training for Seychellois, as well as foreigners.” The establishment o f the Seychelles University Foundation, together with a Cabinet decision in August 2007 according to which government ministers agreed to contribute one day’s salary per month to help finance the costs o f the Foundation, indicates that the creation o f a university is seen as a high priority by the government. The plans are driven, not just by national pride, but also by a desire to reduce the large amount n o w spent from the budget to support Seychellois pursuing university degrees overseas. 223. We recommend a cautious approach and gradual process toward establishment o f a national university. In light o f the nation’s very small population, certain caveats are called for to ensure that the costs o f this new initiative do not escalate out o f control. The national university should begin as an affiliated college o f an established overseas university-one carefilly selected and demonstrating willingness to be a serious partner. For the foreseeable fiture, the degrees earned by those studying at the national university college would be awarded by the overseas partner institution. When it first opens i t s doors, the college should offer degrees in a limited number o f high-priority study areas, this number to be increased only when the success and cost- effectiveness o f the initial programs have been clearly demonstrated. T o the extent possible, the college should make use o f distance teaching methods, including correspondence, recorded lectures and video-conferencing. This places the responsibility for success on individual students. The likelihood that graduation rates will be (a lot) lower than they have been for students studying abroad needs to be acknowledged, but the potentially (much) lower unit costs could justify the difference. 100 224. Students at the college should pay the full cost (or a substantial portion o f the full cost) o f their education, but as with the overseas training, needs-based scholarships should be offered to ensure that poor but deserving students are not barred from study because they cannot afford the fees. 225. For students at the new institution (as well as those studying abroad) who s t i l l have difficulty covering the direct costs o f their study, the government might consider a program o f student loans (and pilot the program before bringing it to scale). To be sustainable, however, and to avoid the creation o f a new but hidden subsidy, the loan program should charge market rates o f interest. Moreover, loans should be given only to those backed by credible (credit-worthy) guarantors, and the earnings or pensions o f the guarantors must be subject to automatic deductions (no exceptions) in the event o f loan non-repayment. In light o f the unusually good information on individual earnings in the Seychelles, with every individual assigned a unique universal identification number, and also given the efficient operation o f the Social Security Fund, it might be possible to consider the creation o f an income-contingent student loan scheme for the Seychelles as opposed to a program o f mortgage-type student loans. Summary o f Key Recommendations 226. The key recommendations from the sections above and their estimated impact on the government budget are summarized in Table 47. 101 Table 47: Recommendations and Estimated Impact on the Budget Estimated Impact on Annual GOS Spending Recommendation (in 2007 prices) Reduce bursaries for post-secondary students by 50 percent SR 5.3 million (savings) Reduce bursaries for bverseas students by 20 percent on average SR 4.8 million (savings) Reduce tuition payments for overseas students by 20 percent on SR 8.1 million (savings) average Budget neutral if cost-sharing inversely related to Implement needs-based scholarships for post-secondary and scholarships, with richer families paying more tertiary students and poorer families paying less but families, on average, satisfying the cost-sharing targets Freeze bus subsidies for creche, primary and secondary education None (families to cover any increases in bus students at current level (SR 2 per trip) fares) Eliminate bus subsidies for post-secondary students SR 5.0 million (savings) Charge students taking IGCSE and A-level exams SR 50 per SR 3.2 million (savings) subject Rationalize the administration and staffing o f post-secondary Savings f i o m this are captured in the education through institutional mergers that make sense recommendation to reduce MOE office staff M O E to respond in timely fashion to new demographic patterns as well as changing preferences on the part o f secondary and None; requires leadership and political will only post-secondary students in their choice o f study programs Require all secondary school teachers to be certified in at least Little or none; perhaps some upfront costs to help two subject areas NIE modify i t s training curriculum Provide more primary school teachers with skills in teaching Ditto multi-grade classes Introduce salary incentives for teachers certified in subject areas Budget neutral given incentives that are in short supply (e.g., mathematics and the physical sciences) as symmetric, meaning that teachers without the well as secondary teachers certified in two or more subject areas desired attributes are paid less and primary teachers trained in multi-grade teaching methods Reduce office staff in MOE by 12.5 percent SR 2.9 million (savings) Eliminate maintenance, cleaning and kitchen s t a f f from MOE SR 10.1 million (savings) payroll Procure maintenance, cleaning and meal services fiom the private SR 8.1 million (addition to “goods and services” sector budget o f MOE) Give greater autonomy to schools and other educational Budget neutral but should result in efficiency institutions gains (improved education outcomes) Streamline curricula o f primary and secondary education so as to Perhaps none, although it might lower costs by increase the focus (time given) to core subjects reducing the need for specialized teachers Some investment may be needed to improve Mobilize “master teachers” o f mathematics and the sciences to intranet connectivity and to compensate the design and deliver lectures aimed at students in different classes master teachers, but inexpensive relative to the in primary and secondary education and record the lectures for cost o f recruiting large numbers o f new teachers access on CDs and/or the intranet by the schools o f these subjects Budget savings resulting from less reliance on Consider incentives to encourage an increase in private provision government financing difficult to quantify in o f education and training advance, but they could be significant The plans formulated by Seychelles University Foundation and Budget trade-off between training degree students the steps taken by GOS to create a national university should be domestically and sending them abroad needs to gradual and careful so as to ensure that costs (financed from the studied as art o f a detailed costing and careful budget) do not escalate out o f control cost-benefi; analysis o f plans for the-miversity 102 Annex 1: Summary Table o f the Empirical Research on Public Finance and Growth Significantly positive effect Inconclusive/No Significantly negative effect/Complex effects effect Impact o f Cronovich (1998) Ram Kromendi & Meguire (1 985) Landau (1 983). Scully government (1 986), Sattar (1993), Grossman (1990) Levine and (1989), Barro(l991),- consumption Macnair, Murdoch Pi and Renelt (1992) Sheeby (1 993) Durden and Elledge on long-run Sandier (1995), Devarajan, Lee & Lin (1994) Garrison & (1993), Hansson and growth Lee ( 1 9 9 9 , Grossman Henkerson (1994) Swaroop and Zou (1 996) (1988), Hansen (1994), Hsieh Karikari (1 995) Landau & Lai (1 994), Gemmel (1985), Landau (1986) (1983), Saunders (1985) Rao Grier and Tullock (1989) Bairam (1990) Sattar (1 989), Assane and (1993) Evans & Karras Pourgerami, (1994) (1994) Hansen( 1994) Barro (1997), Guseh Andres, Domenech and ( 1997) Molinas (1 996) Zhang and Zhou (1 998) Impact o f taxes Koester & Kormendi (1 989) Garrison & Lee( 1996) on long-run Easterly & Rebelo (1993) Kocherlakota and Y i growth Kocherlakota and Y i (1997) (1997) Helms (1985) Easterly & Rebelo (1993) Canto & Webb (1987) Yu, Wallace & Nardinelli (1991) Impact o f Landau (1 983) Barro (1 99 1) education Moomaw & Williams (1 99 1) expenditure on Hansson & Henrekson (1 994) long-run Ansari & Singh (1997) Singh growth & Weber (1 997) Evans & Karras (1 994) Barro (1997) Baffes & Shah (1998) Impact o f Da Silva Costa, Ellson & Mullen & Williams (1 990) Landau (1985) Evans & public Munnel(l990) Moomaw & Barro (1 99 1) Hansson & Karras ( 1994) infkastructure Williams (1 99 1) Binswanger, Henrekson (1994) Laudau Devarajan, Swaroop & and/or public Khandker & Rosenzweig (19986) Hulten & Schwab Zou (1996) investment on (1 993) Easterly & Rebelo (1991) Holtz-Eakin& long-run (1993) Sanchez-Robles(1998) Schwartz (1995) Hulten & growth Ratner (1983) Aschauer Scwab (1 99 1) (1 989) Munnell(l990) Lynde & Richmond (1992) Bajo- Rubio & Sosvilla -River0 (1993) Lynde & Richmond (1993) Harmatuck (1 996) Wylie (1 996) Kocherlakota & Y i (1996) Kocherlakota & Y i (1997) Lau & S i n (1997) Aschauer (1989)Easterly & Rebelo (1 993) Morrison & Schwartz (1 996) Odedokun (1 997) Eisner (199 1) Munnell (1 992) Glomm & Ravikumar (1 997) Source: Based on Poot (2000) 103 Annex 2: Description o f the Legal and Institutional Framework f o r Public Financial Management (PFM) 70 The legal framework for PFM Constitution 24. Chapter XI1 o f the 1993 Constitution o f the Seychelles (as amended) sets out the basic foundations for P F M in the Seychelles. This includes the presentation o f estimates before Parliament, the operation o f the Consolidated Fund, the establishment o f other funds, the imposition o f taxation and the broad mandate and independence o f the Auditor General. Public Finance Act 1996 25. The Public Finance Act 1996 (Act no. 22 o f 1996) and i t s associated Financial Instructions from July 1997 provides for the control and management o f the public finances o f the Seychelles. The Act o f 1996 repeals the original Public Finance Act o f 1991 (Chapter 188 o f the Laws o f Seychelles). However, statutory instruments made under chapter 188 continue in force if it i s not withdrawn or amended by the act o f 1996. 26. The Public Finance Act and its associated Financial Instructions regulates among others: i)the powers and duties o f the Minister o f Finance; i i)the powers and duties o f the Principal Secretary; iii)the duties and responsibilities o f the Accounting Officers; iv) the establishment o f various funds (consolidated fund, contingencies fund, development fund) and procedures to establish other funds; v) procedures for procurement and payments from the funds; vi) procedures for collection and receipt o f revenue; vii) procedures for advances, imprests, deposits and suspense accounts; viii) the custody o f public money and ix) the custody and control o f other assets. The Audit Act 1973 27. The Audit Act dates back to 1973 and had been amended in 1991 (chapter 11 o f the Laws o f Seychelles) to bring it into conformity with the Constitution that came into force on 31St December 1991. The Audit Act specifies the duties and powers o f the Auditor General and i t s staff. Moreover, it regulates the appointment and salary o f the Auditor General. A new Audit Bill has been drafted and i s currently with the Council o f Ministers. Revenue legislation 28. The main laws applicable to revenue include the Revenue Commission Act (2007), The Goods and Service Tax Act (2001), the Social Security Act, The Business Tax Act and the Trades Tax Act. With the exception o f the GST Act, all other tax acts date back to 1987 with revisions only for rates and application. ~ 'O Reproduced from the PEFA Assessment June 2008. 104 Procurement 29. Procurement regulations are currently set out in the financial regulations. The National Tenders Board Act 2004 established a six member National Tender Board with powers to administer and make recommendations to the Government for the procurement o f goods and services, and the hiring and letting o f assets and properties belonging to the Government that are valued above S R 500,0007', for all budget-dependent government agencies. It also has the powers to administer and make recommendations to the Government on the disposal o f government assets and properties. A Procurement Bill has recently been drafted. The institutional framework for PFM President 30. The President i s the Head o f State and Government, as well as Commander in Chief o f the armed forces. The President i s elected by direct universal adult suffrage and i s restricted to three terms o f office o f five years each. Legislative 31. Legislative power i s vested in a unicameral parliament, the National Assembly. 25 members are elected in first-past-the-post single member constituency elections. Up to 10 further members are elected by proportional representation (PR); each party i s allocated 1 seat for every 10% o f the vote obtained; the threshold for a PR seat i s 10%. The term o f the National Assembly i s five years. Presidential elections took place in June 2006 and parliamentary elections in May 2007. There i s one committee, the Finance and Public Accounts Committee, responsible for public financial matters. The Committee comprises o f 11 MPs selected to reflect the weight o f powers in the National Assembly. The mandate o f the Committee i s to scrutinize the budget estimates, the budget statements and the reports o f the Auditor General. It i s not currently chaired by the Opposition in accordance with Commonwealth guidelines. Executive 32. Executive authority i s established in the office o f the President. The Council o f Ministers comprises o f a minimum o f seven and a maximum o f 14 members. Members are appointed by the President with the approval o f the Assembly Judiciary 33. The legal system i s based on English Common Law, the Napoleonic Code and the 1993 Constitution. Company law i s based on English Law and the highest court i s the Court o f Appeal. The court system comprises a Court o f Appeal, a Supreme Court and subordinate courts and tribunals. There i s no specialized commercial court. 7' This excludes military equipment and other security related items. 105 Administration 34. Since 2007, the Business o f Government i s distributed amongst 15 ministries and departments. As noted earlier, recent reform initiatives have created a number o f semi autonomous regulatory bodies and agencies. These bodies have been created either through specific enabling acts or administrative orders. 35. The Ministry o f Finance i s responsible for overall financial and economic management. It has four main “divisions”, the Treasury, Financial Planning and Control, Policy and Research and Administration. The Revenue Commission came into operation in March 2008 and i s charged with the collection o f all domestic taxes and social security contributions. The National Economic Planning Council i s responsible for the development o f the national strategy. The key features of the PFMsystem 36. The financial year in the Seychelles i s from 1st January to 31st December. Financial statements are currently prepared on a cash Capital projects are accounted for through a Development Fund. For central ministries and departments, the GoS has a centralized payments system and uses Visual Accounts Mate financial software. Processing and recording o f transactions i s on a decentralized basis with all ministries and departments having access to the Visual Accounts Mate system. For ministries and departments, the budget process should be as follows: appropriation (by parliament), authorization (by the Minister through the signing o f a general warrant), commitment (by the relevant accounting officer through the raising o f a local purchase , order) and payment (on receipt and validation o f invoice by Treasury). 37. Businesses and employers, not individuals are responsible for all tax and social security payments. There i s no capital gains tax or tax on interest. The Auditor General i s a constitutional appointment with his powers, scope and mandate derived from the Constitution and the Audit Act. ’*The Financial statements for 2006 refer to the use o f modified cash, but no evidence o f accrued revenue could be found. 106 Annex 3: Categorizing Functional Reviews73 Vertical Review 1. A vertical review focuses o n the activities o f one institution. The institution may be a ministry, an agency, or a central body such as the government secretariat or the presidential administration. A vertical review o f a ministry may or may not include a review o f subordinate agencies, and may focus only o n the central ministry or include de- concentrated units. The main focus o f a vertical review i s the extent to which the institution performs the functions required to meet its objectives and the extent to which the organizational structure o f the institution f i t s logically, without duplication or gaps, the requirements for the performance o f those functions. At any one time, one or more vertical reviews may be conducted, but the vertical review o f each institution i s essentially separate from the reviews o f other institutions. There are numerous good and bad examples o f vertical reviews, with the case o f the Latvian ministry o f Agriculture (1997) often highlighted as ‘best practice’. System Review 2. A system review focuses o n a comparative review o f one or more common functions across a number o f institutions, and thus mainly assesses the ability o f administrations to function as in integrated system. A common function i s one performed by all or most institutions, such as personnel, internal administration, legislative drafting and budgeting. A system review o f one or more common functions is carried out across the entire administration or one part o f the administration, such as all ministries, all subordinate agencies, or all ministries in a given sector. The main focus o f a system review is o n the comparability in performance o f common functions across different institutions. In particular, a system review seeks to determine the extent to which the status and position o f a function within different institutions i s comparable, e.g., i s there a personnel department in some ministries but only a section within a department in others? If there is a difference in status, i s it justified by differences in the size or complexity o f the institutions? It also allows for examination o f the equitability o f staffing levels and staff quality for a given function between different institutions, and o f the extent to which the same activities are performed, in a similar fashion in all units. For example, do all personnel departments perform activities related to recruitment, or are there some institutions in which recruitment i s strictly the prerogative o f line managers. 3. A number o f system reviews can be conducted concurrently, but the review o f each function is essentially separated from the review o f other functions. Even if there have been cases where system reviews were carried out separately, to address particular problems in, for instance, legislation drafting, system reviews are most often conducted in combination with one or more vertical reviews. Good examples o f combined functional reviews are the Centre o f Government reviews, carried out by the OECD Governance division for OECD member governments, which address all common functions, or the HRM, budget planning and policy planning reviews carried out in Latvia and Lithuania in 1999-200 1 and the HRM review in Russia conducted in 2004. 73 UNDP (2002) 107 Horizontal Review 4. A horizontal review focuses on the distribution o f functions between institutions. The focus o f such a review i s primarily on objectives and competencies, seeking to establish if at the level o f the administration as a whole the distribution o f competences i s rationalized, without undue duplications and gaps. A horizontal review can also focus on the extent to which all ministries follow the same methods in defining relations between central and deconcentrated units, or the extent to which financial and accountability relations between ministries and subordinated agencies are comparable across the system. Such horizontal reviews are particularly difficult to conduct and are relatively rare. They may be carried out not as separate reviews but as an attempt to draw systemic conclusions from a series o f vertical and system reviews. Good examples o f horizontal reviews, with or without in-depth vertical follow up reviews include the ‘organizational audit’ o f the Slovak government, carried out in 2000-2001 and the horizontal review o f the administration o f Cape Verde carried out under the strategic re-alignment program in 2007-2008. 108 Annex 4: Ministry o f Community Development, Youth, Sports, Culture and the Arts Institutional Review 1. The M C D Y S C A includes two main departments: (a) Community Development and (b) Youth, Sports, Culture and the A r t s ) as well as several subordinated organizations (National A r t s Council, National Sports Council etc.) Department o f Community Development 2. The Department o f Community Development (DCD) defined and implements community development programs and manages 25 district offices, which form the backbone o f the de-concentrated services o f the Government. The Department has 1148 posts, 178 o f which are vacant, and to be suppressed in the ongoing rationalization exercise. 3. The Division for Community Development has 85 positions, 52 o f which are to manage the nine homes for the elderly which together constitute a department o f the ministry. The remaining staff in this division are responsible for the design and implementation o f Community Development Programs, one unit is responsible for programs (17 posts) and one for project implementation (13 posts). The division currently has 100 project requests for a total o f SR 27 Million. 4. The second main division o f the Ministry is the Community Management Division is heavily skewed towards the management o f district offices, which employ a total number o f some 645 staff in post. The other section in this department i s the District Operation division, which houses the inspection and emergency management units. 5. The third division i s Burial Services which includes 118 s t a f f and i s responsible for organizing burials. 6. Finally the Administration and Finance division employs 44 staff, and provides HR, budget management and support services. 7. The Community Development Department is a typical example o f the state driven development model o f the Seychelles: Instead o f funding bottom-up defined community initiatives through a fund or subsidy mechanism, the Department defines programs and projects (though the latter with community input) and is directly involved in their implementation. The state run homes for the elderly, as a section o f the Department, are an anomaly, as such services are rarely managed as a government department in other states. The core function o f the district offices, which i s the coordination o f public service delivery in the districts, has been severely diluted through the mandatory absorption o f workers taken on under a social employment 109 scheme, which brought the department from a staff number o f 325 in January 2006 to 1111 in July 2006. The problem in this case i s not only the artificial increase o f staff numbers, but also the fact that by having to manage large numbers o f low productivity low-skilled workers, the district offices are unable to effectively fulfill their primary function, which i s the local coordination o f public service delivery. This i s proven by the fact that none o f the other Ministries reviewed currently use the services o f the district offices or recognize their coordination role, and operate their own de-concentrated services in isolation. The inspection function should not be housed in the same department as it i s supposed to be inspecting, but rather put directly under the Principal Secretary. Support services are overstaffed, the directorate includes 18 cleaners and other low skilled workers. 8. The core functions o f the Department, support for community development initiatives and the coordination o f public service delivery in district offices, could be delivered with a significantly smaller workforce and structure. 9. The three divisions in the Community Development Division could be easily merged into one by: i) Closing down the projects section and only retaining a program section. It i s up to communities themselves to define and implement projects and submit these for financing to government, where such financing i s available. The government could define overall priority programs under which applications could be submitted. ii) The function o f homes for the elderly should be taken out o f government and replaced with a means-tested subsidy mechanism, while those than can afford to pay should finance their own stay. The homes for the elderly should be run as not for profit organizations under a board o f trustees. The district offices could nominate a government board member as needed. 10. This would allow for the suppression o f 60 o f the current 85 positions in the Division, leaving 25. 11. The Community Management Division could be significantly streamlined, as in the view o f the Principal Secretary it takes only 120 staff to manage effectively the district offices, instead o f the 960 current positions, about 111 o f which are vacant. However, streamlining t h i s department would be achieved under the measures on rationalizing support staff in the previous section. The department would in this case not need more than 125 staff, including central coordination. 12. The current District Operations section would be moved directly under the Principal Secretary and could also be streamlined to 10 staff, instead o f the current 16. 13. Finally the Burial Services division i s another anomaly in the structure o f the Ministry. For this department, a strategy for privatization would need to be defined, 110 though currently there are no private undertakers in the Seychelles, nor i s there an adequate insurance system to handle burials. Since this i s a sensitive function, changing provision to private and putting in place an insurance mechanism will take time. However, the objective should be to privatize this function within the four years o f the fiscal adjustment program. 14. Cemetery maintenance, where this cannot be ensured by religious organizations, could be handled by the district offices, which could contract landscaping and other maintenance functions to individual contractors or firms. As this would not impose a significant burden on district offices this could be absorbed by the 4-5 core staff. Reorganizing the provision o f this function would therefore lead to net savings o f 118 posts. 15. In relation to support services, low skilled support services could be contracted out under the overall strategy set out above. 16. In conclusion, it appears that the Department would need no more than some 195 positions, compared to the current number o f 1148. Whereas much o f the impact o f this reform i s already included in the review o f the support services section, savings o f an additional 220 positions would seem feasible over time. Youth, Suorts, Culture and the A r t s 17. The Youth, Sports, Culture and A r t s Department currently has some 4 15 staff, 66 o f which are likely to be reduced in the context o f the ongoing rationalization exercise. 18. The structure o f the Department i s complex, and has 6 divisions, sports strategic planning and marketing, public relations, marketing and special events, culture, major games, youth and administration and finance. 19. Under these divisions the structure o f the Department i s highly fragmented, with many single post sections that could easily be merged together. A rationalization exercise looking into each o f the units o f the department and review the potential for merging units (with related overhead savings) should therefore be conducted. 20. Based on initial reviews and discussion, the Department includes a number o f functions that are not generally considered core state functions: The National Museum and National Conservation o f Performing A r t s (under the culture division), with 60 staff, 0 The International Conference Centre (under administration and finance), with 37 staff. 0 A playground, under the youth division, with 19 staff. 0 The Major events and Kreol festival units, with 15 staff. 0 Major games, with 10 posts. 111 21. The functions inherent in each o f these u n i t s could be provided in a more effective manner: i) Playground and International Conference Centre should be privatized (ongoing). ii) The National Museum and Conservation should be transformed in not-for- profit foundations, with Boards o f Trustees. A subsidy arrangement on a declining rate could be put in place to ease the transition, as concerns have been expressed about safeguarding national heritage. iii)Major Games should be made the responsibility o f the different Sports Federations. iv) The Kreol festival organization should equally be housed in a not-for-profit foundation with a potential state subsidy. 22. Introducing these ‘quick win’ reforms would lead to a reduction o f posts by about 150. Whereas net budget savings would be lower due to the initial subsidy arrangements it i s likely that significant savings would be achieved overall. 23. Apart from these obvious measures it i s recommended that the Youth section and i t s operations be rationalized. For instance, Youth activities could be coordinated by the 7 program coordinators, but the 42 youth workers (which work from 8-16 when youth are actually in school) posts could be suppressed. I t i s suggested that other aspects o f the work o f the Department be reviewed in detail. Many o f the sections and units in this division perform functions that could be transferred to communities or community based organizations, such as youth centers, young citizens’ movement etc. 24. Finally the administration and finance section has a very large number o f security personnel and a disproportionate number o f support service staff (26, compared to 18 in the much larger DCD). The implementation o f reforms in the provision o f support services could therefore lead to significant savings for this Department. 25. Apart from the core ministry, the extensive mandate o f the National Sports Council has also been noted, in particular the fact that the sports council currently f u l f i l l s functions that go well beyond i t s expected mandate o f coordination o f sports federations and cross cutting issues, and includes for instance the direct management o f the national swimming pool. There i s therefore significant potential for rationalization also in this autonomous organization, which currently employs 166 staff, through the privatization o f functions such as swimming pool management, as well as transferring responsibilities to the various sports federations. 112 Annex 5: Ministry o f Employment and the National Human Resource Development Council Institutional Review 1. The Ministry o f Employment and the subordinated National Human Resource Development Council constitute the smallest o f the organizations reviewed in this chapter. The Ministry was created in 2005, when the previous Department o f Employment was upgraded to a Ministry. The National H um an Resource Development Council, which i s an institution with largely strategic functions, was moved under the Ministry in 2008. 2. The Ministry does not have Main Departments and i s organized in two divisions, Industrial Relations and Employment and Administration and Finance. A small policy unit charged with analyzing issues impinging on productivity as recently established under the Principal Secretary, and a Planning, Research and Information department i s responsible for date collection and the liaison with bodies such as the I L O and other international organizations. 3. The Division o f Industrial Relations and Employment provides employment services, including services to job seekers and employers, registration and referral services, monitoring o f labor market trends and established the regulatory framework for foreign workers. 15 staff are engaged in the unit charged with this function. The Labor Inspections Unit has 10 staff and performs classical labor inspection functions, such as enforcing the labor code and health and safety at work regulations. A further 15 staff work in the Industrial Relations unit and are responsible for designing the normative framework for settling labor disputes, but also currently for mediation services. 4. The current orientation o f the Division reflects the traditional perception o f the role o f the state in the Seychelles as the provider o f all services. In the context o f the ongoing reform program the Ministry plans to: i) Outsource services to job seekers and employers to a private employment agency, there i s an ongoing search for potential interested partners. ii) Transfer the settlement o f labor disputes to a new industrial relations tribunal. At a later stage, the transfer o f mediation services to a joint entity established by employers and employee organizations might also be considered. 5. These measures, which are sensible, may reduce staff numbers from the current 40 to about 25. Further savings would be possible in the support services unit, which employs some 20 l o w skilled workers, such as cleaners, drivers and office clerks. 6. On the other hand, in view o f the obvious productivity issues identified, for instance, in the chapter o n Health Expenditures, it would be recommended to enhance the capacity o f the Productivity unit, which supports an inter-institutional committee charged with analyzing key issues reducing productivity levels in the Seychelles. It would be recommended to add an additional 2-3 staff to this unit, at least in the short term. 113 7. The National Human Resource Development Council (NHRDC) i s mainly a strategy setting institution, and has 19 staff. It coordinates professional training and formulates long term skill development plans. Based on this, the Council also sets norms for overseas programs, including to what venues candidates can be sent. Recent changes in approved venues have started to significantly reduce cost (e.g. doctors can now only be sent to India, Mauritius and South-Africa, while previously the preferred destination was New Zealand). The Council also i s expected to monitor the respect for the Bond that overseas students sign with the government, but enforcement i s l e f t to the Ministry o f Education. 8. One recommendation that has been made, and which i s supported by this study, based on the analysis in the education chapter, that the management o f the overseas studies program i s also moved from the Ministry o f Education to the NHRDC, as this institution i s already responsible for defining venues and monitoring the application o f the Bond. The NHRDC’s Governing body also has to approve all placements. Centralizing program management could in particular enhance the enforcement o f the Bond, as currently functions are divided between monitoring and enforcement. In addition, the NHRDC, as an inter-ministerial body, i s better placed to handle the coordination o f the program. The NHRDC, with i t s small staffing size, i s unlikely to be able to make significant staff cuts, though some savings on support staff may be possible. These will be more limited than in other institutions as the NHRDC makes use o f the pooled administrative services o f National House. 9. Finally, an anomaly on the governance arrangements for the NHRDC was noted, in that the Minister chairs the board o f the Council, while he i s also responsible for i t s oversight. This i s a clear case o f conflict o f interest and would need to be removed. Alternatively, the Principal Secretary Employment could represent the Ministry on the Board, so that the Minister can take final political decisions without regard to hisker role in the Board. 114 Annex 6: Ministry o f Finance InstitutionalReview 1. The Ministry o f Finance i s a relatively flat organization, which includes two large Departments placed under the Principal Secretary, the Revenue Commission and the Treasury, as well as 11 central divisions or units. This includes departments as varied as the Postal Services and the single person Public Enterprise Monitoring Unit. 2. Total number o f staff employed in the Ministry i s 273, but this includes 118 Postal workers. The Revenue Commission employs an additional 224 staff. 3. The capacity constraints in the Ministry were already noted in the section on systemic functions, whereas the Ministry has a large number o f units and divisions, staffing levels on core functions are very weak, with less than 10 full time staff in the Policy and Strategy Department. The key aspect o f reorganization in this ministry would therefore be a focus on core functions and the transfer or privatization o f everything non- core. 4. The organization o f the Ministry also poses span o f control issues; the Principal Secretary i s directly responsible for overseen 11 diverse entities, including several that would be best organized as autonomous entities (consumer protection, commercial credit), or privatized. However, it would s t i l l make sense to organize the remaining entities into two departments, a budget department and a trade and state owned enterprises department. 5. In relation to this point, the obvious candidate for privatization or at least commercialization are the postal services, which should be taken out o f the Ministry as soon as possible and be made either a non-commercial state owned enterprise or, if feasible, be privatized. This would take 118 posts o f f wage bill and allow the Ministry to focus on i t s core functions. Other organizations that could be run in an autonomous manner would be the Consumer Protection Authority and the Commercial Credit Authority, though a chance o f status in these two organizations i s already being contemplated. This would allow for staffing up the Policy and Strategy Department which i s severely understaffed. 6. Implementing these measures i s likely to reduce the net number o f posts in the Ministry by about 100. However, it i s likely that making the postal services self sufficient may take 2-3 years, and net savings therefore need to take into account any state contribution that will be made. 115 Annex 7: Ministry o f National Development Institutional Review 1. The Ministry o f National Development i s a highly complex structure which currently employs 269 staff in the core ministry, plus an additional 43 in the Planning Authority and the Seychelles Investment Bureau. The ministry includes three departments, each headed by a Principal Secretary, a Division for Corporate Services headed by a Director General and two parastatal organizations that report directly to the Minister, the Planning Authority and the Seychelles Investment Bureau. 2. However, from the point o f view o f administrative processes the Ministry deals with three basic functions, physical planning and land management, housing and information and communications technology (ICT). From the discussions with the Ministry, the Seychelles Investment Bureau, the Planning Authority and the Investment, Land Management and Industries operate in a single chain o f administrative process on decisions on land management. 3. The Housing Management Department deals mainly with the planning and provision o f social housing, but depends on the other chain o f administrative processes for land allocation. 4. The I C T department operates largely separately fiom the remainder o f the ministry, and was recently transferred from the Vice President’s Office. The rationale for this decision i s not fully clear, as I T services are an across government function that i s generally better placed at either the President’s or Vice President’s office. It i s equally unclear why the Ministry s t i l l has i t s own I T services unit. 5. The review o f the organization o f this ministry focused on two issues; (i) are the functions it performs core state functions and, (ii)would there be ways to organize those services that are core in a more effective manner. 6. In relation to the first question, the answer i s clear on land management, which i s a classical state function, and ICT, but much less clear on social housing, where the Seychelles have focused on the direct provision o f housing rather than on making housing accessible to a large portion o f the population. 7. Considering the area o f land management, problems arise mainly with administrative processes. Even though the Department o f Investment, Land Use and Industries operates in a single administrative process chain with the Planning Authority and the Seychelles Investment Bureau, the three units are clearly silos. A first recommendation in relation to this ministry would be therefore to place the Planning Authority and the Bureau under the Department, rather than directly under the Minister, which would significantly facilitate administrative processes. 8. In relation to the services provided by these three institutions, most o f these do constitute core functions o f the state, apart from possibly land surveying, which could be contracted out. The Ministry feels that based on initial attempts to contract out services (as the relevant division i s understaffed and has a significant backlog), t h i s solution i s unlikely to be cost efficient. However, a full costing exercise o f the function has not yet 116 been done, and it i s recommended that this be undertaken. Similarly, a merger o f the land planning and land management and development divisions could be considered. 9. Regarding the provision o f social housing, it would be recommended that the Government o f the Seychelles focus on facilitating home ownership rather than engage in direct provision o f social housing, as it currently does. The Department o f Housing could in this case be reorganized into a single division, focusing on the definition o f policies to make home ownership accessible to an as large as possible proportion o f all Seychellois, with access to be handled through the banking system. The management o f land allocation for housing projects as well as permits for individual home construction and for housing projects could in this case be transferred to the land planning and management division. 10. The Planning Authority and Seychelles Investment Bureau were not visited so no direct rationalization measures for these divisions can be proposed. However, the proposed rationalization o f administrative procedures should also lead to cost savings in these two entities. 11. In terms o f Corporate Services this ministry has disproportionally small HR and Finance units, and it would be important that staffing up these units be considered, in the context o f the earlier discussion on systemic functions. 12. Unlike for the two previously reviewed departments, it would not appear that significant staffing cuts could be achieved in the Ministry o f National Development. The main short and medium term actions to be considered are: i) Conduct a full costing exercise o f land surveying work and consider contracting out this function, which may need to be carefully phased. ii) Rationalize the Housing Department by organizing services in a single division and change the policy focus to facilitation rather than direct provision. iii)Move the Planning Authority and the Seychelles Investment Bureau under the Principal Secretary Investment, Land Use and Industries and rationalize administrative procedures for land planning and allocation. iv) Consider moving the I C T department back to a Centre o f Government institution (Presidency or Vice Presidency), as this i s a clear cross cutting function. 13. Whereas some reduction in post numbers would be achieved through these actions (approximately 20-25 positions), the main savings in this ministry would come from contracting out the support service function, as the ministry employs a relatively large number o f low skilled workers (chainmen, gardeners, as well as a large number o f secretarial support staff). 117 Annex 8: Department o f Public Administration InstitutionalReview 1. Some elements o f the work o f the DPA have already been discussed in the section on systemic issues, but the team was requested to also review the structure o f the DPA itself. The Department currently employs 79 staff, equally divided between administration and support services and specialist departments. Specialist departments include several policy support u n i t s directly subordinated to the Principal Secretary as well as the Public Sector Support Department. 2. The policy support units supporting the Principal Secretary mainly deal with the secretariat and substantive preparation functions o f the Public Service Commission and the Chief Executive Forum (the secretariat o f which i s held by the Director General Public Sector), the Terminal Employment Benefit Unit and a Technical Advisory Team (consisting o f the externally funded Commonwealth Secretariat Consultant and a national advisor on Quality and Performance Management). 3. The Public Sector Support Department handles the Human Resources database, processing and monitoring database changes, monitoring the application o f Public Service Orders and Schemes o f Service and the Management Audit Function. This unit in particular suffers from the convoluted nature o f the wage and payroll management systems. The former i s discussed in detail in the next section, but the latter poses serious problems as well. 4. Payroll management i s heavily decentralized. Even though pay i s executed by the Treasury (except for Health, Police and Defense), it i s supposed to be calculated based on Human Resources data collected at the DPA. However, there i s no effective link between this database and the Treasury payroll information and a simple comparison o f data reveals serious discrepancies in data, even between D P A and Treasury, leaving aside the potential risks posed by the separate administration o f the health sector, which has the most complex scheme o f service in the public sector. Whereas these may not necessarily cause errors in payments levels, they do pose serious risks, and rapid action to establish a single HRM-Payroll module linking both sections should be taken.74 5. The other issue facing the Department i s the lack o f staff in the Management Audit unit. In view o f the complexity o f the program outlined in this chapter, and the challenges even more simple rationalization processes are already posing to the current team (consisting effective o f the Director General, one senior specialist and one administrative assistant) the Government will need to invest in building up the capacity o f this unit with at least 4 additional staff, as well as to seek technical assistance support to monitor and accompany the implementation o f the program. 74T h i s conclusion i s in contrast with the recently completed PEFA assessment which evaluates payroll controls as solid, a conclusion that i s unjustified based on a more detailed review o f the real operation o f payroll management. 118 6. The division o f administration and finance employs almost half o f the staff o f the Department, a total number o f 38, some 28 o f which are support staff. Even for Seychellois standards the number o f support staff i s therefore excessive at 36 percent o f total staff. The main cost savings in this Department could therefore be made by support staff rationalization, which could reduce current staff by 20 positions, while other minor gains might be possible in central policy support and the public sector support department. However, increasing the capacity o f the Management Audit Unit will be essential if the reform program i s to be implemented successfully. 119 Annex 9: Department o f Environment Institutional Review 1. The Department o f Environment is part o f the Ministry o f Environment, Natural Resources and Transport. The reason for reviewing environment in particular i s its strategic importance to the Seychellois economy (both in terms o f external grant income and because the attraction o f the Seychelles to tourists is to a large extent the still pristine nature o f many o f the islands). This i s therefore an area in which any reduction in staff size would have to be carefully considered against the value o f the environment to the economic and quality o f life in the country. 2. The Department currently employs some 358 staff, or around 3 percent o f the active public service, and i s divided in three divisions, Nature and Conservation, Pollution Control and Environmental Impact and Climate and Environmental Services. 3. The Nature and Conservation Division employs some 160 staff, most o f whom are employed as national park rangers and in the forestry section, which deals with planting, harvesting and marketing o f high end timber (Mahogany and Sandalwood). The remainder o f staff work in the Conservation Department (13), which i s responsible for the implementation o f international agreements (which bring significant revenue to the Seychelles) and Terrestrial Ecological Research centers, which include the botanical gardens and a biodiversity center (40). 4. The Pollution Control and Environmental Impact Division includes the environmental police, an inspection and enforcement service (18 staff), and the Environmental Impact Assessment unit, with only 3 staff, which is responsible for conducting the internal review o f EIA studies for major investment projects, in particular in the tourist sector. 5. The Climate and Environmental Service division includes the meteorological service (46 staff), the wetland program management service (24 staff) and the environmental engineering unit (4 staff), which i s in charge o f policies and assistance on drainage and water issues and sea level projections. 6. Central units o f the Department include an international cooperation officer responsible for GEF issues, 6 district officers based o n Praslin and l a Digue and administrative and support services. Total central service employment is 66 staff, which includes some 40 support staff, most o f which are l o w skilled workers. 7. Based on discussions, and considering the strategic priorities o f the Seychelles, there appears to be significant scope to right size the Department. It fulfills a number o f services which should be handled under a concession (forestry exploitation) or under a separate, self-financing service (national park services, biodiversity center and botanical garden). 8. Attempts at issuing a concession for the exploitation o f forests have been made, but only few options were explored. In view o f the high end nature o f production, even the small volume produced currently may attract outside interest, potentially from countries that were not yet considered. In addition, the Department reports that forestry 120 management poses significant risks o f corruption and that several officials have had to be dismissed from service for this reason. 9. Plans for creating a National Park Service are being developed and the Department estimates that this can be made self-sufficient, under condition that the Service would manage all national parks and not, as i s currently the case, only those that are less likely to generate revenue. Including the Botanical Gardens and the Biodiversity Center under the National Park Service may also be considered, especially since the former already generates some revenue (Euro 100,000 annually). 10. The Department currently also charges a fee for the internal review o f EIA studies, which covers i t s operational cost for producing these reports. It does not yet charge for meteorological services to the airport, which may also be considered. However, the revenue generated generally does not fully flow back to the Department. 11. The creation o f a National Park Services, which could be made self-financing within the period o f the adjustment program, including the Botanical Gardens and Biodiversity Center and placing the forestry management under concession would free up significant resources, and could reduce the number o f current positions b y 140. A further reduction o f 15 staff will be achieved by the planned termination o f the wetland program. Some o f these savings would need to be re-invested in initial subsidy arrangements for the National Park Service, which would be provided on a declining rate. 12. However, at the same time, the Department urgently needs to staff up key departments such as Environmental Impact Assessment, Inspections and Environment Engineering, where severe staff shortages pose considerable risks to the Seychellois environment and, by extension, the economy. In addition the staffing profile in the Conservation Department would need to be upgraded to staff o f at least MA/MSc education level, in order to effectively engage with international NGOs that monitor international agreements. 13. N e t budget savings o f reforms will therefore be lower than the number o f potentially reduced posts would suggest, as lower end staff would depart, but higher end staff would need to be additionally recruited for the critical functions that are highlighted above. In addition, if no concession agreement on forestry could indeed be reached, alternative forms o f provisions would need to be studied, which could take additional time. 121 Annex 10: Department o f the Police 1. The Police Department i s placed under the President’s office. I t s payroll i s managed separately from the overall payroll, and the Department does not follow the central pay and grading system, but rather has i t s own. The Department has 6 divisions, the Crime Support Wing, the Operations Support Wing, the Public Security Support Wing, which includes the Fire Brigade, the Port and Airport Police, the Resources Development Wing and the Administration and Finance Wing. Total current staff i s 1163, out o f which 97 are civilian posts. The Police Department has a large vacancy ratio. Key issues for the police force are the growing drug trade, but petty and major crime levels have been significantly reduced over the last months. 2. The organization and management o f the, relative large, police services has been the subject o f intensive debate in recent months. An Irish police expert was brought in to review police operations and his report suggests that these i s a need to fully reorganize the police force, as well as to reduce i t s staff, mostly by having the Police Department focus on core functions at community level. The Police force has responded by conducting i t s own review, which shows the need for a significant increase in staffing levels. 3. Discussions with the Commissioner for Police and the head o f the Administration and Finance support wing highlighted a number o f organizational issues: 0 Some core functions, such as airport security and port security are inadequately staffed. Based on international norms, total numbers should be up to 320 staff, while only 180 posts are currently filled. 0 At the same time, the police department also provides functions such as the fire brigade, which, apart from the airport and port services, i s usually not fully state provided, but based on a volunteer’s service. 0 There i s a lack o f flexibly deployable units, the police force currently aims to fully staff all units, which i s not an effective approach to management, considering that most police services are rarely required. For instance, there i s a fully staffed riot squad which has not had to be operational for many years. Whereas at times riot squad staff i s used for other functions, this i s not done in a systematic manner. 4. Striving for a fully staffed police organization, fulfilling all currently defined functions, i s not a realistic objective in the current fiscal context. At the same time, many o f the organizational objectives set out by the Police Department are sensible, e.g. the objective to ensure that more police stations are open 24 hours a day. Therefore, a reform strategy would need to combine a focus on core functions with more flexible deployment o f staff. Some areas that might be considered in this context are: i) Building up a voluntary fire brigade, in particular on Mahe Island. ii)Merging the Tourism Police and Community Policing sections, as these fulfill largely similar functions. iii)Constitute a riot squad o f general police officers, who would receive special training, rather than establishing a full time riot squad. Once the fire brigade 122 would be reorganized as a community service (while the airport and port sections would be brought under port security), it would be possible to merge all operational functions into a single support wing with a community policing (incl. tourism) and a security division. iv) Merge the different administration and personnel sections into a single HRM unit. v) Consider reorganizing the police academy into a budget supported autonomous entity. 5. Implementing these reform measures would allow for; (i) a reallocation o f wage budget resources to those areas which are now under resourced (airport and port police); (ii)meeting the Departments objectives o f having 24 hour community police support available. 123 Annex 11: Department of Defense 1. Whereas the World Bank does not generally take position on the organization and management o f Departments o f Defense, at the request o f the Government discussions were held with the Management o f the Defense Department, which i s subordinated to the President, who i s the Commander in Chief. 2. The Defense Department has experienced serious problems with staff retention, and suffers from continuous rapid turnover o f new recruits. This is a pattern that has established itself in the past 4 years, and i s attributed to ‘mentality issues’, a problem raised frequently also by other Ministries and Departments. The Department currently takes in three new groups o f recruits o f 90 staff each every year, but does not manage to retain more than 30, which is insufficient to fill vacancies arising from retirement and voluntary departures. This problem that has accumulated for the last four years, establishment numbers are currently 600, while effective numbers are 320. 3. In many ways, this situation i s surprising. The Defense Department offers employment conditions similar to those in the Police, and has attractive foreign training programs (France, India), which are fully externally funded, creating good opportunities for skill development. The Department also has an active recruitment program, and i s engaged in a publicity effort. Nevertheless, most young Seychellois apparently find a Defense career unattractive. 4. Due to the problems highlighted above, the Department is unable to effectively fulfill many o f its core functions. For instance, the Department has three patrol boats to patrol the economic zone o f the Seychelles, but lacks personnel to put together full crews for these boats, unless staff are put on double shifts. This i s problematic as the increasing risks posed by the operation o f Somali Pirates close to the territorial waters o f the Seychelles and the growing drug trade, pose new security challenges. One o f the patrol boats was recently refitted in India to serve more effectively in countering such threats. Effectiveness is further hindered by the fact that the Coast Guard does not have any posts on outlying islands, due to a lack o f facilities. In addition, the Department has one surveillance aircraft, but has not been able to recruit or train a pilot. 5. Other key fimctions o f the Department are the protection o f the airport perimeter, the D o g Unit (mostly used for airport security), the Defense Academy, and Presidential Security. The Department i s also involvement in disaster management. However, in this area responsibilities are divided between three units, all based at the Office o f the President, the DisasterEmergency Committee, the Police and the Military. It would be more effective if a single unit to handle emergency response issues were to be created, an issue already discussed in the section on the Police Department. 6. In conclusion, the Defense Department is likely to face a number o f further years o f staff deficits, which i s not in the national interest o f the country. Whereas the development o f an integrated approach to emergency and disaster management might lead to some efficiency gains, further measures would not be recommended until current understaffing (excessive vacancy levels o n operational forces) are addressed. 124 Annex 12: Summary o f Government-Wide Potential Staff reduction^'^ MinistryiFunction Assumptions made about staff reductions Potential Establishment reduction t o remain l a Unemployment Reduction Can be made redundant, can potentially find low skilled 203 0 Scheme-financed staff work in tourism or other sectors. Beautification initiative Can be made redundant, can potentially find low skilled 550 0 and Unemployment work in tourism or other sectors. Reduction Scheme staff at the Department o f Community Development Support staff and low MOE (330). MOH (247). Estimated potential pro-rated 1127 800 across skilled workers n other ministries: (550) /b number i government M O E other Administrative staff reductions 51 2489 M O H other (inc.HSA) Nursing assistance/nurse ratio reduced to 1:4 from the 272 1295 current 1:2 (22 1). Rationalization environmental health: (5 1) Community Development Homes o f the elderly made not-for-profit organizations 189 195 (58). Suppress community projects section (merge into community programs, (7). Privatize Burial services and contract out cemetery maintenance (1 18). Rationalize inspectorates (6). Youth, Sports, Culture Make museums and conservatory independent not-for- 23 5 and Arts and National profit organizations, privatize playground and Sports Council International Conference Center, major games to be moved to Federations, major events to be set up as independent not-for-profit organization (1 50). Remove Youth Worker district posts (42). Privatize Swimming Pool (1 1 staff). Close down sports-for-all program (8). Close down Federations Support Program and phase out foreign coaching program (24). Ministry o f Employment Privatize employment agency functions. Reduce 12 and National Human mediation department once alternative provision available. Resource Development Add staff to productivity unit (+3 positions). Council Department o f Create National Parks Authority and make this self 137 Environment financing, issue concession o n forestry exploitation (140). Terminate Wetland Cleaning program (1 5). Strengthen environmental impact assessment unit and environment engineering section (+18 staff). MOF Postal services privatized. Strengthen budget department 118 (+lo positions) Ministry o f National Land Surveying function contracted out. Land 25 Development management procedures rationalized. Housing policy: change from provision to facilitation. 75 Based on review o f selected ministries only (those with over 5 percent wage bill spending). 125 Ministryrnunction Assumptions made about staff reductions Potential Establishment reduction to remain la DPA n processing and monitoring unit (2 staff) Reduce staff i 20 56 Strengthen Management Audit unit (+4 staff for 4 years) Rationalize finance division and centralized transfer payment fimctions to payroll (2 staff) Contract out Support Services (20 staff) Department o f Police IC Merge Community and Tourism Policing. Conduct feasibility study on voluntary fire brigade creation. Change the status o f the policy academy. Merge different administration and finance units. Create a flexibly deployable emergency response unit instead o f a permanent riot squad. Staff up airport and port units up to required levels. Department o f Defense /c Address recruitment problems (vacancy ratio o f 40 percent). Create integrated emergency response division instead o f the three separate units now responsible under the Presidency Total 2939 Source: Bank staff estimates Notes: a/ based on August 2008 payroll; b/ Where possible excluding those working in institutions to be privatized and excluding those already counted under other institutions. c/ Numbers on police and defense were not available and specific estimates cannot at this point be provided. Net savings on both organizationsare likely to be limited due to the recruitment problems in the defense forces and the need to strengthen port and airport security in the police force. 126 11 !I A cl p-q I f 'E 2c"d ~ 5 < - c 8 v1 I I 1 ' I I Annex 14: MOE Expenditures, 2007 Table A14.1: M O E Expenditure Breakdown by Division O f which, Spend as % Personal Actual Personal o f total Emoluments Expenditure Emoluments MOE as % o f total (SR 000s) (SR 000s) spending. spending. Minister's Secretariat 303.5 112.7 0.2 37.1 Finance, Administration & Personnel 30881.2 6986.0 16.2 22.6 Education Planning & Resource Dev. 9871.7 3920.0 5.2 39.7 Schools 116626.7 112324.0 61.3 96.3 Secretariat 113893.7 59.9 98.6 Primary Schools 1464.5 0.8 Secondary Schools ' 1268.5 0.7 Technical & Further Education 3 1172.7 25443.4 16.4 81.6 Secretariat 25643.7 13.5 99.2 Seychelles Polytechnic 1246.5 0.7 Adult Learning & Distance Education 118.8 0.1 Seychelles Institute o f Technology 70 1.4 0.4 National Institute o f Education 521.1 0.3 International Relations & Training (administration only) 31.1 0.0 Seychelles Tourism Academy 1182.7 0.6 National Institute o f Health & Social Studies 311.6 0.2 Sey Agricultural & Horticultural Training Centre (SAHTC) 372.3 0.2 School o f Advanced Level Studies 325.8 0.2 Maritime Training Centre 717.8 0.4 Information Technology 1279.9 1006.1 0.7 78.6 Quality Assurance 25.2 0.0 Total for MOE 190160.8 149792.3 100.0 78.8 Source: MOE 128 Table A14.2: M O E Expenditure by Level of Education 2007 Level- Pro-rated No. o f Unit Specific Overhead Total students Fiscal Costs (SR 000s) Costs (SR 000s) Costs enrolled - Cost SR Primary (including Creche) 61,948 22,633 84,581 10,929 i,739 Secondary 48,008 17,540 65,548 7,364 8,901 Tertiary 29,075 10,957 40,03 1 2,175 18,405 Adult learning and distance education 1,211 456 1,668 Sey Agricultural & Horticultural Training Centre 1,891 713 2,604 59 44,133 Seychelles Polytechnic 6,6 10 2,49 1 9,101 311 29,263 National Institute o f Education 5,759 2,170 7,930 274 28,940 Maritime Training Center 1,733 653 2,386 97 24,600 National Institute o f Health & Social Science 2,479 934 3,413 168 20,3 16 Seychelles Tourism Academy 3,300 1,244 4,544 330 13,769 School o f Advanced Level Studies 2,455 925 3,381 369 9,161 Sey Institute o f Technology 3,636 1,370 5,006 567 8,829 All levels 139,03 1 51,129 190,16 1 20,468 9,29 1 Source: MOE Table A14.3: Total Education Expenditure per Student by Level of Education, 2007 Total MOE Public Post- Oversea Overseas Education Costs Transport secondary S Bursary Unit Costs Subsidies Bursary Tuition (MOF) (SSF) (SSF) (MOF) Primary (including creche) 7,857 7,739 118 -- -- -- Secondary 9,0 19 8,90 1 118 __ __ __ Post-secondary 25,536 18,405 2,302 4,829 -- -- Agricultural & Horticultural Training Centre 51,263 44,133 2,302 4,829 __ __ Seychelles Polytechnic 36,394 29,263 2,302 4,829 __ __ National Institute o f Education 36,071 28,940 2,302 4,829 -- -- Maritime Training Center 3 1,73 1 24,600 2,302 4,829 __ __ National Institute o f Health & Social Science 27,447 20,316 2,302 4,829 -- __ Seychelles Tourism Academy 20,900 13,769 2,302 4,829 __ __ School o f Advanced Level Studies 16,292 9,161 2,302 4,829 __ __ Seychelles Institute o f Technology 15,960 8,829 2,302 4,829 -- -- Overseas 158,620 __ -- __ 99,655 58,964 All tertiary (post-secondary+ overseas) 46,5 14 All levels (primary + secondary + tertiary) 13,049 Source: MOE 129 Annex 15: Map o f Seychelles 130 REFERENCES African Development Fund. 2008: Support to University o f Seychelles System: MIC Report. Draft report for internal use. AFD, Human Development Department (OSHD). June, 2008. African Development Fund. 2008: Support to University o f Seychelles System: MIC Report. Draft report for internal use. AFD, Human Development Department (OSHD). June, 2008. Andre’s, J., Dome’nech, R., Molinas, C., 1996. Macroeconomic performance and convergence in OECD countries. European Economic Review 40,1683-1 704. Ansari, M.I., Singh, S.K., 1997. Public spending on education and economic growth in India: evidence.fFom VAR modelling. Indian Journal o f Applied Economics 6,43- 64. Aschauer, D.A., 1989a. Public investment andproductivity growth in the group of seven. Economic Perspectives 13 , 17- 25. Assane, D., Pourgerami, A., 1994. Monetary co-operation and economic growth in Apica: comparative evidence P o m the CFA-zone countries. Journal o f Development Studies 30,423- 442. Baffes, J., Shah, A,, 1998. Productivity of public spending, sectoral allocation choices and economic growth. Economic Development and Cultural Change 46,291-303. Bairam, E., 1990. Government size and economic growth: the Apican experience, 1960- 1985. Applied Economics 22, 1427- 1435. Bajo-Rubio, O., Sosvilla-Rivero, S. 1993. Does public capital affect private sector performance? An analysis of the Spanish case, 1964-88. Economic Modelling 10, 179- 185. f countries. Quarterly Journal o f Barro, R.J., 1991. Economic growth in a cross-section o Economics 106,407- 443. Barro, R.J., 1997. Determinants of Economic Growth: A Cross-country Empirical Study. MIT Press, Cambridge, MA. Binswanger, H.P., Khandker, S.R., Rosenzweig, M.R., 1993. How infrastructure and financial institutions affect agricultural output and investment in India. Journal o f Development Economics 41,337-366. Canto, V., Webb, R.I., 1987. The effect o f state fiscal policy on state relative economic performance. Southern Economic Journal 54,186- 202. 131 Commonwealth o f Learning 2008a: Proposed Model o f Seychelles National University: The Policy Framework & Implementation Plan. Badri N. K o u l May, 2008. Commonwealth o f Learning 2008b: Tertiary Education in Seychelles: A Review. Badri N. Koul. May, 2008. Commonwealth o f Learning. 2008c: Tertiary Education in Seychelles: A Review: Supplement Badri N. K o u l May, 2008. Cronovich, R., 1998. Measuring the human capital intensity of government spending and its impact on economic growth in a cross section o f countries. Scottish Journal o f Political Economy 45,48- 77. da Silva Costa, J., Ellson, R.W., Martin, R.C., 1987. Public capital, regional output, and development: some empirical evidence. Journal o f Regional Science 27,4 19- 437. Devarajan, S., Swaroop, V., Zou, H., 1996. The composition ofpublic expenditure and economic growth. Journal o f Monetary Economics 37,3 13-344. Durden, G., Elledge, B., 1993. The effect o f government size on economic growth: evidencefrom gross state product data. Review o f Regional Studies 23, 183- 190. DPA 2006: Public Sector Salary Review Project (CFTUProject No: G/SEY./lO8): Summary Final Report. Prepared by Emmanuel Kwami (consultant). March, 2006. DPA 2008a Sector Directory. June, 2008. DPA 2008b: Public Sector Functions Manual. June, 2008. D P A 2008c: Public Sector Salary Structure. Circular #1 o f 2008. Easterly, W., Rebelo, S., 1993. Fiscal policy and economic growth: an empirical investigation. Journal o f Monetary Economics 32,417- 458. Eisner, R., 1991. Infiastructure and regional economic performance: comment. New England Economic Review 74,47-58. Emmanuel Kwami., 2006. Republic of Seychelles. Public Sector Salary Review Project. CFTCProject No: G/SEY./108. EU 2008: Seychelles: Public Financial Management Performance Report. Draft report prepared by Carole Pretoris, Ferrie Pot and Etienne Soltesz (EC consultants). Rotterdam. June, 2008. 132 Evans, P., Karras, G., 1994. Are government activities productive? Evidence from a panel of US. states. Review o f Economics and Statistics 76, 1 -1 1. Garrison, C.B., Lee, F.Y., 1995. The effect o f macroeconomic variables on economic growth rates: a cross-country study. Journal o f Macroeconomics 17, 303- 317. Gemmell, N., 1983. International comparison o f the efficts of non-market sector growth. Journal o f Comparative Economics 7, 368- 381. Glomm, G., Ravikumar, B., 1997. Productive government expenditures and long-run growth. Journal o f Economic Dynamics and Control 21, 183-204. Grier, K.B., Tullock, G., 1989. An empirical analysis o f cross-national economic growth, 1951-80. Journal o f Monetary Economics 24,259- 276. Grossman, P.J., 1988. Growth in government and economic growth: the Australian experience. Australian Economic Papers 27,33- 43. Grossman, P.J., 1990. Government and growth: cross-sectional evidence. Public Choice 65,217- 227. Guseh, J.S., 1997. Government size and economic growth in developing countries: a political-economy framework. Journal o f Macroeconomics 19, 175- 192. Hansen, P., 1994a. Investment data and the empirical relationship between exporters, government and economic growth. Applied Economics Letters 1, 107-1 10. Hansen, P., 1994b. The government, exporters and economic growth in New Zealand. New Zealand Economic Papers 28,133-142. Hansson, P. Henrekson, M., 1994. A new framework for testing the effect of government spending on growth andproductivity. Public Choice 81, 38 1-401. Harmatuck, D.J., 1996. The influence o f transportation infiastructure on economic development. Logistics and Transportation Review 32,63- 76. Helms, L.J., 1985. The effects o f state and local taxes on economic growth: a time series-cross section approach. Review o f Economics and Statistics 67, 574- 582. Herrera, Santiago and Gaobo Pang 2005. EfJiciency o f Public Spending in Developing Countries: An EfJiciency Frontier Approach. World Bank. March, 2005. Holtz-Eakin, D., Schwartz, A.E., 1995. Infrastructure in a structural model of economic growth. Regional Science and Urban Economics 25, 13 1-1 5 1. 133 Hulten, C., Schwab, R., 1991. Public capital formation and the growth of regional manufacturing industries. National Tax Journal 44, 121-1 34. Hsieh, E., Lai, K.S., 1994. Government spending and economic growth: the G-7 experience. Applied Economics 26,53 5-542. IMF 2008: International Monetary Fund. 2008. A Strategy for Strengthening Budget Management. Draft Report prepared by Pokar Khemani , Katja Funke, Gosta Ljungman and Mark Silins (IMF staff). IMF, Fiscal Affairs Department. July, 2008. Macnair, E.S., Murdoch, J.C., Pi, C.R., Sandler, T., 1995. Growth and defense: pooled estimatesfor the NATO alliance, 1951- 1988. Southern Economic Journal 61,846- 860. Karikari, J.A., 1995. Government and economic growth in a developing nation: the case of Ghana. Journal o f Economic Development 20,85- 97. Koester, R.B., Kormendi, R.C., 1989. Taxation, aggregate activity and economic growth: cross-country evidence on some supply-side hypotheses. Economic Inquiry 27, 367- 386. Kocherlakota, N., Yi, K.M., 1996. A simple time series test of endogenous vs. exogenous growth models: an application to the United States. Review o f Economics and Statistics 78,126- 134. Kocherlakota, N., Yi, K.M., 1997. I s there endogenous long-run growth? Evidence @om the United States and the United Kingdom. Journal o f Money, Credit and Banking 29, 23 5-262. Kormendi, R.C., Meguire, P.G., 1985. Macroeconomic determinants of growth: cross- country evidence. Journal o f Monetary Economics 16, 141- 163. Landau, D.L., 1983. Government expenditure and economic growth: a cross-country study. Southern Economic Journal 49,783- 792. Landau, D.L., 1985. Government expenditure and economic growth in the developed countries: 1952-76. Public Choice 47,459-477. Landau, D.L., 1986. Government and economic growth in the less developed countries: an empirical study for 1960-1980. Economic Development and Cultural Change 35, 34- 75. Lau, S.H.P., Sin, C.Y., 1997. Public infrastructure and economic growth: time-series properties and evidence. Economic Record 73, 125- 135. Lee, B.S., Lin, S., 1994. Government size, demographic changes, and economic growth. International Economic Journal 8, 91- 108. 134 Levine, R., Renelt, D., 1992. A sensitivity analysis of cross-country growth regressions. American Economic Review 82,942-963. Lynde, C., Richmond, J., 1992. The role o f public capital in production. Review o f Economics and Statistics 74, 37-44. M O E 2006: Teachers ’ Scheme of Service. January, 2006. M O E 2007a. Education Sector Development Plan 2007-201 1. March, 2007. M O E 2007b. Education Statistics 2007. M O E 2008. Education Statistics 2008. M O E 2000: Education for a Learning Society. Policy Statement. 2000. Moomaw, R., Williams, M., 1991. Total factor productivity growth in manufacturing: further evidencefrom the states. Journal o f Regional Science 3 1, 17- 34. Morrison, C.J., Schwartz, A.E., 1996. State infrastructure and productive performance. American Economic Review 86,1095-1 111. Munnell, A.H., 1990. How does public infrastructure affect regional performance? New England Economic Review 30, 11 - 32. Munnell, A.H., 1992. Infrastructure investment and economic growth. Journal of Economic Perspectives 6, 189-1 98. Mullen, J., Williams, M., 1990. Explaining total factor productivity differentials in urban manufacturing. Journal o f Urban Economics 28, 103- 123. National Hu man Resources Development Council. 2008. Training Administration Procedure . April, 2008. Nolan 2008: The Seychelles Education & Training System: Does it have the capacity to provide the human resources to achieve the objectives of ‘Seychelles Strategy 2017’? June, 2008. NSB 2005: Labor Force Survey. NSB 2008a: Republic o f Seychelles, National Statistics Bureau. National Accounts Estimates. Statistical Bulletin, Seychelles National Accounts Estimates. February, 2008. 135 NSB 2008b: Republic o f Seychelles, National Statistics Bureau. Population and Vital Statistics 2007. Statistical Bulletin, Population and Vital Statistics: No. 1 o f 2008. March, 2008. NSB 2008c: Republic o f Seychelles, National Statistics Bureau. Consumer Price Index - June 2008. Statistical Bulletin, Seychelles National Accounts Estimates. July, 2008. NSB 2008d: Republic o f Seychelles, National Statistics Bureau. Formal Employment and earnings - January-March 2008. Statistical Bulletin, Seychelles National Accounts Estimates. October, 2008. Odedokun, M.O., 1997. Relative effects ofpublic versus private investment spending on economic eficiency and growth in developing countries. Applied Economics 29, 1325- 1336. Rao, V.V.B., 1989. Government size and economic growth: a newfiamework and some evidencef i o m crosssection and time-series data: comment. American Economic Review 79,272-280. Republic o f Seychelles 2007. Strategy 2017 Republic o f Seychelles 2006. National Human Resources Development Council Act 2006. Republic o f Seychelles 2004 Education Act 2004. Saunders, P., 1985. Public expenditure and economic performance in OECD countries. Journal o f Public Policy 5, 1 -2 1. SADC 2004: South African Development Community Education Policy Support Initiative. The use of ICTs in the curriculum in Botswana, Namibia and Seychelles. Report prepared by Linda Chisholm, Rubby Dhunpath and Andrew Paterson (for Southern African Comparative and History o f Education Society). June, 2004. Sanchez-Robles, B., 1998. Infiastructure investment and growth: some empirical evidence. Contemporary Economic Policy 16,98-108. Sattar, Z., 1993. Government control and economic growth in Asia: evidencefiom time- series data. Pakistan Development Review 32, 179-1 97. Scully, G.W., 1989. The size of the state, economic growth and the efJicient utilization of national resources. Public Choice 63, 149-1 64. Seychelles Institute of Management Act 2006: Republic o f Seychelles, National Assembly. Act 2 o f 2006. April 2006. 136 Singh, R.J., Weber, R., 1997. The composition o f public expenditure and economic growth: can anything be learned from Swiss data? Schweizeriche Zeitschrift fur Volkswirtschaft und StatistiWSwiss. Journal o f Economics and Statistics 133, 617- 634. Ram, R., 1986. Government size and economic growth: a new framework and some evidence @om cross-section and time-series data. American Economic Review 76, 191- 203. Ratner, J.B., 1983. Government capital and the production function for US. private output. Economics Letters 13,2 13-2 17. Republic o f Seychelles, Office o f President 2007. Seychelles Strategy 201 7. Seychelles University Foundation 2008: . Strategic Plan 2007-2009. January, 2008. Sheehey, A.J., 1993. The effect of government size on economic growth. Eastern Economic Journal 19,321- 328. Sattar, Z., 1993. Government control and economic growth in Asia: evidence from time- series data. Pakistan Development Review 32, 179-1 97. Verheijen, T. 2007 Administrative Capacity in the New Member States: The Limits o f Innovation? World Bank Research Paper Series W114, Washington, DC. World Bank 1999: Civil Service Reform Evaluation. World Bank 2004: Preparing PERs for Human Development. 2004. World Bank 2005: Lesotho: A Country Status Report for Education. African Region HumanDevelopment Working Paper Series No. 101. 2005. World Bank (2006) “Welfare Impacts o f Exchange Rate Adjustment and Policy Implications”. World Bank (2008b): Health insurance and competition. Europe Central Asia Human Development. Yu, W., Wallace, M.S., Nardinelli, C., 1991. State growth rates: taxes, spending and catching up. Public Finance Quarterly 19,80- 93. Zhang, T., Zou, H.F., 1998. Fiscal decentralization, public spending and economic growth in China. Journal o f Public Economics 67,221-240. 137 APPENDIX Government Response T o The Review Public Administration and Public Service Reform: This section provides a summary on sector implementation o f the world bank’s recommendations which was derived from review work conducted in coordination with ongoing discussions between the D P A and the line ministries. The public sector reforms focused on aiming for: 0 Better government administration through a leaner structure: Contracting out o f services to the private sector, or privatization, a component o f downsizing. e The work focused on the reduction o f the number o f employees in each institution by 12.5 percent, and a review o f functions for which alternative modes o f provision could be considered as well as efficiency gains that could be obtained. 0 Greater public expenditure reduction and control: better management o f organizations, budgets and personnel emoluments to ensure the sustainability o f the organization and management o f recurrent costs to ensure sustainability o f projects. e The Manpower Budgeting Exercises (MBE) was conducted in Ministries and Departments to verify how the budget allocation i s handled so as to streamline the organization’s establishment to fit within the financial resources allocated. It also enabled DPA to carry out a strategic planning exercise to establish the needs for a given year vis-a-vis the costs involved. To ensure the use o f a fair and transparent procurement system the Ministry o f Finance has set up the National Tender Board under the Public Procurement Act, 2008to see to amongst others the program o f contracting out o f services. 0 Increased managerial efficiency: focus on organizational restructuring; decentralized management and creation o f executive agencies out o f monolithic bureaucracies, and the introduction o f market or quasi-market principles in the delivery o f services. Strategy 2017 has provided the impetus through a strategic positioning o f Government as facilitator. A functional review o f certain ministries was undertaken and good governance structures created taking into account the need to separate corporate responsibility from social responsibility; one being a function o f a business entity and the latter an important role o f government as i s policy formulation, planning and development. The functional review process examined what functions could be commercialized and what could merely be 138 contracted out so that the responsibility o f service provision remains that o f government, through an agency for a period o f time. The report covers the following Ministries and Departments: The Ministry o f Education; Community Development Department Youth, Sports and Culture Department, including the National Sports Council. The Ministry o f National Development The Ministry o f Finance Environment Department Natural Resources and Transport Department The Ministry o f Employment and the Human Resources Development, including the Council; The Health Sector The Department o f Police; and The Department o f Public Administration Ministry o f Education The Ministry went through the process o f streamlining to include the Voluntary Retirement Scheme and t h i s brought the establishment down to 3188 posts compared to the previous o f 3427. The World Bank recommended that there should be a potential reduction o f 51 administrative staff but in this area only 14 such employees exited on VDS The Ministry o f Education i s moving towards the role o f facilitator, to that o f leadership, funding, policy and legislation development, education system governance, setting results-based standards, develop accountability frameworks, and monitor and evaluate performance. In the long term plans autonomy o f schools i s being considered, and work on the structures o f schools i s being undertaken and there i s the possibility o f further cuts (reduction in number o f laborers and handymen). Outsourcing o f cleaning services in educational institutions i s being undertaken after phasing out o f 62.7% o f institutional-based cleaners (1 13 out o f 180). Rationalization Physical Planning i s limited to planning, technical and advisory services, project preparation, pre-investment and feasibility studies as these are requirements o f donors (BADEA), and once contracts have been allocated to the private sector implementation and monitoring o f project construction should take place; all construction and maintenance work i s contracted out thus closing down the Maintenance Unit. The work previously undertaken by the National Audio-visual Centre i s to be contracted out. 139 The portfolio for International Training has been transferred to the National Human Resources Development Council. Other specificities raised in the report on Education will be undertaken as medium and long term action. Ministry o f Community Development,Youth, Sports, Culture And The Arts This Ministry has two main departments, the Community Development and the Youth, Sports, Culture and the A r t s , as well as a few agencies, amongst others the National A r t s Council and the National Sports Council. Community Development Department In response to the government’s call to down size the public service it i s to note that significant attention has already been given by the Department in this regard. The Department has undertaken the following changes to its structure and nominal roll: There are now two main divisions replacing the previous three-the Community Development Division and the Community Management Division. The total work force prior to the cuts was 838. Apart from the 407 who exited o n the different schemes, 2 retired at the age o f 63 and 1 person resigned. Currently the Department has a workforce o f 428 staff. As per the Department o f Public Administration’s recommendation the Districts Operations section in the Community Management Division has been phased out. The suggestion to re-name the Inspectorate unit to Quality Assessment and Inspectorate unit has been strongly appreciated. There are only 4 posts o f which one is vacant. It i s hoped that the District Administration offices take the work o f that unit seriously. The Department has reduced the number o f cleaners in the District Administration offices to one cleaner per district whilst at secretariat level the number has been reduced from six to three. We do not share the view that such duties (both at secretariat and district offices) should be outsourced due to the sensitivity o f these offices. Furthermore the outsourcing o f these services would be much more expensive; so common sense prevails. The Department emphasizes that some o f the recommendations made in the document should be reconsidered due to the fact that our mandate requires us to manage certain aspects specific to the matters o f the local communities. Districts Projects This section has been there since the establishment o f the Local Government Department and then Community Development Department. It is not a program area. Though the request for projects emanates from the districts, it i s more cost effective for the projects to be managed centrally in terms o f effective quality control, standards and accountability. 140 Please note that the request for 2009 was 27 million. Due to budgetary constraints it has been reduced to 16 millions. A total o f 250 small community projects are to be implemented. This has to be professionally managed as per the Public Procurement Act - 2008. Communities need to be advised and guided with regards to undertaking major capital projects. Community projects once identified, the District Authority seeks professional advice from the District Project Section whereby based on the experience and knowledge o f the officers, the project i s validated. The main functions o f the District Project Section are as follows: Administration: management o f projects, overseeing section staff, advising the districts on new project proposals, preparation o f tender and contract documents, organizing meetings. Finance: budget management o f all projects, preparation o f payments, o f periodic reports for Managemeneroject Appraisal Committee and the preparation o f monthly reconciliations with Ministry o f Finance. Planning and Implementation: preparation o f program o f works, scope o f works and the preparation o f plans and submit to the Planning Authority as well as going on District visits for monitoring. Homes for the Elderly The remarks made regarding the running o f the Homes for the Elderly by the government should be addressed by higher authorities o f the State. The Department has advised the government since 2004 that the running o f the Homes should be community owned. It i s to that effect that we have initiated the “Community ownership program”. Since then there has been a remarkable move in gradually transferring ownership from Government to Community; a process which started with the establishment o f the Board o f Trustees in 2004. It i s the Department’s aim in the coming years to hand over the total responsibility o f the management o f the Homes to the respective Boards o f Trustees. It i s to be noted that the Homes are not run for profit making, however through the various activities organized funds are raised to cater for improved general environment and social programs. Voluntary Departure Scheme ‘ As at December 2008, the staffing for the Homes for the Elderly has been reduced considerably to being manned by a Home Administrator only; 20 staff exited on VDS, while 15 vacant posts were deleted bringing a total deduction o f 35 posts. Other recommendations made r e Burial and support services: With regards to the recommendations made in the World Bank Report No. 13, 14 & 15 the Department will, in i t s medium to long term plans, review the services being offered by the Burial Unit as well as the provision o f security services in the District 141 Administration offices. It must be noted however, that in the Burial Services Unit 20 staff exited on the VDS program. The Department emphasizes that caution must be applied with the idea o f streamlining central government through decentralization bearing in mind the needs o f the most vulnerable at community level, the capacity o f the District Administrations, costs and controls. The reform program must not turn out to cause more harm than good with regard the effectiveness, efficiency and timeliness o f service delivery at community level. The Community Development Department would like to place on record that it has contributed substantially towards the reforms and was engaged in the restructuring process way before the mention o f economic reforms. Youth, Sports And Culture Department Voluntary Departure Scheme In December 2008, the Department o f Youth, Sports and Culture finalized the voluntary departure o f 72 members o f staff with 8 others exiting the service o n the Early Retirement Scheme bringing the total to 80. The Department had 324 people on the Department’s payroll as at January 31, 2009 from the original 415 staff. This goes to show that there is no more “a large number o f security personnel and disproportionate number o f staff.” We cannot abolish a l l the security posts because we will always need some in-house security staff. Reforms - Short Term Phase (2008/09) The major change in the structural reforms attempts to separate policy, planning and development (setting goals and direction) from that o f implementation (the ‘doing and achieving) this will slowly help steer the Department from the role o f direct service provision to that o f a facilitator. This action can be seen in the removal o f the public relations, marketing and special events division, the sports strategic planning and policy analysis division, the major games division and the culture policy planning and development section. Instead the Department has created a Policy, Planning and Development Section in the Secretariat o f the Principal Secretary to provide the advice required o n the variety o f issues the Department deals with. The section i s comprised o f policy analysts and planners; professionals with knowledge and experience in the fields of culture, sports, physical planning and youth issues. 142 Reforms - Medium to Long Term Phase (2009- 2011) Privatization Program The process o f privatizing the Children’s Playground i s on-going. Meanwhile the 13 staff members o f the playground have l e f t on voluntary departure scheme, making it easier for when the talks on the privatization process i s finalize and the playground handed over to the new owner. The International Conference Centre (ICCS) too features in the plans for privatization and once this becomes a reality the Department will be ready to handover. Autonomy o f certain affiliate bodies Discussions have started on the drafting o f the necessary legislation that will give autonomy to the Kreol Institute. The other institution in the m e d i d l o n g term plans o f the Department i s the National Conservatoire o f Performing A r t s . Studies are being undertaken to decide on i t s structural form; whether as an agency or a body corporate that could sell i t s services to the public. Not-for-profit organizations The Ministry feels that the proposal to turn the museums and conservatory into independent not for profit organizations cannot be entertained at this stage because o f the fear that the country would lose i t s national heritage. In the medium to long term phase o f the reforms a thorough study will have to be undertaken. Youth Division The Youth Division has streamlined i t s operations and has merged a number o f i t s operations for more efficiency and cost effectiveness. I t has become leaner especially after the voluntary departure exercise. However the suppression o f the 42 post o f youth workers will have to be discussed further because it would mean a radical change o f focus o f the National Youth Policy. Talks will be held shortly between the Principal Secretaries o f Community Development and Education to discuss the portfolio for the Young Citizens Movement, a program currently carried out by both ministries. National Sports Council Seychelles currently has only one Olympic size Swimming Pool which equitable serves our school and the public at large. I t s operation i s fairly complex and demanding. In our opinion, the suggestion to privatize the swimming pool should be differed until we are satisfied that the know-how exists for i t s management and general upkeep. Nevertheless, the staff compliments have been reduced by 3 who opted for the voluntary departure scheme. 143 Sports-for-All-Program: this program is one o f the pillars o f our sports policy objectives which i s relied upon by a huge sector o f our population for a healthier lifestyle and their social well being, more so n o w with the economic reforms in place. Federation Support Program: this has to be maintained in view o f i t s importance for the development o f high level sports. We have also given consideration to the fact that since federations are driven by voluntarism, they need as much support as possible for the laid down objectives to be fulfilled. But the division has been downsized by 5 posts abolished under the voluntary departure scheme. Foreign Coaching: NSC has taken this recommendation on board, and as and when a foreign coach contracts ends, no replacement is being done and hence post i s localized or deleted; foreign coaches have reduced considerably, only two remain o n the payroll. Ministry o f Environment, Natural Resources And Transport Department of Environment The Department o f Environment i s part o f the Ministry o f Environment, Natural Resources and Transport; a Department o f strategic importance to the Seychellois economy both in terms o f external grant income and because the attraction o f the Seychelles to tourists i s to a large extent the still pristine nature o f many o f the islands. It is for these reasons that the reduction in staff size has been carefully considered. The Department previous to the streamlining exercise employed some 304 staff, or around 3 percent o f the active public service, and is divided in three divisions, Nature and Conservation, Pollution Control and Environmental Impact and Climate and Environmental Services. Following the reforms the Department has retained 192 staff; with the introduction o f the V D S program 39 staff o f the l o w and unskilled cadres exited the service as well as 5 administrative staff and 5 staff from technical fields, hence, 49 left through the V D S program and the remaining staff have been transferred to the newly created Agencies and Trust. W h i l s t there is a need to streamline given the structural adjustment program, the Department at the same time urgently needs professional staff in key areas such as Environmental Impact Assessment, Inspections and Environment Engineering, where severe staff shortages pose considerable risks to the Seychellois environment and, by extension, the economy. In addition the staffing profile in the Conservation Department would need to be upgraded to staff o f at least MA/MSc level, up from the current N O level, in order to effectively engage with international NGOs that monitor international agreements. Both these issues are still need to be addressed given the budgetary restrictions and the unavailability o f graduates in the country. 144 Structural Reforms Considering the strategic priorities o f the Seychelles and recalling the strategic direction o f government - from service provision to facilitator, certain functions o f the Department are to be handled by a different system o f management: The National Park Unit within Forestry (2 1 posts) has been transferred to the National Park Authority (operational, currently as the Seychelles Centre for Marine Research Technology-Marine Parks Authority [SCMRT-MPA]); a separate, self- financing service that will raise all their funds from the existing Marine National Parks. The National Botanical Garden Trust has been composed from posts from the botanical garden and biodiversity center (52 posts) transferred from the Nature and Conservation Division. The Trust will function along the same principle as the National Park Authority, but this has to be undertaken within the full period o f the adjustment program before it becomes self-financing. Landscape and Waste Management Agency has been created from the S W A C and Waste Management Units (22 posts) o f the Environment Department. The Wetlands Unit previously had 9 posts o f which 7 posts o f Field Workers, these posts no longer exist: 3 posts have been deleted under the VDS, 2 vacant posts have been deleted, and 2 posts were transferred to the newly created Landscape & Waste Management Agency. Policy Issues The Forestry Section, which deals with planting, harvesting and marketing o f high end timber (Mahogany and Santol), should be handled under a concession (forestry exploitation), however, for such the assistance o f FA0 technical expertise has been sought to study the issue carefully before a final decision is made. All the harvesting o f timber activities are undertaken by private timber merchants and this will n o w be done by a competitive tendering process and the successful bidder will harvest the timber in a particular area at a set price. Government officials will simply assess the wood for harvesting, set the reserve price and monitor exploitation. This mew approach should tackle the existing loopholes in the system. The Department is currently planning to charge fees for the internal review o f EIA studies, which covers its operational cost for producing these reports. The revenue generated will go towards the consolidated funds in the Ministry o f Finance. As for the meteorological services, setting charges for i t s services is currently under consideration, but once it i s operation, as i s usually the case the money will be recouped by the Ministry o f Finance. 145 Natural Resources Department In the functional review o f the Natural Resources Department it was decided to leave production in the hands o f the private sector, and the Department would limit its functions to formulating, coordinating, monitoring and evaluating the implementation o f policies and regulatory instruments. The Government has set up an Agency to take on the role o f service provision, the Seychelles Agriculture Agency (SAA). It has an establishment that operates managerially and budgetary separate; and i s established as a statutory body under a Board o f Directors. Prior to the restructuring the Department o f Natural Resources had a total o f 3 13 posts and with the establishment o f the Seychelles Agricultural Agency 213 posts were transferred. The Department now has only nine posts. Transport Land Division The Transport Department o f the Ministry o f Environment, Agriculture and Fisheries, and Transport maintains only the mandate for policy formulation and planning to provide for a safe, reliable, affordable and convenient Land Transportation System for the social and economical well being o f the entire population; that safely supports the requirements o f sustainable national development. To ensure service provision there i s the new establishment created by the Land Transport Authority Act that sets up a statutory body in the form o f an Authority the Seychelles Land Transport Agency (SLTA). The Land Transport Division previously had 161 posts and 118 were transferred to the Seychelles Land Transport Agency. The Seychelles Maritime Administration was restructured but shed only one post, hence from 10 to 9. The Transport Department now shares the same Principal Secretary with the Natural Resources Department, and each has a total o f 9 posts. Department o f Police Since the PER mission there has been a change in the post o f the Commissioner o f Police. The new Commissioner together with a special working group set up by the President will now require some time to acquaint themselves with the functioning o f the Department and the problems faced both by and in the police force before particular attention can be given to the required reforms as addressed in the World Bank report. At a later stage the new Commissioner o f Police will be in a better position to examine and respond to the World Bank recommendations. 146 The Health Sector With the Voluntary Departure Scheme and Early Retirement Scheme the workforce has been reduced to 1640. Re-organization and re-scheduling o f work has also helped to achieve a further reduction. The present salary on offer i s not sufficient to attract Medical professionals even from third-world countries. The government i s now looking more towards cheaper alternatives through recruiting these under bilateral co-operation agreements with other countries such as Cuba, Morocco, Egypt. Even when the salaries may not be less like in the case o f Morocco the sending party meets the costs o f airfares. The Health Workforce including Public Health Department to date stands as follows: No. % o f Total Physicians 75 Consultants 15 Dentists 13 Pharmacists 4 Other Medical Professionals 223 Para-Medicals 389 Nurses 440 Ancillaries staff 48 1 TOTAL 1640 There are plans to reduce further Ancillaries staff with the planned reduction o f Health Centers and outposts. We do not have student nurses on our payroll. The N I H S S which trains nurses falls under the Ministry o f Education. Physicians have been reduced from 91 to 72. We plan to recruit more specialists now that we are upgrading our Specialized Secondary and Tertiary Care. It i s difficult to entice Seychellois Physicians to return to work in Seychelles with the present salary structure for medical professionals, more so now with the reduced value o f the rupee. One option i s to allow private practice by public service doctors. On this point we do not agree that this will constitute a problem o f patients jumping the queue. There are systems which can be put in place to monitor this and other problems o f conflict o f interest which may come up. However this i s one good incentive to help retain Seychellois Medical professionals. 76 Rationalization of Environmental Health Officers A total o f 23 vacant posts were deleted 15 officers opted for the voluntary departure scheme. The reduction i s 38, with only 17 posts remaining. Utilization of Health Care: The Regionalization o f physician consultations has started with three Health Centers no longer providing such services. Following the completion o f the Beau Vallon Health Center the Glacis one will no longer provide such services. Later 76 To note that the figure given to IMFNorld Bank was not correct, the total nursing staff including Nursing Assistants was 42 1 not 670. There were 220 Nurses and 22 1 Nursing Assistants. However, 16 Nursing Assistant exited on VDS and 26 vacant posts deleted, that i s a total reduction of 42 posts. 147 on when the new Anse Royale Hospital cum Health Center i s completed, two other Health Centers which now provide for Consultations twice a week will also stop the service. The need for the Anse Aux Pins Health Center (which i s not entirely suited for the purpose and needs repair and renovation) will also be considered when the Anse Royale Hospital i s completed. The situation i s being closely monitored and indications are that further reduction and phasing out i s possible without the service being affected. The SMB Health Center no longer exists. Utilization. There has been a reduction in hospitals which i s being completed by end o f March. The number o f beds in Baie Ste Anne Hospital on Praslin has been reduced from 35 to 20. Logan Hospital L a Digue has been reduced from 15 to 8. (Reduction 22 beds). The Ante-Natal ward in Victoria Hospital (24 beds) now has only 13 beds reserved for patients who lose their babies and for psychological reasons cannot be placed in Maternity where there are mothers with live babies. The other space has been used for other purposes. Reduction 11 beds. The ante-natal clinics for patients with no complications will be de-centralized completely as and when the Regional Health Centers are ready. Presently the English River Health Center does its own ante-natal clinics and Anse Boileau and Anse Royale will start and finally Beau Vallon. This will also ensure full utilization o f the midwives in Community Care. The number o f stays hospital stay after giving birth will be reduced and the patients will be followed up at district level. Part o f the Male Medical Ward (the rear bay with 6 beds) i s being closed and will be rented to a Private NGO. A Cardio Unit - 6 beds - has been created on part o f the Female Medical Ward (which now has low occupancy rate) so both male and female cardio patients can be hospitalized there to increase occupancy on that ward. The 12 beds on front bay o f Male Surgical ward will be used as Day Unit for minor surgical day cases such Ophthalmology cases such as cataract removal, Orthopedic cases and other minor surgery. The Gynecological bay (12 beds) on the Female Surgical Ward will also be turned into a Day Unit only as there i s no need for these gynecology patients in that unit to remain overnight in hospital. Reduction 24 beds. Surgical Unit will now be reviewing i t s protocols for admission in an attempt to reduce hospital days. With t h i s reduction in surgical beds, the physicians will have to manage their admissions for non-emergency cases when the wards are fully occupied. This means a total reduction o f 63 beds. With the planned de-centralization o f Specialist Outpatients services such minor surgical procedures may also be done in the Regional Health Centers. Specialized Treatment Overseas: Clear policies, guidelines and selection criteria are being laid down for patients referred for overseas treatment. This includes Means testing before final approval i s given. The Health Services aims to upgrade i t s specialized care both through acquiring better and more modern equipment and training o f i t s Specialists as well as bringing in qualified specialists as locums to perform procedures in Seychelles when the equipment and facilities are in place. This i s already the case for some Orthopedic Surgery like hip and knee replacements, Child Orthopedic Surgery, Maxillo- facial surgery, Plastic Surgery, Vascular Surgery and Neurological Surgery. Government now plans to have a contract with the new Private Hospital for Heart Surgery. Cancer patients for Radiotherapy and Surgery will s t i l l have to go overseas. New negotiations 148 took place last year with the MIOT Hospital which was considered to be giving better value for money than Apollo in India. We also have a contract with MMM where we send patients requiring vascular surgery. Co-Payments: Co-payments have already been introduced for services like Ambulance, De-compression chamber, Physiotherapy, Rehabilitation Aids such wheelchairs, frames, walking sticks. Patients are n o w required to pay for any non-formulary medicines. The proposal for a co-payment in Pharmaceuticals as a Prescription fee is still under consideration by government. Inefficiency in Health Care Spending: All contracts which are outsourced are being reviewed and some have been put on public tender to assess the response. The provision o f food for the whole complex at North East Point which includes 250 patients has been tendered with the use o f the kitchen facilities there. Should the recommended bidder be approved by the Board this will mean a reduction from R135 to R80 per day per head. Security Services and maintenance have also been outsourced. Although we have published tenders for laundry Services we only got the bid from the present contractor. Other operators are either too small or cannot mix Health Services laundry with their other clients’ laundry such as the airline. Streamline And Consolidate Job Positions: The Department o f Administration i s working o n this. It i s recommended that all Health Technicians for example are grouped into one common cadre. 1. Reduction o f operating costs: There has already been a big reduction in operating costs such as for fuel, electricity and telephone. Even with the increase in fuel prices and electricity costs which means that there i s no apparent decrease in the amount paid, the u n i t s o f electricity and petrol consumed have decreased. The telephone costs for 2008 and part o f 2009 has seen a reduction o f more than 40%. Further reductions are being made using the cheaper options o n offer by the telecom companies. 2. Reduction in Pharmaceutical costs: There has been a remarkable reduction in costs o f drugdmedicines as pointed in the report. The removal o f GST on Medicines should now also make it more affordable for patients to go to the private sector. The introduction o f a Prescription fee i s s t i l l being considered by the government. This would reduce wastage and abuse further. 3. The Health Services will monitor the changes for any adverse effects as recommended by the IMF and World Bank. 149 \ Reduction in Non-MedicalSpending A total o f 147 staff have exited the service, 99 through the V D S and 48 through Early Retirement Scheme, and this mostly in support services. Some services have been contracted out to the private sector including Security, ground maintenance and the maintenance o f buildings. Reductions have been made in telephone costs through different cost-cutting exercises N e w tenders have been published for the provision o f food and laundry services in order to source cheaper suppliers. An Oxygen Plant has been purchased and this will mean a reduction in cost for oxygen and medical air supplies. Transport costs have been reduced through the introduction o f better controls; pooling and sharing o f all Transport o f the Health Department and the Agency and no more rental o f cars and buses. Ministry o f Employment and the National Human Resource Development Council Employment Department The Ministry is made up o f one Department (Employment Department) and one autonomous body the, National HumanResources Development Council (NHRDC). The Productivity Unit under the Principal Secretary’s Secretariat remains and the Planning Research and Information is a unit and not a Department. Future Plans: the intention i s to turn it into a Section eventually, once the direction i s settled. The PS’s secretariat also has the Cooperation Unit and the IAEA Unit (International Atomic Energy Agency). The IAEA Unit i s currently working closely with the Ministry o f Foreign Affairs for the setting up o f the regulatory legal instruments and authority which i s to be based within the structures o f the Employment Department. Future Plans: eventually, the IAEA unit will integrate the Labor Inspection Section. However, for direction it n o w remains under the purview o f the PS. There are actually 4 Sections; we do not have Divisions except for the newly created Employment Tribunal headed by a Tribunal Secretary, a post pitched at DO level. We have for other Sections headed by Directors reporting directly to the PS; they are Industrial Relations Section Labor Inspectorate Section Employment Service Section and 150 Finance and Administration Section At this juncture we have no intention o f increasing the number o f people in the Productivity Unit. We have two posts; a research officer and a support staff. The Productivity Unit serves as the secretariat for a multi agency team made up actors from both public and private sectors, NGOs as well from workers and employer organizations. Future Plans: it i s envisaged in the long run to transform the Unit into a h l l y fledged body similar to the Singapore model. National Human Resource Development Council (NHRDC) The National H u m an Resource Development Council (NHRDC) i s mainly a strategy setting institution, that has 18 staff as one exited through the VDS program. One significant functional change during the first phase o f the reforms i s the transfer o f responsibility from the Ministry o f Education to the Council o f the International Training Unit and the Fund. A scholarship Review Committee has been set up to review the criteria for the award o f scholarships and the findings o f the committee will be reported in two months. The comments on the governance o f the Council have been noted and appropriate action will follow. Ministry o f National Development Introduction The Ministry o f National Development employs 263 staff in the core ministry. I t has three departments, each headed by a Principal Secretary: the Housing Department, the Land and Industries Department, the Information, Communications and Technology Department (55 staff), and a Division for Corporate Services headed by a Director General. It has two semi-autonomous organizations that report directly to the Minister; the Planning Authority (29 staff) and the Seychelles Investment Bureau (13 staff). Structural Reforms Short Term Action: 08/09: The structural reforms have brought about a change in the way the ministry operates. The Housing Management Department has been merged with the Land Management Department hence merging the administrative processes for both housing and land allocation, this main Department i s headed by just one Principal Secretary. Medium Term Action: 09/2010 The recommendation to place the Planning Authority and the SIB under the Department, and the merger o f the land planning and land management and development divisions and 151 the staffing o f Corporate Services i s an exercise that will discussed with the Department o f Public Administration shortly. In terms o f this ministry has disproportionally small HR and Finance units, and it would be important that staffing up these u n i t s be considered, in the context o f the earlier discussion on systemic functions. The Ministry has began to examine the ,feasibility o f relocating the portfolio responsibilities for Investment to the Seychelles Investment Bureau and that o f Industries to i t s autonomous agency the Seychelles ENPA, while maintaining the mandate for all such policy matters. The I C T department operates largely separately from the remainder o f the ministry, and was recently transferred from the Vice President’s Office. Higher authorities have yet to decide whether this portfolio, which cross-cuts all sectors, will be relocated centrally. The contracting out land surveying relies on a full costing exercise o f this function, and the assistance o f the World Bank would be appreciated. Policy Issues The function on state housing i s dictated by the national policy o f the Government which is, “to ensure an adequate supply o f housing and basic services for all, on a sustainable basis, land, material and financial resources should be planned and managed in such a way that every Seychellois family can confidently aspire to i t s own house within the parameters o f i t s own means or state help” (SPPF Manifesto), hence the focus o f direct provision o f housing, and any reforms would mean a complete review o f this policy. Ministry o f Finance Government i s looking into the possibilities o f privatizing the Postal Services. Currently the 2009 Budget o f the Postal Services stands at S R 8,939,610 but the total receipts projected from Postal Services i s S R 11,808,000. The moves for privatization might take place under the medium to long phase; as the World Bank has aptly put it,’ making the postal service’s self sufficient may take 2-3 years. The Ministry has established a Parastatal Monitoring Unit, and this Unit once adequately staffed and trained would be the appropriate body to regulate, set guidelines, monitor and inspect commercial enterprises where Government has some stake. This is an area where the World Bank could assist the Ministry with capacity building. As proposed by the World Bank, a reform o f budget preparation and execution procedures, with an integrated budget preparation process (integrating capital and current expenditure budgeting), would significantly enhance the effectiveness o f the central support function o f the ministry. Similar to DPA, the development o f manuals and guidelines on budget preparation and capital budgeting, for line ministries, would benefit 152 everyone and this should be complimented with a well targeted training program on budget management; this too is an area where the World Bank could assist. Department o f Public Administration A previous report has been sent on action DPA intends to take with regard the Public Sector and the Department itself. The Administration Division has 33 active staff, o f which half are cleaners and security guards. On the one hand, it i s to be noted that D P A has a building o f i t s own to maintain, especially so, given that it rents out i t s national hall; most meetings o f importance are held here. To note, the security o f the building i s undertaken by DPA’s own security guards on a shift system. On the other hand, DPA has learnt from the experience o f other organizations who have attempted to contract-out cleaning and security services and have found it to be too expensive. Outsourced security services leave much to be desired, but never-the-less with reforms in place most o f the cleaners work part-time. Amongst others, the remaining staff takes care o f centralized services such as gratuity, compensation, pensions, Government office accommodation, expatriates passages and housing allowance for graduates. The Administrative Division has lost 3 Administrative staff to VDS and several staff members have resigned during the year 2008 and have not been replaced in an effort to reduce on staffing. The remaining posts are vacant o f which 2 w i l l be used to strengthenthe Management Audit Unit. The Public Sector Support Division i s in the process o f setting up the Management Audit Unit and a first audit was conducted on the Seychelles Tourism Board. The Management Audit Unit i s in dire need o f management analysts that are efficient in structural reforms, human resource administration and budget management, notably conducting MBE. The setting up o f the professional course on the Public Sector Orders i s gaining momentum and it i s through the retraining o f public administration practitioners that DPA hopes to get some people to help with the management audits. Specific moves towards a professional Public Management Audit Unit are as follows: Short Term Action: 08/09. Management Audit Unit: The procedures and process are being set up, posts have been made available but help i s required to develop the services it i s to provide. I T Data Base: DPA i s placing all personnel and establishment data currently on hand in the HRIS data base. Medium Term Action: 09/2010 Management Audit Unit: The assistance o f the World Bank i s required with the strengthening o f the capacity o f management audit staff. 153 Management Audit: audits have begun in selected organizations to (i) determine compliance to Government Orders, and (ii) test the performance capacity and ability o f the Mgt audit staff. I T Data Base: Networking, that is, linking the HRIS data base with other organizations so that any staff movements and establishment changes can be done in by the organization (delegated authority) and monitored by the PSSD Desk Officers. Long Term Action: 2010/2011 The Management Audit Unit: produces a comprehensive report on the Public Sector Reforms and this could be complimented by one fiom the Budget management Unit in Finance. I T Data Base: Establish a link between the HRM-and the Payroll, linking the HRIS with Treasury. Talks will begin on its planning in mid-February DPA/ICT/MOF. Downsizing The following table shows the reduction o f 24 staff taking into consideration the implementation o f the exit schemes: Technical Cadres - 5. Administrative Cadre - 8. L o w and unskilled - 11 'hroughthe Voluntary Departure Scheme Organizations I Technical I Administrative I Low and 154 feral1 U R S Financed Staff employed in various Ministries 800 Beautification initiative staff and 207 URS absorbed in 2006. W o r l d B a n k Recommendation I Government Action Overall URS financed staff in I 452 low skilled workers exited on VDS, including - those recruited on URS various ministries - potential but excluding Beautification. reduction o f 203. Beautification initiative Beautification initiative - 283 exited o n VDS, f i o m 2006 up to 2008 a stafWRS in the Department o f number left and so 417 posts were deleted, that i s there i s now a total Community Development - reduction o f 700 beautification posts, as a 100 Beautification staff have potential reduction-550 been retained until privatization o f waste management takes place in communities. - F p o r t Staff, Low and Unskilled Workers Potential Reduction o f 1127 W o r l d B a n k Recommendation I Government Action Potential Reduction in Education - 330 I 110 workers exited on V D S and 107 vacant posts deleted. - Potential Reduction in Health 247 64 workers exited on V D S and 25 vacant posts deleted. (HSA & h4HSD) Potential Reduction in Other Ministries - 550 561 workers exited on VDS. Further cuts are possible upon finalization o f the reforms o f the outstanding departments/ministries. 155 THE FISCAL IMPACT VDS Payment in December Amount on V D S for December'2008 January 2009 Organisation Oll(including March 2009 Payroll payroll accrued leave) PRESIDENT'S OFFICE Risk & Disaster Management 56,690.80 42,887.50 109,534.00 54,005.00 Administrative Dept. 9,675.00 9,675.00 356,472.00 334,103 .OO Public Relation & Info. Dept. 50,610.24 45,125.00 205,183.00 188,062.00 Department o f Legal Affairs I 1 272,493.66 228,578.1 1 Department o f Police 1,200,458.90 I 1,096,460.53 I 5,530,749.56 5,012,954.73 VICE-PRESIDENT'S OFFICE Oflice o f the Vice-president 38,954.00 37,110.00 Dept. o f Public Admin 182,180.64 156,870.00 456,718.27 385,401.85 Dept. of Internal Affairs 288,852.79 25 1,207.40 845,866.66 777,906.41 MINISTRY OF FINANCE Min Of .Finance 356,361.95 356,361.95 1,175,069.00 845,360.00 Sey. Revenue. Commission 712,256.03 621,779.38 1,732,842.63 1,341,632.03 MINISTRY OF ENVIRONMENT, NATURAL RESOURCES, AND TRANSPORT Environment Department 704,453.58 672,098.63 1,591,682.94 1,308,804.78 Natural Resources Dept. 948,589.18 868,202.98 1,193,675.72 * 188,939.21 Transport Department 200,060.40 177,495.50 875,953.03 * MINISTRY OF HEALTH AND SOCIAL DEVELOPMENT Ministers Secretariat 45,050,.00 43,250.00 Social Services Dept. 595,395.77 537,689.75 1,004,620.39 765,984.86 Health Dept. 250,942.55 208,800.00 952,762.99 813,623.34 Health Services Agency 1,65833 1.84 1,36 1,682.00 9,155,164.46 8,3 11,044.05 I ~~ ~ MINISTRY OF EDUCATION 2,230,450.24 2,134,12 1.55 14,256,870.36 13,492,O 15.07 MINISTRY OF NATIONAL DEVELOPMENT National Development Dept. 379,892.70 325,562.25 1,153,000.56 962,614.60 Planning Authority 10,275.00 10,275.00 178,574.54 163,950.00 Info. Tech. and Com. Dept. 11,943.85 11,943.85 434,432.23 371,654.48 MINISTRY OF COMMUNITY DEVELOPMENT, YOUTH SPORT AND 1 CULTURE Youth, Sport & Culture Dept 1,184,567.40 974,684.75 2,237,476.54 1,487,2 12.11 Community Dev. Dept 4,634,4 13.28 3,909,115.02 3,195,477.72 1,761,583.53 National Sport Council 36572 1.33 381,97 1.33 782,037.02 610,25 1.54 National Arts Council 24,898.05 23;156.25 110,848.87 85,714.81 MINISTRY OF EMPLOYMENT AND HUMAN RESOURCES DEVELOPMENT Employment Dept 124,807.95 104,489.75 441,254.99 366,166.36 MINISTRY OF FOREIGN AFFAIRS 54,037.50 I 47,737.50 1 764,163.95 674,537.68 GRAND TOTAL 16,236,066.97 14,329,392.87 49,051,879.09 40,612,45955 ESTIMATED ESTIMATED TOTAL YEAR PAYROLL TOTAL YEARLY VDS PAYMENTS (YEARLY SALARY + VDS SALARY PAYMENTS) 2008 DEC: 49,051,879.09 588,622,549.08 16,236,066.97 604,858,6 16.05 2009 JAN: 40,612,459.55 487,349,514.60 14,329,392.87 50 1,678,907.47 2010 JAN 2009: 40,612,459.55 487,349,5 14.60 NIL 487,349,514.60 Estimated Fiscal Impact The first savings on the wage bill was established through the Manpower Budget Exercises undertaken in February 2008, in ministries and departments. This exercise allowed the MBE teams to verify how the budget allocation was being handled and where deficits were found a streamlining exercise took place to enable the organisation’s establishment to fit within the financial resources allocated. The MBE revealed that a number o f organisations were operating with a deficit totalling approximately SR17, 797,000.00. The surplus amounted to SR13, 767,000.00, which reduced the deficit to SR4.0million on the Personnel Emoluments Budget. As a measure to reduce the number o f employees in the employment o f government an Early Retirement Scheme (55 - 59yrs) was introduced on the 1st January 2008 and this was followed by the Voluntary Departure Scheme in October 2008. All posts occupied by persons who exited under these schemes were abolished. The V D S scheme has brought a reduction o f SR8,439,419.54 per month in the wage bill giving a total savings o f SR101, 273,034 per year. O f the total VDS, one third were from Community Development exiting with a salary package o f SR3 125, using this as a guide, the total VDS for low and unskilled cadres amounts to a saving o f SR27,637,500.00 for the year, excluding those exiting in parastatal bodies. Those exiting the service in 2009, have benefits due payment by the end o f March amounting to SR14, 329, 392.87, this means that by the end o f 2009 the savings will be SR86,943,641.00. The benefits paid for those exiting the service will have costed government SR30, 565, 459.84 although this does not take into consideration the pension payments or those exiting the service in parastatal organizations. It i s to be rememberedthat in November 2008 an increment o f SR 500 and SR450 was given to all full time employees with a personal salary o f SR2200 - 3000 and those with a personal salary higher than SR3000, respectively. For these increments the Ministry o f Finance did not disburse additional funds hence part o f the saving o f the exit schemes 157 will be used to absorb the increase in salaries in November, in ministries and departments. Hence the total wage bill for 2010 for ministries and departments for existing employees will be reduced by SR101, 273,034, due to the exit o f 1047 government employees. As o f September 2008 Government (MidDept) had a total o f 8,987 occupied posts with the departure o f 1047 VDs and 200 Early Retirement, the civil service i s left with a total o f 7740 posts and this does not include vacant posts have been deleted , Public Sector Wage Reforms A Commonwealth Secretariat Salary Expert has begun a comprehensive exercise to review the government’s salary structure. Following a market research his proposal provides two scenarios o f wage grid and scope o f applicability. Work on the components o f the salary structure has reached min-point as the job evaluation exercise that began in November, on the common cadre posts; i s completed and the exercise will resume in January 2009 for the evaluation o f all closed cadre posts. The work under way will incorporate allowances currently paid out such as, those in schemes o f service, periodic allowances, and inducements; once taken into account in the job evaluation exercise these allowances will be stopped leaving only those unpredictable such as overtime. The main tasks that need to be undertaken, before the review o f the salary structure i s completed, have to do with policy and process issues. 0 Benchmark jobs and criteria for defining classification parameters. 0 Rationalize job titles and career ladders. 0 Establish what constitutes the minimum educational requirement for each job/position. Transfer jobs and j o b incumbents onto the new salary structure. 0 Cost the implementation o f the new salary structure, and based on an indicative implementation cost, devise the implementation strategy. Revise schemes o f service and salary administration policies. Overall Conclusions The report shows that in this short period since the reforms have been launched significant progress has been made with regard streamlining either through post reduction (cuts and freezing), exit schemes (VDS & Early Retirement) and the introduction o f rationalization measures (out-sourcing, privatization) and in certain departments functional reviews. To calculate the real total savings on the wage bill, the actual salary o f those exiting must be added to all vacant posts deleted, excluding organizations with a deficit. Suffice to say that a number o f organizations s t i l l have a long way to go in introducing significant reform measures, and further functional reviews will have to be carried out to 158 promote the role o f government as a facilitating body and consolidate administrative and regulatory structures, and improved communication with the public. As a measure to control the size o f Government establishments and reduce on Public Sector expenditure, the Department o f Public Administration issued a Circular reminding all Ministries and Departments that the freeze on new recruitment i s s t i l l in force, and this extended to include budget dependent Public Sector Agencies; recruitment in essential areas are to be referred to DPA. Furthermore, all balance o f funds resulting from the abolition o f posts o f employees who had left the public service on 31" December under the voluntary departure scheme and whose pay i s to cease with effect from 31St March 2009, i s not be committed for recruitment or for use for any other purpose; the Ministry o f Finance will recall the money. In an effort to further streamline Government the function o f national government should be limited to national policy formulation that will guide line ministries in the formulation o f sector policy. Planning, inspection, management o f national programs and projects, national security and foreign policy are the crucial elements o f central government. Capacity development, I C T technical support, legal advice and services, International Cooperation... are services that should be centralized for a more coordinated, efficient and effective Government. Functions essential to the Seychellois economy, such as H um an Resource and budget management; monitoring, control and audit functions performed by the Ministry o f Finance and the Department o f Public Administration need to be reinforced in terms o f staffing and capacity development. 159