Examen de la Gestion des Dépenses Publiques et de la Responsabilité Financière (PEMFAR): Améliorer l'Efficacité du Système Fiscal et Investir dans le Capital Public pour Accélérer la Croissance et Réduire la Pauvreté

Public Disclosure Authorized Report No. 40066-HT Republic of Haiti Public Expenditure Management and Financial Accountability Review (PEMFAR) Improving Efficiency of the Fiscal System and Investing in Public Capital to Accelerate Growth and Reduce Poverty Public Disclosure Authorized January 25, 2008 Poverty Reduction and Economic Management Sector Unit Latin America and Caribbean Region Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank and the Inter-American Develoment Bank, co-produced with the Government of Haiti AAN AIDS APN BRH CAE CAMEP CAS CARICOM CCI CDD CCRIF CEM CFAA CIDA CMEP CNMP CNFL4 COCCI CONATEL CPAR CPI CSCCA CSA DAA DCPE DDE DDR DGI DPG DR DSA EDH EFA-FTI EGRO EPCA ABBREVIATIONS AND ACRONYMS AutoritC Aeroportuale Nationale - National Airport Authority Acquired lmmune Deficiency Syndrome Autorite Portuaire National (National Port Authority) Banque de la RCpublique d’Ha7t1- Haitian Central Bank Country Assistance Evaluation Centrale Autonome Mttropolitaine d’Eau Potable - Metropolitan Water Authonty Country Assistance Strategy Caribbean Community Cadre de CoopCration Interimaire - Interim Cooperation Framework Community Dnven Development Caribbean Catastrophe Risk Insurance Facility Country Economic Memorandum Country Financial Accountability Assessment Canadian International Development Agency Conseil de Modernisation des Entreprises Publiques - Council for Modernisation of Public Utilities Commission Nationale des Marches Publics -National Commission for Public Procurement Commission Nationale pour la Reforme Administrative - National Cornmission on Administrative Reform ComitC Conjoint de coordination de la mise en oeuvre et du suivi du CCI - Joint Committee for the Implementation and Monitoring of the ICF Conseil National des TClCcommunications - National Council for Telecommunications Country Procurement Assessment Report Consumer Price Index Cour Supkrieure des Comptes et du Contentieux Administratif - Supreme Audit Institution Country Social Assessment Departement des Affaires Administratives - Department of Administrative Affairs Direction de la PIannification et de la CoopCration Exteme - Directorate of planning and external cooperation Dtpartement des Etudes - Regional Education Departments Programme de DCsarmement, DCmobilisation et RCintCgration - Disarmament, Demobilization and Reintegration Program Direction GCnkrale des Imp& - Tax Administration Authority Development Policy Grant Dominican Republic Debt Sustainability Analysis ElectricitC d’Ha7ti - National electricity company Education For A11 - Fast Track Initiative Economic Governance Reform Operation Emergency Post Conflict Assistance EU FER FIAS FY GDP GNI GOH HIPC HN HTG IADS ICA ICF ICT IDA IDB IFAD IFC IGF IMF I-PRSP JSAN LAC LIC LICUS MARNDR MDA MDG MDRI MEF MENFP MJPS MINUSTAH MPCE MTPTC MTEF NEPO NGO NPV ODA PEFA PEMFAR PER PFM European Union Fonds d’Entretien Routier - Road Maintenance Fund Foreign Investment Advisory Service Fiscal Year Gross Domestic Product Gross National Income Government of Haiti Heavily Indebted Poor Counties Initiative Human Immunodeficiency Virus Haitian Gourde International Agncultural Development Service Investment Climate Assessment Interim Cooperation Framework Information and Communication Technologes International Development Association Inter-American Development Bank International Fund for Agncultural Development International Finance Corporation Inspection GCnnCrale des Finances - General Finance Inspectorate International Monetary Fund Interim Poverty Reduction Strategy Paper Joint Staff Advisory Note Latin America and Caribbean Region Low Income Country Low Income Countries Under Stress Ministkre de I’ Agriculture, des Ressources Naturelles et du DCveloppement Rural - Ministry of Agriculture and Natural Resources Ministry Departments and Agencies Millennium Development Goals Multilateral Debt Relief Initiative Ministkre de 1’Economie et des Finances - Ministry of Economy and Finance Ministkre de 1’Education Nationale et de la Formation Professionnelle - Ministry of Education and Vocational Training Ministkre de la Justice et de la SCcuritC Publique - Ministry of Justice and Public Security UN Mission for the Stabilization of Haiti Ministkre du Plan et de la Cooperation Exteme - Ministry of Planning and External Cooperation Ministkre des Travaux Publics et des Transports et Communications - Ministry of Public Works, Transports and Communications Medium Term Expenditure Framework National Education Partnership Office Non-Governmental Organization Net Present Value Official Development Assistance Public Expenditure and Financial Accountability program Public Expenditure Management and Financial Accountability Review Public Expenditure Review Public Financial Management PIP PNH PRGF PRSP RGCP SDR SMP SNEP SSA SY SDEP TB TSS TELECO UCREF ULCC UNAIDS UNDP USAID VAT Public Investment Program Police Nationale d’Haiti - National Police Poverty Reduction and Growth Facility Poverty Reduction Strategy Paper Reglement G6ntrale de la Comptabilit6 Publique - General Rules of Public Accounting Special Drawing Rights Staff Monitored Program Societ6 Nationale des Eaux Potables - National Utility for Potable Water Sub-Saharan Ahca Sysdme d’Informatisation des DCpenses - Expenditure Management System Tuberculosis TransitionaI Support Strategy Telecommunications d’HaTti - Telecommunications utility Unit6 de lutte contre le blanchiment de I’argennt - Anti-Money Laundering Unit Unit6 de Lutte Contre la Corruption - Anti-Corruption Unit The Joint United Nations Programme on HIV/AIDS United Nations Development Programme United States Agency for International Development Value-Added Tax ACKNOWLEDGMENTS This Public Expenditure Management and Financial Accountability Review (PEMFAR) is a joint Inter-American Development Bank (IDB)/World Bank and Government of Haiti report. The PEMFAR is a product of a year of teamwork and numerous interactions, and dialogue between IDBNorld Bank staff and many people and institutions in Haiti: the Government of Haiti, the private sector, Non-Government Organizations (NGOs), academia, bilateral and multilateral donors. Two key events were organized to launch the PEMFAR. In December 2006, following an internal IDBrWorld Bank discussion of the PEMFAR concept note, the team organized a brainstorming session with the main donors involved in Haiti’s development to identify key issues and themes to be developed in the PEMFAR. In January 2006, the PEMFAR team organized jointly with the Government of Haiti a mission to agree on the scope and methodology of the PEMFAR as well as to deepen the understanding of issues to be covered in the report. The outcomes of these two important events help to lay the foundations and the strategic directions of the PEMFAR report. The team would like to thank His Excellency Daniel Dorsainvil (Minister of Economy and Finance, MEF, Haiti) and the Government team for the excellent collaboration throughout the preparation of the PEMFAR report and the valuable advice and inputs provided to complete the report. The report was completed under the leadership of Mauricio Carrizosa (Sector Manager, LCSPE). The team also benefited from the advice of Roberto Tarallo (Sector Manager, LCSFM), Enzo de Laurentiis (Sector Manager, LCSPT), and Errol Graham (Senior Economist, LCSPE). The team is particularly grateful to Professor Pierre-Richard AgCnor (Hallsworth Professor of International Macroeconomics and Development Economics, University of Manchester, and co Director, Center for Growth and Business Cycle Research, England) for his technical guidance, invaluable inputs, quality control of the report, and suggestions throughout the preparation of the report. The task team leader and author of the PEMFAR report is Emmanuel Pinto Moreira (Senior Economist, World Bank). The IDB team leader of the report is Susana Sitja (IDB). The PEMFAR core team includes Sandra Bartels (IDB), Fily Sissoko (Senior Financial Management Specialist, World Bank, LCSFM), Patricia Macgowan (Senior Procurement Specialist, World Bank LCSPT), Susana Sitja (IDB), MClanie Xuereb-de Prunele (Assistant Professor University of Paris I1 and consultant World Bank), Roberts Waddle (E.T. Consultant, World Bank, LCCHT). The team led by Ernmanuel Pinto Moreira and Susana Sitja, consisted of Gilles Damais (Consultant, IDB), Robert Cauneau (Consultant, IDB and World Bank), Mark Paolleti (Consultant, IDB and World Bank), Hernan Pfluecker (Consultant, World Bank), Hagop Angaladian (Consultant, World Bank), Stephanie Kuttner (Consultant, World Bank, SDV), and Gilles Gavreau (Consultant, World Bank). Valuable contributions were also provided by Mathurin Gbetibouo (Resident Representative, World Bank, LCCHT), Chingboon Lee (Sector Leader, World Bank, LCSHD), Ahmadou Moustapha Ndiaye (Lead Financial Management Specialist, World Bank, LCSFM), Joana Godhino (Senior Health Specialist, World Bank, LCSHH), Nicolas Peltier (Senior Infrastructure Economist, World Bank, LCSTR), Samuel Carlson (Senior Education Specialist, World Bank, LCSHE), Peter Holland (Operations Officer, World Bank, LCSHD), and Mary Momson (Country Officer, World Bank, LCC3C). Peer reviewers were Ctlestin Monga (Lead Economist, DECVP), Blanca Moreno-Dodson (Senior Economist, PREMVP) and Emile Finateu (Senior Financial Specialist, AFTFM). Haiti: Public Expenditure Management and Financial Accountability Review Table of Contents EXECUTIVE SUMMARY .............................................................................................................................. i PART I: ECONOMIC AND FINANCIAL MANAGEMENT CONTEXT ................................................ 1 CHAPTER 1 : MACROECONOMIC AND FISCAL CONTEXT ............................................................. 3 1.1 STRUCTURE OF HAITI’S ECONOMY AND OF PUBLIC FINANCE .............................................. 2 1.1.1. Economic Structure. Growth. and Poverty ............................................................................................... 2 1.1.2. Public Finance Structure ......................... ................................ ............. 4 1.2 FISCAL POLICY AND ECONOMIC 0 -2006 ........................................................ 14 1.2.1 Fiscal Performance and Improved Economic Outcomes .................................................................... 14 1.2.2 Debt relief and Fiscal Space Issue ......... ........ ..... ........... 16 1.3 POLICY RECOMMENDATIONS ............ .................................................................. 21 CHAPTER 2 : PUBLIC EXPENDITURE REVIEW: BROAD TRENDS AND PATTERNS ............... 25 2.1 ANALYSIS OF PUBLIC EXPENDITURE BY FUNCTIONAL CLASSIFICATION ...................... 26 2.1.1 Shifi in Budget Allocation toward Economic and Social Sectors ...................................................... 26 2.1.2 Analysis of Actual Expenditures ... 30 2.1.3 International Comparison of Fun ..................................... 34 2.2 FACTORS DETERMINING THE STRUCTURE OF PUBLIC EXPENDITURE ............................ 34 2.2.1 Level of Domestic Resources ............................................................................................................. 34 2.2.2 Influence of External Financing ......................................................................................................... 35 2.3 ANALYSIS OF THE PUBLIC INVESTMENT PROGRAM .............................................................. 36 2.3.1 Structure of the Public Investment Program ....................................................................................... 36 2.3.2 Influence of Donor Financing on the Public Investment Program ..................................................... 37 2.4 BUDGET EXECUTION .......................................................................................................................... 39 2.4.1 Broad Trends of Budget Execution .................................................................................................... 39 2.4.2 Execution of the PIP ........................................................................................................................... 40 2.5 POLICY RECOMMENDATIONS ......................................................................................................... 41 CHAPTER 3 : COUNTRY FINANCIAL ACCOUTABILITY ASSESSMENT ...................................... 43 3.1 BACKGROUND ............................................................................................................................... 44 3.2 LEGAL AND INSTITUTIONAL FRAMEWORK ....................................................................... 46 3.3 BUDGET PREPARATION ............................................................................................................. 47 3.4 BUDGET EXECUTION .................................................................................................................. 48 3.5 ACCOUNTING AND FINANCIAL REPORTING ...................................................................... 48 3.6 DEBT AND CASH FLOW MANAGEMENT ............................................................................... 49 3.7 INFORMATION SYSTEMS ........................................................................................................... 49 3.8 INTERNAL CONTROLS ................................................................................................................ 50 3.9 EXTERNAL CONTROLS AND LEGISLATWE SCRUTINY ................................................... 50 3.10 INSTITUTIONAL FRAMEWORK AND PROCUREMENT MANAGEMENT CAPACITY 50 3.11 PROCUREMENT OPERATIONS AND MARKET PRACTICES ............................................. 51 3.12 INTEGRITY OF THE PUBLIC PROCUREMENT SYSTEM ................................................... 52 3.13 POLICY RECOMiMENDATIONS ................................................................................................. 52 PART 11: PUBLIC EXPENDITURE REVIEW IN PRIORITY SECTORS ............................................ 57 CHAPTER 4 : ECONOMIC SECTOR EXPENDITURE REVIEW ........................................................ 59 4.1 AGRICULTURAL SECTOR .......................................................................................................... 61 4.1.1 Background and sector objectives .................................... 4.1.2 Structure and trends in agricultura ........................................................ 4.1.3 Public Investment Program (PIP) ....................................................................................................... 66 4.1.4 Weaknesses, Issues, and Challenges Public Expenditure Management In Agriculture Sector 4.1.5 Policy Recommendations ......................................................................................................... 4.2 INFRASTRUCTURE SECTOR ..................................................................................................... 72 ........................................................................................... 4.2.1 Background and sector objectives 72 4.2.2 Trends and Structure of Infrastructure Expenditures .......................................................................... 74 Haiti: Public Expenditure Management and Financial Accountability Review 4.2.3 Public Investment Programs in the Infrastructure Sector ................................................................... 80 4.2.4 Weaknesses . Issues, and Challenges in Public Expenditure Management in Infrastructure Sector ... 81 4.2.5 Policy Recommendations ....... 84 CHAPTER 5 : SOCIAL SECTOR EXPENDITURE REVIEW ............................................................... 87 5.1 EDUCATION SECTOR .......................................................................................................................... 88 5.1.1 Background and Sector Objectives ........... 88 5.1.2 Trends and Structure of Education Expenditures ............................................................................... 90 5.1.3 Public Investment Programs in the Education Sector ......................................................................... 95 5.1.4 Identifying Weaknesses, Issues, and Challenges in Budget Process and Public Expenditure Management ................................................................................................................................................... 102 5.1.5 Policy Recommendations and Prionties ..... .............. 5.2 HEALTH SECTOR ................................................................................................................................ 105 5.2.1 Background and sector objectives ................... ......................................................................... 105 5.2.2 Trends and Structure of Health Expenditures .. ......................................................................... 108 5.2.3 Public Investment Programs in the Health Sector ............................................................................ 114 5.2.4 Weaknesses, Issues, and Challenges in Public Expenditure Management 5.2.5 Policy Recommendations .......................................................................... CHAPTER 6 : JUSTICE AND SECURITY EXPENDITURE REVIEW .............................................. 120 6.1 BACKGROUND AND SECTOR STRATEGY AND OBJECTNES ............................................... 120 6.2 TRENDS AND STRUCTURE OF JUSTICE AND SECURITY SECTOR EXPENDITURES ...... 123 6.2.1 Trends in Allocations ................... ................ ................. 6.2.2 Intra-Sectoral Allocations of Exp ............................................. 124 6.2.3 Economic composition of expenditure ............ ............................................... 6.2.4 Projected Trends in Police Wage ............................................. 129 6.2.5 Budget Execution Trends ................................................................................................................. 130 6.3 PUBLIC INVESTMENT PROGRAMS IN THE JUSTICE AND SECURITY SECTOR .............. 131 6.4 WEAKNESSES, CHALLENGES AND RECOMMENDATIONS .................................................... 132 6.4.1 Weaknesses and Challenges ......................................................................................................... 132 6.4.2 Main Policy Recommendations ......... ...... . 134 PART 111: ADDRESSING GROWTH AND POVERTY CHALLENGES: A MACRO-MODELING APPROACH ................................................................................................................................................. 138 CHAPTER 7 : ASSESSING THE IMPACT OF FISCAL POLICY ON GROWTH AND POVERTY: A MACROECONOMIC FRAMEWORK ................................................................................................ 140 7.1 DESCRIPTION OF THE KEY FEATURES OF THE HAITI MACRO-MODEL .......................... 140 7.1.1 The Supply Side ............................................................................................................................... 140 7.1.2 Consumption and investment ............ . 144 7.1.3 Composition of public spendi ......................... 145 7.1.4 Taxes and the government budget constraint ................................................................................... 146 7.1.5 Public capital: quality indicators .............. .............................................. 147 7.2 CALIBRATION .............................................. .............................................. 147 CHAPTER 8 : ADDRESSING GROWTH ATTD POVERTY CHALLENGES: FISCAL REFORMS AND AID REQUIREMENTS ..................................................................................................................... 152 8.1 BASELINE SCENARIO, 2007-2015 ..................................................................................................... 153 8.2 POLICY EXPERIMENTS ..................................................................................................................... 153 8.2.1. Increase in Public Investment ........................................................................................................... 154 8.2.2 Spending reallocation ... 8.2.3 Tax Reform ........................... ................... 157 8.2.4 Increase in security spending ............................................................................................................ 158 8.2.5 A composite fiscal pack ANNEXES .................................................................................................................................................... 165 ANNEX 1 ...................................................................................................................................................... 167 ANNEX 2 ...................................................................................................................................................... 173 Haiti: Public Expenditure Management and Financial Accountability Review ANNEX 3 ...................................................................................................................................................... 179 ANNEX 4 ...................................................................................................................................................... 188 ANNEX 5 ...................................................................................................................................................... 196 ANNEX 6 ...................................................................................................................................................... 205 ANNEX 7 ...................................................................................................................................................... 208 ANNEX 8 ...................................................................................................................................................... 21 1 Tables Table 1. Table 2. Table 3. Table 4. Table 5. Table 6. Table 7. Table 8. Table 9. Table 10. Table 11. Table 12. Composition of GDP at factor cost, 2000-06 ............................................................................. 2 Income Per Capita, Nominal GDP, and Growth Rates, 2000-06 ............................................... 2 Composition of Government Revenue in Percent of GDP, 2000-2006 ..................................... 4 Shares of recurrent spending categories in total recurrent, FY2000-06 (in percent) Composition of Government Expenditure, in Percent of GDP, FY 2000-06 ... Overall Fiscal Balance (HTG Million), FY2000-2006 ................ Structure of Pledges and Main Donors Areas of Intervention, 2004-07 (US$ Donor Development Financing. Commitments 2004-07 v. Disbursements as of September 2007 (in US$ Million) ....................................... ........................... otherwise indica General Trends in Budget Allocations, FY2002-07 (in real HTG Million) Table Table Table Table Table Table Broad Trends in Budget Allocations to Priority Sectors, FY2002-07 (real HTG million) ...... 28 3. Broad Trends in Budget Allocations to Priority Sectors, FY2002-07 (in real HTG Million).. 29 4. Geographical Distribution of Government Budget by Department (In nominal HTG Million, 5. FY2006lO7) ............................................................................................................................. 30 Total Spending by Broad Categories (real HTG Million), FY2002-06 ................................... 30 6. Functional Distribution of Actual Total Expenditures-Payment basis (in real HTG million)3 1 7. Functional Distribution of Actual Public Recurrent Expenditures-Payment basis (real HTG 8. million) ...................... .................. ..................................... 32 Table 19. Table 20. Table 2 1. Table 22. Table 23. Table 24. Table 25. Table 26. Table 27. Table 28. Table 29. Table 30. Table 3 1. Table 32. Table 33. Table 34. Shares of “Comptes Co for SeIecte ty Sectors (in percent), FY2002-05 .............................................................................................................................. 33 Comparison of Spending on Priority Sectors. In percent of total budget allocations (excluding debt service) ............................................................................................................................ 34 Public Investment Program FY2004-05, FY2005-06, and FY2006-07 (in million of real gourdes unless otherwise indicated) .................................................. Execution Rates in Percent, FY2002-06 ...... Budgetary allocations (in real HTG millions Budgetary Allocations Structure (in real HT ..................................... 63 Structure of MARNDR’s Operating Budget (allocations in real terms HTG millions), FY2005-2007 ....... Trends in MARNDR’s Expenditures, (in Detailed Expenses by Budget Line (FY 2005-2006) (In real HTG thousand) ......................... 66 Detailed Expenses by Budget Line (FY 2002-2003) (In nominal HTG thousand). 66 Shares in Budget Execution (In real HTG million) .................................................................. 66 Investment Budget (PIP), yearly allocations (In real HTG million unless otherwise indicated) ........................................................................................................... Comparison of Budgets Requested and Allocated (in nominal HTG Generated Funds in Ministry of Agriculture (In real HTG thousand) Main currents account in Ministry of agriculture .................................................................... 69 Network Infrastructure in Haiti 1990-2004 ................. .................. ........ 72 Haiti: Public Expenditure Management and Financial Accountability Review Table 35. Table 36. Table 37. Table 38. Table 39. Table 40. Table 41. Table 42. Table 43. Table 44. Table 45. Table 46. Table 47. Table 48. Table 49. Table 50. Table 5 1. Allocations to the Ministry of Public Works, Transports and Comniunication (MTPTC) (In million of real gourdes), FY2001-07 ...................................................................................... 75 Infrastructure Sector. Share of selected items in Recurrent Budget and their execution rate (In percent), FY2002106 ............................................................................................................... 78 Infrastructure Sector. Budget Execution (In Million of real gourdes), FY2001106 ................. 79 Infrastructure Sector. Recurrent Budget Execution (In Million of real gourdes,), FY2001106 79 Resources for PIP in the Infrastructure Sector. Comparison to other Priority Sectors, FY2004105 and FY2005106 (In million of nominal gourdes) ................................................. 80 Donors’ financing under ICF (in million $US unless otherwise indicated), 2004-06 pledges and June 2004-December 2005 realizations ........................................................................... 8 1 Allocations to Education Sector (In real HTG million), FY2002107 Composition of Spending, (In real HTG million), FY2002-07. ........ MENFP Budget Execution (In real HTG million), FY2002-06 ............ Resources for PIP in the Education Sector. Comparison ro other Prio FY2006-07 (In real HTG million) .......................................................................................... 96 Status of Disbursement versus Commitments, as of December 3 I, 2005 for all types of interventions (under ICF and others, in thousand of US$) ..................................................... 96 Donors’ Commitments and Disbursements under ICF and Other Interventions (US$ thousands, unless otherwise indicated) ................................................................................... 97 Commitments (2004-07) and Disbursements (as of December 2005) by Donor, Framework and Areas of Intervention and Axis .................. 99 Donors’ Conlmitments to Financing School Year 2004-05 (in thousand US$) ..................... 101 Health Indicators. Comparison Haiti and regionaI averages (LAC, SSA, and LIC) Allocations to Health Sector (real HTG million), FY2001/06 ................................. Financing of Public Investment Plan, FY2004-05 to FY2006-07 .......................................... 112 Table 52. Table 53. Health Sector. Budget Execution (real HTG million), FY20021 Health Sector. Recurrent Budget Execution (HTGT million), F 112 ............................ 1 13 Table 54. Table 55. Table 56. Table 57. Table 58. Table 59. Table 60. Table 61. Table 62. Table 63. Table 64. Table 65. Health Sector. Share of selected items in Recurrent Budget and execution rate (in percent), ............................. 1 14 115 Donors’ financing under ICF (in million December 2005 ..................................................................................................................... 1 16 Allocations to Justice and Security Sector (In real HTG million), FY20021 Recurrent Budget Allocations to Justice/Security Sector (In real HTG mill Evolution of the intra-sectoral allocation of recurrent expenditures FY2005-(In real HTG million - excluding aid project, unless otherwise indicated) ................................................. 125 Evolution of the composition of expenditure (in percent of total exp., excl. aid project), FY2001106 .................................................. Justice and Public Security. Credits and exp FY2007 in real HTG thousand - Excluding Justice and Public Security. Projected Salaries Expenditure Projected JusticeiSecurity Salaries Expenditure and Total Government Salaries, FY2007-09 (in Million of Constant US$). ........... Intra-allocation of credits and expenditures, and execution (In real HTG million), FY2004106 .......................... .......................................................................... stice and Security Sector. Average over FY20 real HTG million) ................................................................................................................. 132 Haiti: Public Expenditure Manaqement and Financial Accountability Review Figures Figure 1. Figure 2. Figure 3. Real GDP Growth (1995-05, in percent) ................................................................................... 3 ODA received by Haiti 1990-2005 (Total net, in constant US $ million) ................................ 10 Broad Structure of Budget Allocations in Percentage of Total Budget (average over FY2005- 07) 26 Figure 4. Figure 5. Figure 6. Figure 7. Figure 8. Figure 9. Shares of Executive Branch Components in Percentage of Total Budget FY2004-07 27 Broad structure of the PIP, in Percent of Total Resources ....................................................... 36 Agriculture Value Added in 2004" (percent of total) ............................................................... 61 Economically Active Population in Agriculture in 2004 (percent of total) Share of Agriculture in Total Budget in selected countries, 2000-2005 ..... Public Expenditure in Education (percent of GDP) Haiti and Selected Comparable Countries, 2006 91 Figure 10. Figure 11. Figure 12. Figure 13. Shares of Financing of Education Sector .... .. .... . . .. . . . .. .. .. .. .... . .... . .. . . .. . . . . .. . . . .. . . .. . . . .. . .. . . .. . .. . .... 9 1 Non-Public Sector Enrollment Share in Primary Education (oercent) Per capita total expenditure on health in US$ in LIC in 2003 ........................................... 109 Total Health expenditure in LIC in 2003 (percent of GDP) Figure 14. Private health expenditure in selected LIC in 2003 (percen .............................. 1 10 Figure 15. Figure 16. Figure 17. Figure 18. Figure 19. Figure 20. Figure 2 1. Figure 22. Figure 23. Public health expenditure in selected LIC in 2003 (percent of GDP) ............................... 110 Allocation Distribution, FY2004-05 to FY2006-07 .......................................................... 1 I1 Government Budget--Overall Structure ................. ........ ~ ................................ ........... ....... 146 Baseline scenario, 2007-1 Higher Total Public Inves Higher Total Public Investment and Higher Efficiency of Public Investment, 2007- 15, (Deviation from the Baseline scenario) ....... Figure 24. Figure 25. Reallocation of spending to he Lower collection cost, higher direct tax rate, 2007-15 (Deviation from the Baseline scenario) 157 Figure 26. Lower collection cost, higher d nt in infrastructure, 2007-15 (Deviation from the Baseline scen Figure 27. Figure 28. Higher security spending, 2007- Higher security spending and Elasticity of Security Spending, 2007-15 (Deviation from the Baseline scenario) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................ 158 Figure 29. Combined shock with lower collection cost, higher direct tax and security spending, 2007- 15 (Deviation from the Baseline scenario) Figure 30. Combined shock with higher expenditure, 2007-15 (Deviation from the Baseline scenario) .............................................................. 159 Figure 3 1. Combined shock with lower collection cost, higher security spending, and direct tax incresing later, 2007-15 (Deviation from the Baseline scenario) ......................................................... 160 Figure 32. Combined shock with lower collection cost, higher security spending, elasticity of security spending, and direct tax incresing later, 2007-15 (Deviation from the Baseline scenario) 160 Boxes Box 1. Box 2. Tax Reforms That Work. The Case of Ghana and Uganda: What Lessons for Haiti? Revenue-Enhancing Measures Introduced since 2004 ................................................ Box 3. Creating Fiscal Space: Old Wine in New Bottles ........................... 20 Box 4. Box 5. Box 6. Key Characteristics of the Infrastructure Sector ........................................................................... 74 Pre-requisite for a Multi-Year Sectoral MTEF ............................................................................. 83 The Road Maintenance Fund (Fonds d'Entretien Routier, FER) 84 Haiti: Public Expenditure Management and Financial Accountability Review Box 7 . Institutional and Legal Framework 90 Box 8 . Strategy for the Health Sector in Haiti ....................................................................................... 108 Box 9 . Main Features of the Justice and Security Sector ....................................................................... 122 Box 10 . How Public Infrastructure Can Foster Growth:Lessons from Recent Studies 142 Haiti: Public Expenditure Manaqement and Financial Accountability Review EXECUTIVE SUMMARY I. SUMMARY OF’ MAIN MESSAGES OF THE REPORT HAITI MADE GOOD PROGRESS OVER THE PAST THREE YEARS BUT MAJOR CHALLENGES REMAIN TO ACCELERATING GROWTH AND REDUCING POVERTY 1. After the lost decade 1994-2004, marked by political instability and economic decline, Haiti has reformed significantly and revived growth, especially in the past three years. Macroeconomic policies implemented since mid-2004 helped restart economic growth, reestablish fiscal discipline, reduce inflation and increase international reserves. Financial sector stability has been maintained though weaknesses have emerged. Significant progress was also achieved in the implementation of economic governance measures, mainly in the area of legal framework, core public institutions and financial management processes and procedures. Notably, basic budget procedures were restored, the public procurement system strengthened, and anti-corruption efforts stepped up. Efforts were also made to improve efficiency and transparency in the management of public enterprises. This wave of reforms led to renewed confidence and translated into higher growth. Real GDP is estimated to have grown by 2.3 percent in FY2006, implying an increase of about 0.6 percent in per capita GDP, compared to -0.2 percent in FY2005. The successful implementation of its stabilization program helped Haiti benefit from a three year IMF-PRGF supported program. In addition, in Kovember 2006, Haiti qualified for debt relief under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative by reaching the decision point under the initiative. 2. The Government’s development strategy articulated under the Extended Interim Cooperation Framework Document (ICF) presented at the July 25,2006 Donors’ Conference in Port-au-Prince and in the Interim Poverty Reduction Strategy Paper (I-PRSP) centers around four main pillars: (i) strengthening political governance and promoting dialogue and reconciliation; (ii) improving economc governance and modernizing the State; (iii) promoting economic growth, including by maintaining a stable macroeconomc framework; and (iv) improving access to quality basic services, particularly for the most vulnerable groups. In this context, the Preval-Alexis Government intends to move forward with an ambitious agenda to revive the economy, improve the quality and availability of basic services and modernize the state. The Government’s development agenda has received strong support from the donor community, forcefully stated during two 2006 donor conferences: July 25 in Port-au-Pnnce (Haiti) and November. 30, in Madrid (Spain). In addition, during the donor meeting held on March 23, 2007 in Washington D.C. (USA), the Donors reaffirnmed their support to Haiti’s development program. 3. These recent political and economic developments open a window of opportunity to break with Haiti’s turbulent past and create the sound foundations for strong and sustained economic growth and poverty reduction. Yet, as Haiti enters a new phase of its history, the country faces daunting challenges, mainly related to: (i) uncertain security conditions; (ii) limited resource base; (iii) poor physical and institutional infrastructure; (iv) limited human capital; and (v) weak financial management systems. Along these lines, the Haiti CEM identifies inadequate infrastructure, political instability, inefficient bureaucracy and education as key binding constraints to economic growth. 4. In such an environment, the development challenge of more dynamic growth in order to reduce poverty requires bold policy actions across a broad spectrum covering various areas of Government interventions to: (i) improve security; (ii) expand and improve the quality of the infrastructure base; (iii) expand the economic base and (iv) enhance human capital. But because of Haiti’s scarce resources, prioritizing Government interventions is critical to ensure that public resources are allocated to their best uses. This calls for reforms to improve efjciency of public spending. However, public expenditure reforms would not be enough to decisively put Haiti on a i Haiti: Public Expenditure Manaaement and Financial Accountabilitv Review strong and sustained growth path unless they are complemented by revenue-enhancing measures. This implies that the country design a coniprehensivefisccl reform package. ACCELERATING GROWTH AND REDUCING POVERTY WILL REQUIRE BOLD POLICY ACTIONS WITH A STRONG EMPHASIS ON FISCAL REFORMS 5. From 2004 to 2006, Haitian authorities moved quickly in implementing fiscal adjustment policies and structural measures, backed by an IMF-Staff-Monitored Program (SMP), and two successive Emergency Post-Conflict Assistance (EPCA I and 11) as well as the Bank’s Economic Governance Reform Operation I (EGRO I). The Government tightened expenditure controls, mainly through the reduction in the use of discretionary accounts: the cornptes courants. Quick revenue enhancing measures led to an increase in Government revenue (see Chapter 1). 6. Yet, the growth-poverty response of these “quick fix” fiscal adjustment policies has been limited. More importantly, the Haiti macro-model shows that if the current macroeconomic trends - which are not bad - were to be maintained, the prospects of increasing growth would not be good and the Millennium Development Goals (MDG) of halving poverty by 201 5 would not be achieved even with foreign aid/GDP ratio of 5 percent (see Chapter 8). The poverty rate with RavaIlion’s adjusted elasticity would decrease fiom 55 percent in 2007 to 52.8 percent in 2015. The model also shows that a compositefiscalpackage would lead to an increase in the growth rate of real GDP per capita by 0.7 percentage points on average (deviation fiom the baseline). As a result, the poverty rate (with a growth elasticity of -1 .O) decreases by 2.6 percentage points in 2015. This means a decline in the poverty rate from 55 in 2007 to 50.2 in 2015. 7. A major policy lesson from this experiment is that strong and sustainable growth depends on the scope and quality of the fiscal reforms. Fiscal reforms should target a broad-based fiscal package, which aims at expanding the fiscal space and improving efficiency in the allocation of public spending. This package would combine: (I) an increase in total public investment, (ii) a reallocation of public spending to investment; (iii) a crease in the effective indirect tax rate, (iv) an increase in direct tax rate; (v) an increase in security spending, and (vi) a reduction in collection costs. 8. However, even with the best fiscal reforms, it is unlikely that Haiti will achieve in the near future the high growth rates required to significantly move the country out of the poverty trap. The pay-off of reforms in general and fiscal reforms in particular in terms of higher growth performance and lower poverty tends to materialize only gradually. The Haiti macro-model shows that the proposed fiscal package tends to have positive impact on growth and poverty over time. Foreign aid could play a catalytic role to foster fiscal reforms and help accelerate growth in the short and medium-term. ATTRACTING FOREIGN AID TO REINFORCE FISCAL REFORMS AND BOOST ECONOMIC GROWTH 9. Haiti is unlikely to accelerate growth and move out of the poverty trap solely on the basis of its own resources. The growth experience over the past few years shows that growth rates barely pulled ahead of the population growth rate on a sustainable basis. Growth was volatile, partly reflecting political instability and aid flow volatility (see Chapter 1). 10. More aizdpredictable aidflows are needed to boost economic growth and help overcome some of the vicious dynamic circles that lock Haiti in a low-growth/high poverty equilibrium, and improve living standards. During the past decade, aid flows to Haiti were volatile (see Chapter 1). This led to unpredictable budgetary revenues, limited spending in particular on infrastructure projects, and fiu-ther constrained growth. The procyclical rzature of foreign aid in Haiti over the past decade also restricted the efficiency of policy tools to respond to business cycles. A growth and poverty reducing strategy in Haiti will require more stable aid flows to ensure a continuous .. 11 Haiti: Public Expenditure Manaqement and Financial Accountability Review implementation of fiscal reforms, and a public investment program. A forward looking approach of development challenges facing Haiti is conditional on predictable Government resources. 11. But huge aid flows tend to face issues of limited absorptive capacity of sectors and risks of wastage of public resources in Haiti. The priority sectors’ budget increased sharply over the past three years, reflecting the large increase in the overall Government budget (see below). However, the execution of government spending over the past three years was slow, partly as the result of huge problems of absorptive capacity in the sectors (micro-issue), lack of cash flow planning and monitoring (macro-institutional issue), and poor budget planning at the central and sectoral levels (micro-macro issue) (see Chapter 4 and 5). IMPROVING ECONOMIC GOVERNANCE AND EFFICIENCY IN THE USE OF PUBLIC RESOURCES 12. Effective management of aid flows is critical to ensure that their potential growth enhancing, poverty-reducing and human development-improving effects do materialize. Improving accountability, transparency, and efficiency in the use of public resources is crucial to ensure that public investment translates into accumulation of capital and growth. Increasing efficiency of public investment in Haiti is directly related to the ability of the Government of Haiti to improve economic governance. To this end, completing the implementation of the economic governance reform agenda launched in 2004 is critical to create sound foundations for accountability and transparency of the use of public resources. However, as the country moves toward its medium-term economic program, this first generation of economic governance reforms would need to be complemented by a second-generation of governance reforms focusing on in-depth procurement reforms and actions to fight corruption, improve the rule of law and advance judiciary reforms to decisively firm up the ground for efficiency of public investment: a pre-requisite for higher growth rates. 13. Haiti’s macro-model shows that improved efficiency of public investment (reflecting improved economic governance) leads to higher growth rates and lowers poverty. Simulation results show that the growth rate of output per capita relative to the baseline value rises to 0.6 in 2015, whereas it was only 0.2 when efficiency of public investment is not accounted for. The higher growth rate of GDP per capita translates into a lower poverty rate. With a growth elasticity of - I .O, the drop in the poverty rate reaches 2.5 percentage points by 2015 (relative to the baseline), compared to 1.1 percent drop in the case where efficiency considerations are not taken into account. 14. While increased and stable aid flows are much needed, Haiti cannot - and, indeed, should not - build its growth and human development agenda solely on the basis of an expected increase in foreign aid. The Government must also mobilize domestic revenue. A gradual increase in government domestic revenue would reduce the reliance on aid flows and increase ownership in the implementation of the growth and poverty reduction strategy. The issue of financing the growth and poverty reduction strategy raises the issue of mutual accountability of the Government and donors in mobilizing the resources needed to effectively implement the proposed growth and poverty reduction strategy. ... 111 Haiti: Public Expenditure Management and Financial Accountability Review 11. THRUST, OBJECTIVES, SCOPE AND STRUCTURE OF THE REPORT 15. The main objective of this Public Expenditure Management and Financial Accountability Review (PEMFAR) is to help policymakers in Haiti design an agenda of policy actions to accelerate growth and reduce poverty (MDGs). The PEMFAR is a joint response from the Inter-American Development Bank (IADB) and the World Bank to a demand statement formulated by the Government of Haiti to strengthen the analytical underpinnings of the ongoing PRSP (also named “National Strategy for Growth and Poverty Reduction”), with the aim of centering Haiti’s next round of economic governance reforms and its overall agenda around growth and poverty reduction. 16. The strategic focus of the PEMFAR on issues of linkages between public finance, growth and poverty is motivated by the development challenges facing Haiti, the ongoing international thinking on strategies for achieving higher growth rates and reducing poverty, and the Government’s ongoing PRSP. 17. The report proposes an exercise integrating the analysis of a Public Expenditure Review (PER), a Country Financial Accountability Assessment (CFAA) and a Country Procurement Assessment Report (CPAR), referred to here as Public Expenditure Management and Financial Accountability Review (PEMFAR). The PEMFAR provides a diagnosis of existing systems and capacity in public expenditure management and financial accountability as well as the inter-sectoral and intra-sectoral allocation of expenditures for key priority sectors, including agriculture, education, health, infrastructure, and justice and secunty. Based on the findings of analytical work, the PEMFAR identifies priorities for a medium-term action plan for reforms in public expenditure and financial management. This action plan consists of a concrete set of recommendations for priority reform measures and possible expenditure reallocations as well as for required human and financial resources to implement them. The proposed action plan has been prepared jointly with and adopted by the Government. The plan prioritizes and sequences the proposed measures and coordinates the actions and interventio