(2008) Revizyon Jesyon Depans Piblik ak Responsabilite Finansye (PEMFAR): Amelyore Efikasite Sistèm Fiskal la ak Envestisman nan Kapital Piblik pou Akselere Kwasans ak Diminye Povrete

[page 1] F5 Scport No. 40066-HT : Republic of Haïti 5 Public Expenditure Management and Financial 5 Accountability Review (PEMFAR) Improving Efficiency of the Fiscal System and Investing in Public Capital to Accelerate Growth and Reduce Poverty fanuary 25, 2008 Poverty Reduction and Economic Management Sector Unit Latin America and Caribbean Region L - 3 [page 2] CURRENCY EQUIVALENTS Currency Unit = Haitian Gourdes (HTG) US$1.00 — 38.4 Gourdes (May 11, 2007) GOVERNMENT FISCAL YEAR October 1 — September 30 [DA ice President: Pamela Cox ountry Director vonne Tsikata Sector Director Marcello Guigale Sector Manager: Mauricio Carrizosa ask Manager: [Emmanuel Pinto Moreira DB Deputy Manager JLionel Nicol Co-Task Manager Susana Sitja Rubio [page 3] ABBREVIATIONS AND ACRONYMS AAN Autorité Aéroportuale Nationaie — National Airport Authority ADS Acquired fmmune Deficiency Syndrome APN Autorité Portuaire National (National Port Authority) BRH Banque de la République d'Haïti - Haitian Central Bank CAE Country Assistance Evaluation CAMEP Centrale Autonome Métropolitaine d’Eau Potable — Metropolitan Water Authority CAS Country Assistance Strategy CARICOM Caribbean Community CCI Cadre de Coopération Intérimaire — Interim Cooperation Framework CDD Community Driven Development CCRIF Caribbean Catastrophe Risk Insurance Facility CEM Country Economic Memorandum CFAA Country Financial Accountability Assessment CIDA Canadian International Development Agency CMEP Conseil de Modernisation des Entreprises Publiques - Council for Modernisation of Public Utilities CNMP Commission Nationale des Marchés Publics National Commission for Public Procurement CNRA Commission Nationale pour la Reforme Administrative - National Commission on Administrative Reform COCCI Comité Conjoint de coordination de la mise en oeuvre et du suivi du CCI - Joint Committee for the Implementation and Monitoring of the ICF CONATEL Conseil National des Télécommunications — National Council for Telecommunications CPAR Country Procurement Assessment Report CPI Consumer Price Index CSCCA Cour Supérieure des Comptes et du Contentieux Administratif - Supreme Audit Institution CSA Country Social Assessment DAA Département des Affaires Administratives — Department of Administrative Affairs DCPE Direction de la Plannification et de la Coopération Externe — Directorate of planning and external cooperation DDE Département des Etudes — Regional Education Departments DDR Programme de Désarmement, Démobilisation et Réintégration — Disarmament, Demobilization and Reintegration Program DGI Direction Générale des Impôts — Tax Administration Authority DPG Development Policy Grant DR Dominican Republic DSA Debt Sustainability Analysis EDH Electricité d'Haïti - National electricity company EFA-FTI Education For All — Fast Track Initiative EGRO Economic Governance Reform Operation EPCA Emergency Post Conflict Assistance [page 4] EU European Union FER Fonds d’Entretien Routier - Road Maintenance Fund FIAS Foreign Investment Advisory Service : FY Fiscal Year GDP Gross Domestic Product GNI Gross National Income GOH Government of Haïti HIPC Heavily Indebted Poor Countries Initiative HIV Human Immunodeficiency Virus HTG Haitian Gourde IADS International Agricultural Development Service ICA Investment Climate Assessment ICF Interim Cooperation Framework ICT Information and Communication Technologies DA International Development Association IDB Inter-American Development Bank IFAD International Fund for Agricultural Development IFC International Finance Corporation IGF Inspection Générale des Finances — General Finance Inspectorate IMF International Monetary Fund I-PRSP Interim Poverty Reduction Strategy Paper JSAN Joint Staff Advisory Note LAC Latin America and Caribbean Region LIC Low Income Country LICUS Low Income Countries Under Stress MARNDR Ministère de l’Agriculture, des Ressources Naturelles et du Développement Rural - Ministry of Agriculture and Natural Resources MDA Ministry Departments and Agencies MDG Millennium Development Goals MDRI Müiltilateral Debt Relief Initiative MEF Ministère de l'Economie et des Finances - Ministry of Economy and Finance MENFP Ministère de l’Education Nationale et de la Formation Professionnelle — Ministry of Education and Vocational Training MJPS Ministère de la Justice et de la Sécurité Publique — Ministry of Justice and Public Security MINUSTAH UN Mission for the Stabilization of Haiti MPCE Ministère du Plan et de la Coopération Externe — Ministry of Planning and External Cooperation MTPTC Ministère des Travaux Publics et des Transports et Communications — Ministry of Public Works, Transports and Communications MTEF Medium Term Expenditure Framework NEPO National Education Partnership Office NGO Non-Governmental Organization NPV Net Present Value ODA Official Development Assistance PEFA Public Expenditure and Financial Accountability program PEMFAR Public Expenditure Management and Financial Accountability Review PER Public Expenditure Review PFM Public Financial Management [page 5] PIP Public Investment Program PNH Police Nationale d'Haïti — National Police PRGF Poverty Reduction and Growth Facility PRSP Poverty Reduction Strategy Paper RGCP Règlement Générale de la Comptabilité Publique — General Rules of Public Accounting SDR Special Drawing Rights SMP Staff Monitored Program SNEP Société Nationale des Eaux Potables — National Utility for Potable Water SSA Sub-Saharan Africa SYSDEP Système d’Informatisation des Dépenses - Expenditure Management System TB Tuberculosis TSS Transitional Support Strategy TELECO Telecommunications d'Haïti - Telecommunications utility UCREF Unité de lutte contre le blanchiment de l’argennt - Anti-Money Laundering Unit ULCC Unité de Lutte Contre la Corruption — Anti-Corruption Unit UNAIDS The Joint United Nations Programme on HIV/AIDS UNDP United Nations Development Programme USAID United States Agency for International Development VAT Value-Added Tax [page 6] [page 7] 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 IDB/Worid Bank staff and many people and institutions in Haiti: the Government of Haïti, 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 IDB/World Bank discussion of the PEMFAR concept note, the team organized a braïnstorming session with the main donors involved in Haïti°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 tike to thank His Excellency Daniel Dorsainvil (Minister of Economy and Finance, MEF, Haïti} 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, LCSFMD), Enzo de Laurentiis (Sector Manager, LCSPT), and Errol Graham (Senior Economist, LCSPE). The team is particularly grateful to Professor Pierre-Richard Agénor (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, Worid 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), Mélanie Xuereb-de Prunelé (Assistant Professor University of Paris II and consultant World Bank), Roberts Waddle (E.T. Consultant, World Bank, LCCHT). The team led by Emmanuel 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, Worid 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 Morrison (Country Officer, World Bank, LCC3C). [page 8] Peer reviewers were Célestin Monga (Lead Economist, DECVP), Blanca Moreno-Dodson (Senior Economist, PREMVP) and Emile Finateu (Senior Financial Specialist, AFTFM). [page 9] Haiti: Public Expenditure Management and Financial Accountability Review Table of Contents PART I: ECONOMIC AND FINANCIAL MANAGEMENT CONTEXT seen À 1.1 STRUCTURE OF HAITIS ECONOMY AND OF PUBLIC FINANCE eee 2 1.1.1. Economic Structure, Growth, and Poverty is 2 1.1.2. Public Finance Structure... eee 4 1.2 FISCAL POLICY AND ECONOMIC OUTCOMES, 2004-2006 emmener 14 12.1 Fiscal Performance and Improved Economic Outcomes…............................................. 14 1.2.2 Debtrelief and Fiscal Space Issue... 16 CHAPTER 2 : PUBLIC EXPENDITURE REVIEW: BROAD TRENDS AND PATTERNS sus. 25 2.1 ANALYSIS OF PUBLIC EXPENDITURE BY FUNCTIONAL CLASSIFICATION se. 26 2.1.1 Shift in Budget Allocation toward Economic and Social Sectors 26 2.1.2 Analysis of Actual Expenditures 30 2.1.3 International Comparison of Functional Distribution of Public Expenditure 34 2.2 FACTORS DETERMINING THE STRUCTURE OF PUBLIC EXPENDITURE mms 34 2.2.1 Level of Domestic Resources... 34 22.2 Influence of External Financing sienne 35 23.1 Structure of the Public Investment Program................................................................36 2.3.2 Influence of Donor Financing on the Public Investment Program 37 2.4.1 Broad Trends of Budget Execution... 39 2.4.2 Execution of the PIP....................eneeeneniennse 40 : CHAPTER 3 : COUNTRY FINANCIAL ACCOUTABILITY ASSESSMENT... 43 3.9 EXTERNAL CONTROLS AND LEGISLATIVE SCRUTINY ss SO 3.10 INSTITUTIONAL FRAMEWORK AND PROCUREMENT MANAGEMENT CAPACITY 50 3.11 PROCUREMENT OPERATIONS AND MARKET PRACTICES.eneemmeees D PART II: PUBLIC EXPENDITURE REVIEW IN PRIORITY SECTORS mme D 7 4.1.1 Background and sector objectives... 61 4.1.2 Structure and trends in agricultural expenditures 62 4.1.3 Public Investment Program (PIP).......................................... ss. 66 4.1.4 Weaknesses, Issues, and Challenges Public Expenditure Management In Agriculture Sector ….….. 67 4.1.5 Policy Recommendations 70 4.2.1 Background and sector objectives... 72 42.2 Trends and Structure of Infrastructure Expenditures…................................ 74 [page 10] Haiti: Public Expenditure Management and Financial Accountability Review 42.3 Public Imvestment Programs in the Infrastructure Sector... 80 42.4 Weaknesses, Issues, and Challenges in Public Expenditure Management in Infrastructure Sector … 81 4.2.5 Policy Recommendations 84 5.1.1 Background and Sector Objectives…..................................................................... 88 5.1.2 Trends and Structure of Education Expenditures 900 5.1.3 Public Investment Programs in the Education Sector... OS 5.14 Identifying Weaknesses, Issues, and Challenges in Budget Process and Public Expenditure Management SU inennneeeeneeeeenneeeeeennennenne O2 5.1.5 Policy Recommendations and Priorities….......................................... ss 103 5.2.1 Background and sector objectives... 105 5.22 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... 116 5.2.5 Policy Recommendations nn 118 CHAPTER 6 : JUSTICE AND SECURITY EXPENDITURE REVIEW mess 120 6.1 BACKGROUND AND SECTOR STRATEGY AND OBJECTIVES see 120 6.2 TRENDS AND STRUCTURE OF JUSTICE AND SECURITY SECTOR EXPENDITURES 123 6.2.1 Trends in Allocations sen 123 6.2.2 Intra-Sectoral Allocations of Expenditures 124 6.2.3 Economic composition of expenditure ss 126 6.24 Projected Trends in Police Wage Bill and Fiscal Sustainability Issue 120 6.2.5 Budget Execution Trends... ne 130 6.3 PUBLIC INVESTMENT PROGRAMS IN THE JUSTICE AND SECURITY SECTOR 1317 6.4 WEAKNESSES, CHALLENGES AND RECOMMENDATIONS susrmeeeeeseese 132 6.4.1 Weaknesses and Challenges..." se 132 6.4.2 Main Policy Recommendations..….............................................. ss 134 PART III: ADDRESSING GROWTH AND POVERTY CHALLENGES: A MACRO-MODELING CHAPTER 7 : ASSESSING THE IMPACT OF FISCAL POLICY ON GROWTH AND POVERTY: 7.1 DESCRIPTION OF THE KEY FEATURES OF THE HAITI MACRO-MODEL use 140 7.1.1 The Supply Side ui iienneeneneneeeeeneeenenne 140 7.1.2 Consumption and investment... 144 7.13 Composition of public spending.…................................................. 145 7.14 Taxes and the government budget constraint 146 7.1.5 Public capital: quality indicators su 147 CHAPTER 8 : ADDRESSING GROWTH AND POVERTY CHALLENGES: FISCAL REFORMS 8.2.1. Increase in Public Investment... 154 8.2.2 Spending reallocation 156 8.2.3 Tax Reform... inner 197 82.4 Increase in security spending................................................... ss. 158 8.2.5 À composite fiscal package... ne 158 [page 11] Haiti: Public Expenditure Management and Financial Accountability Review Tables Table 1. Composition of GDP at factor cost, 2000-06... 2 Table 2. Income Per Capita, Nominal GDP, and Growth Rates, 2000-06... 2 Table 3. Composition of Government Revenue in Percent of GDP, 2000-2006 4 Table 4. Shares of recurrent spending categories in total recurrent, FY2000-06 (in percent) 7 Table 5. Composition of Government Expenditure, in Percent of GDP, FY 2000-06... 8 Table 6. Overall Fiscal Balance (HTG Million), FY2000-2006 Table 7. Structure of Pledges and Main Donors Areas of Intervention, 2004-07 (US$ Miïilion) ….….… 12 Table 8. Donor Development Financing. Commitments 2004-07 v. Disbursements as of September 2007 (in US$ Million} ie ieennnns 13 Table 9. Government revenue (excluding grants) Haïti and Selected Comparable Sub-Saharan Africa Countries, 2002-2006 (In percent of GDP)............................ se 15 Table 10. External Debt Service, 2006/06-2014/15 (In US$ million unless otherwise indicated) ….…... 17 Table 11. Debt Service before and after HIPC and MDRI relief 2007-2015 (in million of US$)... 19 Table 12. General Trends in Budget Allocations, FY2002-07 (in real HTG Million)... 27 Table 13. Broad Trends in Budget Allocations to Priority Sectors, FY2002-07 (real HTG million) …... 28 Table 14. Broad Trends in Budget Aflocations to Priority Sectors, FY2002-07 (in real HTG Million). 29 - Table 15. Geographical Distribution of Government Budget by Department (In nominal HTG Million, Table 16. Total Spending by Broad Categories (real HTG Million), FY2002-06 30 Table 17. Functional Distribution of Actual Total Expenditures—Payment basis (in real HTG million)31 Table 18. Functional Distribution of Actual Public Recurrent Expenditures—Payment basis (real HTG MON) eee D2 Table 19. Shares of “Comptes Courants” in Total Spending for Selected Priority Sectors (in percent), Table 20. Comparison of Spending on Priority Sectors. In percent of total budget allocations (excluding debt SerViCE)....................... nier DA Table 21. Public Investment Program FY2004-05, FY2005-06, and FY2006-07 (in million of real gourdes unless otherwise indicated)... ne 38 Table 22. Execution Rates in Percent, FY2002-06 0... 39 Table 23. Budgetary allocations (in real HTG millions)....................................................62 Table 24. Budgetary Allocations Structure (in real HTG millions), FY 2001/0663 Table 25. Structure of MARNDR's Operating Budget (allocations in real terms HTG millions), Table 26. Trends in MARNDR's Expenditures, (in real HTG millions), FY2001-06............................. 65 Table 27. Detailed Expenses by Budget Line (FY 2005-2006) (In real HTG thousand).…..…............ 66 Table 28. Detailed Expenses by Budget Line (FY 2002-2003) (In nominal HTG thousand)…….…..... 66 Table 29. Shares in Budget Execution (În real HTG million).….........................................................66 Table 30. Investment Budget (PIP), yearly allocations (In real HTG million unless otherwise indicated) Table 31. Comparison of Budgets Requested and Allocated (in nominal HFG million)... 68 Table 32. Generated Funds in Ministry of Agriculture (In real HTG thousand)........................ 68 Table 33. Main currents account in Ministry of agriculture 69 Table 34. Network Infrastructure in Haiti 1990-2004... 72 [page 12] Haïti: Public Expenditure Management and Financial Accountability Review Table 35. Allocations to the Ministry of Public Works, Transports and Communication (MTPTC) (In million of real gourdes), FY2001-07 075 Table 36. Infrastructure Sector. Share of selected items in Recurrent Budget and their execution rate (In percent), FV2002/06 diem T8 Table 37. Infrastructure Sector. Budget Execution (In Million of real gourdes), FY2001/06 79 Table 38. Infrastructure Sector, Recurrent Budget Execution (In Million of real gourdes,), FY2001/06 79 Table 39. Resources for PIP in the Infrastructure Sector. Comparison to other Priority Sectors, FY2004/05 and FY2005/06 (In million of nominal gourdes)..........................................… 80 Table 40. PDonors” financing under ICF (in million $US unless otherwise indicated), 2004-06 pledges and June 2004-December 200$ realizations 8 Table 41. Allocations to Education Sector {In real HTG million), FY2002/07 03 Table 42. Composition of Spending, (In real HTG million}, FY2002-07...............,.......,... 94 Table 43. MENFP Budget Execution (In real HTG million), FY2002-06.................................,.....04 Table 44. Resources for PIP in the Education Sector, Comparison to other Priority Sectors, FY2004-05- FY2006-07 (In real HTG million)... 06 Table 45. Status of Disbursement versus Commitments, as of December 31, 2005 for all types of interventions (under ICF and others, in thousand of US$)... 06 Table 46. Donors’ Commitments and Disbursements under ICF and Other Interventions (US$ thousands, unless otherwise indicated)... 97 Table 47. Commitments (2004-07) and Disbursements (as of December 2005) by Donor, Framework and Areas of Intervention and Axis ........................................................................... 099 Table 48. Donors’ Commitments to Financing School Year 2004-05 (in thousand US$)... 101 Table 49. Health Indicators. Comparison Haiti and regional averages (LAC, SSA, and LIC}.......….… 107 Table 50. Allocations to Heaïth Sector (real HTG million), FY2001/06..............................111 Table 51. Financing of Public Investment Plan, FY2004-05 to FY2006-07.................................. 112 Table 52. Health Sector. Budget Execution (real HTG million), FY2002/07.............................. 112 Table 53. Health Sector. Recurrent Budget Execution (HTGT million), FY2002/07................... 113 Fable 54. Health Sector. Share of selected items in Recurrent Budget and execution rate (in percent), Table 55. Resources for PIP in the Health Sector. Comparison to other Priority Sectors, FY2004/05- FY2006/07 (real HTG million)... IS Table 56. Donors’ financing under ICF (in million $US unless otherwise indicated), June 2004- December 2005... nee 116 Table 57. Allocations to Justice and Security Sector (In reat HTG million), FY2002/07 123 Table 58. Recurrent Budget Allocations to Justice/Security Sector (In real HTG million) FY2002/07 124 Table 59. Evolution of the intra-sectoral allocation of recurrent expenditures FY2005-(In real HTG million - excluding aid project, unless otherwise indicated)... 125 Table 60. Evolution of the composition of expenditure (in percent of total exp., excl. aid project), Table 61. Justice and Public Security. Credits and expenditures for selected goods and services FY2002- FY2007 in real HTG thousand - Excluding aid project... 128 Table 62. Justice and Public Security. Projected Salaries Expenditures (million constant US$) …….. 129 Table 63. Projected Justice/Security Salaries Expenditure and Total Government Salaries, FY2007-09 {in Million of Constant US$)... nn 130 Table 64. Intra-allocation of credits and expenditures, and execution (In real HTG million), FY2004/06 Fable 65. Resources for PIP in Justice and Security Sector. Average over FY2004/05-FY2006-07 (In real HTG million)... sen 132 [page 13] Haïti: Public Expenditure Management and Financial Accountability Review Figures Figure 1. Real GDP Growth (1995-05, in percent) 3 Figure 2. ODA received by Haiti 1990-200$ (Total net, in constant US $ million) 10 Figure 3. Broad Structure of Budget Allocations in Percentage of Total Budget (average over FY2005- 07) 26 Figure 4. Shares of Executive Branch Components in Percentage of Total Budget FY2004-07 27 Figure 5. Broad structure of the PIP, in Percent of Total Resources... 36 Figure 6. Agriculture Value Added in 2004* (percent of total) 61 Figure 7. Economically Active Population in Agriculture in 2004 (percent of total) 61 Figure 8. Share of Agriculture in Total Budget in selected countries, 2000-2005... 63 Figure 9. Public Expenditure in Education (percent of GDP) Haïti and Selected Comparable Countries, 2006 91 Figure 10. Shares of Financing of Education Sector 01 Figure 11. Non-Public Sector Enrollment Share in Primary Education (oercent)…..…................... 02 Figure 12. Per capita total expenditure on health in US$ in LIC in 2003... 109 Figure 13. Total Health expenditure in LIC in 2003 (percent of GDP)............................... 109 Figure 14. Private health expenditure in selected LIC in 2003 (percent of GDP).................. 110 Figure 15. Public health expenditure in selected LIC in 2003 (percent of GDP) 110 Figure 16. Allocation Distribution, FY2004-05 to FY 2006-07... 111 Figure 17. Recurrent Expenditure (HTG million), FY2001/06 112 Figure 18. The Supply Side... 141 Figure 19. Composition of Public Expenditure 145 Figure 20. Government Budget--Overall Structure …....................................................................146 Figure 21. Baseline scenario, 2007-15... sun 153 Figure 22. Higher Total Public Investment, 2007-15, (Deviation from the Baseline scenario) ….. 155 Figure 23. Higher Total Public Investment and Higher Efficiency of Public Investment, 2007-15, (Deviation from the Baseline scenario)...’ 155 . Figure 24. Reallocation of spending to health , 2007-15 (Deviation from the Baseline scenario) …. 156 Figure 25. Lower collection cost, higher direct tax rate, 2007-15 (Deviation from the Baseline scenario) 157 Figure 26. Lower collection cost, higher direct tax rate, new revenue to investment in infrastructure, 2007-15 (Deviation from the Baseline scenario)... 157 Figure 27. Higher security spending, 2007-15 (Deviation from the Baseline scenario)... 158 Figure 28. Higher security spending and Elasticity of Security Spending, 2007-15 (Deviation from the Baseline scenario)... iiiineineenennenenrnne 198 Figure 29. Combined shock with lower collection cost, higher direct tax and security spending, 2007- 15 (Deviation from the Baseline scenario)... 159 Figure 30. Combined shock with higher security expenditure, direct taxes, and elasticity of security expenditure, 2007-15 (Deviation from the Baseline scenario)... 150 Figure 31. 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 I. Tax Reforms That Work. The Case of Ghana and Uganda: What Lessons for Haiti? 5 Box 2. Revenue-Enhancing Measures Introduced since 2004 16 Box 3. Creating Fiscal Space: Old Wine in New Bottles? 20 Box 4. Key Characteristics of the Infrastructure Sector …...........................................................74 Box 5. Pre-requisite for a Multi-Year Sectoral MTEF 83 Box 6. The Road Maintenance Fund (Fonds d’Entretien Routier, FER) 84 [page 14] Haiti: Public Expenditure Management and Financial Accountability Review Box 7. Institutional and Legal Framework... DO 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 [page 15] Haiti: Public Expenditure Management and Financial Accountability Review EXECUTIVE SUMMARY I. SUMMARY OF MAIN MESSAGES OF THE REPORT HAITI MADE GOOPD 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, Haïti 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 November 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 7 four main pillars: (i) strengthening political governance and promoting dialogue and reconciliation; (ii) improving economic governance and modernizing the State; (iii) promoting economic growth, . including by maintaining a stable macroeconomic framework; and (iv) improving access to quality basic services, particularly for the most vulnerable groups. In this context, the Préval-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-Prince (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 Haitÿs turbulent past and create the sound foundations for strong and sustained economic growth and poverty reduction. Vet, as Haïti 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 Haïti 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 efficiency of public spending. However, public expenditure reforms would not be enough to decisively put Haiti on a i [page 16] Haiti: Public Expenditure Management and Financial Accountability Review strong and sustained growth path unless they are complemented by revenue-enhancing measures. This implies that the country design a comprehensive fiscal 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 II) 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 comptes 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 Goais (MDG) of halving poverty by 2015 would not be achieved even with foreign aid/GDP ratio of 5 percent (see Chapter 8). The poverty rate with Ravallion’s adjusted elasticity would decrease from 55 percent in 2007 to 52.8 percent in 2015. The model also shows that a composite fiscal package would lead to an increase in the growth rate of real GDP per capita by 0.7 percentage points on average (deviation from the baseline). As a result, the poverty rate (with a growth elasticity of -1.0) 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. À 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 aîms 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) an increase 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 Haïti 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 and predictable aid flows 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 Haïti were volatile (see Chapter 1). This led to unpredictable budgetary revenues, limited spending in particular on infrastructure projects, and further constrained growth. The procyclical nature of foreign aid in Haïti over the past decade also restricted the efficiency of policy tools to respond to business cycles. A growth and poverty reducing strategy in Haïti will require more stable aid flows to ensure a continuous ü [page 17] Haïti: Public Expenditure Management and Financial Accountability Review implementation of fiscal reforms, and a public investment program. À 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 Haïîti. 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 Haïti 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. 1. Haitÿs 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 — 1.0, 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, Haïti 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. À 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. ii [page 18] Haïti: Public Expenditure Management and Financial Accountability Review IL. THRUST, OBJECTIVES, SCOPE AND STRUCTURE OF THE REPORT 15. The main objective of this Public Expenditure Management and Financiat 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 Haïti’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 security. 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 measurés and coordinates the actions and interventions of the various actors. Each component of the report focuses on a key question: e Part I (Economic and financial management context): are Haiti”s fiscal policies and financial management sound to create the foundations for high growth and reduce poverty? °_ Part IT (Public expenditure review): are allocations of public expenditure and their execution in priority sectors broadiy in line with Government’s development priorities? e Part INT (Macroeconomic framework): can fiscal reforms and increased aid flows foster economic growth and reduce poverty? 18. The structure of the report reflects this design. Part I presents the economic and financial management context of Haiti. Part II focuses on the analysis of sector expenditure reviews covering the five I-PRSP priority sectors — agriculture, infrastructure, education, health, and justice and security. Part III presents Haïiti’s macroeconomic framework and assesses the impact of fiscal reforms on growth and poverty reduction. Aid requirements are also calculated. 19. Certain aspects of public finances have been omitted or not sufficiently developed in the report due to the programmatic approach of this PEMFAR. They will be addressed in future work (PEMFAR I and IT). They include: (i} Tracking the impact of public expenditure on beneficiaries (public expenditure tracking surveys); (ï) fiscal implications of decentralization; (iii) geographic iv [page 19] Haiti: Public Expenditure Management and Financial Accountability Review allocation of spending; (iv) gender issues; and (v) human resource management and technical assistance requirements. v [page 20] Haiti: Public Expenditure Management and Financial Accountability Review III. SUMMARY OF KEY FINDINGS OF THE REPORT HAITPS MACROECONOMIC AND FINANCIAL MANAGEMENT CONTEXT IS NOT SOUND ENOUGH TO PROMOTE GROWTH AND REDUCE POVERTY 20. Despite recent improvements Hait”s macroeconomic and fiscal context remains weak. With a low resource base and fixed and quasi-fixed expenditure, the Government has little room to maneuver to use the budget as an effective policy tool to influence economic and social outcomes. 21. International support provided to the country since 2004 has helped the authorities implement adjustment policies and structural reforms. As the result, Haiti reached the Decision Point under the Enhanced HIPC. Debt relief granted to Haïti provides some fiscal space. However, resources freed from debt service relief and associated fiscal space is relatively limited. Efforts should be made to expand the tax base and improve efficiency in the use of public resources to enlarge the fiscal space and increase the Government’s room to maneuver. Moreover, the growth and poverty response of improved policies has yet to materialize. There is a need to design a fiscal reform package, the execution of which would result in higher growth rates and lower poverty. 22. Haïitÿs budget structure is dominated by the predominance of the “executive branch”, which accounts for 95 percent of total allocation on average over FY2002-07. The allocation of expenditures is highly centralized. About 72 percent of the FY2006-07 budget was allocated to the central government while only 28 percent was granted to the ten departments. Moreover the distribution of resources between departments seems not to reflect the poverty incidence as the poorest departments were granted less resources in FY2007 budget than the richest ones. Under these : . Circumstances, catching-up of poor departments may thus be difficult as the budget does not appear to : be an instrument to address the differences between departments. ‘ 23. Over the past five years, there has been a shift in expenditures away from the “political . sector” to the “economic” and “social” sectors, reflecting the authorities’ recent efforts to align expenditures to economic and social objectives as well as the return of donors” financing to support investment programs since 2004. The bulk of the increase in allocations to “economic” and “social” sectors was directed to growth-enhancing and poverty reducing sectors, including agriculture, transport and communications, education, health, and justice and security. This is a good budgetary outcome. However, this also signals the fact that the strong influence of donor financing on expenditure choices has not been offset by a “fungibility effect”, i.e. by a reallocation of the Government’s own funding to non-priority sectors, as donor financing for priority sectors became available. Moreover, the structure of Haiti’s public spending, in particular the investment budget is mainly determined by foreign aid flows, which are volatile. Planning the execution of the investment budget thus becomes difficult. 24. The Government has made significant efforts to improve transparency and accountability in the expenditure management in the context of adhesion to governance reforms. There has been a gradual decline in the use of comptes courants as a source of execution of spending in priority sectors since 2004. However, volatility of aid flows, limited absorptive capacity, and poor budget planning have resulted in 1ow execution rates. DESPITE RECENT PROGRESS, HAITIS COUNTRY FINANCIAL ACCOUNTABILITY AND PROCUREMENT SYSTEMS FACE SIGNIFICANT WEAKNESSES AND CHALLENGES 25. Haiti has made significant progress in strengthening fiscal discipline and improving the efficiency of its public financial management (PFM) system in the last three years, in a relatively vi [page 21] Haïti: Public Expenditure Management and Financial Accountability Review difficult context. Along with achieving macroeconomic stabilization, the Government has strengthened the budget preparation and execution process, increased the transparency of budget information, strengthened budgetary oversight and intensified its anti-corruption efforts. It has adequately reflected in the last fiscal years budget, the policy priorities defined in the Interim Cooperation Framework (ICF) and the Interim Poverty Reduction Strategy Paper (I-PRSP). The budget classification system has been improved both on the expenditure and the revenue sides. The new budget classification is based on the administrative and economic nature of expenditures, and comes relatively close to meeting international standards. 26. The automated financial management system, SYSDEP and its progressive implementation in Ministries Departments and Agencies (MDAs) have improved the budget execution process. Financial Comptrollers as well as public accountants are being recruited to strengthen the MDAs and accelerate the budget execution process. The audit reports for fiscal year 2001/02 and 2002/03 were also completed and transmitted by the Auditor General {Cour Supérieure des Comptes et du Contentieux Administratif - CSCCA) to parliament. 27. Despite these improvements, there remain significant weaknesses and challenges. As a result of the weaknesses (see below), the overall scoring of the Country, under the PEFA and procurement indicators is relatively low in most of these areas. 28. The budget is not forward-looking. The links between sectoral policies and priorities and the budget are weak. The budget is only based on projections of activity during the previous year and is not rooted in a medium-term expenditure framework. There are a number of off-budget operations. The profusion of off-budget accounts and activities severely constrains MEF'’s ability to control resource allocation and public spending. À large part of public spending is channeled through ministries’ “own resources” collected by the MDAs, and special accounts of the Treasury. 29. Budget execution is affected mainly by the lack of cash flow planning and monitoring ‘ - and the weak capacity of the line ministries. Budget releases to the MDAs are made based on the 2 ceilings fixed by the Constitution (one-twelfth of the annual budget appropriation) and not the : effective cash flow needs. As a result MDAs have difficulty in executing their activities in the absence of a budget release based on their real cash flow needs and this arbitrary constraint discourages procurement planning and hampers implementation of multi-year contracts. The budget execution process is also lacking a manual. The existing manual is outdated and does not reflect the recent changes in the Public Financial Management (PFM) system. The deployment of financial comptrollers to support the MDAs, in accelerating the budget execution process, is moving slowly. Budget allocations approved for regional departments are made available with significant delays resulting in slow implementation of activities at that level. 30. Formal coordination mechanism to link aid policies, project and programs to the Country’s priorities and budget needs to be established. A large part of externally financed expenditures is executed outside the budget, with donors using their own implementation arrangements. This results in poor information flow between the spending ministries and the MEF and the MPCE, poor coordination between the development partners and the Government, the lack of a clear framework for the execution of those expenditures and the lack of database related to project based assistance. 31. A sound accounting system, including clear standards and a related automated information system, still needs to be developed. À new accounting framework was adopted recently. It is expected that a sound accounting system will soon be in place in the Treasury department, remedying one of the major weaknesses of the PFM system in Haïti over the last years. To support the implementation of this framework, the accounting module of the computerized Government expenditures management system (Système d'Informatisation des Dépenses — SYSDEP) needs to be developed. Moreover, the link between the different automated financial management software and that used by the MEF to report on Revenus is not automatic. In addition to the risk of errors from data vil [page 22] Haiti: Public Expenditure Management and Financial Accountability Review transfer, the current system cannot generate a clear and comprehensive reporting of the financial situation of the Country. 32. Despite a relatively comprehensive institutional and legislative framework, the internal and external oversight of the budget is still not effective given the lack of capacity of the Institutions. Internal controls are very weak or not yet functioning. External controls are limited by the capacity of the Supreme Audit Institution (CSCCA). The role of the parliament has been Hmited to the approval of draft appropriation laws during the past few years. Budget Review Acts as well as annual audit reports of the CSCCA, when available, were not subjected to parliamentary oversight. 33. The adoption of the new procurement law is a necessary first step but not sufficient, by itself, to institutionalize the recent procurement reforms. Much still needs to be done in terms of fleshing out the procedural details of the reforms and the CNMP”’s ability to enforce them in order to ensure that all procuring agencies adhere to the new requirements of the legal framework. 34. A major challenge to the successful implementation of the PFM reforms is the inadequate quality and quantity of human resources, which has been a primary impediment to public sector efficiency in Haiti over the last years. SIGNIFICANT PROGRESS HAS BEEN MADE TO ALLOCATE MORE RESOURCES TO PRIORITY SECTORS, YET EXECUTION OF SPENDING HAS BEEN SLOW 35. Over the past three years, allocations of resources to priority sectors dramatically increased, mainly driven by huge flows of external aid provided by the donors into the .. investment budget since the re-engagement of donors in 2004. The allocation to the agriculture - sector almost doubled in real terms between FY2002-04 and FY2005-07 while that to the infrastructure sector more than tripled in real terms over the same period. At the same time, the allocation of public expenditure to the education and health sector increased remarkably by more than 30 percent in real terms on average over the period FY2002-07 while it doubled for the health sector over the same period. However, at about 2.5 percent of GDP, the levels of allocations to the education sector still compares poorly with the Low Income Countries (LICs}) average (3.2 percent of GDP) and even by sub-Saharan Africa standards (3.4 percent of GDP). Along the same lines, at 6 percent of total Government budget on average over FY2005-07, allocations to the health sector stand below comparable countries: Madagascar (8.4 percent), Dominican Republic (10.3 percent), Burkina Faso (10.3 percent); and Zambia (13.2 percent). The justice and security sector also recorded a large increase in its budget, which nearly doubled in real terms between FY2002-04 and FY2005-07. Vet, the allocations can be considered as relatively low since justice and security often account for a much larger share of between 20-30 percent of public expenditures, especially in post-conflict countries and fragile states. 36. Leaving aside the issue of its relative levels compared to international standards, the allocation of resources to priority sectors is not the major problem of public finance in Haïti. The major issue is the execution of spending, in particular the execution of the investment budget. Less than 30 percent of the agriculture and infrastructure overall budget was spent on average between FY2004-06. About 75 percent and 60 percent, respectively of the overall budget allocated to the education and health sectors were spent on average between FY2004-06. As a result, the sectors have little influence on economic and social outcomes. 37. Low execution rates reflect the combination of three factors: (i} limited absorptive capacity (sectoral issue); (ii) poor budget planning at the central level (macro-issue) and (ïi) lack of cash flow planning and monitoring (macro and institutional issue). But it is also symptomatic of weaknesses in public expenditure management at the sectoral level (which mirror weaknesses at the central level). First, budget preparation does not follow any specific timetable, and budget proposals have not been backed up by a sectoral strategy. They are seldom substantiated by clear vil [page 23] Haiti: Public Expenditure Management and Financial Accountability Review justification and spending targets, The result is that proposals from the line ministries often do not obtain the MEF’s agreement. In fact, for most of the sectors, budget allocations are just the renewal of allocations of the past year with a factor increase based on neither clear justification nor spending targets. The preparation process is also affected by the centralized approach adopted within the Ministry, which results in little involvement of the Ministry’s directions and entities. Second, budget execution in the sector suffers from the lack of detailed and accurate data. Aggregate execution figures may hide differences in budget items and detailed information on execution is scarce and incomplete. Also, the lack of clear spending targets makes it difficult to judge the effectiveness of budget execution in terms of achieving the objectives set. Only recently has the Government of Haiti prepared a list of poverty reduction items in the context of the HIPC tracking mechanism. The challenge now is to convert this list into specific budget lines to ensure the effectiveness of the tracking and monitoring exercise. Third, governance issues are also a major constraint to effective expenditure management most notably in the education and health sectors. Lack of clearly defined procedures, transparency and accountability in the use of public funds often result in poor expenditure management in these sectors. Fourth, another issue of the expenditures management at sector level concerns the capacity of the line ministries to manage better their own human resources. THE PREPARATION OF THE PUBLIC INVESTMENT PROGRAM (PIP) IS A GOOD STEP TOWARD A STRATEGIC BUDGET PLANNING. YET, SIGNIFICANT CHALLENGES REMAIN TO MAKE IT AN INTEGRATED BUDGET TOOL FOR GROWTH AND POVERTY REDUCTION 38. Haiti has prepared a three year PIP. This document which uses a back-of-envelop : calculations methodology and à top-down approach is an important step toward a : programmatic budgeting approach. However, several issues would need to be addressed for the PIP to become an integrated budget planning tool. First, the PIP does not account for linkages between : various sectors. It has limited links with the sectoral strategies and is not the product of a coordinated exercise involving all line ministries. Second, aid requirements are determined by totaling resource needs of each sector. Third, the PIP does not express the development needs of Haïti as stated in a coherent poverty reduction strategy such as the I-PRSP. In fact, its links with the I-PRSP are not clearly defined. Finally, the document does not adopt a forward-looking approach, which focuses on growth and poverty reduction. 39. The real challenge now is to design a full-fledged integrated PIP, which will adopt a bottom-up approach and account for the linkages between various sectors. The lack of clearly defined sectoral strategies with spending targets makes the design of the new PIP more challenging. It also raises the issue of the right sequencing of the preparation of the PIP. In any event, a pragmatic approach is needed in the context of urgent development challenges facing Haïti. ix [page 24] Haiti: Public Expenditure Management and Financial Accountability Review IV. TOP 7 STRATEGIC POLICY PRIORITIES FOR EFFICIENT USE OF PUBLIC RESOURCES TO ACCELERATE GROWTH AND REDUCE POVERTY IN HAITI 40. Based on the key findings, the PEMFAR recommends the following seven policy priorities to improve efficiency in the use of public resources to accelerate growth and reduce poverty. These priorities will be discussed with the Government of Haiti and the donor community. Expanding fiscal space by simultaneously accelerating the implementation of revenue-enhancing measures and improving efficiency of public spending. at. On the one hand, Haïti has a low resource base. On the other hand, fixed and quasi-fixed expenditures take up an important part of Government revenue. However, there is scope for increasing the fiscal space by implementing revenue-enhancing measures and reallocating expenditures in the budget. On the revenue side, direct and indirect tax revenues are much lower than other low income countries (LICs). On the expenditure side, savings could be achieved by gradually reducing Government transfers to public entities. 42. Recommended Policy Actions e Accelerate implementation of the revenue-enhancing measures agreed upon with the | international community (IMF-FAD). In the short-term, authorities should seek to reinforce tax administration and broaden the tax base. In the longer term, authorities should consider gradually increasing some of the tax rates that are below regional averages (see IMF’s recommendations). The strategy should also include measures to establish effective customs control through ports of entry other than Port-au-Prince. À comprehensive reform plan for revenue administration should be prepared in the near future. Measures to raise revenue could include: (i) eliminating tax incentives in the investment code; (ii) strengthening taxation of fringe benefits, for instance by eliminating their deductibility on the employer side; (iii) comprehensive coverage of personal capital income in the tax net; (iv) increasing the holding tax on property above some relatively high threshold; and (v) increasing specific excise taxes at least in line with the inflation, and increasing existing ad valorem rates.! Actions to strengthen the existing tax administration could include (i} improving collection procedures; (ii) developing audit plans and procedures; and (ti) reorganizing along functional lines. ° _Improve the efficiency of public spending to “kick-start” and “sustain” growth to alleviate poverty. Efficient use of public resources requires that the Government redesign its policy transfer to the public entities and alleviate its financial burden. For instance, over the past six years, central Government transfers to EDH have increased to 1.3 percent of GDP, or 8.8 percent of total Government expenditure. During 2006, with rising international petroleum prices, electricity production in Port-au-Prince declined by about one-third, while fiscal transfers remained broadly unchanged. The savings obtained by reducing transfers to public entities could be directed to productive spending, which includes: infrastructure, education, health, and security. Efficient use of public resources requires that the Government focus on these sectors. 1 At 10 percent, the VAT is at the lower end of the range among low-income countries. However, increasing the VAT could raise concerns regarding the negative impact on the poor. Thus, the PEMFAR team does not recommend this measure. x [page 25] Haiti: Public Expenditure Management and Financial Accountability Review Higher growth, in turn, would generate increased fiscal resources to finance productive spending, further bolstering the dynamism of the Haïtian economy. Designing an aggressive policy of attracting and effectively programming grant flows 43. Revenue-enhancing measures would take time to raise Haïti”’s revenue-GDP ratio to international levels. In the short term, Haiti would continue to depend on foreign aid to finance its development priorities. However, because of debt sustainability considerations, contracting additional debt obligations might not be feasible and does not appear to be a reliable policy option. The Government should thus put in place an aggressive policy of attracting foreign grants. However, the success of this policy will depend on the Government’s capacity to improve budget execution so that public resources are effectively used. 44. Recommended Policy Actions + Prepare a medium-term strategy for attracting grant financing. The strategy should first identify the financial needs of the country to achieve the MDGs. This should be based on the integrated full-fledged PIP, which would be costed (see below). The sectoral strategies would help provide a costing of the needs. The strategy should be developed in close collaboration with the donors in the context of the financing of the Government’s ongoing medium-term reform program and the PRSP. In light of the tremendous needs of Haïti and the limited resources available, prioritizing the needs would be critical. Focus should thus be on growth-enhancing and poverty- reducing sectors, including infrastructure, education, health, agriculture and justice and security. : e Set up an institutional mechanism in charge of grant financing. This mechanism could be created at the level of the Ministry of Economy and Finance (MEF). It could take the form of the : creation of a unit within the MEF, which would have specific responsibility for grant financing. This mechanism would allow tracking of currently available grant resources and potential future resources. The successful implementation of such a mechanism will closely depend on coordination with donors. e Establish a “buffer reserve fund” to cope with abrupt reduction in grant financing. The volatility of aid flows considerably disrupted the implementation of policy reforms over the past decade in Haïti (see Chapter 1). Setting up a buffer reserve fund would help reduce the negative effects of aid volatility. The modalities of this fund (level of resources to be included in the fund, rémuneration, commitment of the resources, etc.) should be discussed with the donor community. Accelerating financial management and procurement reforms 45. The successful implementation of PFM reforms requires that the Government takes specific policy actions. 46. Recommended Policy Actions + Complete the legal framework for financial management by: (a) supplementing the Decree on the preparation and execution of budget laws with a clear and exhaustive reiteration, in a specific section, of all the broad budgetary principles, and (b) incorporating the concept of performance and results based management in the framework. xi [page 26] Haiti: Public Expenditure Management and Financial Accountability Review + Complete the legal framework for public procurement by: adopting the new Procurement Law in essentially the same form as the current draft; (b) enacting all application texts needed by the Procurement Law; (c) publishing updated standard bidding documents, including standard administrative and technical clauses (CCAG and CCTG) in the form of decrees with detailed provisions to cover the execution phase of contracts as well as the award phase; and (d) coordinating CNMP and CSCCA reviews/controls and to prevent any conflict-of-interest. + _Improve budget preparation by: (a) reviewing the sectoral strategies and priorities, Hinking them with the budget and moving gradually toward an MTEF; (b) strengthening the budget and procurement plans of the MDAs:; (c) improving existing budget classifications; (d) refining the definition of budget lines containing poverty reduction expenditures; (e) preparing a list of all off- budget operations and incorporating them into the budget; and (f) preparing an appendix of revenue and expenditure forecasts for autonomous funds. ° _Improve budget execution by: (a) accelerating the recruitment and deployment of financial comptrollers in MDAs; (b) completing the survey of salary arrears; and (c) elaborating and implementing a new accounting and financial framework for expenditures. ° Improve accounting and financial reporting by: (a) accelerating the reduction of the use of comptes courants; (b) including the details of non-requisition expenditures and comptes courants in the annual financial statements; and (c) clearing the backlog of State General Accounts and General Account Balance. ° _Improve debt and cash flow management by: (a) appointing a public accountant at the treasury | department (TD) to manage debt; (b) establishing an information-sharing circuit between TD and the debt directorate: and (c) establishing a cash planning and monitoring committee. + Improve the information systems by: (a) elaborating and implementing a Financial Management Development Master Plan; and (b) improving SYSDEP. °+ Strengthen internal controls by: (a) accelerating the deployment of financial comptrollers in the MDAs; (b) defining a harmonized framework for the conduct of internal controls within technical ministries; (c) hiring and training the General Finance Inspectors; and (c) setting forth in a regulatory text the modalities for using the results of inspection mission and their publication. e Strengthen external controls and legisiative scrutiny by: (a) implementing the capacity building program of CSCCA, (b) developing an action plan to clear the backlog of audit reports (fiscal years 2003/04; 2004/05 and 2005/06); and (c) transmitting to Parliament the draft Budget Review Act. e Reinforce the institutional framework and procurement management capacity by: (a) reassigning the CNMP dispute resolution function to an independent body such as the CSCCA and expanding CNMP'’s activities to include comprehensive data collection and procurement audits; (b} strengthening the procurement planning function; (c) mobilizing the resources of both the CNMP and the civil service training center to improve procurement skills of civil servants through expanded training programs; and (d} developing a program of introductory procurement training for other public sector stakeholders as well as private sector operators and civil society organizations. + Improve procurement operations and market practices by: (a) limiting contracts awarded through single source and/or direct contracting to a maximum of 5 percent of the total value of xii [page 27] Haiti: Public Expenditure Management and Financial Accountability Review contract awards, (b) discouraging the use of restricted tendering in favor of national and international tendering /appel d'offres ouvert], (c) using the existing CNMP Web page to advertise all government bidding opportunities and increase international advertising to broaden the government’s access to foreign suppliers, (d) ensuring that contract awards are made publie through the CNMP Web site and/or publications, (e) requiring procuring entities to submit to CNMP, at regular intervals, data on contract awards below the CNMP review threshold, (f) discontinuing the practice of awarding contracts based on “frois pro formas” and replace it with either an open national tendering process or the use of competitively awarded “indefinite delivery contracts” or “standing offer arrangements”, (g) ensuring the quality of bidding documents, including technical specifications, prepared by procuring entities by instituting periodic prior review of bid documentation by the CNMP, (h) enhancing the training available to procuring entities on bid evaluation procedures, and (i) developing guidelines for contract administration and building capacity nm CSCCA for dispute resolution. e _Improve integrity of the public procurement system by: (a) instituting internal quality control in procuring agencies to promote internal audit of procurement, develop preventive measures and increase capacity and efficiency; (b) building capacity in the CNMP and/or the CSCCA to organize and conduct external (“independent”) procurement audits; (c) eliminating the conflict- generating activities (issuing an opinion and approving contracts ex-ante) from the CSCCA's mandate in order to allow the CSCCA to focus on their audit activities; (d) empowering the CSCCA to handle appeals as part of a more robust system for dealing with protests and complaints from suppliers; (e) reactivating the CNMP Web site with more comprehensive information and advertisement of bidding opportunities: {f) improving the working relationship between the CNMP and the ULCC to develop measures to prevent corruption in government contracting; and (g) developing a working relationship between the CSCCA and ULCC to establish a secure mechanism to allow the public at large to report fraudulent, corrupt er unethical behavior without fear of reprisal. . Designing a full-fledged public investment program, focusing on investment in infrastructure 47. The successful implementation of Haiti”s PRSP requires that the Government prepare a full- fledged and integrated PIP. 48. Recommended Policy Actions ° Starting in FY2008, the Government should prepare a new PIP, which should adopt a bottom-up approach and be based on sectoral strategies. The new approach should aïlow line ministries to prepare their sector PIP, adequate to identify investment required, recurrent expenditure anticipated and aid flows required. The sectoral PIPs should then be put together to produce a Government integrated and multi-year PIP. It is critical that the integrated PIP account for the Hinkages between the sector and not be a simple adding-up of sectoral PIPs. There is thus a need to coordinate among various ministries and spending agencies to establish a coherent, core PIP. Aid requirements might thus be lower and should be identified at the outset of the design process for the integrated PIP. The integrated PIP should also be a rolling exercise allowing some flexibility to account for resource constraints. The design of the integrated PIP should be done in the context of the revised PRSP (three years from now) given the current timetable to complete the ongoing PRSP. e Secure the financing of the integrated PIP. This would require that all the resources possible are added. In other words, resources freed from debt relief should be complemented by other sources of financing: the issue of additionality of resources. It should also involve xiii [page 28] Haiti: Public Expenditure Management and Financial Accountability Review the channeling of resources through the Government’s budget to ensure that Government has full control of all resources allocated to execute the PIP. This in turn, implies improved effectiveness, transparency, and accountability in budgetary operations. Allocating more resources to the priority sectors and expanding sector absorptive capacity 49. More resources should be provided to the priority sectors to enable them to deliver quality public goods. However, their capacity to execute huge flows of resources should be strengthened. 50. Recommended Policy Actions ° Increase allocations of resources to the education sector, with 50 percent of the resources to primary education. The allocations of resources to the education sector should reflect the EFA targets and be based on the sector MTEF. However, because of the large share of the non-public sector in the education sector, increasing allocation to the public education sector would not have much impact unless there is a strong partnership with the non-public sector. Access to non-public schools stands out as an area where this partnership could be explored. A possibility that could be considered is the provision of subsidies to poor students currently un-enrolled in school so they could attend non public primary schools free of charge. e Increase the allocations to the health sector, with a focus on the delivery of basic health services. À first step for the sector is to complement the current strategy with specific spending targets and define clearly budget allocation priorities. + Increase the allocations to the infrastructure sector by focusing on investment spending : while securing the financing of recurring costs associated with new investments. This means ‘ : that the sector should first prepare a full-fledged costed and integrated infrastructure strategy with sub-sectoral actions plans, which are linked to spending targets. ° Increase the resources provided to the agriculture sector by focusing on allocations to specific items, including fuel and lubricants, fertilizers, plant material and seed, hydraulic works, insecticides, etc. e Increase allocations to the justice/security sector so as to gradually bring the allocations to international levels observed in post-conflict countries and fragile states. This requires that the sector develops a full-fledged integrated strategy with specific spending targets. + Augment the capacity of sectors to absorb resources by reinforcing technical, human and administrative capacity. À specific focus should be on strengthening the sectors’ ability to comply with procurement procedures. Designing a one-year technical assistance program in quantitative macroeconomic modeling 51. Quantifying the impact of fiscal reforms (in general) and public spending (in particular) requires developing a quantitative macroeconomic framework, which accounts for the linkages between public investment, growth and poverty. 52. Recommended Policy Actions e Prepare a comprehensive technical assistance program, which identifies the technical needs in basic macroeconomic modeling in the Ministry of Economy and Finance (MEF). xiv [page 29] Haiti: Public Expenditure Management and Financial Accountability Review e Install a multi-sectoral team, comprised of a few technical staff members of the MEF, Ministry of Planning, and various ministries, including education, health, infrastructure and justice and security. + Exploit the ongoing preparation of the PRSP to reinforce the synergies between the proposed technical assistance in macroeconomic modeling and technical needs to complete the PRSP. Improving human resource management 53. 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Ê pe] 9 E £ 2 re] J o < 5 O9 € S = [res TG = LI ns Fe. vd € Ÿ a g S S = v LE 3 £ TD Fe Ÿ 2 x ne 2 8 ZT ne = e] T [page 35] Haiti: Public Expenditure Management and Financial Accountability Review PART I: ECONOMIC AND FINANCIAL MANAGEMENT CONTEXT 1 [page 36] Haiti: Public Expenditure Management and Financial Accountability Review 2 [page 37] Haiti: Public Expenditure Management and Financial Accountability Review CHAPTER 1 : MACROECONOMIC AND FISCAL CONTEXT 1.1. This chapter reviews the macroeconomic and fiscal context of Haiti. It first describes the economic and public finance structure of Haiti, focusing on economic growth and the structure of Government revenues and expenditures. It then discusses recent fiscal performance and improved economic outcomes. Finally, the chapter analyses the issue of fiscal space associated with recent debt relief provided to Haiti in the context of the Enhanced HIPC Decision Point. 12. The key findings of the chapter can be summarized as follows. First, Haiti’s economy is undiversified and largely dominated by the agriculture sector, which makes up more than one- quarter of the country’s GDP. Growth performance over the past decade has been below regional averages and also below the performance of African countries. Partly as a result, Haiti has remained the poorest country in the Latin America and Caribbean region and amongst the poorest in the world. Second, the public finance structure is characterized by a low revenue base. At 10 percent of GDP, Government revenues are among the lowest in the world. At the same time, the Government faces fixed and quasi-fixed expenditures, including wages and salaries, interest payment on its debt, subsidies and transfers to state-owned enterprises and welfare financial obligations. Put together, this leaves the Government with litle room to maneuver and to use the budget as a policy tool to influence economic and social outcomes. Third, in the face of its low resource base and huge development challenges, Haïti has relied on external assistance to finance its development needs. Aid flows, provided by a limited number of donors, tended to be volatile, reflecting political developments over the period from 1990 to2004. In addition, while‘ large : amounts of resources were committed under the ICF, disbursement of aid flows has been slow. D . Fourth, since 2004, fiscal policy and economic outcomes have improved as the Government LL moved quickly in implementing adjustment policies and structural reforms supported by the doñor ë community. However, the growth and poverty responses of improved policies are yet ‘to ‘ materialize. Fifth, improved macroeconomic stability and successful implementation of its reforms program helped Haiti reach the Decision Point of the Enhanced HIPC Framework. Debt relief granted to Haiti provides some fiscal space. However, resources freed-up from debt service relief and associated fiscal space, are relatively limited. Efforts should be made to expand the tax base and improve efficiency in the use of public resources to enlarge fiscal space and increase the Government’s room to maneuver. 13. Policy recommendations center on: (i) accelerating implementation of macroeconomic stability policies and structural reforms; (ii) implementing revenue-enhancing measures and a more aggressive policy to attract foreign grants; (iii) strengthening the management of external debt to maintain debt sustainability; (vi) improving efficiency of public spending to “kick-start” and “sustain” growth to alleviate poverty; and (v) designing and implementing a multi-year and integrated public investment program to be supported by foreign aid flows. 3 [page 38] Haiti: Public Expenditure Management and Financial Accountability Review 14. Political and economic instability, low growth and high levels of inequality and poverty have been persistent challenges confronting Haïti. The impact of protracted political conflict, withdrawal of international economic support, natural disasters and weaknesses in economic governance and management has been severe. Real income per capita has declined on average by 2 percent annually over the past 20 years. With more than half of the population subsisting on less than US$1 a day, Haiti is the poorest country in the Latin America and Caribbean region and among the poorest countries in the world. There are marked inequalities in access to productive. assets and public services’, which tend to hamper physical and human capital accumulation, thereby perpetuating low growth and poverty. 1.5. The return to democracy in 2004 brought about hope. From 2004 to 2006, the Transitional Government made significant progress in improving governance and transparency in public sector operations, and restoring economic progress. The Alexis-Préval Government that took office in June 2006 after free and open elections moved quickly to restore fiscal order and to elaborate a poverty reduction strategy. There have been notable improvements both in terms of economic growth and fiscal performance. Real GDP grew by 1.8 percent in FY2005 and further by 2.3 percent in FY2006 compared with a contraction of 3.5 percent in FY2004. À modest increase in Government revenue and a decline in public expenditures reduced Government’s deficits. Increased donor confidence and the resumption of external assistance helped finance a significant increase in capital expenditures. 1.6. Nevertheless, Haïti’s poor infrastructure base, limited natural resource base, limited. . human capital, weak financial management systems, as well as uncertain security conditions remain binding constraints to growth and poverty reduction. À more diversified economic base, improved core infrastructure and major efforts in fiscal management are essential for sustained growth and poverty reduction — the Government’s overarching development objectives. Moreover, effective use of domestic resources and external assistance will be essential to meet the country’s daunting challenges and create conditions for a long-term economic recovery and improvement in social sector services critical to the success of the country’s poverty reduction strategy. ? Nearly half of national income goes to the richest 10 percent of the population. 3 The year 2004 was characterized by the armed conflict that ended the Aristide government and by a process of establishing the transition government. 4 [page 39] Haiti: Public Expenditure Management and Financial Accountability Review 1.1 Structure of Haiti’s Economy and of Public Finance 1.1.1. Economic Structure, Growth, and Poverty 1.7. Haiti is essentially a rural and undiversified Table 1. Composition of GDP at factor cost, 2000-06 economy. Agriculture generates NN 9000 2008 2002 2003 2004 2005 2006* more than one quarter of GDP GDP factor cost 100 100 100 100 100 100 100 and employs two-thirds of the | Agriculture 28 29 28 28 27 21 26 economically active population. Industry 16 17 17 16 16 16 16 me sal an of nie Services 55 55 55 55 57 57 58 tec . 01087 > the low evel 9 Source: Government Statistics, World Bank Database and staff capitalization of Haitian Caïculations. producers, the insufficiency Of «gsimate of February 2006. infrastructure in rural areas, the poor condition of agricultural Table2. Income Per Capita, Nominal GDP, and Growth roads, as well as land insecurity Rates, 2000-06 RÉ : ; ET cr tave limited agrieulures CHIDAINNNNN) DITauo Dour 2002 00 2004 2005 20067 potential. Abou! percent Of | GNI per capita (US$ small farmers cannot satisfy the | Atlas Method) 490 460 430 390 370 400 480 basic food needs of their families i à Nominal GDP (in and rely on several other sources billion of gourdes) 79.8 85.7 94.0 119.7 140.3 1680 196.2 of revenue, including | Nominal GDP (in remittances, the sale of seasonal | billion de 5.38 36 35 29 35 43 47 manpower in other regions ofthe | peu GDP Growth (in n country and in the Dominican | bercent) 09 -10 -03 04 -3$5 18 23 . Republic, and small business. Source: Government Statistics, World Bank Database and staff The service sector accounts for Calculations. about 60 percent of GDP and *Estimate of February 20 employs about 40 percent of the workforce. Activities in this sector are largely concentrated in retail and wholesale trading, exports and basic public services. Industry, which is undiversified, has been flat and accounts for 16 percent of GDP (see Table 1). It comprises mainly small-scale local manufacturing, construction and electricity. 5 [page 40] Haïti: Public Expenditure Management and Financial Accountability Review 18 Growth Figure 1. Real GDP Growth (1995-05, in percent) performance over the past decade has been lackluster, 5 À and below regional averages 4 L D and performance of African 3 | | countries. When compared to 2 DS ——————— ; African countries of the same 1 D: 5; level of development, Haiti 0 SC SN H fares below the slow growing 4 Ligue) 1906 007-1808 _1000_20n0 De 762 200 7! vs African countries and far 2 D TT \/ \ below the sustained growing 3 TT Ÿ | African economies (see Table 4% D, A1.2 in Annex 1). Its average 5 nd growth rate of 0.9 percent Source: World Bank Database and Staff Calculations. over 1995-2004 is 11 times lower than that of Rwanda (the fastest growing African country), 2.6 percentage points lower than that of Niger (a slow growing country} and below that of Central African Republic (a post-conflict and fragile state). In addition, growth has been very volatile as year-to-year changes in Haiti’s growth rates have been caused largely by uncertain security conditions, volatile donors’ assistance, and weather conditions and their effects on economic activity (see Figure 1). Despite the : respectable growth levels achieved during the 1970s and recently 2005 and 2006, per capita income today is only about US$480, nearly the same level as in 1990. 19. Partly as a result of poor growth performance, Haïti has remained the poorest country in the Latin America and Caribbean region and amongst the poorest in the world. . The 2006 United Nations Human Development Index ranked Haïti 154th out of 177 countries. ‘ About 54 percent of Haïti’s population lives below the USS1 a day poverty line and 78 percent below US$2 a day (2001 data). Social indicators are also abysmal. Although adult illiteracy decreased from 60 percent in 1990 to 52 percent in 2003, it remains the highest in the Latin America and Caribbean region. Only 55 percent of children 6-to12 years of age are enrolled in school. Quality is also a major concern. Food deprivation and limited access to health care, due to poor infrastructure and lack of qualified personnel and drugs, has resulted in dire health conditions for Haïti’s poor. Haiti also faces a high incidence of HIV/AIDS: UNAIDS estimates that 5.6 percent of the adult population has HIV. 1.10. Ensuring strong and sustained growth to reduce widespread poverty and improve social conditions stands out as a critical issue facing Haiti. It requires continued improvement in security conditions, more and predictable aid flows, a large public investment program to rehabilitate and expand infrastructure, and efficient allocation and execution of Government resources, a critical challenge for Haiti. * Estimates based on household surveys suggest that poverty and inequality rates may have not changed substantially over the last two decades. Part of the explanation could be that while GDP per capita declined, consumption levels were maintained by remittances which have accelerated since the mid-1990s. See Haiti Country Economic Memorandum, 2006. 6 [page 41] Haiti: Public Expenditure Management and Financial Accountability Review 1.1.2. Public Finance Structure 1.1.2.1. Government revenue structure 1.11. About 95 percent of Haïitÿs total Government revenues are derived from taxes, Table 3. Composition of Government shared between taxes on domestic activity Revenue in Percent of GDP, 2000- (taxes on goods and services and income taxes), 2006 _ _ which account for about 65 percent of total NUL ei Averages 2: revenue, and taxes on international trade, . E. which make up 30 percent. At 10 percent of GDP in 2006, government revenues are among the | Total revenue 83 v.6 lowest in the world (see Table 9 below). Tax Current revenue 83 9.6 revenue in Haïti is much lower than the levels Domestic taxes 5.8 63 observed in other low-income countries because of Customs duties 2.2 2.7 the country’s narrow tax base, low yield from Other current revenue 03 0.5 income, excise and trade taxes, as well as weak Transfers from publie . LL tax administration. Table 1 of Annex 1 shows that prises 02 30 the VAT tax rate is one of the lowest in the region. Budget support : 09 In addition, collection issues hamper tax Project grants ee 2. performance. For instance, with tax rates similar Source: Government and IMF Statistics, 2007. : to Haïti, Guatemala and Paraguay obtain larger : collection percentages; the Dominican Republic with a lower rate, is able to collect more. The . :- Corporate Income Tax (CIT) rate is close to regional standards but revenues from the CIT represent only 0.85 percent of GDP, much lower than the 2 percent collection in low-income countries. Moreover, Haiti grants numerous fiscal concessions and tax holidays are in place. For itistance, .. È Haiti’ s investment code grants fiscal and customs” holidays of between 15 and 20 years. : 1.12. Given Haiïtis current revenue structure and weaknesses in the tax administration system, the priority for the authorities is to reinforce the tax administration and broaden the tax base. Revenue-enhancing measures introduced since 2004 have resulted in only a modest increase in the ratio of revenue to GDP. However, there is a potential for catching-up. Further increase in revenue would depend on the ability of the authorities to tackle the issues of weak tax collection, excessive tax exemptions and a narrow tax base. À 2005 IMF-FAD report has highlighted several channels that the Government could explore for increasing the tax/GDP ratio. More recently, the IMF has provided policy recommendations to increase revenue performance in Haiti. Along these lines, in the short-term, the focus should be on improving tax administration and broaden the tax base. In the longer term, the authorities should consider raising some of the tax rates to regional levels. The strategy should also include measures to establish effective customs control through ports of entry other than Port-au-Prince. À comprehensive reform plan for revenue administration should be prepared later. Measures to raise revenue could include: (i) eliminating of tax incentives in the investment code; (ii) strengthening taxation of fringe benefits, for instance by eliminating their deductibility on the employer side; (iii) comprehensive coverage of personal capital income in the tax net; (iv) increasing holding tax on property above some relatively high threshold; and (v) increasing specific excises, at least in line with the inflation, and $ International Monetary Fund. Haiti Selected Issues. April 29, 2005. 7 [page 42] Haiti: Public Expenditure Management and Financial Accountability Review increasing existing ad valorem rates.Ÿ Actions to strengthen the existing tax administration could include (i) improving collection procedures; (ii) developing audit plans and procedures; and (iii) reorganizing along functional lines. The extent to which these reforms can translate into a higher revenue/GDP ratio in Haïti is not known as the potential impact of these suggested reforms has not been quantified. It requires a general equilibrium framework, to account for interactions between taxation, consumption, and growth. However, the experience of countries such as Ghana and Uganda suggests that well-managed tax reforms can raise tax revenues significantly (see Box 1 below). Box 1. Tax Reforms That Work. The Case of Ghana and Uganda: What Lessons for Haiti? In Ghana, the tax revenue/GDP ratio increased by almost 10 percentage points from the early 1980s to the late 19905, reaching its current level of about 16 percent of GDP. In Uganda, the revenue/GDP ratio rose from about 7 to about 11 percent during the 1990s. These gains were underpinned by policy reforms that included: (à) lowering of top marginal income tax rates for persons and corporations to reduce incentives for tax evasion; (üi) broadening the tax base — for example by eliminating tax incentives for corporations and including fringe benefits in the personal income tax base; and (iii) expanding the base for indirect taxes, most notably the VAT. On the administration side, reforms included: (i) the creation of autonomous tax and customs administrations; (ii) reorganization of the tax and custom administration departments along functional lines (payment, enforcement, audits, rather than by type of tax); (iii) computerization; and (iv) improvement of taxpayer registers. 1.13. Although we do not know with much certainty how much of an impact these. : "measures have had on growth (and thus on the tax base) in these countries, it is worth ' pointing out that growth effects will depend in general on how the increased revenue itself is . allocated. In that sense, ensuring that tax reforms “work” requires a careful analysis of their impact ” ‘on priVate behavior (saving and investment decisions) as well as the allocation of revenues betwéen prodüctive and unproductive speriding componénts. The “net growth effect” of tax reform also ‘depends on spending allocation. | 1.14. Notwithstanding these remarks, in the short-term, the Government has taken the commitment to gradually increase direct and indirect tax revenues to raise yields closer to the levels in other low-income countries. The authorities’ strategy will initially focus on establishing effective customs control through entrypoints other than Port-au-Prince. 1.1.2.2. Trends in Central Government Expenditures 1.15. Broad structure and trend of expenditure. The composition of government expenditures is dominated by a large share of recurrent expenditure. They accounted for more than 73 percent of total expenditure leaving less than 30 percent for capital expenditure over FY2000-06. However since 2004, there has been a gradual shift toward more capital expenditure in Haiti’s budget, reflecting mainly the increase in donors’ financing of capital expenditure. The share of capital expenditure in total expenditure increased gradually over FY2000-06: from an average of 22 percent in FY2000-03 to 32.4 percent (10 percentage point increase) in FY2004-06. In the meantime, the share of recurrent spending shrunk from an average of 78 percent of total expenditure in FY2000-03 to 67.6 percent in FY2004-06. Yet, accounting for about 9 percent of GDP on average over FY2004-06, recurrent spending still dominates the expenditure structure $ At 10 percent, the VAT is at the lower end of the range among low-income countries. However, caution should be taken regarding the increase in the VAT rate given the regressive nature of this tax. 8 [page 43] Haiti: Public Expenditure Management and Financial Accountability Review while capital expenditure (excluding foreign-financed outlays) has been relatively modest at less than $ percent of GDP over the same period (see Table 5 below). 1.16. Economic composition of spending. The past six years were characterized by continued decline in the share of government wage bill and an increase in other current expenditure (see Table 4). The share of wages and salaries in total current expenditure declined from an average of 44.3 percent in FY2000-03 to an estimated average of 35.6 percent in FY2004- 06 (see Table 4 below). At about 3.2 percent of GDP in FY2006, the government wage bill is below the levels of 6-7 percent of GDP for other low-income countries.” The decline in the wage bill was particularly pronounced after 2000, reflecting the freeze on nominal wages in the public sector. However, the public sector wage bill takes up a significant portion of the Government overall budget in Haïti, reflecting very low overall revenue and expenditure levels. In FY2006, total spending on wages and salaries was 32.2 percent of central government current revenues and 34.1 percent of government current expenditures, ratios higher than the average for PRGF-eligible countries (about 28 percent and 26 percent, respectively). À comparison of public sector salaries to those of the private sector reveals that public sector salaries are significantly lower than private sector averages. À recent survey conducted by the Prime Minister’s office showed that employees in higher skill managerial positions earn 40 percent of their private sector counterpart’s salaries, while employees in lower skill positions earn 70 percent. The low level of public sector wages raises doubts about the government’s ability to attract and retain quality personnel. More generally, the small size of the civil service raises questions about the ability of the government to deliver essential public services, including health, education, infrastructure and assurance of public order. It also raises the critical issue of generating more domestic revenue to eventually finance a more efficient and better paid civil service. ee 1.17. Interest payments on the debt account for 8-10 percent of total recufrent spending : : ° over the period FY2000-06 (see Table 4). Together with wages and salaries, interest payments :: make up about 45 percent of total government recurrent expenditure on average over FY2004-06. : These “fixed and quasi-fixed expenditure” (about 8.2 billion gourdes, or US$194.2 million in FY2006) imply that the government has little scope to shift expenditure from one category to another. At the same time, capital expenditure is mainly foreign-financed (see below). Put together, this leaves the Government with little room to maneuver and to use the budget as a policy tool to influence economic and social outcomes, unless foreign aid is geared toward achieving the Government’s own public investment program (PIP). In other words, the current structure of Haiti”s budget provides little room to create fiscal space. The issue of fiscal space is discussed below in the context of HIPC and MDRI debt relief. 7 It was estimated that for PRGF eligible countries, the average central government wage bill represents about 6-7 percent of GDP. See IMF Haïti: Selected Issues. 2005. $ The estimated exchange rate at end-2006 is US$1=42 gourdes. 9 [page 44] Haiti: Public Expenditure Management and Financial Accountability Review 1.18. The share of expenditure on goods and services in total current expenditures declined from an average of 38.4 percent in FY2000-03 to Table4 Shares of recurrent spending 31.6 percent in FY2004-06 (see Table 4). This categories in total recurrent, ; : FY2000-06 (in percent reflects the Government’s recent efforts to contain FT - CAVE current expenditure and improve expenditure management procedures. It is worth mentioning that |: 2000-03 2004 06. the Government of Haïti made significant efforts to | Wages and salaries 443 35.6 reduce the proportion of expenditures channelled | Net operations 38.4 31.6 through discretionary ministerial accounts, so-called | Interest payments 9.8 8.8 comptes courants This has signalled the raser sand 7.8 23.9 Government’s strong commitment to improve Total recurrent 100 100 expenditure control, transparency, and tackle Sources: Government statistics, IMF, and Staff weaknesses in expenditure management. calculations. 1.19. In the meantime, subsidies and transfers have been increasing since 1999, reflecting subsidies to state-owned enterprises and increasing welfare obligations of the Government. Their share in total current expenditures tripled from an average of 7.8 percent in the period FY2000-03 to about 24 percent in FY2004-06 (see Table 4 above). Some expenditure overruns : (mostly electricity-related transfers) resulted in a further increase in this category of expenditures, with its share rising to 30 percent of total current expenditures over the past two fiscal years. It is ‘ worth noting that the electricity sector has been a significant drain on Government resources, through funds provided to the state electricity company EDH, payments for private electricity . generation and purchases of fuel for generators. Over the past six years, central Govemment . transfers to EDH have increased to 1.3 percent of GDP, or 8.8 percent of total Government expenditure. During FY2006, with rising international petroleum prices, electricity production in : Port-au-Prince declined by about one-third, while fiscal transfers remained broadly unchanged. : How to reallocate Government expenditure from tranisfers and subsidies to public sector enterprises toward spending in key areas such as health, education, infrastructure, and security remains a challenge for the Haitian authorities. ? The percentage of non-salary current expenditures disbursed through the comptes courants was 62 percent over the period October 2003-March 2004. However, this percentage was reduced to less than 10 percent in FY2005/06. 1 Subsequently, the government amended the budget to contain expenditures. 10 [page 45] Haiti: Public Expenditure Management and Financial Accountability Review 1.20. Capital expenditure is dominated by externally financed expenditures (see Table TableS. Composition of Government 5). About 75 percent of capital expenditure was Expenditure, in Percent of GDP, FY financed by foreign assistance during pre —000 2 MONET FY2005/06. Government’s capital spending was _n | me | volatile, reflecting in part the difficulties in | 2 ul establishing a multi-Vear public investment Total expenditure "13 us | program under the conditions of unstable Current expenditure 8.7 9.1 external financial assistance. !! Wages and salaries 37 32 Net operations’ 35 2.8 1.21. Government expenditures on priority Interest payments 0.8 0.8 sectors. Chapter 4, 5, and 6 provide a detailed External 0.4 0.4 analysis of the trends of government Domestic : 04 04 expenditures in these sectors. At this point, it is Transfers and subsidies 0.7 23 : : Capital expenditure 2.5 44 worth noting that government expenditure on D , h . omestically financed ee 14 education, health, infrastructure, and Foreign financed . 30 security are low." Budget allocation for the Sources: Government statistics, IMF, and Staff education sector stood at about 2.5 percent of calculations. 1 Includes statistic discrepancy. GDP in FY2006/07, the lowest in the LAC region (average of 5 percent of GDP) and low by sub-Saharan Africa standards as well (average of . 3.9 percent of GDP). Ÿ The low level of direct government spending in the social areas combined with nadequate physical infrastructure explains why Haïti has some of the poorest social indicators L in the world. At less than 2.7 percent of FY2006/07 GDP, allocations to the health sector are. the : lowest of the LAC region, below the regional average of 3.3 percent of GDP. However, : considerable efforts have been made by the Government to increase the allocations to social sectors ‘in the FV2007 budget (see Chapter 5 below). Public infrastructure, especially roads, has suffered from lack of maintenance over the years. According to the ICF findings, only 5 percent of the : network is considered in good condition and 15 percent in acceptable condition. The Ministry of Publie Works, Transport and Communications in charge of the road network does not have the required resources — both human and financial — to ensure adequate road maintenance. Road maintenance expenditures have been falling dramatically over the past years so that less than 10 percent of the network is maintained on a regular basis. 1.1.2.3. Fiscal Balance and Structure of Financing 122. On the one hand, fiscal revenues are too low to finance much-needed public services and ensure fiscal sustainability. On the other hand, the expenditure structure is dominated by “fixed and quasi-fixed” incompressible spending, which does not allow much maneuver room to the Government. Haiti faces a structural fiscal balance problem. The overall fiscal deficit has continuously deteriorated over the past decade, reflecting poor fiscal management and the difficulty to match scarce resources with pressing social needs. At an average of 4.3 percent of GDP over FY2004-06, fiscal deficits (excluding grants) have been higher than the averages observed in LIC. However, recent efforts to increase revenues, contain expenditures, combined 'jtis worth noting that authorities currently are preparing a public investment program that will center on supporting infrastructure and will be coordinated with donor assistance. "2 The low level of Govermment expenditures on education and health should be interpreted with caution since Haïti traditionally has relied on more than many other low-income countries on private financing and private sector provisions of social services such as education and health. 13 See Education For All in Africa: Paving the Way for Action 2005, UNESCO BREDA. 11 [page 46] Haiti: Public Expenditure Management and Financial Accountability Review with large flows of foreign grants resulted in improved fiscal deficits (including grants) over the past three years (see Table 6 below). 123. Because of the difficulty in accessing foreign financing, the banking sector served as the main source of finance to the Government. Monetary financing of fiscal deficits has been a common practice. Over 2000-2003, on average more than 90 percent of the fiscal deficit (excluding grants) was covered by the central bank financing, which has resulted more often in inflationary pressures.* Subsequently, the bulk of financing of fiscal deficits has shifted away from domestic financing toward external financing. Project loan financing covered on average more than 40 percent of the fiscal deficit during the period FY2004-06, reflecting the return of donor assistance to Haïti after an economic embargo that began in 2000. Meanwhile, Central Bank financing of fiscal deficits has been eliminated for the first time since 1999. The authorities’ current fiscal strategy aims at balancing the need to avoid central bank financing of fiscal deficits, while at the same time providing adequate resources for investment and poverty reduction. 124. Securing sufficient and timely budget support is, therefore, critical to ensure Table6. Overall Fiscal Balance (HTG financing of expenditures. Given the low Million), EY2000-2006 _— revenue-to-GDP ratio, and constraints on | 0 | . monetizing fiscal deficits, the Government might. Des Mu | : suffer from severe cash shortfalls when expected | Overali Balance a disbursements are delayed. The need to improve Including grants -2,696.3 -881 | aid predictability and avoid délays in | Excluding grants -2,926.0 -7,2103 |. : disbursements is therefore critical to ensuring RTE gens and . NA -1,4947 __… proper execution of the budget. At the same time, Domestis finandeg $ 2.567.5 307 the Government must strengthen revenue BRH 2.700 828 projections underlying budget preparation and the Banks ER 117 cash management system. It should consider |ow. establishing precautionary cash balances that Other non-bank -5.0 -40.0 could be used as bridge financing in case of delays financing in disbursement of budget support. The lack of |, Arrcars (net) 33-0 357 : Mu : xternal financing 129 1,383.7 predictability in aid flows is not only the result of Loans 468.5 2,878.7 problems on the donor side but also on the Amortization 6243 -1,338.7 Government’s side. Strengthening domestic Source: Government of Haiti, IMF and Staff management of aid operations, including rigorous Calculations. monitoring of implementation of policy reforms, combined with greater predictability of aid flows (based on a well-designed multi-ÿear program of investment outlays), could help ensure that disbursements are made on schedule. 125. Haiti needs ambitious fiscal reforms to support its development. À broad-based development strategy would require substantially larger amounts of government resources than are currently available to expand physical infrastructure and improve access to social services in the areas of health and education. To this end, Haiti’s need to increase its domestic revenue is substantial. Along the lines of recent IMF work, this would involve reforming the tax administration and broadening the base of the corporate and personal income taxes, and improving Average inflation increased from 8.1 percent in 1999 to 16.5 percent in 2001 and further to 26.7 percent in 2003. 12 [page 47] Haiti: Public Expenditure Management and Financial Accountability Review tax and customs administration. In the medium-term, emphasis should be placed on tax and customs administration in the provinces, and possibly raising excise rates. However, to “kickstart” and “sustain” economic growth will need a large increase in aid targeted at core infrastructure, to finance the PIP — Tax reform will pay greater dividends in a growing economy. On the expenditure side, Government expenditure would need to be subject to much tighter prioritization, scrutiny and control. Specifically, the trend toward lower spending on wages and higher spending on other current expenditures would need to be reversed. In addition, a shift toward a substantial expansion of Government spending focused on capital expenditure would be needed. 1.1.2.4. Development Financing and External Assistance Issues 126. In the face of its low resource base and huge development challenges, Haïti has relied on external assistance to finance its development needs. The pattern of aid flows provided to Haiti has mainly been dominated by multilateral aid, which accounts for 28 percent of total ODA over the period from 1990 to 2005. Muitilateral assistance to Haïti was largely provided by IDB and the World Bank which together accounted for more than 40 percent of multilateral ODA to Haïti. The United States, Canada and France were the major bilateral providers of ODA over 1990- 2005, together accounting for 82 percent of bilateral assistance. 1.27. Aïd flows, provided by : k n k a limited number of donors, Figure 2. ODA received by Haiti 1990-2005 (Total net, in tend to be volatile, reflecting in constant US $ million) part political developments (see 1000 mener E LT ns 30% . Figure 2). The massive inflow of 800 | . Li FA | 25% foreign aid under President 800 ji |, at : | | 20% : Aristide in 1990-91 was followed 0 . | | ll ii ni it | a 15% b bargo under the milita il | | | | on MR regime (1992-94). Total ODA | Ra ris inflows (on disbursement basis) BESRELLESSSRESNRSE NL dropped from an average of FRS SSÉSÉERSSRRS US$227 million during 1990-91 to USS141 million on average Source: OECD, IDS database, DAC over 1992-93, Subsequently, international assistance was revived from 1993 to 1995. It then declined from 1995 to 97 and resumed slightly in 1999. But aid flows declined after the disputed 2000 elections and have resumed since 2004 following the resumption of democracy and political stability. 1.28. In 2004, the Transition Government defined a development framework, the Interim Cooperation Framework (CF) and associated financing needs. Subsequently, the 5 The ICF covers the period July 2004 — September 2006 and consists of four axes: (i) strengthening political governance and promoting national dialogue; (ii) strengthening economic governance and contributing to institutional development; (ïi) promoting economic recovery; and (iv) improving access to basis services. The total financing needs for the implementation of the ICF over the period July 2004 — September 2006 were estimated to be approximately US$1.37 billion. This amount does not include the financing urgent humanitarian needs presented in the Haïti Flash Appeal (US$ 35.1 million) as well as the additional needs resulting from the 2004 floods in the South-eat of the country. The internal resources available from the national budget for the ICF activities were estimated approximately at US$127 million. 13 [page 48] Haiti: Public Expenditure Management and Financial Accountability Review Government detailed its main development priorities in the Extended ICF and in the Interim Poverty Reduction Strategy Paper (I-PRSP) completed in September 2006. In response to the Government’s successful implementation of its reform agenda, aid commitments have started increasing since 2004. Table 7 summarizes the structure of total assistance pledged over the period 2004-07 and the main areas of donor interventions. Pledges exceeded financing needs over 2004-06 as defined in the ICF. The five main donors contribute the bulk of financing to Haiti. Two of them, USA and Canada, accounted for about 86 percent of financing needs over 2004-06. In terms of pledges, the top five accounted for about 80 percent of total pledges for the period 2006- 07. They cover all four priority areas of Haiti’s growth and poverty reduction strategy spelled out in the extended ICF and the I-PRSP. The lion’s share of donor interventions is directed for access to basic services (Pillar 4), which accounts for more than 30 percent of total pledges over the extended ICF period 2006-07. This reflects donors’ response to finance the Government’s Program of Social Appeasement (Programme d’Apaisement Social), which aims to provide quick responses to meet pressing social and economic needs in disadvantaged and conflict-prone areas. Likewise, external resources available were estimated at US$315 million. This leaved a financing gap of US$924 million. See ICF 2004-2006 Summary Report. July 2004, p.41. 1 The extended ICF was presented at the July 25, 2006 Donors’ Conference in Port-au-Prince and covers the period July 2006 - September 2007. The extended ICF and the I-PRSP reaffirmed the continuation of the axes and the strategic objectives of the 2004 ICF. 1? Total fmancing requirement for the extended ICF period (July 2006 — September 2007) is of US$1.8 billion, of which more than two thirds already covered by both domestic and external funding, leaving a gap of US$544. At the Conference, the donors pledged about US$750 million for the period July 2006 — September 2007. 14 [page 49] Haiti: Public Expenditure Management and Financial Accountability Review Table 7. Structure of Pledges and Main Donors Areas of Intervention, 2004-07 (US$ Million) ‘Donors Amonnts. Amounts : Amounts . Percentage Percentage : Mainareasof ee Piedged … Pledged: Pledged ; oftotal | oftotal intervention, 2006/07 LT 2004-06 200607 Total 2004". financing … : pledged 0 USA 634 210 844.2 46.3 28.0 Pillar 4 — Access to Basic Services (131.9) Pillar 1 — Political Governance (41.4) IDB 263 150 413 30.1 20.0 Pillar 2 - Economic Governance (47.5) Pillar 3 - Economic Growth (73.39) Pillar 4 — Access to basic services (15) EU 273 58 330.8 19.9 7.7 Pillar 4 — Access to Basic Services (58) Canada 535 107 642 39.1 142 Pillar 1 - Political Governance (54) . Pillar 4 - Access to : Basic Services (27) IDA 131 68 201.6 9.6 9.1 Piliar 4 — Access to Basic Services (30) Pillar 2 - Economic Governance (23} Piliar 3 - Promoting Economic Growth (15) : . Sources: Haiti Interim Strategy Note and Authors’ calculations. Total financing needs for the implementation : of the ICF over the period 2004-06 were estimated at US$1.37 billion. Total aid pledged for the extended ICF was estimated at US$750 million. . 129. IDA financing mainly has focused on economic governance (pillar 2) and basic social services (pillar 4), which account for more than 75 percent of its pledges of financing for 2006/07. IDB financing has mainly focused on economic growth (pillar 3) and economic governance (pillar 2), which account for about 80 percent of its pledges of financing for 2006/07. In support of economic governance and economic growth, the IDA envelope for FY07'8 includes a development policy grant (DPG) to support the second phase of the Government’s economic governance reform program (Economic Governance Reform Operation IL US$23 million), à rural water and sanitation project (US$S million), a project to support the implementation of the Education for All (EFA) initiative, and a Risk Financing Project (US$9 million). }? The IDB has committed in FY2007 to finance US$50 million in grants, US$12.5 million for the first loan of a Public Resource Management Strengthening Program; US$25 million for a Productive Roads Rehabilitation Program; and US$12.5 million for an Agriculture 1 The IDA FY07’s envelope of the amount of US$68 million is the third exceptional IDA allocation under both IDA 13 and IDA 14 guidelines for Haïti for the period FY05-07. Under [DA 13 and 14 rules, Haiti received exceptional allocations of US$75 million in FY05 and US$63 million in FY06. For FY08, Haitis IDA allocation will be structured in line with performance as per the usual performance-based allocation process of IDA. ® A US$6 million Electricity Loss Reduction Project was approved by the Board in early FY07 by using IDA allocations carried out from FY06. 15 [page 50] Haïti: Public Expenditure Management and Financial Accountability Review Intensification Program. In FY2006, the IDB approved projects totalling USS$86 million, divided between US$35 million for economic governance; US$36 million for economic growth and US$15 million for basic services. 130. Disbursement of aid pledged remains an issue as the experience of the implementation of the ICF confirms. As of September 2006, about US$968 million had been mobilized to implement the interventions under the ICF and the extended ICF. This represents about 90 percent of the total US$1.1 billion pledged during the July 2004 Donor Conference but less than 50 percent of total estimated USS$2.1 billion pledged by major donors throughout the ICF implementation period (See Table 8 below). However, this general trend might hide disparities among donors and across projects. While more than 60 percent of EU and about 55 percent of USA'’s commitments have been disbursed as of September 2006, less than 25 percent of IDB's commitments have been mobilized. Yet, these ratios might be high by regional standards. For instance, IDA disbursement ratio of 38.1 percent is quite high compared to international standards of 33.2 percent and 24.1 at the regional and bank-wide levels, respectively. Budget support operations tend to be disbursed quicker. The Economic Governance Reform Operation I (EGRO 1) was fully disbursed and closed in March 2006 as was the Fiscal Reform (PBL E) by IDB that was fully disbursed and closed in September 2005 and a second PBL that was approved in July 2005 and has disbursed over 75 percent of its resources. On the other hand, most of the projects approved during the period July 2004-September 2006 still are at an early implementation stage, as many of them experienced delays averaging six months in the declaration of effectiveness, following the political transition. ?° 1.31. : The low level of disbursements is related to the fact that some agencies disburse gradually and in line with progress in the implementation of the programs they support. Delays in disbursements also reflect poor performance as well as weak institutions and limited :. human capacities. Performance can improve quickly to the extent that the government’s commitments are implemented on time and within the timeframe agreed upon with donors. By contrast, building institutions and capacities is à gradual and difficult process, which requires strong and sustained commitment from the Government and the donors as well as predictability in aid flows. Haiti faces the difficult challenge of meeting its pressing development financing needs while at the same time building strong domestic institutions to mobilize much needed external resources. Table 8. Donor Development Financing. Commitments 2004-07 v. Disbursements as of ME pion _ ii AU je USS Million A ed USA 844.2 4573 386.9 54.2 IDB 591.5 146.5 445.0 24.8 EU 330.8 208.0 122.8 629 IDA 201.6 80.0 121.6 39.7 Canada 642.0 26.6 615.4 4.1 Others 76.2 52.7 23.5 69.2 Total 2,044.3 971.1 1,073.2 47.5 Sources: Government ICF and Staff calculations. 2 See Haïti Interim Strategy Note. World Bank December 2006. 16 [page 51] Haiti: Public Expenditure Management and Financial Accountability Review 1.32. In a weak institutional setting, huge aid flows might face absorptive capacity issues, with potential destabilizing macroeconomic effects. Creating or expanding the technical and human capacity to manage aid flows and macroeconomic policies thus becomes a priority for Haïti. Human resource management and capacity building is a cross-sectoral issue that this PEMFAR covers. It recommends that donors provide a full-fledged capacity building assistance to Haiti. 133. Channeling more funds through the national budget is crucial to ensure coherent management of public resources and enable the government to explore and account for dynamic policy-tradeoffs between alternative allocations of government resources. It is also critical to maintain the short-term objective of macroeconomic stability to improve the investment climate and general confidence in public policies, and the long-term goal of strong and sustained growth for poverty reduction. However, the prerequisites for more budget support including transparency and accountability in public finance management remain a concern. Chapter 3 discusses these issues and provides policy recommendations. 1.2 Fiscal Policy and Economic Outcomes, 2004-2006 1.2.1 Fiscal Performance and Improved Economic Outcomes 1.34. In 2004, Haïitian authorities inherited a deteriorating macroeconomic situation. Real GDP contracted that year by 3.5 percent, resulting in a fall in per capita GDP by more than 5 percent. Fiscal deficit (including grants) worsened to 3.5 percent of GDP in 2003. The Government also accumulated large external and domestic arrears. Prior to 2004, the Government had at times Fe operated without approved budgets or with budgets approved late into the fiscal year. : . 135. The authorities moved quickly in implementing fiscal adjustment. policies and | .. structural measures over the past three years, backed by an IMF- Staff-Monitored Program cr (SMP), and two successive Emergency Post-Conflict Assistance (EPCA I and IT) as well as the . Bank’s Economic Governance Reform Operation I (EGRO D and two IDB Policy Based Loans (BL I and IT) totaling USS50 million. The reform program sought to restore macroeconomic stability, improve public finance management, and boost economic growth. Since 2004, the economic outcomes of the reform program have been satisfactory. 1.36. Government revenue (excluding grants) increased from 9.0 percent of GDP in FY2003 to an estimated 10.0 percent in FY2006, as a result of a series of revenue-enhancing measures (see Box 2). However, Haïti’s revenue performance remains weak and its revenue-to- GDP ratio is one of the lowest within the LAC region and even by sub-Saharan Africa standards. At 10.0 percent of GDP, Government revenues are 9 percentage points lower than that of Burundi (post-conflict country), 6 percentage points lower than the West Africa Economic and Monetary Union average and 6-7 percentage points lower than that of Benin or Mali (see Table 9). 17 [page 52] Haïti: Public Expenditure Management and Financial Accountability Review Table 9. Government revenue (excluding grants) Haiti and Selected Comparable sub-Saharan Africa Countries, 2002-2006 (In % of GDP : Haiti 8.3 9.0 8.9 9.7 10.0 Burundi 20.3 21.1 20.1 20.0 19.1 Central Africa 10.8 77 8.1 8.2 8.7 Republic Benin 163 17.0 164 16.5 16.7 Burkina Faso 113 12.1 12.8 123 124 Côte d'Ivoire 17.9 16.9 17.5 17.1 18.0 Guinea-Bissau 153 15.2 17.2 17.6 19.8 Mali 15.9 16.4 17.4 17.9 17.2 Niger 10.6 9.9 112 9.7 113 Senegal 17.9 182 18.5 194 19.7 Togo 123 17.0 16.8 15.7 16.1 WAEMU 15.4 15.7 16.2 16.0 16.5 Sources: IMF, African Department Database; World Economic Outlook; and staff estimates. Estimate as of February 2006. 1.37. The Government tightened expenditure controls, mainly through reducing use of discretionary accounts. In 2006, recurrent expenditure was kept broadiy in line with its 2002 level _: : | of less than 10 percent of GDP. With increased revenues and tighter expenditure controls, the ‘ central Government overall deficit (including grants) was reduced from 3.5 percent of GDP in FY2003 to 0.9 percent in FY2006. This has largely eliminated recourse to central bank financing of | the Central Government deficit. | . 138. The substantial fiscal adjustment helped reduce inflation and supported the recovery ° of growth. End-of-period inflation fell from 38 percent ih FY2003 to an estimated 12 percent in FY2006. However, this rate of inflation is still high relative to comparable low income countries. It is six times higher than the West African Economic and Monetarÿy Union (WAEMU) average (2.0 percent) and Mali, five and three times higher than those of Burkina Faso and Benin, respectively. Annual GDP growth increased to 1.8 percent in FY2005 and is expected to increase further to 2.3 percent in 2006 after a decline of -3.5 percent in 2004. Net international reserves (NIR) have increased, raising import coverage from 1!* months of imports of goods and services in FY2003 to an estimated 1.7 months in FY2006. 1.39. Progress has also been achieved in the implementation of structural and economic governance measures, notably in the areas of budget formulation, execution, and reporting as well as public procurement and public enterprise management and road maintenance. Chapter 3 of the report provides an overview of the public finance management reforms undertaken since 2004 and the remaining challenges. 1.40. The successful implementation of its reform program enabled Haïti to be granted a Poverty Reduction and Growth Facility (PRGF), and to reach its Enhanced HIPC Decision Point. 18 [page 53] Haiti: Public Expenditure Management and Financial Accountability Review Box2. Revenue-Enhancing Measures Introduced since 2004 The following reforms have been undertaken since 2004: Internal revenue + Income tax: Establishes a new individual income tax, raising the minimum taxable wage from 20,000 to 60,000 gourdes; a new corporate tax, a proportional rate of 30 percent is imposed on the net income of companies and other corporate entities; for individuals residing in Haïti, tax assessments are based on residence and, for nonresidents, on income generated in Haiti; access is provided to information held by banking institutions on taxpayers being audited. e Special stamp duties: Establishes a special value-added tax of 0.02 percent on all invoices and receipts issued by the DGI. + Business volume tax: Establishes a simplified regime for individuals subject to income tax who maintain business volumes below 1,250,000 gourdes. + Taxpayer register: Establishes a tax registration number, the “Tax Identification Number” (NIF); as a single central computerized taxpayer register, to be supplied with data from the manual registers held at different locations around the country and will gradually encompass all operations pertaining to each taxpayer. Includes an amendment to tax legislation so as to require use of the NIF on all tax documents. Establishes appropriate sanctions for fraudulent use; and modifies how the National Identify Card (CIN) is administered by tax services. e Tax code rationalization: Eliminates the tax stamp of .01 percent on invoices and receipts; eliminates the special 12 gourde duty on invoices and receipts issued by the DGI (substituted by | - Special Stamp Duties above); and abolishes duties and fees on imported alcohol and tobacco. Legal framework 4 LA oc + .. The Law of 15 July 1996 was amended to provide for bonuses to be paid to officials who monitor |. : Fc and impose fines for infractions of customs rules and laws, to facilitate and accelerate clearance of 5. . goods through customs. CU - : + Customs Code: A new Customs Code has been drafted, to be in line with modem codes on the |. : : : matter, and that includes valuation of goods in accordance with GATT Chapter VIL. The new Code | has been submitted to Parliament. Institutional and administrative framework + Regulatory Framework: New organizational charts prepared for the administrative departments; a manual prepared containing descriptions of functions; agents trained in the new control techniques; monitoring measures adopted; personnel designated for the new services; and a monitoring committee designated. e+ Training area: An AGD official has studied customs techniques at the World Customs Organization (WCO); two officials were trained at a 10-month course at the French Customs School in Tourcoing; three officials took a nine month customs training course at the Morocco Training Center. Information Systems: AGD has begun to implement Sydonia World, a computerized management system covering most foreign trade procedures. This system processes manifests, customs declarations, accounting, transhipment and exemptions. 1.2.2 Debt relief and Fiscal Space Issue 1.41. Because of its good policy track record over the past three years, Haïti reached the Decision Point under the Enhanced HIPC Initiative’s export window in November 2006. Thus, Haïti was granted debt relief estimated at US$140 million in NPV terms (US$212.9 million in nominal terms) as of end-September 2005, which reduced the level of the debt to a more 19 [page 54] Haiti: Public Expenditure Management and Financial Accountability Review sustainable 150 percent debt to export ratio! Haiti would qualify for Multilateral Debt Relief Initiative (MDRT from IDA upon reaching its completion point? Debt relief associated with MDRL is estimated at about US$243 million in NPV terms (US$464 million in nominal terms) assuming that Haiti reaches its completion point by end-September 2008. In addition, several Paris Club members have indicated their intention to provide additional relief beyond the HIPC Initiative. Table 10. External Debt Service, 2006/06-2014/15 (In USS million unless otherwise indicated _ 2005/ 2006/ 20077 2008/ 2009 2010/ 2011/ 2012 2013 2014 Averats | 06 07 . 08 09 10 fi 12 LR) 14 15 2005/06 a Do : at ii, Es. Reduction in debt service as a result . 133 6.5 15.1 112 5.3 5.0 52 5.0 5.6 8.0 of HIPC assistance! Reduction in debt service as a result of MDRI 0.0 0.0 0.0 9.3 14.1 19.8 19.7 19.6 19.5 20.5 12.2 assistance? Reduction in debt service as a result - of additional 0.0 0.0 2.4 5.3 54 53 5.3 53 53 48 3.9 bilateral assistance CU beyond Hipc? Deus Soùrce: Enhanced Heavily Indebted Poor Countries (HIPC) Initiative Decision Point Document. World Bank; October 1The reduction in debt service is measured as the difference between the projected debt service after full use of traditional debt relief and debt service after the application of HIPC relief. ? MDRI assistance applies only to the World Bank and starts after the completion point (September 2008). Assumes that MDRI has no impact on Haiti’s new borrowing over the projection period. 1.42. Debt service relief after HIPC and MDRI relief is estimated at about US$22 million on average over 2005/06-2014/15 and about USS$26 million on average over the same period when bilateral relief beyond the HIPC is considered (see Table 10 above). The reduction in debt service would provide some fiscal space in Haïti’s budget. Maximizing the poverty impact of resources made available by debt relief would require that the Government ensure that these resources are allocated to productive spending. The Government has recently defined a list of pro- poor expenditures. In the short-term, there is a need to reinforce this list and translate its items into 2° Within the framework of the Enhanced HIPC Initiative, the level of indebtedness is considered unsustainable when the NPV of debt to exports of goods and services is above 150 percent. As of end- September 2005, Haiti debt in NPV terms, after full application of traditional debt relief mechanisms, is estimated at US$928 million, equivalent to 177 percent of exports of goods and services (above the HIPC Initiative threshold). 2 The assistance provided by IDA would cover all outstanding debt disbursed from IDA prior to end- December 2003. Haiti is not expected to have eligible debt for MDRI debt relief from the IMF. Haiti is scheduled to repay all eligible debt to the IMF (i.e. debt that was outstanding to the IMF before December 31, 2004) by December 2006. 5 With the delivery of MDRI assistance, Haiti’s NPV of debt-to-exports ratio would significantly fall, remaining within the 90-100 percent range over the period 2006-25. This assumes that MDRI has no impact on Haïti’s new borrowing over the projection period. 20 [page 55] Haïti: Public Expenditure Management and Financial Accountability Review specific budget lines. The ongoing preparation of the PRSP offers the opportunity to define such a mechanism that could ensure these expenditures are protected against unpredictable shortfalls in government revenue. This could be done through the design of a cash allocation plan. 143. But the notion of pro-poor expenditure is not clear. For instance, spending on roads might be more “pro-poor”” than direct transfers to low-income households because they foster investment and growth (and thus an increase in income of the poor, even with no change in income distribution) and have a more lasting impact on poverty reduction than transfers. À better distinction should be between productive spending (which enhance growth: infrastructure, education, health, the latter two affect productivity; see Chapter 7 Box on infrastructure) and non-productive spending (or not directly productive; transfers for instance). From that perspective, the critical issue is not to protect some categories of spending that are deemed “pro-poor”, but rather to protect a core PIP, which will foster growth and help to reduce poverty (see Chapter 8 macro-model and policy simulations). In this context, designing a core integrated PIP agreed upon with the donor community, which identifies foreign resources available should reduce in the short-term, the negative effects of volatility of aid flows that Haiti has undergone since the 1990s. In the medium-to-long term, it should firm up the foundations for a growth and human development strategy. 1.44. Fiscal space associated with debt service relief depends closely on the Government’s ability to accelerate its reform agenda and reach the Completion Point of the Enhanced En HIPC Framework by September 2008 A delay in reaching the completion point would result in revenue loss. Table 11 below shows projected revenue loss if the completion point is delayed. : For instance, Haiti would forgo an estimated US$48.5 million (equivalent to more than FY2006-07 ‘ recurrent budget for health and more than 60 percent of that of education sector) in debt relief in ° the event of a one year delay in reaching the completion point. : Le # See Assistance to the Republic of Haiti Under the Enhanced Heavily Indebted Poor Countries Debt Initiative. World Bank. Report No. 37394-HT. October 25, 2006. 21 [page 56] Haiti: Public Expenditure Management and Financial Accountability Review Table 11. __Debt Service before and after HIPC and MDRI relief 2007-2015 (in million of US$ 2 2008 200 20 DO 2002 201320 Mu 20IS Debt service before debt relief 64.5 68.4 ni 76.8 78.6 83.0 88.0 93.9 100.5 HIPC debt relief 26.8 20.2 212 7.1 12 0.6 0.7 0.7 0.6 Debt service after HIPC 377 48.1 49.9 69.7 773 82.3 87.3 933 100.0 2008 completion 376 520 572 569 565 563 57.0 point relief Debt service after HIPC and MDRI 37.7 48.1 123 17.7 20.1 25.5 30.9 36.9 43.0 (2008) Cumulative cost of delaying the 48.6 107.7 166.1 223.6 280.8 337.8 395.3 completion point Source: Enhanced Heavily Indebted Poor Countries (HIPC) Initiative Decision Point Document. World Bank and IMF staff estimates, May 2007. 145. Because of the nature and the limited amplitude of debt relief, fiscal space resulting from debt relief will provide a small boost to resources and will need to be supplemented with an increase in aid to support the Government’s public investment program. The resources : saved from debt relief could prove useful if they are invested properly. However, given their L 57. magnitude, the impact on growth and poverty will be limited unless Haïti finds additional means to ‘ expand fiscal space and finance an ambitious public investment program. At the same time, thereis . ‘ some potential to expand the fiscal space both at the expenditure and revenue levels provided that the reallocation of expenditures in the budget is done efficiently and revenue-enhancing measures identified above are implemented. Box 3 below summarizes the issues associated with fiscal space and the ways through which a typical LIC such as Haïti could create fiscal space. Regarding expenditure efficiency and reallocation, it involves reducing waste in public spending, particularly in the case of public investment. Regarding tax revenues, efforts to broaden the tax base and strengthening tax administration (through, for instance, a reduction in collection costs and measures to reduce tax evasion) might result into additional revenues, which can be used to finance productive spending. Foreign assistance is needed to strengthen the Government’s efforts to increase domestic revenue. However, the tendency of foreign grants to be highly volatile raises the issues of sustainability of medium and long-term development programs hinging on the risks of shortfall in grant financing. 22 [page 57] Haiti: Public Expenditure Management and Financial Accountability Review Box 3. Creating Fiscal Space: Old Wine in New Bottles? Definition. Fiscal space can be defined as “the availability of budgetary room that allows a government to provide resources for a desired purpose without any prejudice to the sustainability of a government’s financial position”? Ways to create fiscal space. How can low-income countries create fiscal space? Essentially, there are three ways to make additional resources available for productive government spending, without compromising the sustainability of public finances in the medium term: (i) through improvement in expenditure efficiency and reallocation of spending, (ii) through higher tax revenues, and (ïi) through greater domestic or foreign financing at relatively low cost. Expenditure efficiency and reallocation of spending: A first option to create fiscal space is by reducing waste in public spending, particularly on public investment. This can be achieved by improving governance in a broad sense, that is, with tighter management and greater accountability. Another option is to reduce “unproductive” expenditures. However, care must be taken in classifying expenditures as “unproductive.” In an environment such as Haiti where crime and violence deter individuals from saving and investing, spending on security should retain a high priority — despite the fact that it might not appear to be prima facie directly productive. Similarly, attempting to create fiscal space by cutting spending on maintenance might be an ill-advised strategy; it might “work” in the short term (in the sense that consequences for the quality of infrastructure might not be immediate), but only at a greater economic cost in the long term. Higher tax revenues: It is possible that by broadening the tax base and strengthening tax administration | : ° (through, for instance, a reduction in collection costs and measures to reduce tax evasion), additional |. revenues can be ‘raised to finance productive spending. In many poor countries, however, the capacity to ‘ raise resources through taxation remains limited by the very fact that incomes are low to begin with; and | .:"- if the components of spending that are being contemplated for expansion require large or lumpy |: È * investments (as is often the case for infrastructure), relying solely on higher taxation to create fiscal space: .s ue might not be feasible. ue L an Low cost domestic or foreign financing: Resources can be borrowed or received in the form of foreign grants. In many poor countries, the capacity to borrow domestically is often limited by the size of the financial sector. As for foreign borrowing, unless it is on highly concessional terms, it might adverse implications for the sustainability of public debt. Debt relief, by contrast, frees resources that were previously earmarked for debt service operations, and might in principle provide a significant boost to outlays in some specific productive spending categories. 7 An alternative financing option is foreign grants. However, what has become clear in recent years is that grants tend to display a high degree of volatility. This is particularly problematic if a country must finance a multi-year public investment program that requires a sustained inflow of resources; an unexpected shortfall could derail the program and annihilate its potential effects on growth and future tax revenues.” Another potential problem with Peter S. Heller, “Understanding Fiscal Space,” IMF Policy Discussion Paper No. 05/4 (March 2005).. See also Peter S. Heller, Menachem Katz, Xavier Debrun, Theo Thomas, Taline Koranchelian, and Isabel Adenauer, “Making Fiscal Space Happen!,” World Economies, Vol. 7 (July-Sept. 2006), 89-132. #The degree of financial development, together with other institutional factors (such as the nature of the country’s exchange rate arrangement) also limits the ability to raise revenues through seigniorage. See for instance John Weeks and Terry McKinley, “Does Debt Relief Increase Fiscal Space in Zambia? The MDG Implications,” Country Study No. 5, International Poverty Centre (September 2006), for a case study of the impact (or lack thereof) of debt relief on fiscal space. #See Ales Bulir and A. Javier Hamann, “Volatility of Development Aid: From the Frying Pan into the Fire?,” Working Paper No. 06/65, International Monetary Fund (March 2006), and UNCTAD, Doubling Aid: Making the Big Push Work, Geneva, 2006. #1n fact, as argued for instance by Pierre-Richar Agénor and Joshua Aizenman (“Aid Volatility and Poverty traps”, unpublished, University of Manchester, May 2007) a high degree of aid volatility may deter 23 [page 58] Haiti: Public Expenditure Management and Financial Accountability Review foreign aid (in addition to short-term Dutch disease effects) is an adverse moral hazard problem — the fact that aid might weaken revenue performance and lead to higher (unproductive) spending. If so, then the fiscal space initially created by higher aid flows might vanish fairly quickly. Lessons learned. There are two main lessons that can be drawn from the foregoing discussion. The first is that considerations related to fiscal space are best made in the context of an explicit medium-term budget framework, with a clear outline of the government's expenditure priorities — particularly in the area of public investment — and available financing options. In that sense, the current debate is “old wine in new bottles.” The second important lesson that can be drawn is that assessing ways to create fiscal space, while ensuring sustainability of the fiscal stance, is inherently country specific and requires the use of a quantitative model that accounts for the country’s key structural economic features, its revenue and expenditure structure, the composition of its debt and its cash flow implications, and its prospects for greater access to foreign resources. Such models are essential to discuss how a reallocation of spending from “unproductive” outlays to investment in health and education, for instance, might affect growth and the budget, and whether “true” fiscal space can be achieved. As discussed elsewhere in this report, issues of efficiency and strengthening of fiscal institutions can also be framed in the context of these models. 1.46. Beyond the issue of expanding the fiscal space, quantifying the potential growth and poverty impact of increased fiscal space is more relevant from a policy perspective for a country such as Haiti. Using Haïti’s macro-framework, policy simulations of increased fiscal space are run and their growth and poverty impact are assessed. Chapter 8 reports on the results of | these simulations. ‘ : É 1.3 Policy Recommendations - - 1.47... Based on the findings of this chapter, the following policy recommendations are made: + _Accelerate the implementation of policies for macroeconomic stability and structural reforms. Improved macroeconomic stability that Haiti has achieved since 2004 would need . to be reinforced to create conditions for a stable environment favorable to private sector | development. To this end, accelerating the policies for macroeconomic stability is critical and should be done in the context of the ongoing IMF-PRGF program. Areas for further improvement include price stability, reducing current account deficit, boosting gross official reserves, and improving fiscal strategy. However, macroeconomic stability policies would not achieve their expected growth and poverty reduction objectives, unless they are complemented by structural reforms. Reforms should be done to strengthen economic governance. Specific areas of focus include public financial management, transparency and accountability of public sector operations, and efficiency and transparency in public infrastructure management. The Bank Economic Governance Reform Operation Il and subsequent Development Policy Lending (DPLs) and IDB’s PBLs would offer the opportunity to advance the agenda of economic governance. The challenge facing Haïti is to sustain a broad- based reform over the next decade and permanently move away from the policy of “stop and go” the country experienced over the past decades, which has locked Haiti in a low-growth-high poverty incidence. ° _Implement revenue-enhancing measures and a more aggressive policy to attract foreign grants. Haiti’s revenue to GDP ratio is one of the lowest in the world. Fortunately, there is potential to increase revenue. The Government should implement the revenue-enhancing governments from implementing (costly) reforms aimed at raising domestic resources, and may well lead to a poverty trap. 24 [page 59] Haiti: Public Expenditure Management and Financial Accountability Review measures identified by the IMF-FAD and IDB. While these measures could increase revenue, increasing the revenue/GDP ratio to international levels would require time to implement. In the short term, Haiti would continue to depend on foreign aid to finance its development priorities. The Government should therefore put in place an aggressive policy of attracting foreign grants. Large flows of foreign grants might raise several issues, including: (i) Dutch Disease effect through appreciation of the real exchange rate and loss of competitiveness,; (ii) absorption capacity problems and the risk of wastage of resources, in particular in the context of limited human and institutional capacity; (iii) governance problems; and (iv) moral hazard through the reduction in incentives to collect domestic resources. An effective management of grant flows would thus be needed to avoid their potential destabilizing macroeconomic effects. It could require setting an institutional mechanism to this end. The tracking mechanism of aid flows to be implemented in the context of donor coordination offers an opportunity to discuss the outlines of such mechanism. e Strengthen the management of external debt to maintain debt sustainability. Debt management has improved in Haïti over the past years. While the MEF is rebuilding its database, the Central Bank of Haiti (Banque Centrale de la République d'Haïti, BRH) has a relatively complete debt database.” The BRH updates its database at every payment cycle, ensuring the authorities’ database is broadly in line with the creditors. Overall, the coverage of public debt (external and domestic) is appropriate. The BRH produces monthly, quarterly and annual reports that contain data on external debt. These reports cover the transactions (disbursements and payments} as well as the stock of debt and the accumulation of arrears. The reports are disseminated throughout the Central Bank and the MEF. This allows authorities to integrate the relevant information into the macroeconomic framework. The data is available to the public upon request within one month after the reference period, and it is : | subsequently published with some additional delay. Looking ahead, Haiti needs to further .: strengthen its debt management capacity by: (1) clarifying by a protocol of understanding between the BRH and the MEF the debt management responsibility; (ii) improving : information sharing, including frequent debt reconciliation exercises, between the BRH and the MEF, (ii) shortening the procedures for debt service payments; (iv) improving the tracking of disbursements; (v) acquiring a modern debt reporting system; (vi) training of staff, and (vi) improving the capacity to produce debt sustainability analyses. In addition, authorities should implement a prudent external debt policy to keep the levels of external debt at sustainable levels. This requires that contracting future debt obligations should be scrutinized to avoid jeopardizing the debt situation as emphasized in the HIPC Decision Point Document. ° Improve the efficiency of public spending to “kick-start” and “sustain” growth to alleviate poverty. The impact of government spending on growth and improving human development depends on the efficiency of these outlays and how well they are targeted at the poor, not just on the level of spending. In Haiti, improving efficiency of public spending by better allocating the Government’s scarce resources could contribute to improved growth performance. In fact, policy priorities should focus on allocating more resources to productive spending (infrastructure, education, health and security} and less to unproductive spending (transfers). Efficiency arguments also suggest that public spending should be directed to areas with the highest social returns and should complement, rather than compete with, the private sector. This involves either financing or supplying directly needed public # Currently the Central Bank of Haiti and the MEF are jointly responsible for debt management in Haiti. The archives of the MEF were devastated by a fire in 2002. 25 [page 60] Haiti: Public Expenditure Management and Financial Accountability Review goods that the private sector will not supply adequately because of market failure. In Haïti, on the contrary, Government failure to provide adequate education and health services has resulted in the presence of a large non-public sector (see Chapter 5). Efficient use of public resources in this context requires finding the ways to use Government resources so that poor students currently un-enroïled im school could attend non public primary schools free of charge. Chapter 5 provides policy recommendations to that effect. Several categories of public expenditure can influence long-term growth in Haiti - especially spending on infrastructure, education, health and security. Efficient use of public resources requires that the Government focus on these sectors. Higher growth, in turn, would generate increased fiscal resources to finance productive spending, further bolstering the dynamism of the Haitian economy. Chapter 7 presents a macroeconomic framework that links public investment disaggregated into investment in infrastructure, education, health and security, and growth and poverty. Chapter 8 assesses the impact of higher efficiency of public spending on growth and poverty reduction. e Design and implement a multi-year and integrated public investment program to be supported by foreign aid flows. Haïti has prepared a three-year PIP, using a back-of-the- envelope methodology and a top-down approach. This is a good start. The challenge is now to move to an integrated multi-year PIP, which accounts for the linkages between various sectors, most notably infrastructure and education and health. The new PIP should adopt a . ; bottom-up approach based on sectoral strategies. In fact, the new approach should allow line : : ministries to prepare their sector PIP, which should identify required investment, anticipated È recurrent expenditure and needed aid flows. The sectoral PIPs should then be put together to | ‘ Ê prodüce a Government integrated and multi-year PIP. It is critical that the integrated PIP Lo . account for the linkages between the sector and not be a simple adding-up of sectoral PIPs. Thus, there is a need to coordinate among various ministries and spending agencies for establishing a coherent, core PIP. Aid requirements might thus be lower and should be identified at the outset of the designing process of the integrated PIP. The integrated PIP should also be a rolling exercise allowing some flexibility to account for resource constraints. The design of the integrated PIP should be done in the context of the revised PRSP (three years from now) given the current timetable to complete the ongoing PRSP. The financing of the integrated PIP would require that all the resources possible be added. In other words, resources freed from debt relief should be complemented by other sources of financing to ensure additionality of resources. It also involves that the resources are channeled through the Government’s budget to ensure that Government has full control of all resources allocated to execute the PIP. This, in turn, implies improved effectiveness, transparency and accountability in budgetary operations: the core objective of this PEMFAR. 26 [page 61] Haiti: Public Expenditure Management and Financial Accountability Review CHAPTER 2: PUBLIC EXPENDITURE REVIEW: BROAD TRENDS AND PATTERNS 2.1. Chapter 1 of this PEMFAR report has reviewed the macroeconomic and fiscal context of Haïti. It has analyzed the broad structure of Haiti*s public finance by focusing mainly on the economic composition of spending: trends of expenditure categories (wages and salaries, goods and services, interest payments, and transfers and subsidies). Chapter 2 reviews the broad trends and patterns of public spending by functional classification. 2.2. The analysis of public expenditures by functional classification centers on whether sufficient resources are being allocated to sectors and line ministries. However, the extent to which resources allocated to sectors are considered sufficient or not is limited by the lack of sectoral strategies with clearly defined spending targets. In this context, the current analysis limits itself to broad trends toward the Government’s development priorities spelled out in the extended ICF and the I-PRSP. The analysis also highlights the broad trends in actual spending and discusses the drivers of the execution of spending. The structure of the Government public investment program (PIP) is discussed, focusing particularly on the influence of donors’ financing of the PIP. However, because of the lack of a complete series of data, the analysis of the execution of the PIP is limited : in time (FY2004-05 PIP), and scope and source of funding (national resources). ee 2.3. The analysis of public expenditure structure and trends is complemented by an analysis of : . spending in the priority sectors — agriculture, education, health, infrastructure, and justice and : security — in Chapters 4, 5, and 6 to determine whether the allocation and the use of public resources has been consistent with the ICF and I-PRSP and sector strategies (where they exist). LU 24. The main findings of this review are the following. First, the functional classification of : .. Haïiti’s budget is dominated by the predominance of the “executive branch”, which accounts for 95 percent of total allocation on average over FY2002-07. Second, over the past five years, there has been a shift in expenditures away from the “political sector” in favor of the “economic” and “social” sectors, reflecting the authorities’ recent efforts to align expenditures to economic and social objectives as well as the return of donors’ financing to support investment programs since 2004. The share of “economic sector” in total budget allocation increased sharply from 10.8 percent of the total FY2004/05 budget to more than 48 percent in FY2006/07. The budget share of the “social sector” also increased from 14.1 percent to 18.4 percent in that period. Third, the recent trends in recurrent expenditures reveal the Government’s efforts to translate its development priorities set forth in the ICF and the recently approved I-PRSP into budget priorities. The share of recurrent expenditures allocated to “economic sector” increased to an average of about 15.1 percent of total recurrent expenditures (excluding interest payments) over the FY2005-07 period, up from an average of 11.8 percent during the FY2002-04 period. Allocations to the “social sector” followed a similar increasing trend up to 24.8 percent on average over FY2004-06 from 23.8 percent. Fourth, the bulk of the increase in allocations to “economic” and “social” sectors was directed to growth-enhancing and poverty reducing sectors, including agriculture, transports and communications, education, health, and justice and security. Accounting altogether for about 16 percent of the FY2006/07 GDP, the share of these five sectors in the total budget increased by about 10 percentage points over the period under review: up from 36.3 percent in the FY2002-04 period to about 50 percent on average over the three fiscal year-period FY2005-07. Fifth, geographic allocation of expenditures reflects the highly centralized government’s expenditures, 27 [page 62] Haiti: Public Expenditure Management and Financial Accountability Review which are allocated mainly to the central government. About 72 percent of the FY2006/07 budget was allocated to the central government while only 28 percent was granted to the ten departments. Sixth, total spending (including recurrent and all capital expenditures) declined slightly in real terms by about 2 percent on average between the FY2002-04 and the FY2005/06 periods. Seventh, there has been a gradual dectine in the use of comptes courants as a source of execution of spending in priority sectors since 2004. This decline reflects the shift toward the use of normal expenditure procedures, namely “direct payments”, and the Government’s efforts to improve transparency and accountability in expenditure management in the context of adhesion to governance reforms. Eighth, the structure of Haïti’s public spending, in particular the investment budget, is mainly determined by foreign aid flows. Volatility of aid flows, limited absorptive capacity and poor budget planning have resulted in low execution rates. Ninth, the strong influence of donor financing on expenditure choices has not been offset by a “fungibility effect”, 1.e. by a reallocation of the Government’s own funding to non-priority sectors, as donor financing for priority sectors became available. 2.5. Policy recommendations emphasize the need for Haiti to: (i) improve budget classification by enabling the distinction between sector directly productive and sector indirectly productive; (ii) enhance the geographic coverage of the budget by better targeting the poorest departments; (iii) accelerate the policy of reducing the comptes courants; (iv) reallocate resources in the budget to account for “fungibility effect”; and (v) improve the execution of spending by improving budget planning, increasing absorptive capacity; and efficiency of public resources. ‘ 2.1 Analysis of Public Expenditure by Functional Classification : oc 2.1.1 ‘Shift in Budget Allocation toward Economic and Socia! Sectors _ ae get du ne on a ne Figure 3. Broad Structure of Budget Allocations in Percentage of : : Total Budget (average over FY2005-07) the predominance of the “executive branch” (economic, political, social, and cultural sectors), which . accounts for about 95 percent NL D, Be of total allocation on average NS À B Legisiative over FY2002-07. Legislative jo LP m Judiciary | and judiciary branches, and Independent Organe) (CSCCA, University of Haiti, Co etc.) together make up on Qi 0 7 LU average barely 5 percent of total allocation over the same period (see Figure 3). Source: Le Moniteur, Journal Officiel de la République d’Haïti and Staff Calculations. 28 [page 63] Haiti: Public Expenditure Management and Financial Accountability Review 2.1. Over the past five years, Figure 4. Shares of Executive Branch Components in there has been a shift in Percentage of Total Budget FY2004-07 expenditures away from the 60 A “political sector” in favor of the 5 50 à “economic” and “social” sectors, È reflecting the authorities’ recent 5% M Ti efforts to align expenditures to E® pi ‘ economic and social objectives as 2 2 : me ! well as the return of donors” 5 10 | | LL | EN LL : financing to support investment 9 = — j _. programs since 2004. Budget FY2004-05 FV2005-08 FV200607 allocations to “economic sectors””! m Economic Sector B Political Sector Social Sector increased sharply from 10.8 percent #3 Cultural Sector ElOthers Administrations of total FY2004/05 budget to more Source: Le Moniteur, Journal Officiel de la République d'Haïti and than 48 percent in FV2006-07. This Staff Calculations. reflects mainly the large increases in real terms of allocations to the “economic sectors”, which Table12. General Trends in Budget Allocations, FY2002-. increased six-fold in FY2005/06 07 (in real HTG Million) ___ . | and further by 55 percent in Res: BE: RÉT ae y FY2006/07. The allocations to the Li 200204 2005.07 “social sector” doubled, leading to 1. EXECUTIVE 20059.7 275709 oo _ an increase in their share in total Economic Sector 4236.7 130275 . budget allocation from 14.1 percent Political Sector 4060.0 4908.5 Le in FY2005-06 to 18.4 percent in oser Do no : FY2006/07. In the meantime, the Other Administrations 6929.1 6369.0 share of “political sector” declined 2. LEGISLATIVE 489.8 355.7 by five percentage points from 19.3 3. JUDICIARY 280.2 241.2 percent of total allocations on 4. OTHER 435.0 5085 ORGANIZATIONS average over FY2004/05 to 14.3 TOTAL 212647 324913 percent in FY2006/07, reflecting Source: Le Moniteur, Journal Officiel de la République d'Haïti and the decline in shares of the Ministry Staff Caleulations. of External Affairs, the President’s Office, the Prime Münister’s Cabinet and the Ministry of Interior. Most notably, allocations to the President’s Office decreased by about 20 percent between FY2005/06 and FY2006/07. Allocations to the Ministry of External Affairs also declined by the same magnitude over the same period. Allocations to the Prime Minister’s Cabinet were also cut — though by less (about 3 percent) — between FY2004/05 and FY2006/07. 3! In Haiti budget classification, economic sectors are represented by Ministries of Planning, Economy and Finance, Agriculture, and Public Works, Transport and Communications, Commerce and Industry, Environment, and Tourism. Social sectors include Ministries of Education, Social Affairs, Health and Population, Women Rights, and Youth and Sports while “political sectors are represented by Presidency, the Prime Minister’s Office, the Interior Ministry, Ministry of Foreign Affairs, and Ministry of Haitian Diaspora. 29 [page 64] Haiti: Public Expenditure Management and Financial Accountability Review 2.8 The recent trends in recurrent expenditures reveal the Government’s efforts to translate its development priorities set forth in the Table 13. pra Trends in pret : cations 0 riori ICF and the peenny approved I-PRSP into Padget Sectors, FV2002-07 (ceal priorities. e 5 are © recurrent expenditures HEG million allocated to the “economic sector” increased to an RTE IX FEU average of about 15.1 percent of total recurrent n À ki 1 expenditures (excluding interest payments) over the 2 0 2 008 FY2005-07 period up from an average of 11.8 percent | 04. il during the FY2002-04 period. Allocations to the | AGRICULTURE 2978 13153 ST » A ; TRANSPORT 21572 64269 social sector” followed a similar increasing trend up | xUsricE 15474 26755 to 24.8 percent on average over FY2004-06 from 23.8 EDUCATION 26064 3286.7 percent. This increase was mainly driven by the HEALTH 12336 18999 allocations to education sector, whose share in total Source: Le Moniteur, Journal Officiel de la recurrent spending (excluding interest payments) République d'Haïti and Staff Calculations. grew from 15.6 percent over the FY2002-04 period to 17.9 percent during the FY2005-07 period. In real terms, the allocations of recurrent budget to the education sector increased by more than 33 percent over the past five fiscal years.?? The share of the “political sector” shrank to 26.8 percent on average over the FY2004-07 period from more than 27.5 percent during the FY2001-03 period, ; following the reduction in resources allocated to the President’s Office combined with a flat trend . . ‘ in allocations to the Ministry of Externaï Affairs and the Prime Minister’s Cabinet. #7 The FY2006/07 combines the allocations to Ministère Education Nationale et Formation Professionnelle and Ministère de la Jeunesse des Sports et l’Action Civique. Adding ‘interventions publiques’? (subventions-fonctionnaires rentrée des classes) would further increase the share of education sector. 30 [page 65] Haïti: Public Expenditure Management and Financial Accountability Review : : : Table 14. Broad Trends in Budget Allocations 29... The bulk of the increase in allocations to Priority Sectors, KY2002-07 (in to “economic” and “social” sectors was es . h real HTG Million directed to growth-enhancing and poverty RTE TX ee 1 Ses cet D RU transports and communications, education, | 2002-04 20ûs. LUN health, and justice and security. Accounting | MIN AGRICULTURERES 297.8 1320.8 altogether for about 16 percent of FY2006/07 NN FRAN PUBS 21572 64497 GDP, the share of these five sectors in total | TRANSP & COMM . . budget increased by about 10 percentage points MIN DE LA JUSTICE 1,5474 2,675.7 over the period under review: up from 36.3 MIN EDUCATION NAT,J 2,6064 3,2974 percent in the FY2002-04 period to about 50 | & SPORTS MIN JEUNESSE SPORTS percent on average over the three fiscal year ET ACTION SOCIALE period FY2005-07 (see Table 14). This reflects UNIVERSITE D'ETAT 280.8 260.3 the combined effect of increased resources to D'HAITI the investment budget and a reallocation of | INTERVENTIONS PUBS recurrent expenditure over the past three fiscal ÉDUCATION ENSEMBLE 28872 346352 years. In real terms, total allocations to these NCL. UNIV HAITI AND sectors more than tripled over the period INT PUBS-RC) FY2005/06 fiscal years compared to the NOTA PRLORITS POP 153 eve FY2002-04 fiscal years. As indicated above, the GROWTH AND POVERTY > . | reallocations of recurrent expenditures in the SECT : : . budget wére done by reducing or keeping TOTAL 21,264.7 32,460:3 almost unchanged the allocations to the SHARES in TOTAL 36.3 499 |... . “political” sector, most notably the Presidency, Source: Le Moniteur, Journal Officiel de la rie the Prime Minister’s Office, and the Ministry of Répubiique d'Haïti and Staff Calculations. hors : External Affairs. The shift in budget allocations was particularly pronounced during the past two. : fiscal years. Total allocations to the growth-enhancing and poverty-reducing sectors more than ï. tripled in real terms in FY2005-06 and nearly quintupled in FY2006/07 compared to FY2003/04. . 2.10. Geographic allocation of expenditures reflects the highly centralized government’s expenditures, which are allocated mainly to the central government. About 72 percent of the FY2006/07 budget (46.4 billion gourdes or US$1.1 billion) was allocated to the central government while only 28 percent (18.2 billion gourdes ie. US$433 million) was granted to the 10 departments. In terms of recurrent budget, the central government received more than 80 percent of the FY2006/07 budget. The distribution of resources between departments seems not to reflect the poverty incidence. For instance, the Department of West (which has the lowest poverty incidence) was granted about 8 percent of total FY2006/07 allocations while the North-East department (with the highest poverty incidence) received less than 1 percent. The discrepancies are more striking when accounting only for recurrent expenditures. The Department of West received about 37 percent of the recurrent budget while the North-East Department was allocated only 4.5 percent. More worrying is the fact that the poorest department (the North-East Department) received only 2.5 percent of total investment expenditures allocated to the departments. Catching-up of poor departments might therefore be difficult as the budget does not appear to be an instrument to address differences between the departments. Part of the explanation of this problem is related to the lack of a spatial approach in the definition of the Government’s budget. In fact, budget conferences have not factored the geographical and spatial dimension of the budget into discussions about budget allocations. This also reflects the fact that decentralization is at an early stage. However, it is worth mentioning that the Government recently has made an effort to account for this spatial dimension of the budget. The FY2006/07 budget includes an annex on the budget 31 [page 66] Haiti: Public Expenditure Management and Financial Accountability Review allocations to the departments. The real test would be for the Government to move toward a more decentralized budget at the time of the completion of the ongoing decentralization process. Table 15. Geographical Distribution of Government Budget by Department (In nominal HTG Million, FY2006/07 National Territory 20,525.20 25,852.00 46,377.20 718 Department of West 1,765.90 3,191.30 4,957.20 7.7 Department of South-East 260.1 670.9 931 1.4 Department of North 511 1,030.80 1,541.80 2.4 Center Department 206.7 412.6 619.3 0.9 Department of Artibonite 560 3,467.50 4,027.60 6.2 Department of South 363 3,112.60 3,475.60 5.4 Department of North-East 209.1 341.6 550.7 0.8 Department of Grand-Anse 3013 203.1 5044 0.8 Department of North-West 196 900.3 1,096.30 1.7 Department of Nippes 285.3 200.2 485.5 0.7 Total 25,183.80 39,382.90 64,566.70 100 Source: Le Moniteur, Journal Officiel de la République d'Haïti and Staff Calculations. 2.1.2 Analysis of Actual Expenditures 2.1.2.1 Broad Trends in Actual Spending 2.11. Accounting for about 13.8 percent of Spendi b Broad GDP on average over the FY2005/06 period, Table 16. el TE Mines total spending (including recurrent and all . palegories (rea ilion), - . . ‘ , _FY2002-06 capital expenditures) declined slightly in real RE HR terms by about 2 percent on average between ee ge FY2002-04 and FY2005-06 (see Table 16). This | 20004 200806. declining trend of spending is driven mainly by TOTAL 18282.21 17,920.81 the “legislative and judiciary branches”, where 1. EXECUTIVE spending declined in real terms by more than 60 POWER 17,337.86 __ 17,179.46 percent and 4 percent, respectively (see Table 16). ECONOMIC SECTOR 2,923.31 3,277.08 However, because of the low share of these POLITICAL entities in total spending (both account for less SECTOR 543405 3,891.69 than 4 percent of total spending), the impact on SOCIAL SECTOR 3,811.70 3,353.85 total spending was quite limited. CULTURAL SECTOR 327.40 348.23 OTHER PUBS ADMINISTRATIONS __4,841.40 6,308.61 2- LEGISLATIVE POWER 393.73 142.65 3- JUDICIARY POWER 213.54 205.38 4- INDEPENDENT ORGANISMS 337.08 393.32 Sources: Le Moniteur, Journal Officiel de la République d'Haïti and Staff Caïculations. 32 [page 67] Haiti: Public Expenditure Management and Financial Accountability Review 2.12. At the sub-sector level, spending on economic sectors has increased while Table17. Functional Distribution of Actual political and social sectors recorded a Total Expenditures—Payment basis decline over the period under review. Total (in real HTG million) spending in the economic séctors increased in | | a ta . real terms by 13 percent on average between | ! ui ui the period FY2002-04 and the FY2005/06 Agriculture, Natural Resources 403.7 3123 period, mainly driven by spending of the and Rural Development Ministry of Economy and Finance (recurrent Public Works, Transport and 13264 1202.1 spending) and Ministry of Planning and Rate end Scarty 17050 18437 External Cooperation (investment spending), | Education (Inel. Universityof 2,547.0 2,298.5 which both account for about 50 percent of | Haiti) total spending of economic sectors on average Health 1,097.9 802.7 over the past two fiscal years (FY2004/05 and | Total priority sectors 7,080.0 6,776.6 FY2005/06). The sharp decline in spending of LT other sector 112022 11,144. : : . Source: MEF, Worid Bank and IDB staff calculations. the Presidency largely determined the decline in total spending of the political sector by more than 28 percent. It is worth noting that the share of the political sectors in total spending has been declining since FY2002/03 and much further in FY2004/05: 20.5 percent of total spending compared to 34.5 in FY2001/02. Despite significant increases in allocations, total spending in social sectors declined by about 12 percent on average over the period under review. This reflects mainly the decline in investment spending in health sector, education and the Ministry of Social Affairs, while recurrent spending has been increasing : in thèse sectors (see Table 18). . 2.13. Total investment on priority sectors declined in real terms by about 40 percent. between FY2002-04 and FY2005/06, stemming from a decline in investment spending in the . social sectors (as mentioned above) and in investment spending in transports and communications sector. : 33 [page 68] Haïti: Public Expenditure Management and Financial Accountability Review 2.14. Accounting for 4.2 percent of FY2005/06 GDP, recurrent spending : for all priority sectors increased by Table 18. Functional Distribution of Actual Public nearly 5 percent in real terms Recurrent Expenditures—Payment basis between FY2002-04 and FY2005/06 ———("2t8t6 milon) (see Table 18). As the result, the share |: ER FY spending (excluding interest payments AGRICULTURE, NaTURAI RESOURCES 274.7 245.0 : EVELOPMENT on the debt) increased by more than PUBLIC WORKS, TRANSPORT AND 300.3 303.4 seven percentage points, from an COMMUNICATIONS average of 37.8 percent in FY2002-04 JUSTICE AND SECURITY 14438 17590 to 443 percent in FY2005/06. This EDUCATION (INCL. UNIVERSITY OF 2296.0 2483.7 positive trend was driven by the | Ham) (education and health) and justice and | Grier secrors 8937.0 78933 security sectors, which altogether TOTAL RECURRENT SPENDING ALL 14206.6 13416.0 account for more than 90 percent of Ton Excel 136684 124280 1 sori XCL. a D sectors spending (the largest share). SHARE OF PRIORITY SECTORS IN TOTAL 37.8 443 Meanwhile, recurrent spending on | RECURRENT SPENDING (Excel. Interest agriculture and transports were | Payments of the deb) marginal, reflecting the very nature of Source: MEF, World Bank and IDB staff calculations. L . these sectors, which are mainly . “Mmvestment sectors”. : ‘ : ‘ 2:15. Authorities intend to further increase the Share of spending on priority sectors, cure _- particularly health and education in the coming years. This signals the Government’s commitment to implementing its development priorities. However, the success of this approach will depend on the Government’s ability to increase absorptive capacities and enhance resource management in the sectors. This also requires that all priority sectors develop comprehensive sectoral strategies with clear and realistic spending targets and outcomes to monitor the progress achieved. While designing the spending targets, the authorities should not only take into account their priorities but also the absorptive capacities of the sectors. The sectoral targets could be presented in the ongoing full PRSP to be completed by the end of 2007. 2.16. Yearly fluctuations of spending on priority sectors during the period under review, reveal the fragility of a spending policy highly dependent on volatile donor aid flows (investment budget) and subject to abrupt changes in political context (recurrent spending). The sudden decline in spending on priority sectors by 44 percent in FY2003/04 compared to FY2002/03, following political instability” and donors’ “wait and see” attitude illustrates the lack of capacity to conduct a sound and predictable spending policy in such an environment. Reducing volatility of spending would require broadening the domestic resource base to strengthen the ability of the economy to compensate for unpredictable changes in foreign aid by more stable domestic resources. However, this is a medium-to-long-term goal given the current status of the revenue basis in Haïti. In the short-term, developing policies to protect spending in the priority sectors should receive particular attention. They could take the form of execution of priority spending % President Aristide’s departure from the country on February 29, 2004 led to a “wait and see” attitude by major donors. 34 [page 69] Haiti: Public Expenditure Management and Financial Accountability Review items, the list of which could be drawn from the recently developed poverty reducing list. In the medium-term however, an integrated PIP agreed upon with the donor community could help to prevent abrupt changes in allocations and their destabilizing effects on spending execution. 2.1.2.2 Sources of Spending and Use of Comptes Courants 2.17. In Haïti, the execution of spending has used both normal procedures and discretionary accounts, so-called the comptes courants. The pervasive use of comptes courants which evolved as a result of an attempt to circumvent the normal expenditure execution process (itself long plagued with complicated procedures between the requisition and disbursement stages), has resulted in lack of transparency in public resource management and has led to corruption. The use of comptes courants has been highly discretionary and circumvents the normally complex ex- post control procedures of the Supreme Audit Institution (Cours Supérieure des Comptes et du Contentieux Administratifs or CSCCA). The authorities thus committed to reduce the recourse of comptes courants as part of their efforts to return to normal budget execution procedures and improve transparency and accountability in the use of public resources. 2.18. Table 19 shows the gradual Table19. Shares of Cowpres Couranrs in Total Spending for Selected decline in the use of Priority Sectors (in %), FY2002-05 _ ——— — ‘ re a in Lutin moi mue | ‘the : execution sf Agriculture, Natural Resources and Er 430 324 37 _. _- ‘ spending in priority Rural Development : sn sectors. The share of | Public Works, Transport and 80.8 87.6 758 02 io comptes courants in Communications . total spending of Justice and Security | h 22.2 40.8 10.7 82 : : selected priority sectors poraion (nel. University of Haiti) 35 537 1 ne : dropped to less than 3 | ‘otai priority sectors 244 314 19.7 2.7 percent in FY2004/05 Source: MEF, World Bank and IDB staff calculations. compared to about 20 percent in FY2003/04 and 31 percent in FY2002/03. The decline was across all priority sectors With the Ministry of Public Works, Transports and Communications recording the highest decline. 2.19. The decline reflects the shift toward the use of normal expenditure procedures, namely “direct payments”. It also signals the Govermment’s resolve to improve fransparency and accountability in the expenditure management in the context of adhesion to governance reforms. The test facing the authorities now is to ensure a sustained decline in the comptes courants in particular in priority sectors. Phasing out completely the use of comptes courants is a challenging objective given the fact that the recourse to this expenditure mode has been a deep-seated practice since the early 2000s. In addition, the flexibility and rapidity of execution of spending that the comptes courants have offered to line ministries require that their phasing out be replaced by an expenditure mechanism that encompasses those aspects of the comptes courants (flexibility and rapidity) and ensures transparency in spending execution.” # Along the same lines, it is worth mentioning that the IMF considers that phasing out completely the use of current account might be difficult, at least until there is a clear strategy for a) development of a TSA, in which ministries' revenue and spending accounts would eventually be zero-balanced (but not necessarily 35 [page 70] Haiti: Public Expenditure Management and Financial Accountability Review 2.1.3 International Comparison of Functional Distribution of Public Expenditure 220. In terms of resources allocated to the Table20. Comparison of Spending on Priority Sectors. In percent education, health and . of total budget allocations (excluding debt service rural development oi CHA Benin Burkina Niger Uganda ‘| t Haiti f £ NN. Average Average: Faso Average Average sectors, Haïti fares far | 200406 200104 Average 200104 200102 | below in comparison to : ER selected comparable Education 132 20.8 23.8 224 19.4 countries in sub-Saharan Health 5.6 93 113 15.7 10.8 Africa (see Table 20). dgrieire, and 3.7 6.7 NA 11.0 44 Allocations for transports | Development and communications have Transport and 19.1 10.5 NA 73 13.7 been relatively high over | Communications the past 2-3 years. Justice and 9.2 NA NA NA NA Security However, these Source: National Authorities Data, and Bank and IDB staff calculations. comparisons need to be treated with caution, as expenditure categories might be defined differently in these countries. 2.2 Factors Determining the Structure of Public Expenditure 221. Two factors stand out as major determinants of the Structure of public expenditure in: : Haiti: (i) the level of domestic resources; and (ii) the influence of external financing. oo ce 2.2.1 Level of Domestic Resources CU cc 222. Because of Haïtis current low domestic resources, the structure of public expenditure | shows a dual aspect. The Government’s scarce resources are mainly allocated to recurrent expenditure while investment expenditures are mainly financed by external assistance. “Fixed and quasi-fixed” expenditures (wages and salaries, debt service, and transfers, and subsidies to some public enterprises) account for a large part of the Government’s resources, leaving little for the other category of recurrent expenditures — goods and services. Expenditure on goods and services appears as a “residual” item and operates as an “adjustment” item in the recurrent budget. For the same reasons, the Government’s limited resources are allocated to few line ministries or priority sectors (education, health, economy and finance, etc.) with little funds directed to other sectors. 2.23. National resources to finance the investment budget are limited and their allocation is pre-determined. Investment expenditures are not identified and planned in a coherent framework. In fact, there has not been a clearly integrated multi-year investment program. Only recently has the Government prepared a rough multi-year public investment program, the quality of which needs to be improved. There is a lack of strategic planning of investment expenditure after about 20 years of neglect of capital budgeting and weakening of institutions involved in preparing and monitoring the public sector investment program (especially the Ministry of Planning and External Cooperation). The situation has caused a disconnect between public sector capital expenditures on the one hand and poverty reduction and socio-economic development needs on the other. The lack closed) at the end of each working day; b) procedures for supplying petty cash needed by spending ministries, including for advance accounts. 36 [page 71] Haiti: Public Expenditure Management and Financial Accountability Review of public investment planning and monitoring has meant that public sector investment has been driven by donor-funded and NGO projects, further causing a disconnect between the Government’s current expenditure budget and the overall investment made in the public sector (including through donor-funded projects). Government has thus little influence on the investment budget. As a result of weak investment planning, changes to the investment budget occur in an ad-hoc manner during budget execution. In fact, sectoral ministries have had little control over the execution of capital expenditure in their respective sectors. 2.2.2 Influence of External Financing 2.24. External financing has a strong impact on the structure of expenditure since more than 20 percent of Haïiti’s total public expenditure and about 70 percent of its capital expenditures in 2004-06 were financed by external assistance. The donors’preference for financing projects and programs in priority sectors has a strong influence on the share of priority sectors in total public expenditure {as highlighted in Chapter 1). 2.25. Haitÿs heavy reliance on external budget support reinforces the outside influence on expenditure choices. Both tied and, to a lesser extent, untied budget support requires the Government to earmark budget resources for specific sectors and/or types of expenditures. In the case of tied financing, this link is direct. Yet even untied budget support operations are usually based on an agreement between the authorities and the donor to earmark a certain share of this support to specific sectors. However, to what extent this earmarking of expenditure has translated into a reallocation of expenditure toward non-priority sectors (fungibility effect}? : 2.26. There are clear indications that the strong influence of donor financing on : expenditure choices has not been offset by a “fungibility effect” j.e. by a reallocation of the . :. ° Government’s own funding to non-priority sectors, as donor financing for priority sectors Mo became available” An analysis of the fungibility of external financing and domestic resources . reveals that the possibility of external funding expenditures crowding out expenditures that are traditionally financed from domestic resources is limited. External project financing accounts for nearly 70 percent of Haïti’s investment budget. In addition, counterpart funding to external projects constitutes a large share of the domestic contribution to the investment budget. 2.27. The large share of donor financing of Haiïti’s budget has resuited in a lack of autonomy in decision making by the authorities and a strong vulnerability of sector spending to fluctuations in external financing (as mentioned above). The Government has recognized this and has launched a process of enhanced donor coordination with and among donors within the framework of the Extended ICF and current PRSP implementation. À medium-term program is under preparation and its successful execution will require that the Government and donors jointly adopt medium-term spending priorities and integrate their funding. However, such positive development will require that the Government make an effort toward improving the budget preparation process, in particular to eliminate the dichotomy in the formulation of the recurrent and investment budgets. Experiences in other countries (e.g. Uganda) has shown that it takes a long time and concerted efforts to fully integrate all funds from domestic and external sources in the budgeting process. # See World Bank (1998) for a discussion of fungibility of foreign aid. 37 [page 72] Haiti: Public Expenditure Management and Financial Accountability Review 2.3 Analysis of the Public Investment Program 2.3.1 Structure of the Public Investment Program 228. The structure of the PIP is skewed toward economic sectors, on average consisting of more than 80 percent of total resources allocated to the PIP over FY2005-07, while social and cultural, and political sectors account for 12 percent and 5 percent, respectively (see Figure 5). The analysis of the intra-sectoral allocations of spending of the FY2005-07 PIP reveals the dominant position of transport sector, which accounts for more than 40 percent of total allocations while agriculture, education and health made up about 8 percent, 5 percent and 6 percent, respectively. Figure 5. Broad structure of the PIP, in Percent of Total Resources PIP2004/05 PIP2005/06 : PIP2006/07 Economic Sector = Socio-Cultural Sector | Doi di EU Political Sector . mie : | — Other Sectors l Sources: National Authorities Data, and Bank and IDB staff calculations. 2.29. Economic sector. The PIP in the economic sub-sector is largely dominated by the allocations to the MTPTC (Ministère des Travaux Publics, Transports et Communications) and the Ministry of planning, which together account for about 75 percent of allocations to the economic sector, over FY2005-07. Allocations to investment programs reflect the large program and projects being executed (or in the process of) in the transport sector, following the return of foreign aid flows as well as developing planning programs under the control of the Ministry of Planning. 2.30. Social-cultural sector. Investment programs and projects in the social sector are mainly directed to the education and health sectors. Altogether, these sectors account for 90 percent of the social-cultural sector PIP on average over FY2005-07. This structure of the social- cultural PIP reflects the Government’s policy choice of priority given to improvement of education and health outcomes while social protection appears to be a secondary objective. 2.31. Political sector. At about 70 percent of the total PIP, justice and public security dominate the structure of the political sector PIP. Mainly as the result of renewed attention to 38 [page 73] Haïti: Public Expenditure Management and Financial Accountability Review public security, foreign resources to justice and public security PIP are projected to increase in the FY2006/07 budget (2.1 billion gourdes or US$49.9 million). The extent to which these resources could be absorbed by the sector is not clear as they are not backed by a full-fledged strategy with spending targets (see Justice and Security PER for further discussion of these issues). 2.32. More generally, the lack of specific spending targets in the PIP does not provide a baseline for assessing the trends of resources allocated to the sectors. Thus, the increase in allocations (or in the shares) becomes meaningless. Part of the problem is the absence of a clear link between the PIP and sectoral strategies. In fact the PIP is built with little (or no) reference to sectoral strategies. In addition, most of the sector strategies (when they exist) do not have specific spending targets. 2.33. The volatility of both domestic and external resources complicates the assessment and translates into variability of shares and relative importance of the sub-sectors. Yearly changes in allocations appear drastic, uncontrollable, and do not display any specific pattern. For instance, allocations to planning, health and justice/security dropped significantly in FY2005/06 PIP. In the meantime, resources allocated to transport and to a lesser extent agriculture sectors increased sharply (see Table 21). Part of the volatility of the allocations is explained by the cycle of externally-financed programs/projects which might start or end with little Government’s control. It is also due to a lack of rigorous resource planning on the part of the Government. Yet, planning resource allocation is a daunting chailenge in a context of a PIP largely dominated by unpredictable. CE donor financing. . Fo 2.3.2 Influence of Donor Financing on the Public Investment Program Ci pat 2.34. Haïtis public investment program (PIP) is mainly financed by external assistance. : : The analysis of available data reveals that 80-90 percent of Haiti’s PIP in 2004-06 was financed by : . donor assistance (see Table 21). Investment in economic and social sectors is predominantly donors” financed. Ninety percent of the public investment program in agriculture and transports ‘ was financed by donors over the period. In addition, more than 70 percent of education and health PIP was financed by donors. Meanwhile foreign resources to the justice and security sector has been limited as only 30 percent of the PIP of the sector was financed by donors in 2004/05 and no external resources was allocated to the sector in 2005/06. 2.35. The increase in resources allocated to the PIP over the past 2-3 years reflects donors’ increased allocations. Allocations to the PIP increased from 9,014.4 million gourdes in FY2004/05 to 16,774.9 million gourdes in FY2005/06: an increase of more than 60 percent in real terms. This reflects the doubling of donor financing over the period, from 7,226.9 million gourdes to 15,235.9 million gourdes. 39 [page 74] DT F4 1© : 13 « mn © NW ns Mn Vs NS SUIS £ 18 a * roe— SAS Fe Les sun Sms ssss ) 10 AT Le el a Lai mile : i ie À je? to an nf e®mToure & Sa ae dm ss a? ie ES SURESNES] Se S à à = HS LL+ Pr Sr va Sara uoir Jimi = & LISE SAS RNQSr ES rar TrNisuna SD TT È La Re) È IN © — nRe & Le PR sS «a doi sa Du a2z ti eXÉeTseum F9 & « Se ns | SErSs se PRESENT -E giT © + a se D rss CES EAST DS OS <'QSS ET or ra anse HR aQT © © Dms De Dm ane © SAT eu 0 À BOSS D OS SiS dar dé Qar a% SATTENUIX ÉLREREZ 2 ? ZSN Srx = SAT SK PR ST CA SEL FE lSs « + voeu Jar œu Jen nA rea-saa—d 2. 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The high dependence of the PIP on donor financing raises the issue of predictability of aid flows. Indeed, an effective implementation of the PIP over the medium term requires a sustained inflow of resources. This implies that an unexpected shortfall could derail the program and hamper its execution. Predictability of aid flows is much needed if Haiti’s PIP has to be a tool for shaping the basis for its investment and development priorities. 2.4 Budget Execution 2.4.1 Broad Trends of Budget Execution 2.37. The subsequent chapters provide detailed analysis of the execution of spending in each sector covered by this PEMFAR report, including agriculture, education, health, infrastructure, and justice and security. This section attempts to summarize the broad features of execution of spending by covering the three broad budgetary sectors, namely political, economic and social sectors. The section focus only on the overall budget while subsequent chapters discuss details of the execution of both the recurrent and the investment budgets. Because of the poor quality of data, caution should be taken when analyzing the execution rates and interpreting their evolution. 2.38. A key feature of the execution rates is their | . volatility during the FY2002-06 period. On average, Table22. Execution Rates - in | execution rates were relatively high during FY2001-04 Percent, FY2002-06 : sub-period, reflecting poor budgetary planning of . ei mn l : resources required by the sub-sectors rather than high Il nu | - absorptive capacity, and the use of non transparent | Economie sector 742 337 l° execution procedures: the comptes courants. The Political sector 134.6 96.07 N execution rates have dropped since FY2004-05: 68.9 percent on average over FY2005/06 compared to 91.3 LTotal 91.3 68.9 percent in FY2002-04. This reflects mainly the limited Sources: Government Statistics and Staff : : : Calculations. absorptive capacity of the sectors in the face of sudden increases of allocation of resources since FY2004/05, following large increases in foreign aid. 2.39. This general trend tends to hide high variability among sub-sectors. Broadly speaking, the political sector tended to fully spend (or even overspend) the resources allocated during the first sub-period under review (FŸ2002-04). The political instability that characterizes this period led to recourse to increased spending by the executive branch, most notably the Presidency, the Prime Minister’s Office, and the Interior Ministry. The execution of spending was facilitated by the increased recourse to the comptes courants. Execution rates in the political branch declined (but stil remain at high levels), reflecting the adjustment of spending more and more in line with resources allocated, in the context of improved transparency and accountability in public finances. 2.40. While social sectors recorded execution rates relatively high”, resources allocated to economic sectors were poorly executed. Part of the problem is the weak capacity of ministries composing this sector, including agriculture, public works, and commerce and industry, to absorb the large resources provided over the past two fiscal years, mainly foreign aid flows. Another % The execution rates in social sectors should however been interpretated with cautious as they may reflect the large share of wage expenditures, which more often have execution rates of close to 100 percent. 41 [page 76] Haiti: Public Expenditure Management and Financial Accountability Review explanation is the difficulty of line ministries to adapt to new budget procedures, including the use of regular execution procedures in place of the comptes courants. 2.4.2 Execution of the PIP 2.41. Data on the execution of the PIP is scarce and exists only for the part of the PIP executed on national resources in FY2004/05. Caution should be taken when interpreting the execution data, which might not reflect the whole picture of the execution of the PIP in Haïti as the data does not capture the part of the PIP executed on foreign resources.” Four main features of the execution of the PIP are worth emphasizing. First, poor budget planning of the PIP has resulted in disbursement of resources higher than resources projected under the revised PIP (less optimistic than the original PIP): 2.3 billion gourdes (US$ 59 million) compared to 1.8 billion (US$ 45.9 million) projected in the PIP. Second, overall execution of the PIP is quite low: only 25 percent of domestic resources allocated to the PIP are actually absorbed. This reflects the combination of low absorptive capacity of the overall Haitian economy, slow start of the execution of the PIP, and delays on the part of line ministries in processing the required documentation for the disbursement of funds, in executing their projects and programs. In addition, the revision of initial allocations to the PIP resulted in further delays by line ministries, most of which adopted a “wait and see attitude”. Third, large disparities exist between and within sub-sectors. Economic and political sectors recorded relatively low execution rates: 20 percent and 15.6 percent, respectively. Within the economic sector, most of line ministries in charge of the execution of programs and projects recorded'low execution rates, with the exception of commerce and industry. Along the same lines, _ some ministries composing the political sector, inicludinig the Ministry of Interior and Ministry of Haiïtian Diaspora did not spend the resources allocated to their PIP. Part of the problemis relatedto .. _the political ‘instability that the country experienced in the year 2004, which disrupted the . ” iñvestment process and the spending procedures. Fourth, most of the line ministries focused more : : on executing the recurrent budget most notably through the use ôf comptes courants, while little attention was paid to the investment budget. L ". . 2.42. What Drives the Execution Rates? Exogenous factors could have influenced the execution of spending in Haïti, including for instance political instability and donors’ withdrawal from the country in FY2002/03. These factors should not have been underestimated when analyzing the trends in execution rates. However, more generally, three factors can influence the execution of spending in a typical LIC, such as Haïti: (i) a cash rationing decision to limit an eventual fiscal deficit (a macroeconomic issue); (ii) poor budget planning (a macroeconomic issue); and (iii) limited absorptive capacity at the sectors level (micro-sector issue). The first factor is well established as a key determinant of execution rates in many LIC in sub-Saharan Africa. Over the past four years, Haiti did not experience a sudden cut in expenditures during the fiscal years, which might have prevented the country from fully executing its planned spending. In fact, the low execution rates are essentially due to the combination of poor budget planning and the limited absorption capacity of the Haitian economy. Poor budget planning is reflected by the lack of a sound budget preparation process. The numbers included in the Government budget are more often meaningless as they do not reflect the real needs of the sectors and the country as whole. 37 There are allegations on the side of the Government which indicate that in July 2005, some US$400 million were invested by the donors to execute the PIP. However, the details of the execution (break-down between axis, programs and projects) are not available. 8 The typical example is Niger, which uses a cash rationing system to comply with budget deficit criteria agreed upon in the context of IMF-PRGF supported programs and the West Africa Economic and Monetary Union Fiscal Convergence Criteria. 42 [page 77] Haiti: Public Expenditure Management and Financial Accountability Review Chapter 3 of the report documents the weaknesses in budget preparation and planning and their implications for the performance in budget execution. It also proposes some remedial measures. Absorptive capacity typically refers to limits on a country’s ability to use aid effectively owing to the quality of a country policies and institutions and lack of administrative capacity in the form of specific skills or, more generally, of insufficient human resources and physical conditions Gnfrastructure and equipment) for policy and program implementation. Chapters 4, 5, and 6 discuss the issue of absorptive capacity of the sectors in the presence of huge foreign aid flows. 2.5 Policy Recommendations 2.43. Based on the findings of this chapter, the following policy recommendations are made: ° _Improve budget classification by enabling the distinction between directly productive sectors and indirectly productive sectors. The current functional classification of the budget — broken down between “executive power”, “legislative power”, “judiciary power” and “other independent entities” — reflects more the need to match budget allocation and spending with the existing separation of functional power between the three entities of the state. Also, the rationale for including the sectors and sub-sectors under each category is not well explained. From a policy perspective, it would be better to complement the current classification by a classification that allows the distinction between directly productive (agriculture, infrastructures, health and education) and indirectly productive sectors (judiciary and . legislative branches). This would allow distinguishing between productive and unproductive : spending.” Moreover, as Haiti is preparing its PRSP, which will become its strategic framework for its development agenda over the medium term; it is critical that the budget Lo classification reflects the Government’s declared objectives to grant priority to key sectors. To : 5... this end, distinguishing between priority ‘and not priority sectors could be a classification to: 7. “à consider. The advantage of doing so is two-fold: First, it would allow the Govémment to assess Ur whether the allocations and actual spending are in line with its development priorities. This: requires'that the sectoral strategies are in place and include specific spending targets. Second, D such classification would enable the Government to track the execution of specific spending in the priority sectors and provide a policy response to correct deviations from the spending targets. ° Improve the geographic coverage of the budget by better targeting the poorest departments. Haiti has made great strides to improve its budget presentation. The FY2006/07 budget includes an annex on geographic allocation of expenditures. This is a good start. Yet, geographic allocation of spending seems not to reflect the country’s spatial poverty incidence. There is a need to make the budget reflect the Government’s poverty reducing priorities by better targeting the poorest departments. Starting in FY2008/09, budget conferences should include sessions to discuss levels of allocations to the various departments. This would require involving representatives of the departments into the budget discussions. However, the issue is the ability of the department representatives to be familiar with budget procedures and influence the budget decisions. Looking ahead, the Government would need to strengthen local capacities in budgetary processes. This could be done in the context of the ongoing decentralization program. For this purpose, the authorities could explore how to use a GFS-based functional classification system in the coding system for spending. 43 [page 78] Haiti: Public Expenditure Management and Financial Accountability Review e Accelerate the policy of reducing the comptes courants. À major achievement of budget execution in Haiti since 2004 has been the reduction in the discretionary accounts: the comptes courants. However, there are concerns about the existence of comptes courants, which some line ministries still run. A first step could be for the Government to clearly define the list of existing comptes courants, the institution which still are using these accounts and their volumes. A second step should be to agree with the line ministries concerned on a calendar to phase out the comptes courants. Finally, the Government would need to strictly implement the condition agreed upon with the IMF and the World Bank to limit the ratio of comptes courants to total expenditure (excluding salaries) to 10 percent. This would signal its resoive to improve transparency and accountability in the use of public resource. + _ Reallocate resources in the budget to account for the “fungibility effect”. Since 2004, Haïti has benefited from large aid flows, mainly directed to priority sectors. This has provided some leeway to the Government’s budget. À close look at the financing picture reveals that the ‘füungibility effect” of external financing and domestic resources did not occur. Government did not reallocate its own resources to non-priority sectors as the foreign aid became available. From a policy perspective, the Government would need to assess its maneuver room to reallocate resources to non-priority sectors. This does not however mean to change its development strategy, which rightly focuses on priority sectors. This means that the resources should be allocated as priorities to sectors where the needs are, in particular when foreign aid flows, abundant. The marginal returns of increasing the allocations of public resources to priority sectors facing absorptive capacity : issues might be declining while the resources are needed in other sectors. The challenge for the Government is to find the right balance between allocating more resources to non- ! | “priority sectors and keeping the Government’s development objectives intact. ° Improve the execution of spending by improving budget planning, increasing : absorptive capacity, and efficiency of public resources. The trend of execution of spending over the past five years was not satisfactory. To improve the execution of spending, policy actions should focus on: (i) improving budget planning; and (ii) increasing sectors’ absorptive capacity. In the short-term, the Government would need to undertake bold actions in the area of budget preparation by strengthening the capacity to prepare the budget (revenue and expenditure projections, sectors needs, etc.). In the medium-term, policy actions should focus on increasing the capacity of sectors to absorb the flows of foreign resources. This would include increasing their budget management capacity, human resource, increasing the scope of programs and projects to be executed, etc. But beyond the objective of increasing the levels of execution rates, the main issue is the issue of efficiency of spending. The quality of spending matters more than its levels. Improving the efficiency of public spending would require better targeting the allocations of public resources. Increasing resources to the infrastructures sector might have a stronger growth and human development impact (through its direct and indirect effects on education and health outcomes) than transfers to public utilities or subsidies to ill-functioning public schools. 44 [page 79] Haiti: Public Expenditure Management and Financial Accountability Review CHAPTER 3 : COUNTRY FINANCIAL ACCOUTABILITY ASSESSMENT 3.1. Effective, transparent budget management and accounting instruments are essential to allow Government officials to make the right spending decisions, monitor budget implementation, evaluate the cash position of the Government, and adjust spending levels to available resources as needed. This chapter of the PEMFAR report summarizes the detailed assessment and recommendations provided in the full Country Financial Accountability Assessment (CFAA) and the Country Procurement Assessment Report (CPAR), attached to this PEMFAR report as volumes I and II, respectively.“ 3.2. While reliable data is not available to assess some of the indicators, by using the OECD/DAC and the PEFA methodology, the PEMFAR lays the foundation for future work. 3.3. The key findings of the chapter are the following. First, the budget is not forward looking. The link between sectoral policies and priorities and the budget is very weak. The budget is only based on projections of activity from the previous year and it is not rooted in a medium-term investment plan. Second, there are many off-budget operations. An important part of public spending is still channeled through comptes courants, and “own resources” coilected by the Ministry Departments and Agencies (MDA), and special accounts of the Treasury. it is difficult to quantify the extent of these unreported operations. Third, budget execution is affected mainly. by : . the lack of cash flow planning and monitoring. Budget releases to the MDAs are made based on the . ceilings fixed by the Constitution (one-twelfth of the annual budget appropriations} and not on the ; effective cash flow needs. Fourth, a sound accounting system, including clear standards and a related automated information system, still needs to be developed. The link between the different automated financial management software and that used by the MEF to report on Revenue is not automatic. Fifth, despite a relatively comprehensive institutional and legislative framework, the internal and external oversight of the budget is still not effective given the lack of capacity of the institutions. Sixth, the adoption of the new procurement law is a necessary first step but not sufficient, by itself, to institutionalize the recent procurement reforms. Seventh, the successful implementation of the PFM reforms requires that institutions be adequately staffed with appropriately qualified and motivated personnel. | 3.4. In order to improve financial accountability in public finances in Haïti, the CFAA recommends that the Government should: (i) strengthen the legal and institutional framework for public finance management; (ii) reinforce budget preparation and execution; (iii) enhance accountability and financial reporting; (iv) strengthen debt and cash flow management; (v) reinforce information systems; (vi) strengthen internal and external controls and legislative scrutiny; (vii) enhance institutional and procurement management capacity; (vili) reinforce procurement operations and market prices; and (ix) enhance the integrity of the public procurement system. # The full CFAA and CPAR reports are available unpon request. 45 [page 80] Haiti: Public Expenditure Management and Financial Accountability Review 3.1 Background 3.5. The Government of Haïti (GoH) has made significant progress in strengthening fiscal discipline and improving the efficiency of its PFM and procurement systems during the past three years, in a relatively difficult context!. Along with achieving macroeconomic stabilization, the Government has adopted several PFM laws and regulations“, strengthened the budget preparation and execution process, increased the transparency of budget information, and strengthened budgetary oversight. The Government has adequately reflected in the last fiscal year’s budget, the policy priorities defined in the Interim Cooperation Framework (ICF) and the Interim Poverty Reduction Strategy Paper (I-PRSP) prepared in 2006. This was done notably through increased allocations for critical sectors related to the implementation of the “Programme d’Appaisement Social” The budget preparation process was strengthened by the introduction of improved coordination and consultation with the Ministries Departments and Agencies (MDAs), including the Ministry of Plan and External Cooperation /Ministère du Plan et de la Coopération Externe - MPCE]. The budget classification system has been improved both on the expenditure and the revenue sides. The new budget classification is based on the administrative and economic nature of expenditures, and comes relatively close to meeting international standards. The automated financial management system, SYSDEP and its progressive implementation in MDAs have improved the budget execution process. Financial Comptrollers as well as public accountants are being recruited to strengthen the MDAs and accelerate the budget execution process. The audit reports for fiscal years 2001/02% and 2002/03.were also completed and transmitted by the Auditor oi General {Cour Supérieure des Comptes et du Contentieux Administratif - CSCCA] to parliament. . | 3.6. . In addition, in response to the recomunendations of the ICF, a number of important: : : measures were taken between 2004 and 2006 to strengthen the public procurement system. u * Most notably, a new Procurement Decree was published on February 14, 2005%. While this 2005 : Decree fails to address many of the flaws in the old Decree (1989), it enabled the creation of the Commission Nationale des Marchés Publics (CNMP), with five full-time commissioners named with input from the public and private sectors. The Decree also strengthened the commission’s mandate and incorporated many elements of internationally accepted procurement practices including, most importantly, the stipulation that competitive methods are the norm and not the exception. The Commission is now operational and as an important first step has produced preliminary and workable versions of standard bidding documents. Advances in the transparency of the procurement process have also been achieved through the establishment of the CNMP’s Web site, which publishes Government contract awards as well as a supplier database, and through the creation of the Anti-Corruption Unit (Unité de Lutte Contre la Corruption - ULCC), as an autonomous entity under the Ministry of Economy and Finance. #1 Most of the reforms were implemented during the transition period (2004-2006) after a long period of political instability. ? The most important PFM laws and decree adopted were: the decree of February 16, 2005 related to the formulation and execution of appropriation laws, The Order of May 19, 2005 establishing general regulations for public accounting, the decree of November 23, 2005 establishing the organization and operation of the Auditor General of Haiti, the decree of May 25, 2006 creating the General Finance Inspectorate. # The fiscal year in Haiti runs from October 1 to September 30. # Décret fixant la réglementation des marches publics de services, de fournitures et de travaux du 3 décembre, 2004 (publié le 14 février, 2005). 46 [page 81] Haiti: Public Expenditure Management and Financial Accountability Review 3.7. In order to improve the procurement system further, the Government has also prepared a draft law to replace the 2005 Decree. This law is expected to be submitted to Parliament for ratification in 2007. Based on a review of the most recent draft of the law by the World Bank’s Legal Department, it appears that the law’s adoption would address most of the failings in the current Decree and that the draft text constitutes a solid legal basis for the establishment of a modern and transparent procurement system. However, despite these improvements in both the public financial management and procurement systems, there remain significant challenges, as summarized below. 3.8 The budget is not forward-looking. The link between sectoral policies and priorities and the budget is very weak. The budget is only based on projections of activity during the previous year and is not rooted in a medium-term investment plan. As a result, the impact of recent investments is not properly taken into account in projecting current expenditures or in measuring the effect that current investments might have on future government operations. In addition, budgetary classifications differ from accounting classifications, so that it is very difficult to maintain a proper accounting and reporting system. 3.9. There are many off-budget operations. The profusion of off-budget accounts and activities severely constrains MEF'’s ability to control resource allocation and public spending. Despite its declining trend, an important part of public spending is still channeled through comptes courants and, “own resources” collected by the MDAs, and special accounts of the Treasury. Itis : . difficult to quantify te extent of these unreported operations. However, it seriously impairs the Treasury’s éfforts to manage the public resources and reconcile the Government’s cash position. LL ec Budget execution is affected mainly:by the lack of cash flow planning and monitoring and.fthe : "4 weak capacity of the line ministries. Budget releases to the MDAs are made based on the ceilings fixed by the Constitution (one-twelfth of the annual budget appropriations) and not the effective 4 À! | cash flow needs. As a result MDAs have difficulties in executing their activities in the absence of a | : budget rélease based on their real cash flow needs. In particular, this arbitrary constraint on the | availability of funds hampers the implementation of multi year contracts and discourages procurement planning by the MDAs. The budget execution process is also lacking a manual. The existing manual is outdated and does not reflect the recent changes in the Public Financial Management (PFM) system. The deployment of financial comptrollers to support the MDAs, in accelerating the budget execution process, is moving slowly. Budget allocations approved for regional departments are made available with significant delays resulting in slow implementation of activities at that level. 3.10. Formal coordination mechanism to link aid policies, project and programs to the Country’s priorities and budget needs to be established. A large part of externally financed expenditures is executed outside the budget, with donors using their own implementation arrangements. This results in poor information flow between the spending ministries and the MEF and the MPCE, poor coordination between the development partners and the Government, the lack of a clear framework for the execution of those expenditures and the lack of database related to project based assistance. # Avant Projet de Loi fixant les Règles Générales relatives aux Marchés Publics et aux Conventions de Concession d'Ouvrage de Service Public. 47 [page 82] Haiti: Public Expenditure Management and Financial Accountability Review 3.11. A sound accounting system, including clear standards and a related automated information system, still needs to be developed. À new accounting framework was adopted recently. It is expected that a sound accounting system will soon be in place in the Treasury department, remedying one of the major weaknesses of the PFM system in Haiti. To support the implementation of this framework, the accounting module of the computerized Government expenditures management system (Système d’Informatisation des Dépenses - SYSDEP) needs to be developed. Moreover, the link between the different automated financial management software and that used by the MEF to report on Revenue is not automatic. In addition to the risk of errors from data transfer, the current system cannot generate a clear and comprehensive report of the financial situation of the Country. 3.12. Despite a relatively comprehensive institutional and legislative framework, the internal and external oversight of the budget is still not effective given the lack of institutional capacity. Internal controls are very weak or not yet functioning. External controls are limited by the capacity of the CSCCA. The role of the parliament has been limited to the approval of draft appropriation laws during the last years. Budget Review Acts as well as annual audit reports of the CSCCA, when available, were not reviewed. 3.13. The adoption of the new procurement law is a necessary first step but not sufficient, by itself, to institutionalize the recent procurement reforms. Much still needs to be done in Lo terms of fleshing out the procedural details of the reforms and the CNMP’s ability to enforce them in order to ensure that all procuring agencies adhere to the new requirements of the legal | framework. Fi. —— 3.14. The successful implementation of the PFM reforms requires that institutions be … A ‘ adequately staffed with appropriately qualified and motivated personnel. This is one of the . main challenges of the Government as the inadequate quality and quantity of human resources have | been a primary impediment to public sector efficiency in Haïti. The capacity of the Human Resources Unit, recently created in the Prime Minister’s Office, should be strengthened. This will enable the Unit to achieve its mandate notably by establishing and implementing a new framework for human resource management, including qualifications, skills assessment and capacity building program, developing a transparent and merit-based procedure for new recruitments and promotions. 3.15. As a result of the weaknesses discussed above, the overall scoring of the Country, under the PEFA and procurement indicators is relatively low in most of these areas. Table A.3.1 in Annex 3 provides the overall PEFA assessment results. À detailed explanation of the rationale for the ratings for the Performance Indicators benchmarks and the Procurement Baseline Indicators, as well as the underlying information, is provided in Volumes II and INT of the PEMFAR. The assessments cover the fiscal years 2003/2004, 2004/2005, 2005/2006. The paragraphs below elaborate on the main areas in which the Government will need to focus its efforts. 3.2 Legal and Institutional framework 3.16. The legal and regulatory framework for the public financial management systems in Haiti is set forth in the 1987 Constitution as well as several decrees and orders“ prepared and %6 A complete list of all different Decree and Orders enacted is provided in Volume II of the PEMFAR. 48 [page 83] Haiti: Public Expenditure Management and Financial Accountability Review enacted by the Executive. Although these texts provide an adequate corpus, they have some limitations. The first limitation relates to the coherence of the different text and laws. This is due mainiy to the absence of an organic law, enacted by the parliament, which outlines the preparation and execution of the budget, the public accounting rules and principles, the decentralization of commitment of expenditures in MDAs as stipulated in the Constitution, and the role and functions of CSCCA. Certain broad budgetary principles — e.g., budget unity and single treasury account — are also not reinforced by the legal framework. The principle of performance and results-based management in order to improve the budget execution process and make the MDAs accountable for the results of their respective departments does not exist in the existing legal and institutional public financial management framework. 3.17. The 2005 procurement decree is limited in its formulation and has a number of gaps. These include an inadequate articulation of the relationship between Haïtian procedures and those applicable to contracts financed by external assistance and a limited field of application, as the Decree does not cover concessions or other public-private partnerships, contracts concluded between public bodies, defense contracting, the contracts of “modernized” public enterprises, or contracts below the thresholds established by the Decree. The 2005 Decree also concentrates a multiplicity of functions in the mandate of the CNMP, to include ex-ante reviews, ex-post oversight, audits, protest review and work as a regulatory body, creating duplicate oversight requirements which do not meet international standards. Further exacerbating the situation, the | mandatory preliminary opinion of the CSCCA on all government contracts duplicates the control : exercised by the CNMP and the CSCCA’s dual oversight function, ex-ante and ex-post, also =. creates an inherent conflict-of-interest. DE 3.18. In order to address some of these weaknesses, a draft law was prepared by the > hi D Government and is expected to be presented to the Parliament for ratification in 2007. This u .. - new Law will be partially completed by a number of standard bidding documents, including : : . standard administrative clauses (CCAG) and general technical specifications (CCTG) prepared by . : the CNMP and to be published in the form of an Order by the Prime Minister. 3.3 Budget Preparation 3.19. Despite recent improvements, the budget preparation process is still hampered by the lack of comprehensiveness; moreover, the budget is not based on forward-looking plans. The links between sectoral policies and priorities and the budget is very weak. The Investment Program (Programme d’Investissement Public — PIP) is formulated for one year and it is still prepared separately from fhe recurrent budget. The lack of budgetary envelope ceiling also has undermined the quality of MDA’Ss proposals and the budget preparation process overall. 3.20. Procurement has not yet been mainstreamed into public financial management in Haïti. Procurement planning is not part of the budget process and no organized and consistent data on procurement is available. In addition to the lack of interface between financial management and procurement systems, the absence of procurement planning can be credited in large part to the fact that the Budget Law and financial procedures do not permit multi-year contract execution and, as described in section 3.6 below, budget releases are based on monthly allocations of one-twelfth of the annual budget appropriations, rather than any estimate of cash flow requirements for the period. 49 [page 84] Haiti: Public Expenditure Management and Financial Accountability Review 3.21. The existing budget classification is not compatible with the accounting classification. Moreover, there are several types of classifications for preparing the budget and for recording resources and expenditures on the books; one in particular is that used by the ministries for their comptes courants transactions and to take into account the specificity of some of their expenditures.®”. Thus, it is impossible to ensure proper consolidation of all government budgetary operations emanating from the various budget authorization officers and budget managers. 3.22. With regard to budget comprehensiveness, there are many off-budget operations; which might be broken down into the following categories: “own resources”, expenditures financed by Grants and Loans, and expenditures financed through the special accounts of the Treasury. Revenue and Expenditures forecasts related to those expenditures are not presented in the Annual Financial Act. The amounts involved might be substantial, particularly for “own resources”. 3.4 Budget Execution 3.23. The most important risk associated with the budget execution is the lack of preparation and approval of Budget Review Acts during the last fiscal years. This led to weak expenditure controls and legislative oversight of budget execution. 7 7 324. In order to improve the budget execution process and the commitment controls of | : + expenditures, the Government häs started the deployment of financial comptrollers in MDAs -"" büt the process is moving slowly. The budget exécution process is also lacking a manual. The o Det existing manual it outdated and it does not reflect the recent changes in the Public Financial 7: Mäanagement (PFM) system. "© 4 ° n 2 set 325. Payroll management is also-an area of concern. The lack of discipline in the 2. recruitment of civil servants has generated salary arrears. The Government is cenducting a survey to determine exactly the level of salary arrears but there should be effective sanctions for recruitment made beyond the budget appropriations. 3.26. On externally financed expenditures, the Government is facing a big challenge. A large part of these expenditures is executed outside the budget. This results in poor information flow between the spending ministries and the MEF and the MPCE, poor coordination between the development partners and the Government, the lack of a clear framework for the execution of those expenditures and the lack of database related to project based assistance. 3.5 Accounting and Financial Reporting 3.27. The Government has initiated the implementation of a new accounting and financial framework (Règlement Général de la Comptabilité Publique —- RGCP} based on accrual accounting. Within this new framework, the Treasury Department (Direction du Trésor — DT) is *7 Fore example the purchase of drugs for the Ministry of Health. The Ministry of Agriculture has already, for its part, established a new accounting classification specific to its own operations. “The “own resources ” are resources collected by some ministries for different services rendered : e.g. university enrolment fees, Sales of drugs or services provided to patients at public hospitals, Fines (Haïitian National Police), Soil analysis (Ministry of Public Works, Transportation and Communications —MTPTC), express passport fees, etc. 50 [page 85] Haiti: Public Expenditure Management and Financial Accountability Review responsible for maintaining the general accounts and all public financial management transactions. In order to achieve this objective, a three-vear plan to recruit, train and deploy public accountants in the MDAs is being implemented. 3.28. According to the RGCP, DT should establish the annual financial statements prepared for the State General Accounts, supported by a General Account Balance. In practice, it has never been possible to produce the General Account Balance. 3.29. Disbursements occurring without prior requisition appear in the General accounts but these operations are not subject to oversight by the Freasury, which is not responsible for payments. For the last two fiscal years they totaled 24.3 percent” of the 2005/06 budget, and 23.7 percent” of the 2004/05 budget. 3.6 Debt and cash flow Management 3.30. Debt is monitored by the Central Bank of Haïti (Banque Centrale d’Haiti - BRH) and the debt directorate of the MEF but without the direct involvement of the Treasury Department. As a result, debt flows do not appear on the Government’s book. 3.31. There is no real cash flow planning and monitoring. According to the Constitution, u ceilings for expenditure commitments are limited to one-twelfth of the annual budget : : appropriations. This ceiling is not in line with the effective cash flow needs of the MDAs, : especially given the nature of the MDAs spending. : . 3.7 ‘Information Systems | one : 3.32. The Government has made significant efforts to improve budget execution with the installation and deployment within MDAs of the computerized expenditures management system, SYSDEP. However there are still some weaknesses in the overall system. Although SYSDEP has been designed to manage Budget Expenditures, there are many exceptions that allow the execution of a large portion of the budget by other procedures 1.e. the investment budget, debt payments, public interventions comptes courants and other budgetary expenditures. 3.33. Moreover the link between SYSDEP and the other computerized financial management systems (SYSPAY, used to process the payroll of civil servants, SYSPENS, used to process payment of civil and military pensioners, CHEK used by Treasury to issue all checks and SYDONIA used by the Customs Department) is not automatic and there is no interface with them. The Government is still working on adding three modules: Accounting, Investment operations and Fixed Assets. However, the overall financial management information system lacks a master plan that will provide a medium term vision to organize and coordinate the required financial management system improvements. # HTG 5,2 millions out of a total of HTG 21,4 millions (payment basis). FHTG 5,2 millions out of HTG 22,1 millions. 51 [page 86] Haïti: Public Expenditure Management and Financial Accountability Review 3.8 Internal Controls 3.34. Internal controls are undertaken by the financial comptrollers and the newly created General Finance Inspectorate (IGF). Some MDAs have internal audit units whose controls often duplicate those of the DCB. Overall, the internal audit systems are very weak in most cases. In others, they are not yet functioning. 3.9 External Controls and Legislative Scrutiny 3.35. External controls are exercised by the CSCCA. Although it has recently made a determined effort to clear the backlog of audit reports, external controls are still limited by its capacity. CSCCA does not apply the Internal Standards on Auditing and has no manuals of procedures and code of ethics. À capacity building program for CSCCA’s staff was recently developed. 3.36. With regard to legislative oversight, the role of the parliament has been limited to approval of draft appropriation laws during the last several years. Budget Review Acts as well as annual audit reports of CSCCA were not reviewed and approved. Both chambers of the parliament (Chamber of Deputies and Senate) also are limited in their economic and financial analysis capabilities. | . 3.10 Institutional Framework and Procurement Management Capacity met ‘ - 3.37." Since its establishment by the 2005 Decree as the functional and normative body for : : ‘ public procurement in Haiti, the CNMP has been succéssful in gradually including various - elements of best practice in the Haïtian public procurement system. To this end the CNMP has | strengthened the oversight function to capture all public procurement through the introduction of a prior review process above a certain threshold, created Ministerial and Specialized Commissions in all Ministries and State Enterprises, increased the transparency of procurement through mandatory advertising, promoted a higher level of efficiency and reliability by introducing standard bidding documents, established consistent bidding procedures throughout the system and trained personnel handling procurement within the public service and the private sector. 3.38. However, as mentioned above, some of the CNMP’s functions and responsibilities create an inherent conflict-of-interest. The conflict emanates primarily from the ex-ante review function of the Commission and the CNMP'’s role as a dispute resolution forum for aggrieved bidders. It would be preferabie for the CNMP to remain involved as a functional and normative body in public procurement through the ex-ante clearance of contracts, while confining the dispute resolution function to an independent body. The almost complete absence of procurement planning, which results in large part from the lack of integration of such planning with budget preparation and approval, also constitutes a major obstacle to full implementation of the 2005 procurement reforms. Planning for procurement is further impeded by the shortage of trained personnel handling government contracting. 3.39. In 2006, the CNMP was able to provide introductory procurement training to more than 300 public officials. However, Haiti’s institutional capacity to develop procurement professionals remains limited. With the formation of Ministerial and Specialized Commissions, 52 [page 87] Haïti: Public Expenditure Management and Financial Accountability Review which are in fact procurement units within ministries and public agencies, the initial steps have been taken, but ad-hoc one-time training will not be sufficient to develop these personnel into procurement officers and professionals. 3.11 Procurement Operations and Market Practices 3.40. Since the adoption of the 2005 Decree and the establishment of the CNMP there is evidence that procuring entities are making some effort to follow the new rules and are using more competitive procurement methods than in the past. However, analysis of available data on contract awards financed by Treasury funds (vs. donor financing) indicates that: (a) the use of the single source and/or direct contracting (gré-à-gré) method is still frequent and (b) restricted tendering through direct invitation from pre-determined lists (appel d’offres restreint) remains the predominant procurement method used by contracting entities. 3.41. When more competitive procurement methods, such as national and international tendering (appel d’offres ouvert), are used bid opportunities are advertised in local newspapers and at the Web sites of some procuring entities. However, bids are not yet being advertised at the CNMP Web page created for this purpose. Transparency in the procurement process has been further limited by the discontinuation of the publication of government contract awards at the CNMP Web site — a practice that was in place from December 2004 to August 2005, when contract awards by multiple procuring entities were published. The splitting of bids into multiple packages below the threshold for prior review by the CNMP, which are then procured - : using the informal quotation procedure known as “three pro forma quotations”, is another example PT of lingering lack of transparency in the current system. ct n 3.42. Since its creation, the CNMP has done a commendable job of standardizing tender Lure documentation in Haïti. The standard documents produced by the CNMP are based on models Fo oies consistent with Worid Bank and IDB models and reflect the requirements of the new draft et Procurement Law. However, there are no systems in place to ensure that procuring entities are using the standard documents properly, without significant modifications. There is also substantial room for improvement in the preparation of the technical specifications which are a critical component of each bidding document, as such specifications are often based on summary or outdated designs which either fail to provide sufficient details or provide information that is incorrect. At the stage of bid evaluation there is evidence that some procuring entities do not fully understand the evaluation criteria contained in the standard documents and that bids might be awarded on the basis of the “lowest price”, rather than the “lowest evaluated price”. 3.43. There are no formal provisions applicable to contract administration across the public service in Haiti. Procedures followed for contract administration vary depending on the procuring entity, with no central coordination or data collection. While provisions for dispute resolution are included in all government contracts, for Treasury-funded contracts where cases are referred to the CSCCA, disputes are rarely submitted for resolution. Contractors and suppliers are apparently reluctant to submit their disputes to the CSCCA, because of concemms about the timeliness of decisions rendered by the Court and also about the independence of the Court, whose members are all former civil servants. As a result, the local dispute resolution process is only marginally functional. 53 [page 88] Haiti: Public Expenditure Management and Financial Accountability Review 3.12 Integrity of the Public Procurement System 3.44. The system for control and audit of procurement in Haïti is weak. There are no provisions for internal audit within the procuring entities themselves. Although the CNMP, as the normative body for procurement, has the responsibility for organizing or conducting independent procurement audits, it has not yet taken on this additional task. The external audit function is the responsibility of the CSCCA. However, as noted above, the CSCCA also provides an official opinion (avis motivé) on all draft contracts and approves and registers contracts once they are signed, which creates an inherent conflict of interest in that the CSCCA must audit the same contracts that it has approved. The appeals mechanisms available to government contractors in Haïti are limited, as most remedies in place are based on amicable resolution of the appeal. 3.45. An important requisite for maintaining the integrity of public procurement is transparency and a key measure of transparency is the ease of availability of information to the public. In this regard, CNMP’s initial establishment of a Web site to broaden public access to procurement information is commendable. However, for reasons unclear, much of the information on the Web site has not been updated regularly since late 2005. The early reactivation of the Web site, with an expanded range of information, is of utmost importance. 3.46. The GoH has taken several steps to curtail procurement related corruption, the most ‘important being: (a) creation of an Anti-Corruption Unit (ULCC) that has been active in the eo domain of public procurement and (b). inclusion of provisions addressing the issue of corruption, fraud, conflict of interest and unethical behavior in tender and contract documents. The draft procurement law also envisages inclusion of fraud- and corruption-related clauses along with “4%: defined levels of responsibilities, andthe CNMPis in the process of drafting a Code of Ethics for A se, voivik-servants handling procurenient.: However, these measures are.only the beginning and the Sn -effectiveness of the ULCC, the:‘CNMP and the CSCCA in combating corruption in government OL contracting will depend in large part on their ability to work together to leverage their limited resources for the most impact. | 3.13 Policy Recommendations 3.47. Based on the findings of this chapter,we issue the following policy recommendations: 3.48. In order to complete the legal framework for financial management, the Government should: ° _ Supplement the Decree on the preparation and execution of budget laws with a clear and exhaustive reiteration, in a specific section, of all the broad budgetary principles; and e _ Incorporate the concept of performance and results-based management in the framework. 3.49. In regard to the legal framework for public procurement, the Government should: e _ Adopt the new Procurement Law in essentially the same form as the current draft; ° Enact all application texts needed by the Procurement Law; e Enact CCAG and CCTG in the form of decrees with detailed provisions to cover the execution phase of the contracts as well as the award phase; and + Coordinate CNMP and CSCCA reviews/controls and prevent any conflict-of-interest. 54 [page 89] Haiti: Public Expenditure Management and Financial Accountability Review 3.50. To improve budget preparation, the Government should: ° Review the sectoral strategies and priorities, link them with the budget, and move toward a Medium Term Expenditure Framework (MTEF); ° _ Strengthen the procurement and financial management capacity of the MDAs to provide support for the preparation of sectoral strategies, their corresponding budgets and procurement plans; e Communicate expenditure ceilings based on the macro economic framework to the ministries at the beginning of the budget preparation process in order to allow them to prioritize realistic proposals; ° Improve existing budget classifications to make them compatible with accounting classifications, refine the definition of budget lines containing poverty reduction expenditures, and establish three main sections (Functional classification broken down into sub-functions corresponding to the broad strategic intervention themes defined by the sectoral ministries in various technical areas; Administrative and territorial classification; Economic classification or classification by type of expenditure); and e _Identify a complete list of all off-budget operations and incorporate it into the budget. For autonomous funds, revenue and expenditures, forecasts should be appended as an annex to the budget. 3.51. In order to improve budget execution, the Government should: ‘ e Clear the backlog of Budget Review Acts for the last three fiscal years: ri - e Accelerate recruitment and deployment of financial comptrollers in MDAs. This oo should be done together with the elaboration and dissemination of a budget execution ce manual; e Complete the survey on salary arrears, and effective sanctions should be taken for recruitment made beyond the budget appropriations; and e On externally financed expenditures, elaborate and implement a new accounting and financial framework for expenditures. This framework would notably cover: (i) a detailed budget classification; (ii) a connection with the SYSDEP: (iii) a specific statute for project accountants who should be accountable to the MEF; (iv) opening of all needed project accounts at BRH:; and (v) establishment of a data base for physical progress reports on all investment projects. 3.52. In the area of accounting and financial auditing, priority measures include: + Continue implementation of the action plan for deployment of publie accountants im MDAs and reinforce the role of the Treasury Department in the management of the State Accounts; e Continue the process of reducing the comptes courants and have the public accountants manage the existing comptes courants once they are deployed in MDAs. The details of non-requisition expenditures and comptes courants expenditures should be included as a note to the annual financial statements; and e Clear the backlog of State General Accounts and General Account Balance. 55 [page 90] Haiti: Public Expenditure Management and Financial Accountability Review 3.53. In order to improve debt and cash flow management, the Government should: + _ Appoint a public accountant at the Treasury department to manage debt and establish an information-sharing circuit between DT and the debt directorate; and e Establish a cash planning and monitoring committee, which would project and monitor cash-flow plans in coordination with MDAs on a monthly or quarterly basis. 3.54. To enhance information systems, we recommend the following policies: e _Elaborate and implement a Financial Management Development Master Plan that will organize and coordinate the required financial management system improvements with a medium-term vision. The plan will identify necessary changes, prepare institutions for those changes, and establish the sequence of the technical improvements and the reengineering of the administrative and control procedures. It also will coordinate the technical and financial assistance needs; and e Inthe short term, improve SYSDEP by: (a) reducing the exceptions that allow skipping SYSDEP when processing expenditures, such as agencies’ comptes courants; (b) installing SYSDEP in the other MDAs; and (c) elaborating and implementing the other modules of SYSDEP, particularly the accounting application. 3.55. To reinforce internal controls, the Government should: : . : Deploy financial comptrollers in MDAs, develop, and make available to oversight entities tools and manuals, enabling them to perform their functions; e. Define a harmonized framework for the conduct of internal controls within the technical ministries; and e Hire and train General Finance Inspectors. In addition, the modalities for using the results of inspection missions and for their publication, as necessary, should be set forth in a regulatory text. 3.56. In the area of external control and legislative scrutiny, the Government should: e _Implement the capacity building program of CSCCA together with a streamlining of CSCCA staff, so as to ensure that only qualified officers are responsible for operational activities; + Develop an action plan to clear the backlog of audit reports (fiscal years 2003/04, 2004/05 and 2005/06); ° _Strengthen economic and financial analysis capabilities of the Finance Committees of both chambers, which should be strengthened for effective legislative oversight; and ° Submit to the parliament the draft Budget Review Act within the prescribed timeframe. 3.57. To enhance the institutional framework for procurement, we recommend the following actions: e The CNMP should relinquish its dispute resolution function to an independent body such as the CSCCA and expand its activities to include comprehensive data collection and procurement audits for use as inputs to formulation of procurement policy; and 56 [page 91] Haïti: Public Expenditure Management and Financial Accountability Review ° In order to better integrate procurement into the PFM system, steps should be taken to strengthen the procurement planning function. 3.58. In the area of institutional capacity development, the Government should: e Establish an expanded training program needs on a more sustainable basis to support the development of a public sector career path in procurement; ° _ Mobilize the resources of both the CNMP and the civil service training center (Centre de Formation et de Perfectionnement des Agents de la Fonction publique — CEFOPAFOP) in order to facilitate an increase in the proportion of staff with the procurement skills appropriate to their level of responsibility; and e Develop a program of introductory procurement training for other public sector stakeholders (parliamentarians, judges, ministers, staff of CSCCA and ULCC, etc.) as well as private sector operators and civil society organizations. 3.59. To enhance procurement operations and market prices, the Government of Haiti and CNMP should redouble their efforts to: e Limit contracts awarded through single source and/or direct contracting to a maximum of 5 percent of the total value of contract awards: rc e Discourage the use of restricted tendering in favor of national and international et tendering (appel d'offres ouvert); ° e Use the existing CNMP Web page to advertise all government bidding opportunities and increase international advertising to broaden the government’s access to foreign . suppliers; | e Ensure that contract awards are made public through the CNMP Web site and/or publications: *< Require procuring entities to submit to CNMP, at regular intervals, data on contract awards below the CNMP review threshold; e Discontinue the practice of awarding contracts based on “trois pro formas” and replace it with either an open national tendering process or the use of competitively awarded “indefinite delivery contracts” or “standing offer arrangements”; e Ensure the quality of bidding documents, including technical specifications, prepared by procuring entities by instituting periodic prior review of bid documentation by the CNMP; e Enhance the training available to procuring entities on bid evaluation procedures; and e Develop guidelines for contract administration and build capacity in CSCCA for dispute resolution. 3.60. To enhance the integrity of the public procurement system, the Government needs to: e Institute internal quality control in procuring agencies to promote internal audits of procurement, develop preventive measures and increase capacity and efficiency; 57 [page 92] Haïti: Public Expenditure Management and Financial Accountability Review e Build capacity in the CNMP and/or the CSCCA to organize and conduct external (“independent”) procurement audits; e Eliminate the conflict-generating activities (issuing an opinion and approving contracts ex-ante) from the CSCCA’s mandate in order to allow the CSCCA to focus on its audit activities; + _Empower the CSCCA to handle appeals as part of a more robust system for dealing with protests and complaints from suppliers; e Reactivate the CNMP Web site with more comprehensive information and advertisement of bidding opportunities; e Reinforce collaboration between the CNMP and the ULCC to develop measures to prevent corruption in government contracting; and ° _ Strengthen the working relationship between the CSCCA and the ULCC to establish a secure mechanism to allow the public at large to report fraudulent, corrupt or unethical behavior without fear of reprisal. 58 [page 93] Haiti: Public Expenditure Management and Financial Accountability Review PART Il: PUBLIC EXPENDITURE REVIEW IN PRIORITY SECTORS 59 [page 94] Haïti: Public Expenditure Management and Financial Accountability Review 60 [page 95] Haïti: Public Expenditure Management and Financial Accountability Review CHAPTER 4 : ECONOMIC SECTOR EXPENDITURE REVIEW 4.1. This chapter presents a review of expenditure in two priority sectors, agriculture and infrastructure. It first analyzes the recent trends of allocations of public resources to these sectors over the past five fiscal years, and the extent to which they are consistent with the development priorities of the Government of Haiti. It then analyzes the structure of spending in these sectors and highlights the relative weight and trends of recurrent versus investment expenditure in these sectors. The chapter also discusses the execution of spending and its determinants over the past fiscal years. The main characteristics of the PIP in these sectors are discussed. The weaknesses, issues and challenges of public expenditure management in these sectors are also discussed. The chapter concludes by providing some policy recommendations to improve effectiveness of public spending in order to achieve higher economic growth and reduce poverty. 4.2. The key findings of this chapter are the following: First, the allocation to the agriculture sector almost doubled in real terms between FY2002-04 and FY2005-07, mainly driven by investment expenditure. Second the budget structure is dominated by investment spending, on average accounting for more than 68 percent of the sector’s budget while recurrent spending makes up about 32 percent over the period FY2005-07. Third, the execution rates fell between FY2001-03 and FY2004-06, reflecting the drop in execution of programs and projects. . However, the execution rates were relatively high for wages and salaries and goods and services ° : over the period under review. Fourth, resources allocated to the PIP are projected to triple in . FY2006/07 as compared to FY2001/02, reflecting higher than expected external financing. Fifth, Le despite improvements during the past three years, several weaknesses remain most notably in the Doi areas of budget preparation, effective execution of the investment budget, transparency in public u expenditure as well as public procurement issues. The chapter recommends: (i) improving the ne process of elaborating the budget by defining a clear calendar of preparation and separating the Loti policy monitoring structure from the technical structure; (ii) improving transparency and financial ‘ accountability by accelerating the deployment of an MEF financial controller to the Ministère de l’Agriculture, des Ressources Naturelles et du Développement Rural (MARNDR), (for the recurrent budget). Regarding the investment budget, the improvement in transparency requires closing the existing “current account” used for executing the investment budget and the “suspense account”; (iii) describing in detail the priorities in the agriculture PIP and establishing a three year rolling investment budget by objectives; (iii) establishing a Procedures Manual for a transparent management of the sector’s “own funds”; (iv) introducing procurement procedures for tenders at the beginning of the fiscal year for the management of purchases of the MARNDR; and (v) reinforcing human resource management including through technical assistance to be provided to staff of the MARNDR in the areas of budgetary management and public procurement. 43. With regard to the infrastructure sector, the key findings of the PER are: First, the allocation to the infrastructure sector more than tripled in real terms on average between FY2002- 04 and FY2005-07, mainly driven by increased external resources allocated to the investment budget since the re-engagement of donors in 2004. Second, the structure of the infrastructure budget is dominated by investment spending, reflecting the nature of the infrastructure sector, mainly composed with economic activities, which involve investment spending. Third, while the investment budget tripled on average over the FY2002-04 and FY2005-07, the recurrent budget increased slightly by 5 percent in real terms over the same period. This suggests that investment spending is not backed by sufficient associated recurrent allocations in the budget, reflecting the Hmited Government resources, poor planning of recurrent resources associated with investment programs, as well as the disconnect between the preparation of the investment budget and the 61 [page 96] Haïti: Public Expenditure Management and Financial Accountability Review recurrent budget. Fourth, because of limited public resources and little involvement of the private sector, it is critical that resources be allocated to the best uses and be used as efficiently as possible in the infrastructure sector. The management of resources allocated to MTPTC, in particular the recurrent budget, could be improved and therefore used to help save some resources to be reallocated for other purposed. The staffing structure and transfers of public resources to public utilities are two areas where savings could be achieved. Fifth, the analysis of intra-sectoral allocation of expenditure shows that over the period FY2005-07, on average, 60 percent of the total recurrent budget of MTPTC was allocated to finance the Ministry’s general administration services. This left few resources to other services and entities under the MTPTC supervision, and might have affected their capacity to perform activities. Sixth, the execution of spending in the infrastructure sector was extremely volatile and fell to relatively low levels over the period FY2002-06, reflecting the volatility of the execution of the investment budget. Two major factors explain the low execution of the investment budget: (i) the low absorption capacity of the investment budget in the MTPTC due mainly to slow execution of programs and projects, human resource constraints, and limited technical capacity and (ii) the poor capacity planning due partiy to a lack of qualified staff in MTPTC. Seventh, the infrastructure PIP is mainly financed by donors. More than 90 percent of the spending on infrastructure in the FY2004-06 PIP was financed by foreign aid. Aid-funded allocations to the infrastructure PIP almost quintupled in two years, between FY2004-05 and FY2005-07. Eighth, despite some recent improvements, weaknesses and challenges still exist in the areas of budget planning, efficiency, transparency and accountability of the execution of the investment budget, resource management and procurement. À specific issue concerns management problems of autonomous agencies such as CONATEL (telecommunication sector), and FER (road transport sector), which prevent them from delivering high quality infrastructure regulation. Policy recommendations to improve efficiency include: (i} : prepare a full-fledged costed and integrated infrastructure strategy with sub-sectoral action plans, _ - which are linked to spending targets; (ii). prepare an integrated multi-year PIP, which reflects the : translation of the integrated infrastructure strategy into resources requirements; (iii) phase out by 2009 the use of comptes courants; (iv) connecting new investments with maintenance spending and support to community-based organizations managing rural infrastructure; (v) strengthen the functioning of the Road Maintenance Fund (FER), (vi) strengthen the functioning of the Road Maintenance Fund (FER); and (vii) improve donor involvement and better coordinate their intervention. 62 [page 97] Haiti: Public Expenditure Management and Financial Accountability Review 4.1 AGRICULTURAL SECTOR 4.1.1 Background and sector objectives 44. Over the last two decades, Haitÿs rural economy has Figure 6. Agriculture Value Added in 2004* (% of total) declined dramatically. Bud sen à Agriculture, which generated me a | : about 40 percent of GDP in the re EE —— | ; early 1990s, contributes today to É —— | | about 25 percent of GDP. The à 2 — i ! contribution of agriculture t0 | RS —————— | Haitÿs value-added compares se ————— poorly to comparable EICs. It RE —— | stood below the performance of ee © | Burundi, Togo, Rwanda, Niger, NS es Benin and Mali (see Figure 6). 9 10 2 50 n 5° 5° Agriculture exports fell from 28 Aarcuiure, value Adteë (9 tolan percent of total exports in 1981 to * in 2003 for Niger and Chad. only 6 percent in 2004. Chronic Source: WDI, 2006. underinvestment in the rural public Figure 7. Economically Active Population in Agriculture goods (eg. infrastructure, public in 2004 (% of total) services and programs), low public Burkina Faso — nt — resources, poor security, natural RE ——— ù | : disasters and ineffective natural cie a — F0 resource management have steadily PE — . “ ‘ depleted the rural productive base. "pes a | RE J Trade liberalization in the 1990s TE es | ° included no transitional or pro-active on EE export measures, suddeniy making Aie CES | Haiti one of the most open markets Fe EE— | in all of Latin America, yet leaving crises ——— | the rural economy without the RE —————— means to adjust or to facilitate labor = market shifis. Lack of rural 0 20 40 60 80 100 infrastructure, limited access to Economically Active Population in Agriculture (% total} 4.5. Yet, agriculture remains by far the most important economic and social activity, and Haiti is still predominantly a rural country. Almost two-thirds of Haitian households lived in rural areas (4.7 million people residing on around 800,000 farms)?. Agriculture is the main economic activity and a source of income for two-thirds and one of two workers, respectively, in rural areas and in the country. According to FAO data, agriculture employs up to 60 percent of the economically active population in Haïti, higher than the figures for Togo, Benin, and 51 See Haiti. Agriculture and Rural Development. Diagnostic and Proposals for Agriculture and Rural Development Policies and Strategies. World Bank. Report No. 36785. October 5, 2005. %? / Source: IHSI ; Recensement 2003 5 Ibid. 63 [page 98] Haiti: Public Expenditure Management and Financial Accountability Review Mauritania; but far lower than those of Rwanda, Burundi and Niger, countries with the same income level (see Figure 7). 4.6. Given its large economic and social importance, the ICF and the I-PRSP considered agriculture as one priority sector for public intervention. The I-PRSP indicates the need to ensure the availability of agricultural products that ensure food security and increased incomes. The Government action will give priority to improving farmers’ access to credit and basic farming inputs, rehabilitation of agricultural infrastructures, and security of land ownership,; this security is necessary to make the best of policies aimed at promoting investment in irrigation, public transportation, communications and storage and marketing infrastructures. This priority will also be given to products promising the greatest possibilities of profits. More specifically, MARNDR will design and implement a strategy designed to increase the production of basic foodstuffs so as to enlarge the supply of food as quickly as possible. 4.7. Meeting the objectives set forth to the agriculture sector would require both the provision of adequate resources to the sector and an efficient use of these resources to ensure that they translate into improved economic and social outcomes. In the absence of a comprehensive agriculture strategy including spending targets, this chapter seeks to: (i) define the current structure of expenditures in the agricultural sector and its consistency in regard to stated priorities; (ii) measure progress accomplished and remaining weaknesses concerning financial transparency and the execution of the budget; (iii) examine the level of transparency in the current process of awarding public contracts and its conformity with the new regulations adopted in late 2005; and (iv) propose some policy recommendations in order to reinforce the current expenditure efforts. . 4.1.2 Structure and trends in agricultural expenditures 4.1.2.1 Total budgetary allocation 4.8. Total annual allocations to the . . Ministry of Agriculture increased by more Table 23. Budgetary allocations (in real than 80 percent in real terms on average |—-— —HTG millions)__ RREEUTE between FY2002-04 and FY2005-07 (ce À | | De Table 23), in line with the large imerense in he cu aa Government overall budget, reflecting the large Agriculture total budget 757.4 1374.6 increase in allocations to programs and projects | Agriculture Share in 33% 44% : : total Government the Govemment’s resolve to provide more | je resources to the agriculture sector (a priority Source : Le Moniteur, Journal Officiel de la sector) as stated in the I-PRSP. République d’Haïti and Staff Caleulations. 64 [page 99] Haïti: Public Expenditure Management and Financial Accountability Review Figure 8. Share of Agriculture in Total Budget in 49. However, the increase in L selected copntries, 2000-2005 5 allocations also reflects the low levels of allocations to begin with. In BR pement addition, the increase reflects more the S 10% mom ——_—_—_ large resources devoted to programs and É 8 Di projects mainly funded by the donors 5 oi : that the Government’s resolve to provide È mL Le | hi rm. more resources to MARNDR. In fact, $ ee ho the level of allocations is not the Ë 2 EE Le je outcome of a thorough assessment of the 07 + ee ne MARNDR needs. The allocations are Neer Beni san pre-determined as a large share of the Source: MARNDR budget is dominated by the investment budget, which is funded by the donors (see below). Also, MARNDR has no influence on the resources provided to the sector as it barely participates in budget discussions. Moreover, because of the lack of a comprehensive strategy with clearly defined spending targets, it is difficult to assess the extent to which the allocations are sufficient to perform the objectives set forth in the I-PRSP. But at less than 5 percent of total Government budget on average over FY2005-07, the agriculture sector share seems below the figure of African countries at the same level of income per capita and comparable economic structure: for instance, in Niger it stood : above 10 percent on average over 2000-02; and in Benin at 7.3 percent on average over 2002-03: ' : (see Figure 8). ee 4.1.22 Budget structure ei : 4.16. The structure of the agriculture Table24. Budgetary Allocations Structure ‘(in EU sector budget is dominated by the - real HTG millions), FY2001/06 : oo investment budget (programs and projects), AXE . which accounted for more than 67 percent of | ll a | He total budget on average between FY2005-07 LR while the operating budget accounted for ancre on Da slightly above 32 percent (Table 24). % 437% 258% Other current exp. 72.1 442 4.11. The large concentration of the | Immob. 15.8 5.4 MARNDR budget on programs and pou current expenditure Du Een P rojects reflects the impact of donor Programs and projects 434 111.0 allocations over FY2005-07. During that |, 425% 678% period, the budget allocated to programs and Sources: Le Moniteur, Journal Officiel de la République projects more than doubled in real terms d’Haïti and Staff Calculation while total recurrent budget declined. This raises three critical issues. First, the increases in the investment budget do not seem to be backed by sufficient allocations in the recurrent budget. This reflects the lack of Government resources to support the programs and projects financed by donors. It also mirrors the lack of an integrated budget process marked by a parallel process of preparation of the investment budget and the recurrent budget. Second, the programs are only very partially implemented, reflecting the low capacity of the MARNDR to execute large resources flows. Third, the pre-determined nature of the investment budget (programs and projects) limits the ability of MARNDR to have full control on the implementation of the agriculture policy and prevent it to influence economic outcomes. The lack of coordination of donors’ activities in the agriculture sector and the absence of full 65 [page 100] Haiti: Public Expenditure Management and Financial Accountability Review control by MARNDR of donors’ operations make it harder for MARNDR to have a clear picture of the agriculture policy and its implementation. As a result, MARNDR has little impact on economic outcomes despite the large share of agriculture in Haïti’s economic activity. 412. Current expenditure allocations concentrate on wages and salaries (82 percent of total recurrent), in payment of the employees who work in MARNDR. The share of goods and services in total expenditure is low compared to normal standards, despite low employment and wages (Table 25). This signals the lack of room for MARNDR to maneuver and use its budget as a policy tool. Recurrent resources provided are so low in view of the wages and salaries payment obligations that MARNDR cannot arbitrate between alternative use of its resources (wages versus goods and services). Constrained by its obligations to meet its emergency and short-term needs (payments of wages and salaries), MARNDR thus operates on a routine basis without a medium-term objective of influencing the economic development of Haïti. 4.13. The low level and wage concentration of current expenditure reflect, as in other sectors, the very binding constraints imposed by the Government’s own revenues and the difficulty of further curtaïling wage expenditures. Limited fiscal space results in low resources allocated to the sectors, including MARNDR. Table25. Structure of MARNDR’s Operating Budget (allocations in real terms HTG millions), : . FY2005-2007 : PERSONNEL EXPENSES k "252. . 83% 3,04.8 82% - . : : :ICONSUMPT. GOODS AND SERVICES ù 17.7 6%. © . 23.1 6% : GENERAL HARDWARE 22.3 Th .: 31.8 9% . . : ._ [TANGIBLE ASSETS | ot 14 : 0% : 10.2 3% INTANGIBLE ASSETS ‘ 0:1 0% 0.1 0% | ‘ SUBSIDIES AND SHARES La: 4% : 1.0 0% ° . OTHER PUBLIC EXPENDITURES 0.2 0% 0.2 0% TOTAL 304.9 100% 371.1 100% Sources : MARNDR data ; Le Moniteur, Journal Officiel de la République d’Haïti and Staff Calculations 66 [page 101] Haïti: Public Expenditure Management and Financial Accountability Review 4.1.2.3 Budget execution trends 4.14. In contrast to the priorities stated in aple26. Trends in MARNDR’s budget allocations, effective expenditures Expenditures, (in real HTG show a very different performance. While real millions), FY2001-06 recurrent expenditures roughly mirror their RP LR - Averages expenditure allocations, | expenditure on y ji ai SR # : sn " programs and projects declined sharply in real | ji 2001/03 200406 | terms, in contrast to the intended very large | TOTAL BUDGET 7573 7103 increase in the budget allocations (Table 26). ALLOCATED alaries 226.0 2119 4.15. As in most of the sectors, wages and Se Pr Per salaries are fully executed while programs TOTAL 403.7 3123 and projects recorded a decline in their EXPENDITURE execution. Three factors explain the low Salaries 209.5 2072 . . : Current expend. 653 37.8 execution of programs and _ projects in Projects 128.9 674 MARNDR over FY2004-06 period: (i) poor TOTAL 81% 52% budget planning; (ii) limited absorptive capacity EXECUTION RATE of the Ministry of Agriculture; and (iii) lack of Salaries 94% 98% cash flow planning and monitoring. First, on the purent expend. 90% 76% : rojects 122% 26% one hand, MARNDR lacks the capacity to Sources: MARNDR data; Le Moniteur, Journal effectively and accurately prepare and plan its Officiel de la République d’Haïti and Staif | budget needs (see below). On:the other hand, it : Calculations ru oo barely influences the programs and projects of | ie the sector, which are mainly implemented by the donors. Put together, the allocations to the | investment budget (programs and projects) are thus beyond MARNDR'Ss control. The execution : of spending are thus disconnected from the allocations and might vary significantly frem.one ee - period (FY2001-03) to another period (FY2004-06). Second, MARNDR's limited absorptive US capacity faced the huge flows of donor resources provided to the agriculture sector over the | period FY2004-06. The inability of MARNDR to execute large flows of resources resulted in low | execution rates over that period. Third, the ceilings fixed by the Constitution (one-twelfth of the annual budget appropriations), which determine budget allocations does not account for seasonality of some agriculture programs. As a result, some agriculture programs are not fully implemented as MARNDR's lacks the financial resources to execute them. 4.16. An intra-sectoral analysis of expenditure reveals that spending is concentrated on few items, with fuel and lubricants representing almost 30 percent of MARNDR's non salary operating expenses (Table 27). The extent to which this structure of spending reflects MARNDR'"Ss strategic priority of ensuring food security and increased incomes of the poor is unknown as the sector does not have specific spending targets. 67 [page 102] Haiti: Public Expenditure Management and Financial Accountability Review Table 27. Detailed Expenses by Budget Line (FY 2005-2006) (In real HTG thousand TOTAL 28,064.2 825% Source: MARNDR data Table 28. Detailed Expenses by Budget Line 2002-2003) (Inr__ ninal HTG thousand [ 303 Veterinary tools and supplies “1: ‘20237. .. 1,858.5 92% 5% : 311 Insecticides, disinfectants, and other chemical inputs = 1,400.8 1,235.8 88% 3% TOTAL 28787.5 76% ‘ MARN L 4.1.3 Public Investment Program (PIP) Table 29. Shares in Budget Execution (In 417. The scenario regarding investment real Hre von Average expenditures is somewhat different in the PIP. À pv pv | Figures pertaining to investment programs in the |: Le 1112001/03 : 2004/06 agricultural sector are incomplete, at most | Salaries 209.5 207.2 preliminary, and can be confusing at times. For | %oftotalexpenditure 52% 67% consistency, one single source of data has been Current Expenditure 653 378 reviewed in this report, the PIP prepared by the Re expenditure Des Ga | Ministry of Planning and External Cooperation % of total expenditure 32% 2% (see above). Total Expenditure __ 2958 3665 4.18. Our analysis focused mainly on the gs is République FOIE 2004-2005 and 2005-2006 fiscal years, for which Caïculations 68 [page 103] Haiti: Public Expenditure Management and Financial Accountability Review partial data was gathered. 4.1.3.1 Allocations 4.19. The agriculture PIP reveais ee three major Table 30. Investment Budget (PIP), yearly allocations (In characteristies ps DR real HTG mio unless here in } ( allocations more han tipled fn MN JHNAONN] Hvansne | Han compared to FY2005-06, mainly [remsury | 126 | 290 | 156 | driven by donor resources. However, as in ofher sectors, this [lotal | 77627 | 748 | 6 | also reflects the low levels to begin with. Second, the PIP is largely driven by donor resources, which accounted for more than 90 Source: MARNDR and MPCE data percent of total allocations on average over FY2004-06 (Table 30). Third, the provision of the Government’s own resources (national treasury) to finance the agriculture PIP has been volatile, reflecting the lack of predictability of Government’s resources. While the allocation from the treasury declined significantly by more than 70 percent in real terms between FY2004/05 and FY2005-06, it was multiplied by more than six in FY2006-07, a year marked by a large increase in foreign aid. This signals the fact that the counterpart of government’s resources allocated to . finance the programs and projects evolve mainly in response to donors” financing. MARNDR . seems not to possess an independent agriculture strategy. : Hit 4.1.3.2 Execution of the PIP L ‘ “ =. . 420. ‘There is no reliable data on effective PIP expenditures in Agriculture, a signal of -:... shortcomings in the budgetary and monitoring process. However, a recently published ae F. Government report, which assesses the implementation of the ICF indicates that as of March 2006, only about US$30.2 million was disbursed out of USS$85.8 million committed mainly for investment projects and programs in the agriculture sector (1.e. a disbursement rate of 35 percent). The report poirits out that despite this low disbursement rate, significant investment programs have been implemented to reinforce agriculture production and productivity as well as food security. These include among others: (i} investment in réhabilitation and maintenance of irrigated areas; (ii) rehabilitation of rural roads; and (ii) projects and programs in the areas on agriculture production, irrigation, and marketing of local products. 4.1.4 Weaknesses, Issues, and Challenges in Public Expenditure Management in Agriculture Sector 421. Budget preparation at the Ministry of Agriculture is practically disconnected from the existing sector policy framework. The investment budget is more a compilation of the priorities of each donor supporting the sector, and the operating budget is conceived through a projection of the budget executed the year before. When a rational programming effort is undertaken, it is generally undermined by public finances and absorptive capacity constraints. For instance, during FY2005-06, an innovation was introduced linking the budget to objectives: each of the Ministry’s entities was asked to detail the additional resources needed to meet the objectives defined in comparison to the initial situation. This exercise was conducted in a similar manner in FY2006-2007. As shown in Table 31, both exercises resulted in budgets that widely exceeded the allocation approved by the Ministry of Economy and Finance (MEF). 69 [page 104] Haiti: Public Expenditure Management and Financial Accountability Review 4.22. In 2006-2007, less than 10 percent of the amount requested Table31. Comparison of Budgets Requested and by MARNDR was allocated by the Allocated (in nominal HTG million (with only about 4 percent of the (A) | G@). ().- investment budget) Such a |,, OPerating 790.7 242.0 31 : ra Investment 418.6 60.7 15 procedure of budget elaboration 2 (Trcaury) constitutes a waste of resources and Ls £ Total 1,209.4 302.7 25 discourages Ministry staff, which , — Operating 4544 265.5 58 considers it of no use. Considerable S Investment 4,480.1 189.6 4 work will have to be executed to | & (Treasury) integrate agricultural policy È ES Total 4,934.5 455.1 9 orientations into a realistic and Sources: MARNDR and MPCE data and Staff Calculations. operational budget. The Working Group on Agriculture created at the MARNDR is a positive initiative that goes along these lines. 4.23. On the one hand, the execution of the operating budget has markedly improved in recent years with the computerization of expenditure monitoring and the elimination of prior control from the Cour des Comptes. Further progress must be made in accelerating the spending process. | 4.24, . On the other hand, much remains to be done.in the area of managing the investment : .… budget, the total amount of which is superior to that of the operating budget when salaries are excluded. There are no written procedures and the chain of personnel involved shows . weaknesses in their knowledge of the procedures. There is no systematic accountancy tracking of investment expenditures at the Ministry of Agriculture’s level. Project evaluation and monitoring are practically non-existent and are carried out solely on the basis of reports submitted by project : - . directors. Projects financed by foreign aid are for the most part. managed by autonomous entities - . (DB, IFAD), and there is no formal relationship between these project units and the Ministry’s administrative structure, whether for monitoring and evaluation or for their management. Therefore, the Ministry of Agriculture cannot develop a global vision of actions within the sector. 425. Funds that are generated by the Ministry (0 32. Generated Funds in Ministry of Agriculture (In called “own resources”) are nl real HTG thousand generally managed directly by ENPRATE D | lryzona-aou | rv2004-200s| rya008-2006 staff responsible for the unit uns? [FM2002200)FVnni 2008 | Fy20ns-zon that geérates them and this (rimes | 208 | ua | 0 allows te unit to partial Or ges rene — | 583 | 201 | 0 totally renew its stock of goods and services sol actes, 5 Kromalparks [2627 | 1569 | 913 | fish, as examples). Only the National parks 262.7 156.9 91.3 ; P y provision of well-digging services gencrates funds that are deposited in the Ministry’s current account for «operations» bearing the Source: MARNDR signature of the Minister and the administrator. Four main sources of generated funds are available in the Ministry of Agriculture, as shown in Table 32. They represent less than 1.5 percent of total current expenditure of Ministry of agriculture (including salaries). 70 [page 105] Haiti: Public Expenditure Management and Financial Accountability Review 4.26. Despite efforts to improve transparency in budget execution, the execution of spending in MARNDR is still affected the use of comptes courants There are actually two main current accounts in the MARNDR on which there is a joint signature of the Minister and the administrator: an account for deposits accruing from financial proceeds of grants provided by Japanese aid (KR2 grant) and a main current account called “Institutional support”, that received all generated funds, consolidated advances for all investment projects financed within the framework of specific programs, and special advances for current expenditure through “interventions publiques” (Table 33). Table 33. Main currents account in Ministry of agriculture Institutional Support Account Totat | EE TOTAL expenditur % account Generated Current Transitoire Protection Mitit. € 1 funds exp. civile Démobil. il 2603-2084 Opening statement 372645 2939924 nflow of funds 906945 7 698 142 [Resources 7943383 1279500 10 638 067 31 778 696 ses 2495756 1004051 9470 399 23 444657 303958 658 8% tatement on l B0/09/04 5447626 275530 116766 633409 ‘| DNS |, Statement 5447626 275539 1167668 0. Q 8 334 039 " Hnflow of funds 0 3770796 3947322 8965216 1 500 000 25 901 450 . Resources 5447626 4046334 5114989 8965216 1 500 000 34 235 489 : [uses 4821635 3703269 3998544 8 806 236 0 29 121 496 372 695 908 8% Statement on a (30/09/05 625991 343066 1116445 68980 1 500 000 5 113 993 : à [Opening (statement 625991 343066 1116445 68980 1 500 000 0 5113 993 nflow of funds 403586 1244314 630749 23508487 458206 3430000 31 550 405 Resources 1029577 1587380 1747195 23577467 1958206 3430000 36 664 398 [Uses 841930 1543442 1742373 22840352 1928683 3187630 35370 227 360 330000 10% Statement on (30/09/06 187.647 43937 4821 737114 29523 242370 1294171 Source: MARNDR data. 4.27. Public expenditure through current accounts has increased in the last three years, from 8 percent expenditure to one of 10 percent of the total budget in the agricultural sector. It is specifically due to the special integration program of demobilized militaries financed through public intervention. 4.28. In addition, about 80 other current accounts service investment projects, which are financed by donors or resources from the Treasury. At the level of the MARNDR's Administrative Directorate, there is no updating inventory of these accounts and neïther is there any regular and systematic monitoring of these accounts. 4.29. Public procurement issues also hamper budget management in the agriculture sector. The Ministerial Commission for Public Procurement (Commission Ministérielle des Marchés Publics) has been in operation for four months (October 2006) and has examined 71 [page 106] Haïti: Public Expenditure Management and Financial Accountability Review approximately ten projects for public procurement. Two have been returned to the entities having prepared them; the others have been approved by the ministerial commission for transmission to the CNMP. In accordance with the terms of existing regulations, only proposals for public procurement with amounts of more than 800,000 gourdes are examined by the commission. Proposals for smaller amounts can be used for purchase, on the basis of a comparison of pro-forma invoices. 4.30. In practice, all procurement proposals examined by the ministerial commission for agriculture have been prepared by project teams supported by external donors (PIA, PPI, PICV). AI procurement contracts attributed on MARNDR's operating budget funds have been purchases of less than 800 000 HTG. 431. The analysis of purchases (less than 800 000 HTG) on MARNDR's operating budget for fiscal year 2005-2006 shows that on 226 purchases amounting to a total of nine million gourdes, which represent 26 percent of MARNDR”s non salary current expenditures, 83 have been carried out with a single company: Elf Oïl d'Haïti, for purchases of fuel and lubricants. This company by itself accounts for 38 percent of purchases and 70 percent of payments (more than 6.6 million gourdes). Three companies account for more than 50 percent of purchases and nearly 80 percent of payments. But in terms of cumulative amounts, only purchases with the Elf company are over the authorized limit for purchases without tender (800,000 HTG). This particular situation concerning Elf Oùl results from the fact that the fuel . market in Haïti is a controlled market (no price competition, prices determined by the government). In all, 43 different providers have benefited from purchases by the MARNDR, with an average of 217,950 gourdes by provider. 4.32... The ministerial commission for. public procurement seems insufficiently articulated : : - at the present time with the National Commission. It has not been officially consulted for L - example regarding the project for the establishment.of a public procurement code. The General . Directorate of the Ministry of Agriculture seems however to have provided its own comments on the project for establishing a code, independently of those made by the ministerial commission. 4.1.5 Policy Recommendations 433. Based on the findings of the PER, we issue the following policy recommendations: ° Increase allocation of resources to the agriculture sector. While the budget allocations to MARNDR increased over the past two years, they are still low in comparison with countries at the same level of income. For the agriculture sector to drive economic growth and play a key role in the poverty reduction strategy, resources allocated to MARNDR would need to increase so as to enable it to fully execute the sector programs and projects. However, efficient use of public resources requires that the sector’s absorptive capacity be increased. This could be done by reinforcing administrative and technical capacity to execute the programs and projects. A focus on strengthening MARNPDR staffs capacity in the areas of budget processes and procurement procedures would significantly improve its ability to execute agriculture programs and projects. e Prepare a full-fledged costed and integrated agriculture strategy with sectoral actions plans, which are linked to spending targets. This requires that the sector should adopt an integrated approach, which involves all actors at the Ministry concerned by budget operations issues. A rigorous process of spending planning should be implemented. This requires that MARNDR improve its budget preparation process by elaborating a clear timetable and allocating more time to budget planning (both resources 72 [page 107] Haiti: Public Expenditure Management and Financial Accountability Review expected and expenditure planned to be executed). This will enable the sector to request realistic budget allocations and avoid the wide difference observed between budget proposals and budget allocated. + _ Prepare a sectoral multi-year PIP, which will translate the integrated agriculture strategy into resource requirements. The sectoral PIP should be the product of a thorough costing of programs and projects and prepared jointly with the Ministry of planning and the MEF. A starting point for the preparation of the PIP is the existing aggregate PIP, prepared by the Ministry of Planning. Thus, MARNDR should use the information provided in the aggregate PIP to design a detailed sectoral PIP that will ultimately serve as a basis for reinforcing the overall Government’s PIP. The financing of the agriculture PIP should be secured. This means that the PIP should identify donor current and future resources available for its financing and the Government’s recurrent resources to support the investment programs. e Move graduallÿ toward an integrated budget preparation process. Ensuring that the integrated sectoral strategy (to be prepared) is effectively implemented and produce outcomes requires that MARNDR put in place a medium-term expenditure framework (MTEF). However, given the current status of budget preparation in MARNDR , this is a medium-term objective. In the short-term, focus should be on reinforcing the preparation of the annual budget and introducing gradually a medium-term approach. + _Improve data collection. Budget execution is hampered by the lack of data or the poor : quality of existing data. A first step to improve data collection is for MARNDR to work . ‘ closely with the MEF (for the recurrent budget} and the Ministry of Planning (for the ‘ ° investment budget} so as to regularly collect budget data available in those ministries and : reconcile its data with those of the MEF and Ministry of Planning. A second step *… : : involves strengthening the statistical department of MARNDR. This could be done . :. È .… quickly through a specific capacity building program focusing on data collection and. :: analysis. This second step will be the starting point of a full-fledged capacity building : : program in budget management, which MARNDR should install. e _Improve transparency and accountability in the use of public resources. This implies three actions on the part of MARNDR: (i) close the existing current account used for executing the investment budget; (ii) establish manual procedures for a transparent management of the sector’s “own funds”; and (iii) introducing procurement procedures for tenders at the beginning of the fiscal year for the management of purchases of the MARNDR. ° Promote private investments. Agriculture cannot be an engine of dynamic growth unless there is a strong participation of private sector. In fact, Government’s interventions should facilitate private investments to ensure private-sector led growth. This could be done through public sector support to “partnerships” between small producers and buyers of their products.** e _Reinforce human resource management. In the short-term, technical assistance would need to be provided to staff of MARNDR involved in budgetary management and public procurement issues. In the medium-term, the Ministry of Agriculture would need to design a full-fledged human resource management plan that identifies the needs m particular in the area of budget management. % This policy recommendation is drawn from the World Bank report on Diagnostic and Proposals for Agriculture and Rural Development Policies and Strategies. Op. Cit. 73 [page 108] Haiti: Public Expenditure Management and Financial Accountability Review 42 INFRASTRUCTURE SECTOR“ 4.2.1 Background and sector objectives 4.34. Haitÿs infrastructure coverage and quality are poor and constrains economic growth and poverty reduction. Table 34 presents information on different infrastructure sectors: electricity, roads, water and sanitation, and information and communications technologies (ICT). Despite improvements in some access rates, between the early 1990s and 2004, access to all types of infrastructure in Haïti remains below the average levels for Latin America and the Caribbean, (LAC), sub-Saharan Africa (SSA) and low-income countries in general. In 2004, electricity consumption in Haiti was 31 KWh per capita — well below levels of an average sub-Saharan African country. When Haïiti's figures are compared with those of successful African countries — such as Mauritius, Ethiopia, Ghana, and Senegal — the gaps are even more apparent. For instance, access to electricity in Haïti is much lower than that of Ghana. Despite improvement in access to water, Haïti is well behind other countries, with an average access rate of 67 percent compared to 89 percent for LAC countries in 2002. Similarly, access to improved sanitation facilities is only 34 percent in Haïti compared to 36 percent in sub-Saharan Africa. The same applies to access to telecommunications and road networks. At 64 per 1,000 in 2004%, telephone density in Haïti is well below average for sub-Saharan Africa: 84 per 1,000. Haïti is poor in terms of other information and communications technologies as well. Only 59 of every 1,000 individuals use the internet, which is below the average values for sub-Saharan African countries. and low-income countries. Only 18 percent of all Haitian roads are paved, compared to 35 . percent and 100 percent in Botswana and Mauritius, respectively. In addition, it is worth noting : that in Haïti, only 20 percent of the paved roads are considered acceptable condition, 10 percent: in good condition, and 10 percent in fair condition.‘ : Fe . Table 34. ___ Network Infrastructure in Haiti 1990-2004 Electricity consumption (KWh per capita) 60 487 1224 31 513 1618 Improved Sanitation Facilities Access 15 32 68 34 36 74 Road network (km per 1000 people) 0,54 2,15 6,27 0,40 0,50 1,09 Telephone Density (per 1000 people) 7 10 6} 64 84 499 Internet users (per 1000 people) 0 0 0 39 19 115 Source: WDI 2006. 435. The Government has made infrastructure a key sector of its growth and poverty reduction strategy.* However, it lacks a comprehensive and integrated infrastructure % Infrastructure is here defined as a sector including transport, water and sanitation, electricity and telecommunication. But, for transport sub-sector, only road issues are addressed here, as it is the main transport mean in Haïti. $ It is the telephone density for fixed lines and mobile phones. «Stratégie pour le Secteur des Transports 2006-2011” (November 2006). 8 The I-PRSP states that “Sustained economic growth is necessary for the success of any poverty reduction program. But economic growth cannot be sustained if basic physical infrastructures are lacking or are of poor quality...”. 74 [page 109] Haiti: Public Expenditure Management and Financial Accountability Review strategy with clearly defined spending targets.” Efforts are oriented in that direction though they are still limited. During the donor conference in Madrid, Spain in November 2006, authorities presented the Government’s infrastructure program and financing needs to implement it over the next five years. Significant levels of investment would be required to increase the infrastructure network coverage and the quality of services. Maintenance is also a major issue, especially in the road sub-sector, given that road rehabilitation in Haiti has almost never been followed by proper maintenance, which has resulted in very low quality of services relating to infrastructure. Moreover, infrastructure spending in Haïti has been heavily focused on service provision through utilities, which provide services in parts of the urban areas. Infrastructure needs of the poor living mainly in rural areas and in slums have not received the necessary attention. 4.36. Unlike in the education and health sectors, the private sector is hardly present in infrastructure sector. In this perspective, the burden of infrastructure expenditure on the government budget is quite large. 4.37. Increasing the population’s access to improved quality of basic infrastructure services will require that sufficient public resources are allocated to the Ministry of Public Works, Transport and Communication (MTPTC), the key institution within the infrastructure sector. However, it is also critical to improve the quality of public spending, to ensure effective use of public resources in infrastructure sectors. In particular, weaknesses need to be addressed in budget preparation and execution, accountability and transparency in budget process and management, public procurement issues as well as human resources . management constraints. Transparency and accountability of resource use and general quality of . administration within utilities are also key issues — as well as overall legal and regulatory - : frameworks and the degree of enforcement of these resources. They are pre-requisites for public — Le spending on infrastructure to translate into increases in access and quality of infrastructure _: - services and to make this sector a cornerstone of the growth and poverty reduction strategy of Haiti. 4.38. The infrastructure sector is also dominated by the critical role that public entities play in the delivery of infrastructure services, including: (i) the autonomous public companies: EDH (Electricité D'Haiti) in the electricity sector; TELECO in the sector of telecommunications and CAMEP (Centrale Autonome Métropolitaine d'Eau Potable) and SNEP (Service National pour l'Eau Potable) in the water sector; iii) the autonomous organizations in charge of regulation and maintenance, such as the CONATEL (Conseil National des Télécommunications) for telecommunication sector, the LNBTP, for the construction sector and the FER for the road sector; and iv) the Conseil de Modernisation des Entreprises Publiques (CMEP), a technical entity that oversees the reform of public enterprises. While the issue of improving their capacity to deliver high-quality infrastructure services to the poor Haitian might not necessarily require increasing the level of public resources allocated to them, it is crucial that their financial situation be sound. % Although strategies exist in some sectors, such as roads and electricity, they do not include spending targets. 75 [page 110] Haïti: Public Expenditure Management and Financial Accountability Review Box 4. Key Characteristics of the Infrastructure Sector The road network: The Haïtian transport network is not only insufficiently developed but it deteriorated significantly in the decade before 2004. That decade has seen the transport network in constant degradation. In 2004, according to the MTPTC®, the road network consisted of 3400 km of roads, of which only 18 percent were paved. This network consists of 20.3 percent of primary roads (routes nationales), 44.4 percent of secondary roads (routes départementales) and 35.4 percent of tertiary roads (routes communales) that link the rural communities to the secondary road network. Furthermore, only 20 percent of these roads are considered to be in an acceptable condition. To address the maintenance issue, an autonomous entity — the Fonds d'Entretien Routier (FER) — has been progressively put in place from 2003 to ensure maintenance in the sector. The FER benefits from earmarked funds (coming from taxes on gasoline, car licenses, etc.) transferred directly by the MEF and act as a donor on issues regarding road maintenance (MTPTC plans and contracts while the FER finances). But, this executing system has experienced some delays mainly due to a lack of planning and executing capacity of the MTPTC. Electricity: In Haïti, the production, transport and distribution of electricity is the responsibility of EDH (Electricité D'Haiti), a public commercial company that is under the supervision of the MTPTC. Currently, the company provides electricity to 184,000 customers — who represent about 10 percent of the population. And there has long been almost no maintenance. Thus, from an installed productive capacity of 220 MWh, the company now produces around 60 MWh. EDH also faces a high number of illegal connections. The losses due to these illegal connections are estimated to be about 30 to 40 percent of the output. | Water and sanitation: The Haïtian water and sanitation sector is dominated by community-based water committees and two state-owned companies: the CAMEP (Centrale Autonome Métropolitaine d'Eau. Potable}, which is in charge of water supply in Port-au-Prince and the SNEP (Service National. pour: | - : l'Eau Potable), which is in charge of water supply in secondary towns and rural areas. According to | Häitis CEM 2006, in 2002, 88 percent of population had access to an improved water access in areas: k that are urban and 55 percent.areas that are rural. Service quality is poor with intermittent supply and ‘ |dubious water quality, forcing those who can afford it to rely on expensive bottled water and water from | . . | tanker trucks. No real sewer network exists in Port-au-Prince or in secondary towns. Existing sanitation - facilities are individual and consist of latrines, septic systems and clandestine connections to the storm water drainage system. According to Haiti’s CEM 2006, in 2002 52 percent of population had access to sanitation facilities in urban areas and only 23 percent in rural areas in Haiti. The sector is currently under a reform process through a Water and Sanitation Framework Law that is currently being discussed in Parliament. According to the Law, regional water and sanitation companies would be created to replace CAMEP and SNEP. As part of the reform process, a General Directorate for Drinking Water and Sanitation (DGEPA) is expected to be created under MTPTC with the task of developing policies and to regulate the sector. Telecommunication: There are four major operators in the telecommunications sector: TELECO - the national telecommunication company — DIGICEL, COMCEL and HAITEL, the last three being cellular operators. TELECO retains a monopoly over fixed lines but the cellular market has been open to competition since 1997. In Haïti, there are about two million mobile phones for about 1.8 million subscribers — of which about 1.2 million are DIGICEL subscribers. The telecommunications sector is regulated by the CONATEL (Conseil National des Télécommunications) which is an autonomous entity and depends on MTPTC. The national company, TELECO, has been experiencing a very difficult situation since opening to competition. It is scarcely represented in the cellular market, whereas this market experiences a rapid growth. % But, according to MTPTC, these data are only estimations as the last inventory was made more than 10 years ago. À new one is being performed. 76 [page 111] Haiti: Public Expenditure Management and Financial Accountability Review 4.2.2 Trends and Structure of Infrastructure Expenditures 4.2.2.1 Trend in Total Allocations 4.39. Allocation to the infrastructure sector more than tripled in real terms on average between FY2002-04 and FY2005-07, mainly driven by increased external resources allocated to the investment budget since the re-engagement of donors in 2004. 4.40. The investment budget tripled over the same period. As à Table35. Allocations to the Ministry of Public Works, result, the share of MTPTC budget in Transports and Communication (MTPTC) the nation’s total budget more than Ân million of real sourdes FX2001-07 aa NE percent over the period FY2002-04 to HV02/04 | EX05/07 an average of 22.0 percent during Ne Ie pu 2572 us FY2005-07 (see Table 35). MTPTC Invest Baie 18798 6,869. A Total Nation Budget 21,264.5 32,491.3 441. Accounting for about 7 | jou Recurent Budget (Excl 140786 11,792. percent of FY2006/07 GDP, Interest Payments) infrastructure budget compares MTPTC total in Total Nation 10.1 22.0 favorably with international | Budget (in %) | standards — the infrastructure MTPTC Recurrent in % of total 2.0 2.4 . - recurrent budget (excluding interest expenditure peaked at 6.5 percent Of | bayments on debt} ] GDP in Dominican Republic over the Sources: Le Moniteur, Journal Officiel de la République ‘ period 1970 to 2003. However, some d’Haïti and Staff Calculations. “ri si concerns remain for three main : no : : reasons: First, this represents only allocation, and Haïti experiences some difficulties to fully - re ” execute resources allocated to that sector; Second, the increase in allocations is mainly based on: . donors’ contributions, which are known to be volatile. Thus, securing financing for implementing Do a multi-year integrated PIP is not guaranteed; Third, imfrastructure spending in Haiti goes from such a low base that it would be necessary to maintain this level of expenditure for many years to achieve significant results. But past experience of volatility of resources allocated to the sector, in particular during the period FY2001-04, raises the issue of the ability to maintain consistently high levels of resources. 4.2.2.2 Structure of Allocation 4.42. The formation of the infrastructure budget is dominated by investment spending, reflecting the nature of the infrastructure sector. The infrastructure sector is mainly composed of economic activities, which involve investment spending. More than 90 percent of the MTPTC budget consists of investment expenditure while recurrent budget accounts on average for about six percent of resources allocated to the MTPTC over the FY2004-06 period. 443. The recurrent budget increased slightly by 5 percent in real terms on average between FY2002-04 and FY2005-07. As a result, the average share of the recurrent budget aHocated to the MTPTC in percent of total Government recurrent expenditure (excluding interest payments) remains relatively flat at less than 3 percent over the period under review. This figure raises three major concerns. First, it suggests that investment spending is not supported by sufficient associated recurrent allocations (most notably for spending on maintenance) in the budget. One explanation of this situation is related to the disconnect between the investment budget and the recurrent budget, which follow a parallel budget preparation process — that is, a budget not fully integrated. Another explanation is related to the lack of resources that Haïti 77 [page 112] Haiti: Public Expenditure Management and Financial Accountability Review faces, which constrains the Government’s capacity to adequately finance the recurrent costs associated with the investment projects and programs. Second, efficiency of investment programs is closely linked to maintenance spending to ensure durability of infrastructure investment. Unfortunately, Haiti’s recurrent budget does not account for these aspects of infrastructure investment. The budget does not clearly indicate how much recurrent spending is associated with the execution of infrastructure investment program and projects. Congestion costs associated with Hmited infrastructure network should also be accounted for as they affect the quality of infrastructure. Third, a legitimate question (and more fundamental problem) that arises is the opportunity to expand the imvestment in infrastructure. This PEMFAR takes the view that given the huge infrastructure gaps, congestion costs, and the need to increase the accumulation of physical and human capital (a pre-requisite for higher growth and poverty reduction), there is a need to expand the infrastructure base with new investments while ensuring that adequate levels of financing for recurrent costs are provided. Chapter 7 of this report presents a macro-model in which the composition of public expenditure, externalities associated with public capital, issues of maintenance spending, and durability and quality of public capital are explicitly accounted for. Policy simulations are carried out in Chapter 8, with one assessing the impact of increased spending on infrastructure and higher efficiency of spending on growth and poverty reduction. 4.44. Given Haitÿs limited budget, the private sector should play a key role in the infrastructure sector to attract resources to the sector and alleviate the burden on the public sector’s scarce resources. Unfortunately, private sector is hardly involved in the infrastructure : sector, partly because of political instability over thé past years and security issues. How to increase private participation in infrastructure should be thought through. There are windows of | opportunities for private activities in the infrastructure sector that would need to be identified. D Carrying-out an investment climate assessment (ICA) should shed some light on the avenues te - explore ‘and the appropriate forms that the private séctor involvement could take to have ‘ | maximum impact on the infrastructure sector.°! 7 : ° ° 4.45. : Because of limited public resources and little involvement of the private sector, it is . critical that resources be allocated to the best uses and be used as efficiently as possible in the infrastructure sector. The management of resources allocated to MTPTC, in particular the recurrent budget, could be improved and therefore help save some resources to be reallocated to other use. The staffing structure mainly composed of too many unqualified staffs (poorly remunerated and motivated) could be restructured to allow for a smaller number of better paid qualified personnel. Indeed, as pointed out in Haiti Country Economic Memorandum (CEM), the staffing structure is inefficient with too many unqualified people in ineffective roles and shortage of qualified, technical staff, particularly in the regional department”®. Another avenue of efficient use of public resources is public transfers to public utilities involved in the infrastructure sector. Quantifying the possible savings associated with more efficient use of public resources in the infrastructure sector could be performed in the context of a complementary study to this PEMFAR. $1 There are indications that an appropriate form for private sector involvement is twinning or arrangements for comprehensive technical assistance with international utilities, as in the Jacmel Power System KRehabilitation Project. This program which is financed by the CIDA and the Government of Québec with close involvement of Hydro-Québec, provides a comprehensive package of assistance that has allowed the EDH office in Jacmel to produce and distribute electricity in the area. Haiti: Options and Opportunities for Inclusive Growth, CEM, World Bank (2006). 78 [page 113] Haïti: Public Expenditure Management and Financial Accountability Review 4.2.2.3 Analysis of Intra-sectoral allocation of spending 4.46. The analysis of intra-sectoral allocation of expenditure shows that over the period FY2005-07, on average, 60 percent of the total recurrent budget of MTPTC was allocated to finance the Ministry’s general administration services. This left few resources to other services and entities under MTPTC supervision, and might have affected their capacity to perform activities. For instance, resources allocated to CONATEL in the FV2006/07 budget (about five million gourdes) were not sufficient to allow it to perform its regulatory role of the telecommunications sector. At the same time, allocations to the FER have declined over the past three fiscal years: from 21 million gourdes in the FY2004/05 budget to 5.0 million in FY2006/07. It is worth mentioning that this subsidy to the FER should disappear with the complete implementation of earmarked taxes which are supposed to be transferred directly by the MEF to finance the FER. 4.2.2.4 Economic Composition of Spending 447. On average, allocation to investment account for more than 90 percent of total allocation over the FY2004-06 period. This reflects the nature of activities of the MTPTC, an “investment ministry”. Wages and salaries accounted for less than 4 percent of total expenditures on average over FY2005-07. This low level of the wage bill is partly explained by the low level of salaries paid in the MTPTC. As a result, the sector cannot attract qualified workers and many employees are poorly motivated. : . | 4.48. Goods and services and other expenditures accounted for about 3 percent of total expenditures on average, over the FY2064-06 period, down from an average of 7 percentin : . Lo FYŸ2001-03. This reflects the reduction in allocations to goods and services, which fell iñ real : . . . terms by more than 50 percent between FY2002-04 and FY2005-07. This raises the issue.of the E | capacity of the MTPTC to perform its routine operations. Foi 4.2.2.5 Analysis of Budget Execution : . 7 4.49. The main feature of budget execution in the infrastructure sector is the extreme volatility of the execution of resources allocated to this sector. Vearly execution of expenditures varied significantly over FY2002-06. While in FY2001/02, only 34 percent of total allocations to MTPTC were spent, the execution rate increased to 86 percent in FY2002/03, but fell to 45 percent in FY2004/05. This mainly reflects the volatility of the execution of the investment budget. Recurrent spending was executed at about 90 percent over the period FY2004-06. However, the execution of the investment budget dropped from 78 percent in FY2002/03 to less than 40 percent in FV2004/05, and further to 12 percent in FY2005/06. 4.50. Because of problems of accurately recording execution data, caution should be taken when interpreting the execution rates. Three factors explain the low execution of the investment budget: i) the low absorption capacity of the investment budget in the MTPTC due mainly to slow execution of programs and projects, human resource constraints, and limited technical capacity, ii) the poor capacity planning due partly to a lack of qualified staff in MTPTC, and (fi) poor execution capacity of the private sector to execute in specific areas, such as the building and maintenance of roads. The absorptive capacity issue has been highlighted with huge flows of resources following the donors’ reengagement. The data over the past few vears showed that the MTPTC absorbed à maximum of about 1.5 billion gourdes of the investment budget allocated. However, this does not mean that resources have to be cut and tailor to the sector’s current absorptive capacity. Ït means that resources have to be used to expand the sector’s 79 [page 114] Haiti: Public Expenditure Management and Financial Accountability Review capacity through, for instance, the provision of technical assistance in budget management, increasing staffing and improving maintenance spending. 4.51. Table 36 presents the shares and execution rates of selected items for FY2002-06. Although their execution rate has increased from 74.5 percent of total recurrent budget in 2002- 2004 to 79 percent in FY2004-06, the share of roads and network maintenance expenditure in the total recurrent budget has been cut almost by half, from 5.6 percent in 2002-04 to 2.9 percent in 2004-06. This is particularly worrisome in light of the country’s poor quality of infrastructures and the maintenance needs. It sheds light on the financing issue of maintenance spending that Haiti faces. Along the same lines, the share of spending on construction supply has also decreased from 2.3 percent of the total recurrent budget on average over FY2002-04 to 1.2 percent in FY2005-07, despite the increase in the execution rate from 64.5 percent to 85.5 percent over the same period. Starting from FY2005/06 a new category of expenditure has appeared: the subsidies to autonomous entities, such as FER or LNBTP. This expenditure type accounts for about one quarter of the total recurrent budget and has recorded a relatively high execution rate of about 84 percent. Table 36. Infrastructure Sector. Share of selected items in Recurrent Budget and their execution rate (In %), FY2002/06 A EE 1 a s H Allocated 8.5% ‘ 738% 03% 0% ., ... ['S Executed 69% (30% 02% 0% Éel S Execution rate 62.5% 59.5% 582% / . Allocated 3.8% 16% 0.022% 0% 3 Exccuted 43% 15% 0.016% 0% [al 2 $ Execution rate 86.5% 69.5% 583% / , Allocated 32% 11% 01% 0% S Exccuted 3.6% 13% 0.1% 0% & 2 Execution rate 93.6% 99.0% 100% / , Allocated 27% 11% 0.012% 245% L'el 8 Executed 22% 10% 0.010% 23.00% È $ Execution rate 644% 719% 66.7% 738% ources: Le Moniteur, Journal Officiel de la République d'Haïti and Staff Calculations. 80 [page 115] Haiti: Public Expenditure Management and Financial Accountability Review 4.52. The low execution rate of the capital budget of the MFPTC might . raise the issue of the relevance of Table 37. Infrastructure Sector. Budget Execution allocating large amounts of resources QE RE de past two fiscal years). However, atthe | Total Budget allocated 2,157.2 6499.7 same time, Haiti’s infrastructure needs Total Budget executed 1,326.4 1,202.1 are huge and require that massive Execution res qu "7 4, ë6 : otal recurrent allocate . . resources be allocated to investment | ré recurrent executed 300.3 303.4 programs. The issue is therefore how t0 | Execution rates (in %) 110.2 102.9 improve the execution capacity of the Total investment allocated 1,879.8 6196.8 MTPTC to ensure that the resources Total investment executed 1,026.1 898.8 provided are well executed to meet the xenon is 2) TO Se Re Le : : ources: Le iloniteur, Journal ciel de la République infrastructure needs. The challenge is d'Haïti and Staff Calculations. that this issue involves many other aspects of the operation of the MTPTC, including improving its management, providing technical assistance to enhance budget management, and increasing human resources and technical capacity. À policy response to expand the sector’s capacity could consider for instance the provision of technical assistance in budget management, increasing staffing and improving maintenance spending. 4.53. As compared to the investment budget, the pace of Table38. Infrastructure Sector. Recurrent Budget . - .. .… execütion of the recurrent Execution (In Million of real gourdes.), . : budget has been. remarkable. FY2001/06 et es : . : . The recurrent budget allocated is 1 AœvermRese E : spending and expenditure on Total ocurrent allocated 277.4 302.9 * goods and services reached, more Ofwhic . : Wages and salaries 172.7 163.7 often, an execution rate of 100 : . : Goods and services 94.7 43.7 percent during the period under Others 0.4 24 review. The MTPTC’s spending | Total recurrent executed 300.3 303.4 on these budget items has Of which sometimes exceeded the Wages and salaries 175.6 157.3 allocations. This mainly reflects Goods and services 124.7 146.1 poor budget planning. Others NA NA Execution rates (in %) 110.2 102.9 4.54. The analysis of the Wages and salaries 102 96.3 sources of execution of the Goods and services 136.8 113.4 investment budget reveals the Sources: Le Moniteur, Journal Officiel de la République d’Haïti and Staff Calculations. remarkable efforts that the authorities have made since FY2004/05 to eliminate the recourse to the use of comptes courants to execute the MTPTC budget. While over the period FY2002-04, more than 95 percent of investment spending of the MTPTC was executed through the comptes courants, in FY2004/05, the investment budget was executed through the normal budget procedure without recourse to comptes courants. Figures pertaining to the recurrent budget also show the elimination of the comptes courants: less than 1 percent of recurrent spending was executed through the comptes courants in FY2004/05 compared to 37 percent on average over the FY2001-03 period. 81 [page 116] Haiti: Public Expenditure Management and Financial Accountability Review 4.2.3 Public Investment Programs in the Infrastructure Sector 4.55. The PIP in infrastructure sector displays three main characteristics. First, the infrastructure sector stands out as the major sector of the Government’s PIP. It accounts for on average more than 40 percent of total resources (including foreign aid) allocated to the PIP over FY2004-07. Second, the infrastructure PIP is mainly financed by donors. More than 90 percent of the infrastructure FY2004-06 PIP was financed by foreign aid. However, this is not specific to the infrastructure sector. Most of the investment programs in other sectors, including agriculture, education and health are also funded by external aid. Third, aid-funded allocations to the infrastructure PIP literally exploded over the past two fiscal years. Total allocations funded by donors almost quintupled in two years, between FY2004/05 and FY2005-07 (see Table 39), reflecting both the authorities” successful policy to attract foreign aid and donors’ response to the Government’s quest to finance much needed basic infrastructures. Table 39. Resources for PIP in the Infrastructure Sector. Comparison to other Priority Sectors, FY2004/05 and FY2005/06 (In million of nominal gourdes “Sectors à : PIPFV20040S PIPFY200906 ji resources resources In% resources resources n% Total Sectors 1 787,5 7 226,9 9 014,5 100 1 538,9 15235,9 16 774,9 100 Infrastructures 491,4 19348 24263. 26,9 . 933 118684 12 801,4 76,3 Other sectors 1 296,1 5 292,1 6588,2 .... 73,1 605,9 3 367,5 3 973,5 23,7 Shares in total 20,2 79,8 100 | 7,3 92,7 100 … [infrastructure (% ce ue Le Sources: Ministry of Planning and External Cooperation and Staff Calculations. ss - _ … 466... Fable 40 provides details on donors’ interventions in the infrastructure sector, The L ù à … JDB and the European Union stand out as the sector’s two main donors. Together, they : . account for nearly 80 percent of the sector’s investment pledges for the 2004-06 period; with the EU representing almost 60 percent of the sector’s investment expenditures over the period June 2004-December 2005. 82 [page 117] Haiti: Public Expenditure Management and Financial Accountabiliry Review Table 40. Donors” financing under ICF (in million $US unless otherwise indicated), 2004-06 pledges and June 2004-December 2005 realizations Components © © ID UN WB Ger Canada France USA EU Total Road Transport 112.6 6.6 4 0,9 Î Î Î 103.0 223.1 Rehabilitation 112.6 6.6 Î ll dl Îj / 47.2 166.4 New Road Projects / / / Î / / / 14 14 Poverty Reduction / / Î 0.9 Î / / 54.5 554 Electricity / / 6.0 / 23.9 4.0 24.0 / 57.9 Support to electricity sector / Î 6.0 / 19.9 / 24.0 / 49.9 Rehabilitation / / / Î 40 3.0 / / 7.0 Electrification / / / / / 0.6 / / 0.6 Other / / / / / 0.4 / / 0.4 Water and Sanitation 68.6 12 / / / 11.0 / 12.2 93.1 Rehabilitation / / / / / 42 / 7.0 112 New Projects 15.0 0.5 / / / 0.7 / 4.6 20.9 Other 53.6 0.7 / / / 6.1 Î 0.7 61.0 Total 1812 7.8 °° 6.0 0.9 23.9 15.0 24.9 115.2 374.1 Percent of total Contributions 40.1 23 2.1 0.3 8.5 14 8.5 36.7 100.0 ‘ | Spent Budget 22.09 LOI. 051 -/ - 0.76 152 2295 67.11 11595| À Roads and Transport 17.21 0.26. / / / : 0.02 0.45 “1432 32.26 ‘ - Electricity | 076 045 220 023 23.44 Water and Sanitaion 4.88 0.75 0.51 / / 1.05 0.50 52.56 60.25 Source: Bilan des Financements et des Réalisations - Période : juin 2004-décembre 2005 ; mars 2006. 4.57. In terms of components, support to road rehabilitation accounted for the largest share of donors’ interventions in infrastructure. It represented more than 50 percent of total donors’ financing. 4.24 Weaknesses, Issues and Challenges in Public Expenditure Management in Infrastructure Sector 4.58. Budget preparation is dominated by the investment budget, leaving little time to the recurrent budget. As in other line ministries, there is no formal planning mechanism or a specific timetable for preparing the recurrent budget. Allocations are therefore mainly determined on the basis of prior year spending. 4.59. The public expenditure management of the MTPTC does not reflect the changes it has to initiate to move from force account activities toward contracted works. The public expenditure management has to evolve in parallel with the change of MTPTC toward a regulatory body. 4.60. The Haitian public works market is still too weak and suffers from great inefficiencies and of a lack of institutional capacity. In addition, the MTPTC fails to attract 83 [page 118] Haiti: Public Expenditure Management and Financial Accountability Review foreign companies (especially those based in the Caribbean), in part because of consequent insurance costs due to the security situation. 4.61. An infrastructure PIP largely financed by foreign aid raises three major issues: (i) absorptive capacity; (ii) sustainability; and (iii) credibility. First, with its weak implementation capacity, the issue is raised as to how the MTPTC could cope effectively with huge flows of foreign aid. The experience to date has demonstrated that the limited execution capacity of the MTPTC does not allow it to efficiently allocate resource available to infrastructure projects and programs. This however does not mean that aid-funded infrastructure should be reduced. It calls for both the Government and the donor community to enhance the capacity of the MTPTC and entities involved in the infrastructure sector (especially the FER). Second, related to the issue of limited absorption capacity is the issue of sustainability of the infrastructure PIP. Large investments in infrastructure also imply recurrent spending that the Government’s limited budget might not be able to afford. Sustainability problems of the PIP might thus arise over the medium-term Third, beyond the issues of absorptive capacity and sustainability, the design of the infrastructure PIP raises credibility issues. The huge gap between the amount of allocated resources included in the PIP and the resources executed reflects technical problems to effectively cost the programs and projects at the sectoral level. The PIP is not done on a rolling basis, therefore it does not include backward adjustment calculations. The PIP is not backed by an MTEF (Medium-Term Expenditure Framework) and hence lacks a forward-looking approach. In fact, the document is more generally a yearly approximate estimate of programs and projects in execution or to be executed. It does not rest on sectoral strategies and has no growth or poverty … réduction perspective. Loir Fo :'. 462 . The infrastructure sector is certainly a sector where the adoption of a programmatic ee | ‘7 budgeting approach, within a medium-term. budget framework (MTEF and budget- Di | ‘ prôgrain tools) is needed because of the very ‘dynamic nature of investment in moe ï infrastructure and its positive dynamic externalities on education, and health outcomes (see Lite Chapter 7). Linking public spending with outcomes within and outside the sector would :indeed require having programmatic budget tools to ensure that budget allocation and execution are in line with the multi-year sectoral objectives. However, the pre-requisites of such an approach are not yet in place. How to create the conditions for moving to a medium-term PIP, given the current status of budget preparation in the infrastructure sector, is a challenge. It would require a gradual approach that identifies the different steps (see Box 5) to follow and technical assistance is also required. 4.63. Largely dependent on foreign aid inflows, budget execution in the infrastructure sector has been volatile. Increasing the impact of infrastructure spending on outcomes requires more predictability in the flow of resources. But the issue is that aid flows to the sector depends (or will rely more and more) on the country performance in the context of shift of the donor community to a performance based budget allocation. Therefore, there is no guarantee that the execution will be stable and have significant impact on outcomes. The volatility of budget execution of MTPTC is also reinforced by the budgetary management rule of Haiti, which implies one-twelfth execution of the state’s budget. This implies that the MTPTC often has to delay the implementation of big infrastructure projects, whose execution requires gathering enough resources over many months. 84 [page 119] Haiti: Public Expenditure Management and Financial Accountability Review Box5. Pre-requisite for a Multi-Year Sectoral MTEF STAGE CHARACTERISTICS L Development of Macroeconomic/Fiscal e__ Macroeconomic model that projects revenues and Framework expenditure in the medium-term (multi-year) IL Development of Sectoral Programs e Agreement on sector objectives, outputs, and activities e__ Review and development of programs and sub- programs e Program cost estimation HT. Development of Sectoral Expenditure ° Analysis of inter- and intra-sectoral trade-offs Frameworks e Consensus-building on strategic resource allocation IV. Definition of Sector Resource Allocation + Setting medium term sector budget ceilings (cabinet approval) V. Preparation of Sectoral Budgets e Medium term sectoral programs based on budget ceilings VI. Final Political Approval ° Presentation of budget estimates to cabinet and parliament for approval Source: Le Houerou P. and R. Taliercio (2002): Medium Term Expenditure Framework: From Concept to 4 Practice, World Bank Africa Region Working Paper Series. - ce 4.64. Another issue is related to the lack of clear spending targets, which makes it difficult : to assess the effectiveness of budget execution in terms of achieving the objectives set. The | list of poverty-reducing budget items does not integrate linkages between infrastructure spending . and outcomes of other sectors, most notably education and health. Moreover, while the practice of comptes courants has declined, issues of transparency, accountability, and cumbersome budget procedures still impact the effective use of public resources in infrastructure, and ultimately their impact on human development outcomes. 4.65. A specific issue concerns management problems of autonomous agencies such as CONATEL ({telecommunication sector), and FER (road transport sector), which prevent them from delivering high quality infrastructure regulation. Part of the problem is related to irregular transfers of resources collected by the MEF to these public autonomous entities. As a result, they often experience treasury problems at the expense of infrastructure services. 85 [page 120] Haiti: Public Expenditure Management and Financial Accountability Review Boxé. The Road Maintenance Fund (Fonds d’Entretien Routier, FER) The setting of a road maintenance fund, largely supported by donors, has been gradual. The FER was created in 2003 (Journal Officiel de la Republique d'Haïti N°54 July 24th}. The Board was appointed in December 2004 and it held its first meeting. The first contract was signed in January 2006. By law, the FER is an autonomous entity that is in charge of financing road maintenance for the eligible network. Its resources cannot be used to finance new roads or réhabilitation that can be considered as investments. The FER is only in charge of financing and on its own it cannot process road maintenance or act as a work master. The FER has now achieved a significant operative capacity, particularly in terms of available resources. But, its actual road maintenance activity is still insignificant. However, the FER's fiscal commitments include: (i} a contract for periodic maintenance; (ii) a dozen for regular maintenance; and (ii) an emergency maintenance convention. But, all these contracts are waiting either for procurement authority approval, or for the oversight implementation. Therefore, no request for payment has yet been sent to the FER. It is thus critical that FER and the MTPTC process the implementation of these activities. Currently, the FER has a budget of 135 million gourdes, broken down as 85 percent for maintenance activity financing, 10 percent for coverage of its operating costs and S$ percent for emergency maintenance. This budget comes from fuel fee revenues and from donor support. The FER is currently waiting for the transfer of the drivers’ license and first registration fees. Therefore, it is critical that the Ministry of Finance implement fiscal resource transfers to the FER on a consistent and predictable basis. : Sources: Le Moniteur, Journal Officiel de la République d'Haïti, N°54, Jeudi 24 Juillet 2003 and Aide-mémoire, Transport and +. Territorial Development Project, February 2007. u ru | | | 4.66... Lastly, like in most other line ministries, human resource management is also an co issue and affects expenditure managément. The limited number of qualified staff well : - : “acquaintéd. with budget procedures limits the effectiveness of budget preparation and execution in © the MTPTC. No more than four staff members are devoted to preparing the Government infrastructure PIP. This causes delays in preparing the PIP and following-up on its execution. ‘ Only recently has the MTPTC produced its first implementation report. The quality of that report could be substantially improved. 4.2.5 Policy Recommendations 4.67. Based on the findings of the PER, the following policy recommendations are made: e Prepare a full-fledged costed and integrated infrastructure strategy with sub- sectoral actions plans, which are linked to spending targets. This involves having an integrated approach in the sector. The existing sub-sectoral strategies could serve as the basis for elaborating such a strategy. A rigorous process of spending planning should be implemented. This requires that the MTPTC improve its budget preparation process by elaborating a clear timetable and allocating more time to budget planning (both resources expected and expenditure planned to be executed). Then, a tracking mechanism should be put in place to compare results to initial objectives and readjust the strategy: ° Prepare an integrated multi-year PIP, which reflects the translation of the integrated infrastructure strategy into resource requirements. À first step is to proceed with the elaboration of a PIP using the classic back-of-envelope calculation methodology. In this case, what is needed is to improve the current PIP and make it reflect the integrated infrastructure strategy. This means that spending targets defined in the strategy have to be reflected in the multi-year PIP. The PIP should also comprise of annexes that track the yearly execution of programs and projects covered by the PIP. In 86 [page 121] Haiti: Public Expenditure Management and Financial Accountability Review the medium-term (3-4 years), the elaboration of the PIP should be based on a more advanced methodology, which enables accounting for the linkages between infrastructures and education, health and security. Aid requirements will be calculated and might prove to be lower than the back-of-envelope calculation. This could be done in the context of the revised PRSP in 2010/11.; e A transparent execution of budget implies the elimination of comptes courants. The MTPTC has already made remarkable efforts and has dramatically reduced the recourse to these accounts. The next step is for the MTPTC to phase out by FY2009/10 the use of comptes courants to ensure transparency, credibility and accountability in budget execution; e+ Connect new investments with maintenance spending and support to community- based organizations managing rural infrastructure. The MTPTC should coordinate with FER and other entities responsible of maintenance, to ensure that its planned investments (e.g. rehabilitation of existing roads) will be followed by proper maintenance and that sufficient funds are allocated to these entities to perform this maintenance role. Also, recurrent budget resources should be allocated to provide public good functions related to basic rural infrastructure, such as rural water committees that operate and maintain basic water infrastructure, and the promotion of on-site sanitation. Reaching the poor requires a different approach to public expenditures that acknowledges the fact that much of the rural infrastructure, especially in water and sanitation, is operated and : : maintained by communities. Support to these communities is a public good function with : high pay-offs. Financing and organizing this support, directly or indirectly, is a key state . -_ function for which sufficient resources should be made available; re - e Strengthen the functioning of the Road Maintenance Fund (FER) by: (ÿ) enhancing En Me en coordination of the programming of road maintenance activities with MTPTC; (ü) | ° - ensuring regular and adequate budgetary transfers to the FER account of proceeds from . earmarked taxes for road maintenance; (it) developing expertise in FER to promote an efficient model for routine and emergency road maintenance, using either small firms or : community-based micro-enterprises; and (iv) improving its institutional capacity. To ensure the FER functioning, it is crucial to secure its financing. Thus, as required under EGRO IL the government should include in the FY2008 budget an annex detailing the planned revenues and expenditures for the FER. The current lack of a budget line for the FER makes it difficult to track whether sufficient resources have been allocated to it for road maintenance; e Overhaul state utilities. Funds must be channeled to the rehabilitation of existing dilapidated assets and improving service to existing customers before coverage can be expanded. Maintenance is crucial to ensure the sustainability of investments made and must be provided for by ensuring adequate funding and training of staff. Transparency and accountability require better mformation systems, a more active role for boards of directors and open contracting, and regular public disciosure of information on levels and quality of services provided to the public and the performance of public utilities. And realistic strategies are needed for involving the private sector where possible. In the road sub-sector, particular attention should be paid to strengthening the national public works market and to attract foreign companies. À restructuring and a decrease in the wage bill is expected to enable these companies to devote resources to investments. Moreover, the financial relationship between these companies and the public authority is not very transparent as government departments do not always pay the bill and utilities do not always pay taxes. It is crucial for the functioning of these companies that the budget 87 [page 122] Haïti: Public Expenditure Management and Financial Accountability Review includes expenditure lines for electricity, water and telecoms in the FY2008 budgets to track the payment of bills to EDH, FELECO and CAMEP; and e _Improve donor involvement and better coordinate their intervention. This involves both better coordination and securing longer term donor commitments. In the transport sub-sector, policies are coordinated. In particular, the EU, the AFD and the Bank are co- Financing a major road segment in the North region (RN3). In the water and sanitation sub-sector, a protocol is in progress to coordinate donor actions. It is crucial that such agreement be successfully concluded and be extended to other infrastructure sub-sectors. 88 [page 123] Haiti: Public Expenditure Management and Financial Accountability Review CHAPTER 5 : SOCIAL SECTOR EXPENDITURE REVIEW 5.1. This chapter presents a review of public expenditure in social sectors, education and health. It first analyzes the recent trend of allocations of public resource to these sectors over the past five fiscal years, and the extent to which they are consistent with the social development priorities of the Government of Haiti. It then analyzes the structure of spending in these sectors and highlights the relative weight and trends of recurrent versus investment expenditure in these sectors. The chapter also discusses the execution of spending and sheds some light on the determinants of the execution rates. The PIP in these social sectors is presented and its main characteristics are discussed. The weaknesses, issues, and challenges of public expenditure management in these sectors are also discussed. The chapter concludes by providing some policy recommendations to improve effectiveness of public spending in order to achieve higher education and health outcomes. 5.2. The key findings of the chapter are the following: First, the allocation of public spending to the education sector increased by more than 30 percent in real terms on average over the period FY2002-07 while it doubled for the health sector over the same period. Second, the increases reflect the low levels of allocations to begin with and are mainly the result of donors’ aid flows. Third, despite these increases in allocations, the level of expenditure in the education (about 2.5 percent of GDP in FY2006/07) and health (less than 3 percent of FV2006/07 GDP) sectors are : still low by international standards and insufficient to meet the EFA goals (education sector) and. _—— the sector priorities and objectives (health sector). Fourth, both sectors are dominated by an ‘ important private sector. Eighty percent of all primary level students attend non public schools, . financed by parents, religious associations, NGOs and other sources, and only 20 percent attend : 7. ‘+ virtually free public schools. The share of private financing of the education sector is estimated at _ more than 3 percent of GDP. About 60 percent of health expenditures are provided by the private _ sector. Fifth, the execution rates are quite low, reflecting the combination of weaknesses in. budget formulation and planning and low absorptive capacity of these sectors. Sixth, the PIP in these sectors is dominated by donors’ resource flows. Seventh, weaknesses and issues of poor public expenditure management result in inefficiency of public spending, which impedes Haiti from achieving higher education and health outcomes. 5.3. Policy prescriptions for the education sector center on: (i) increasing allocation of resources to the education sector, with a focus on primary education; (ii) executing the Medium- Term Expenditure Framework (MTEF); (ii) improving budget data and information; (iv) Improving public resource management; (v) preparing a list of poverty reducing expenditures to be protected against a sudden shortfall in the resources and follow-up its execution on a quarterly basis; (vi) ensuring sustained investment flows and targeting specific investment programs; (vi) developing a tracking mechanism of donors’ aid flows provided and executed outside the education sector’s budget; (vii) creating and reinforcing Public/Non Public Sector Partnerships; | and (vit) reinforcing technical capacity in public finance management. For the health sector, the report recommends: (i) increasing allocations to the health sector, with a focus on delivering basic health services; (ii) improving the budget preparation process by elaborating a clear timetable and defining responsibility of each actor involved in the preparation of the budget; (iii) reinforcing the links between the sector’s strategic objectives (and expected outcomes) and spending targets and monitor progress closely; (iv) setting the basis for a programmatic budgeting approach by reinforcing pre-requisites for an MTEF (medium-term projections of resources and expenditures, prioritization of spending, linking spending to expected outcomes); (iv) preparing a list of poverty reducing expenditure to be protected in the case of sudden shortfall and follow-up its execution 89 [page 124] Haiti: Public Expenditure Management and Financial Accountability Review on a quarterty basis; (v) strengthening human resource management and reinforcing capacity in budget processes and spending management by the provision of technical assistance; and (vii) developing a tracking mechanism of donors’ resources provided outside the sector budget. 5.1 EDUCATION SECTOR 5.1.1 Background and Sector Objectives 5.4. With only 71 percent of children aged 6-12 enrolled in school, and only 32 percent of primary education students reaching the fifth grade, education levels in Haïti are quite low and among the lowest in the world. The education sector suffers from weaknesses in virtually all aspects of the sector’s performance, including access, equity, quality and institutional capacity. Current primary net enrollment rate in 2006 is calculated at 71 percent, with a gross enrollment rate of 127 percent and a primary level completion rate of 66 percent. Approximately 500,000 children aged 6-11 do not attend school of any kind, and only about half of all 6-year-olds enroll in first grade. ® Gender bias is also an issue.“ Age of enrollment rates is significantly different, with 52 percent of boys and only 43 percent of girls starting school at age 6. Ÿ. The education system lacks trained teachers for the system. Currently, public education financing benefits mainly middle and lower middle class households living in urban areas, rather than poor households located primarily in rural areas. Quality of instruction and learning is extremely poor. Governance of the sector is a major issue, both internally and externally. Internally, there is a lack of procedures and transparency in the use of public funds, and poor coordination across : . technical departments and of externally financed investment projects. Moreover, many trained National Ministry of Education and Vocational Training (Ministère de l’Education Nationale et . .de la Formation Professionnelle, MENFP) civil servants have left the system for opportunities | ‘’âbroad of as externally-financed consultants. Externally, the MENFP is overshadowed by the ‘ “*" non-public sector (which accounts for 90 percent of all schools), largely ignoring government ° oo ‘regulations and accreditation standards. : | 5.5. The MENFP’s basic capacities to conceptualize, plan, execute, monitor and evaluate | educational programs and its budget in a coordinated manner are weak. Reliable up-to-date education statistics and budget data, essential for planning purposes, are not readily available to MENFP staff. 5.6. The Government has prepared a 10-year National Education and Training Plan, 1998-2008, and elaborated the National Strategy of Education for All (Stratégie Nationale d'Education pour Tous ou SNA/EPT) with the support of the World Bank, UNESCO, UNICEF, and other donors The strategy calls for: (i) expanding and improving comprehensive early childhood care and education, especially for the most vulnerable and disadvantaged children; (ii) ensuring that by 2015 all children, particularly girls and children im difficult circumstances, have access to, and complete, free and compulsory primary education of $ DHS Survey 2005 # While gender bias is a critical issue, this report does not provide a comprehensive analysis of gender issues. These issues will be covered in detail in a subsequent report, consistent with the programmatic approach of the PEMFAR. $ Similarly, the World Bank report (2006) notes that up to age 10, school-participation rates are higher for females than males, but this trend reverses between ages 14 and 24. In other words, households are more likely to continue investing in school if their child is male. $% This fully costed ten-year plan aims at placing Haiti on the path toward achieving EFA by 2015. It is hoped that this strategy will be endorsed by the EFA Fast Track Initiative in 2007, which could mobilize additional financing from the EFA FTI Catalytic Fund. 90 [page 125] Haiti: Public Expenditure Management and Financial Accountability Review good quality; (iii) ensuring that learning needs of all young people and adults are met through equitable access to appropriate learning and life-skills programs; (iv) achieving a 50 percent improvement in levels of adult Hteracy by 2015, especially for women, and equitable access to basic and continuing education for all adults: (v) eliminating gender disparities in primary and secondary education by 2015, and achieving gender equity in education by 2015, with a focus on ensuring girls’ full and equal access to and achievement in basic education of good quality; and (vi) improving all aspects of the quality of education and ensuring excellence of all so that recognized and measurable learnmg outcomes are achieved by ail, especially in Hteracy, numeracy and essential life skills. 5.7. Specifically achieving EFA goals would require that about 21 percent of Government’s recurrent budget (excluding debt service) is allocated to the education sector, of which at least 50 percent go to primary education. This would demonstrate the Government’s own commitment to these goals, necessary to mobilize the additional resources from external sources that will be required to achieve EFA. Developing the education sector and making primary education more accessible to the poor are key strategic objectives of the new Haïitian Government. This is reflected in the I-PRSP and reiterated in statements by President Préval. 5.8. In line with declared government priorities, public resources devoted to the education sector have recently increased. Yet, at 2.5 percent of GDP for FY2006/07, public education spending appears relatively low compared to the LAC average of 4.3 percent and stands out as a major source of weaknesses in the education sector. Increasing the education : outcomes toward meeting the EFA goals is conditional to ensuring adequate public financing to : . the education sector, improving management of government’s resources allocated to the sector as . well as efficiency of spending. : . 91 [page 126] Haïti: Public Expenditure Management and Financial Accountability Review Box 7. Institutional and Legal Framework Education in Haiti is governed by the Constitution of 1987 and the Decree of 1989, which confer on the Ministry of Education, Youth and Sports (now the Ministry of Education and Vocational Training) the right to elaborate, implement, evaluate and update the State’s general policy related to Education and Vocational Training. Articles 32.1 to 32.3 of the Constitution stipulate that the State and local governments are responsible for Education. Additional other official documents, such the Law of 1901 on public instruction, the Decrees of December 1960 on the creation of the National University and of March 1998 on the creation of primary teaching, and the National Plan of Education and Training (PNEF, 1998), define the rest of the legal framework for education policy in Haiti. They all focus on the three objectives of school aiming at: (i) encouraging one’s development in all its dimensions, (ii) training citizens to be economic, social and cultural development agents, and (iii) promoting national and cultural identity and exposure to universal, regional, and Caribbean values. - The March 30 2007 decree known as “Bernard Reform” organizes the education system into five levels: pre-school, basic (grades 1-9), upper secondary, technical and professional, and higher education. Furthermore, education in Haïti is predominantly non-public-sector provided. The latest education census (2002/03) showed that 92 percent of schools are privately operated and financed. In terms of student enrolment, the State provides for just 18 percent of primary school enrolment, while non-public education services make up 82 percent of primary enrolment.67 Non-public schools are a heterogeneous group, encompassing international-quality schools attended by the country’s elite and extremely low quality schools attended by the country’s poorest. The majority of non-public schooling is affiliated with religious associations (Catholic, Protestant, Presbyterian and the like), as seen in Figure 5.2 below, . … | followed by independent secular schools. : | 5.1.2 Trends and Structure of Education Expenditures et ‘ 5.1.2.1 Rising trends in education expenditure allocations co - “5 9 | There has been remarkable increases in education expenditures between FY2002-07. ‘ The éducation sector stands out as one that benefited from the increase in the Government budget ° over the past years. Total yearly allocations to the education sector increased in real terms by more than 30 percent on average over the period FY2002-07 (from 2.9 billion gourdes on average in the period FY2002-04 to 3.8 billion in FY2005-07), following rising trends in the total Government budget. As a result, the share of the education sector in the total budget has remained relatively high at about 10-11 percent of total budget since FY2003/04. 7 MEN: S, Direction de la Planification et de la Coopération Externe, Recensement Scolaire 2002-2003 92 [page 127] Haiti: Public Expenditure Management and Financial Accountability Review 5.10. Yet, at about 2.5 percent Figure 9. Public Expenditure in Education (% of GDP) of GDP in FY2006/07, the level of Haiti and Selected Comparable Countries, 2006 allocations to the education sector DE still compares poorly with the 0 1 LICs average (3.2 percent of A nnemnonrsremmennemmennenrnemennen] i GDP) and by sub-Saharan Africa A rrmmenmmnnnemmeenmmennean ! | | of GDP). Total allocation to the | fé mes | 1 sector is 2 percentage points lower Se | | than that of Ethiopia (4.6 percent of | El ne com em | L. GDP), and more than 3 percentage AG ee | | points lower than that of Uganda enmenneanmu] | (5.2 percent of GDP) and Burundi- Ne —. | | of GDP), and far below Kenya (7.0 0 2 4 6 8! percent of GDP) (see Figure 9). l Source: World Bank Database and Government Statistics, 2006. 5.11. While the Government declared development priority focus on the education sector has translated into higher budget allocations to the sector, Haïti still devotes relatively insufficient resources to education. The number of teachers is quite low: nationwide just 450 new teachers are trained each year compared to an estimated Figure 10.Shares of Financing of Education Sector | 10,000 new teachers needed to achieve ci . EFA.% Access to public education is 4 ‘ thus limited and quality of instruction | : H - and'* learning is extremely poor. D” mPublic-. # ‘ Curricula are outdated and in many d Domestically : Do cases inappropriate for overage students | fnancing : . who make up the bulk of the primary Gui - Extemal education population. Teaching rancng practices are inappropriate.® Because of Private a lack of public resources, no programs exist to support the hundreds of multi- grade schools in the system. Approximately 75 percent of all | teachers lack adequate training; many have just a 9 grade or 12 grade Tv World Bank Database 2nd Government Statistics, education, with no teacher training ° whatsoever. As parents lack resources and the public sector does not offer sufficient support, the readiness of children to learn is a major issue. Many students are simply hungry and lack the energy they need to focus on learning. This problem is compounded by the weak infrastructure base. Many schoolchildren have to travel long distances from home to school, often without eating breakfast. 7? $ See World Bank Phase One for an Education for Al Adaptable Program Grant. PAD, April 26, 2007. % They consist almost exclusively in ‘’chalk and talk”, requiring students to recite words and phrases they frequently cannot understand. See World Bank Phase One for an Education for All Adaptable Program Grant. PAD, April 26, 2007. 7° School feeding is a key element of the support to primary education. Unfortunately, schooi feeding programs in Haïti are declining in coverage, due to cutbacks from key international donors, from 800,000 93 [page 128] Haiti: Public Expenditure Management and Financial Accountability Review 5.12. Linked to the low level of public resources is a large and growing non-public provision of education services. Eighty percent of all primary level students attend non public schools, financed by parents, religious associations, NGOSs and other sources, and just 20 percent attend virtually free public schools. The share of private financing of the education sector is estimated at more than 3 percent of GDP while public domestically-financed education accounts for less than 2 percent of GDP (see Figure 10 above). Non-public sector enrollment share in primary education is quite large, representing more than 80 percent of total sector enrollment: Twice as high as that of Togo (40 percent); four times higher than that of Ghana (20 percent) and more than eight times higher than those of Benin and Ivory Coast (about 10 percent) (see Figure 11). The large share of non-public education provision makes it difficult to assure quality of education in Haiti as non-public schools largely ignore government regulations, accreditation standards, and are rarely visited by Figure 11.Non-Public Sector Enrollment Share in Primary MENFP school inspectors. More Education (%) than 75 percent of ali non public schools function illegally (no permit | Femmes or license from the MENFP) | © rene ! ! However, the non public sector”s | sè nes | | i ability to respond to parents’ NE | | | demand for education services # Earl | | obliges the government to accept D | | the current situation. Indeed, the Se et : ! | non public sector offers both lower pe En À | | unit costs and faster supply response j XF | | capacity, with greater accountability | EU) 1 l | | | to “clients” (parents) than the public | 0 20 40 60 80 100 sector,:with comparable results on |, ‘Private enrollment share (%), primary national exams. Source: World Bank Database and Government Statistics, 2006. 5.13. Policy to influence education outcomes go beyond the increases in public resources and cannot ignore the non-public sector. Public/non public partnerships thus become a central element of an outcome-based education policy. Since the National Education and Training Plan was first issued in 1996, it has been recognized that no viable EFA strategy in Haïti can ignore the urgent need to develop institutionalized mechanisms to promote a partnership between the State and non public education sector. Such a partnership could promote cost-effective expansion of access, while increasing the MENFP”’s capacity to ensure respect for minimum standards of safety, quality and accountability. Creation of the National Education Partnership Office (NEPO) provides public and non-public education stakeholders a much-needed institutional structure for policy dialogue, strategic planning and operational collaboration.” children in 2002 to about 400,000 in 2006. See World Bank Phase One for an Education for All Adaptable Program Grant. PAD, April 26, 2007. 71 Legislation establishing the NEPO was submitted for Parliamentary approval in October 2006, and approved by the Lower House in March 2007 (now before the Senate). 94 [page 129] Haiti: Public Expenditure Management and Financial Accountability Review 5.14. The current budget structure is skewed toward Table 41. Allocations to Education Sector (In real i illi FY2002/07 recurrent expenditure. About 80 HTG million), D TRE percent ‘of the edueztion budget | ; ; EE RIN EF ON} consists of recurrent expenditures, Fo Education Budget 28872 38253 while the investment budget Total Education Recurrent 2252.0 2995.4 accounts for on average 20 percent Budget of the resources allocated to the Total Education Investment 635.1 829.9 72 Budget sector over FY2004-06. The Total Recurrent in % of total 81.0 80.0 recurrent budget also has been | Eäucation budget trending upward since FY2001/02. | Total Investment in % of total 19.0 20.0 Allocations to the recurrent Education budget expenditures increased in real terms Total Nation Recurrent Budget 14073.6 11792.5 by about 33 t th iod (Excl. Interest Payments) y avou : percent over Îne pero Percentage of recurrent in total 15.2 25.0 under review. As a result, the average nation recurrent budget (excluding share of recurrent budget allocated to interest payments on debt) the education sector increased up to | Total Nation Budget 212646 35191.0 25 ercent of total recurrent Shares of Education in Nation 13.1 10.8 Fe ludi . Budget (in % expen iture (exclu Ing interest Sources: Le Moniteur, Journal Officiel de la République d'Haïti payment) in FY2004-06 from an and Staff Caleulations. average of 15.2 percent in FY2001- . Education sector comprises Ministry of National Education, Youth ‘ 03. This reflects the new authorities’ and Sports and University of Haiti. In FY2006/07, it includes . Ministry of National Education and Professional Training, Ministry efforts to allocate much needed of: Youth and Sports, and Civil Action, University of Haiti. We also resources to the education sector, with include “interventions publiques” in favor of education sector. - a view to improving education . outcomes and achieving thé EFA goals (see Table 41). # : . 5.15. At the same time, the investment budget increased significantly by about 39 percent : ° in real terms, reflecting the large increase of investment budget in FY2006/07 (see Table 41). :: : 5.16. The analysis of intra-sector allocation of expenditures shows that less than 50 percent of the total recurrent expenditures to the education sector go to primary education. The predominance of allocations to primary education reflects the authorities’ education priorities, which aim at expanding and improving access and quality of basic education in public schools. However, recurrent spending to education remains insufficient given Haiti’s abysmal enrollment rates. Indeed, total recurrent public education spending (excluding University of Haïti) for FY2006/07 of 4.6 billion gourdes (US$ 109.3 million) serves about 2.1 million students enrolled in primary and secondary education (both public and non-public), which translates into 2,187 gourdes (US$52) for each student each year, extremely low even by sub-Saharan African standards (estimated US$110). 72 The education sector refers to “Ministère de l'Education Nationale et de la Formation Professionnelle”, ‘’Ministère de Jeunesse des Sports et de l’Action Civique’””, and ‘’Université d’Haïti’’. In FY2006/07, allocations for the education sector also account for ‘’interventions publiques: rentrée scolaires”’. 95 [page 130] Haiti: Public Expenditure Management and Financial Accountability Review 5.17. Economic composition of education expenditures. The Table42. Composition of Spending, (In real HTG economie composition of million), FY2002-07 es MEET salaries account for about 53 us and salaries Drums 7 percent of total recurrent spending | Goods and services 780.5 222.0 on average during the period Others NA 908.7 FY2005-07, while expenditures on | Total . 3168.8 2407.4 goods and services and other items Pi wages and salaries in total 74.3 53.0 (mainly subsidies) made up about Share of goods and services and 25.7 47.0 47 percent.” The Government has others in total (in % made efforts to control the wage bill Sources: Le Moniteur, Journal Officiel de la République d’Haïti in the education sector while and Staff Caiculations. allocating more resources to ensure proper functioning of Government entities in charge of the education sector, most notably the National Ministry of Education and Vocational Training. As a result, the share of wages and salaries in total recurrent spending declined over the period under review. However, average wages are still relatively higher than in the non-public sector. Average public school teacher salaries (estimated at USS$2,765 in 2005, 7 times GDP per capita) are more than four times higher than non-public school teacher salaries (estimated at US$589, or 1.6 times GDP per capita).* Unit costs for public schools are thus estimated to be at least two times those for non-public schools at the primary level. This major issue nourishes a growing deficient non- ‘ public education sector. . . ‘ 5:1.2.2 ‘Analysis of Budget Execution | e ‘ ro 5.18. Because of lack of data, the analysis of budget execution in the education sector was. limited to the MENFP and does not cover the University of Haiti. In addition, due to lack of : detailed data.on execution, the analysis was kept broad and limited to the recurrent budget. Future. work will complement this analysis. 5.19. Table 43 shows that recurrent expenditures were executed on average Table43. MENFP Budget Execution (In real at about 78 percent over the past four HTG million), FY2002-06 fiscal years. The execution rates are driven | 1 Ave ages | by the L cvaz4 vos | y the large execution of wages and salaries Hi TL ft (nearly 100 percent) while spending on Budget Allocated 12109 2198.8 goods and services faces issues of | Budget Executed 968.9 16733 absorptive capacity of large aid flows most LExecution Rates {in %) 80.9 761 notably during the past two years, as well as Source: Le Moniteur, Journal Officiel de la République £ : d’Haïti and Staff Calculations. procurement issues. However, this does not mean that allocations to the sector should be reduced to account for its absorptive capacity. Indeed, the ambitious goals of the sector require more resources. Ensuring that these resources are absorbed and well managed requires creating capacity within the Ministry to manage public funds in a transparent and fully accountable manner. To this end, the modernization of the Department of Administrative Affairs (DAA) is crucial. The DAA is responsible for the overall budget execution (in collaboration with the Regional Education Departments, DDE), and is the primary interface with the Ministry of Finance. Caution should be taken in interpreting the figures and trends. Indeed, reallocations of items to different spending categories were made during the period under review, which may well have affected the trends. Enseignement de Base en Haïti, World Bank, 2003, p. 10. 96 [page 131] Haiti: Public Expenditure Management and Financial Accountability Review 5.1.3 Public Investment Programs in the Education Sector 5.20. Achieving the goals outlined in the EFA strategy for primary education alone will cost an estimated US$1.8 billion for the period 2007-2015. The strategy estimates available national : resources to finance approximately US$932 million during that period, leaving an external financing gap of about US$865 million, or approximately US$100 million per year. It is important to note that the estimate for local resources is based on overall annual GDP growth rates of approximately 4 percent, as per IMF calculations”. Second, it assumes a growing proportion of public budget resources to the education sector, from an estimated 21 percent in 2007 to 28 percent by 2015. Finally, it plans for dedicating 60 percent of the Ministry of Education’s annual budget to the primary level by 2015, a target that is 5 percent higher than that suggested by the Education for All Fast-Track Initiative. Although these planned budget allocations selected by the Ministry of Education are noble, they might prove overly ambitious, especially considering that the allocation level for primary education in 2006 was an estimated 38 percent”. This would effectively represent more than quadrupling the national budget for primary education from approximately $US 39.2 million in 2006 to US$ 191 million in less than a decade. 5.21. Increasing resources. Table 44 shows that resources devoted to the sector’s investment programs (including foreign aid), as recorded in the PIP, increased over the past two fiscal years, from 474 million (US$12.2 million) in FY2004/05 to 700 million (US$16.6 million) in FY2005/06. This represents an increase of about 28.9 percent in real terms. ÂAltogether, the sector was granted 1,174 million gourdes (US$24.3 million), equivalent to the - allocation to agriculture but higher than that to health and justice and security. | Fo 5.22. Resources are expected to more than double in FY2006/07, up to 1,888.9 mittion à gourdes (US$45 million), following a large increase projected in foreign aid fiows to the L : sector (1,681.3 million gourdes i.e. US$40 million). However, the current increase in investment ° De budget raises several issues. First, the increase comes on such a low base that it is difficult to - . ascertain the extent to which efforts have been made to significantly increase the investment budget. Second, the injection of large resources in the education sector might certainly help Haïti achieve better education outcomes and bring education indicators to the levels of comparable countries. However, large resources will not translate into higher education outcomes unless they are well managed and targeted to sub-sectors and areas with decisive impact on outcomes. In other words, efficiency of mvestment allocation and spending stands out as critical issues, which requires utmost attention if Haïti has to improve education indicators. Third, related to the issue of efficiency is the issue of capacity of the education sector to absorb large foreign resources. Because of its limited administrative, technical and human capacity, the risk of waste of resources exists. But this does not imply that allocation of resources should be taïlored to existing capacity. It calls for a strengthening of capacity at various levels of the public finance management in the education sector, including budget preparation, execution, controls, and reporting as well as procurement standards. Fourth, investment flows imply additional recurrent spending, which will result in an additional strain on Haïiti’s limited budget in the long-term. The extent to which the Government budget could afford these resource requirements is a major sustainability issue. 75 IMF. 2006. Haiti: Enhanced Initiative for Heavily Indebted Poor Countries. Washington DC: IMF. September. IMF Country Report No.06/338. 76 Ministère de l'Education Nationale et de la Formation Professionnelle, 2007, La Stratégie Nationale d'Action pour l'Education Pour Tous, Port-au-Prince, Avrit 2007. 97 [page 132] Haiti: Public Expenditure Management and Financial Accountability Review 5.23. Anvestment programs in the education sector are mainly financed by . . donors. More than 80 percent of the Table 44. Resources for PIP in the Education Sector. Comparison to other Priority sector FY2005/06 PIP was financed by Sectors, FY2004-05-FY2006-07 (ln foreign aïd. This is in the same range of real HTG million donors’ share of the PIP in other priority TTSeétors Average TT sectors, most notably health, agriculture, 0 and transport. Donors’ interventions focus mainly on five areas: governance, quality, SRE ER ER L , Most donors investing in education in Haïti | Other sectors 619.6 4,989.40 5,609.0 are focusing on supply-side issues such as Shares of 4.77 the construction/rehabilitation of public Education in schools (access) and teacher in-service Ltetal (in %)_ , - training (quality). As a result, intervention Sources: Ministry of Planning and External Cooperation . . ? and Staff Calculations. in the areas of quality and access account for three quarters of donors’ commitments under the ICF and outside the ICF framework. The most important donors are the European Union, the Inter-American Development Bank (IDB), USAID, and CIDA.* , Table45. Status of Disbursement versus Commitments, as of December 31, 2005 for all types of | interventions (under ICF and others, in thousand of USS : . me UN RP ue nn nue eur RatioGin %) | Governance 15,917.7 18.5 6,581.1 29.8 413 Quality 29,949.9 34.7. 8,894.1 .. 403 29.7 | : ACCess 35,391.6 41.1 6,607.7 29.9 18.7 : Efficiency 4886.2 | 5.7 0 0 0 FU Youth and 50.0 0.1 0 0 0 Sports Total 86,195.6 100 22,082.9 100 25.6 Source: Ministère de l’Education Nationale, de la Jeunesse et des Sports, Cadre de Coopération Intérimaire. Bilan des Financements et des Réalisations, Période de Juin 2004-Décembre 2005. Mars 2006. 5.24. However, donors’ commitments of resources do not necessary translate into disbursements. Table 46 compares donors’ commitments over the period FY2004-07 with 77 Few donors are intervening on the demand-side, most notably the World Bank. 78 The European Union has channeled its support through the Euro 25 million Quality Improvement Project (2000-2007), focused on in-service teacher training, classroom rehabilitation, and a pilot program for coverage youth in several regions. It is anticipated that the EU will follow this assistance with a Euro 12 million project (2008-2011) to continue these qualitative investments in four regions. Similarly, IDB’s US$19 million Basic Education Project has supported in-service teacher training, public school classroom construction and rehabilitation, and institutional strengthening. Finally, it is anticipated that CIDA will commit approximately CANS200 million between 2008-13, to build new schools (as many as 400), strengthen institutional capacity of the MENFP, continue its quality improvement programs in the Arbonite region, and improve vocational training. It is worth noting that recent figures indicate that as of April 2007 World Bank and Caribbean Development Bank are major donors, with US$25 million and US$10 million, respectively. 98 [page 133] Haiti: Public Expenditure Management and Financial Accountability Review disbursements. As of December 31, 2005, only US$22 million out of more than US$ 86 million was disbursed, resulting in a relatively low disbursement ratio of 25 percent. Disbursement under ICF framework appears relatively low at less than 20 percent while donors’ aid flows provided outside the ICF framework (linked to the “ rentrée scolaire” and back-payment of contractual teachers’ salaries) record higher disbursement rates: about 32 and 35 percent (see Table 46). In terms of areas of intervention, governance and to a lesser extent quality record relatively good disbursements of resources: 41 and 30 percent, respectively. At less than 20 percent of total disbursement, activities related to increasing access might be limited by poor disbursements of aid flows. But it is also due to delays in MENFP execution of school construction programs, which involve much lengfhier procurement processes.” If this disbursement trend were to continue, barely 60 percent of total commitments would be disbursed at the end of the ICF period. This raises an important concern given the fact that increasing access is at the center of the strategy for achieving EFA goals. Table 46. Donors’ Commitments and Disbursements under ICF and Other Interventions (US$ thousands, unless otherwise indicated _—————— INT rom ll om mm mr F Doi je LL Il | I] | (200407) | lasofbec ti, | | 6 da) à Dee | 20 il | Ab Deal nl | Hi hi He | ul | hi ou | 1 | Ha Governance 5,560.9 1,067.9 : 8,030.8 3,187.1 2,326.0 2,326.0. :: Quality 10,332.9 1,716.3 17,319.6 5,907.2 22974 . 1,2706 ACCESS 29,116.2 6,470.1 : 377.4 89.6 5,898.0 48.0 Efficiency . 17173 où 3,169.0 0 : Youth, Sport 50.6 0 Le - 0 : and civil : education Total 46,777.3 9,254.3 28,896.9 9,183.9 10,521.4 3,644.6 Ratio 19.8 31.8 34.6 Disbursement/ Commitments % Source: Ministère de l’ Education Nationale, de la Jeunesse et des Sports, Cadre de Coopération Intérimaire. Bitan des Financements et des Réalisations, Période de Juin 2004-Décembre 2005. Mars 2006. ® While MENFP lacks capacity in school construction, it is important to highlight FAES as a positive experience in this respect. 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SE À & à 55e S z 2 2 LSasSs 5 Fa É EResès = 5 22328 4 3$232 CRE [page 137] Haiti: Public Expenditure Management and Financial Accountability Review 5.25. Donors also provide specific interventions to ensure implementation of the school year. Table 48 provides details on donors’ interventions to finance school year 2004/05. Unfortunately, existing data is limited to commitments. Because of the lack of disbursement figures, it is not possible to provide a clear picture of the impact of donor financing on the FY2004/05 school year. Much in line with donors’ involvement in the education sector as a whole, USAD, CIDA, European Union and IDB stand out as key players in the provision of assistance during the 2004/05 school year. Altogether, they account for about 90 percent of the financing commitment of the school year, with USAID representing more than 40 percent of expenditures over the period June 2004-December 2005. ’able 48. Donors’ Commitments to Financing School Year 2004-05 (in thousand USS nn ju oo School building 1 696.0 405.1 162.1 2 263.2 School réhabilitation 17800 1 854.8 405.1 3654 900.0 4 939.9 School furniture 810.3 5 840.0 333.4 644 844.9 Support to schoo! 2 142.9 14585 4900.0 1 089.0 9 126.5 .. | fees , : Schooi canteens 810.3 7 447.5 _ : Distribution of 810.3 . administrative documentation Payment of arrears to 1 053.4 10534 contractual teachers Logistic and 162.1 162.1 management fees Total 39229 35508 5 509.0 10 1089.0 698.7 1126.4 26 647.8 740.0 Percent of total (47) (33) (20.6) (403) (41%) (26%) (42%) (00%) Contributions Source : Bilan des Financements et des Réalisations - Période : juin 2004-décembre 2005 ; mars 2006 5.26. In terms of components, support to school fees and cafeteria as well as school building and rehabilitation account for the largest shares of donors” interventions in the education sector. They represent about 27 percent and more than 60 percent of the total donors’ financing, respectively. 5.27. Although several donors are active in the education sector, there is still a significant gap between available resources and needs on the ground. While there has been progress under the ICF, results on the ground have been slow because conventional modalities for delivering education services to the poor are limited by the lack of institutional capacity. Furthermore, most external education funding committed under the ICF aims to improve educational quality in public schools. Much more needs to be done to expand access by addressing both demand-and-supply- side constraints. 103 [page 138] Haïti: Public Expenditure Management and Financial Accountability Review 5.1.4 Identifying Weaknesses, Issues and Challenges in Budget Process and Public Expenditure Management 5.28. Several weaknesses, issues and challenges would need to be addressed to strengthen public finance management in the education sector. Weaknesses in this area are at the center of the poor quality of management of public resources and ultimately impair efforts to increase education outcomes. An increase in resources will not be enough to improve education outcomes. Efficient and transparent management of public resources would be crucial to achieve improved education indicators. 5.29. Budget preparation does not follow any specific timetable, and budget proposals have not been backed up by a sectoral strategy. As with other line ministries, the process starts with the instructions of the MEF through the ‘’lettre de cadrage’. There is no formal planning and consultation mechanism established within the Ministry of Education. Although the sector has a clear strategy, budget proposals have not been based on that strategy, and allocations do not reflect any strategic achievable objective. More often the sector’s budget proposals are overly optimistic beyond its demonstrated absorptive capacity. They are not often substantiated by clear justification and spending targets. The result is that more often than not the proposals from the Ministry of Education do not obtain the MEF’s agreement. In fact, as for most of the sectors, budget allocations are just the renewal of allocations of the past year with an increase not often substantiated by clear justification and spending targets. ‘ - ‘ 530. The preparation process is also affected by the centralized approach adoptet witkim nou : the Ministry, which results in little involvement of the Ministry’s directions and entities. The Direction de la Planification et ce la Cooperation Externe (DCPE) is in charge of the preparation along ‘with the Department des Affaires Administratives (DAA). Other central and regional departments are not involved in the process. Thus the budget proposals do not account for needs expressed by the ministry’s entities other than those articulated by the DCPE and DAA. This is an important issue given the discouraging effect that it could have on staff of the Ministry, who questioned the usefulness of their contribution to preparation of the budget. 5.31. Budget execution in the sector suffers from the lack of detailed and accurate data. Aggregate execution might hide difference in budget items. But detailed information on the execution is scarce and incomplete. Also, the lack of clear spending targets makes it difficult to judge the effectiveness of budget execution in terms of achieving the objectives set. Only recently has the GoH prepared a list of poverty reduction items in the context of the HIPC tracking mechanism. To what extent the list reflects the priorities of the PRSP, currently under preparation is questionable. Specifically, to what extent the list is consistent with the sector strategy and the EFA's objectives, is unclear. However, one might argue that the I-PRSP has been a solid basis to design the list. The challenge now is to convert this list into specific budget lines to ensure the effectiveness of the tracking and monitoring exercise. For the education sector, this would require designing specific spending targets for these items and following-up with their execution. 5.32. Governance issues are also a major constraint to effective expenditure management in the education sector. Lack of clearly defined procedures, transparency and accountability in the use of public funds often results in poor expenditure management in the sector. Weak capacity of the Ministry of Education to oversee and regulate the dominant non-public education sector has a negative impact of the sector as a whole. In fact, lack of resources and weak capacity in the Ministry of Education (MENFP) have resulted in distortions in the education sector and hampered 104 [page 139] Haiti: Public Expenditure Management and Financial Accountability Review the MENFP from fulfilling its normative functions of regulation and quality control. As a result, quality in education has sharply deteriorated. À high percentage of schools do not meet basic sanitary and safety standards (16 percent are houses, 33 percent are in churches, and 9 percent are open-air). 70 percent of schools are not accredited by the MENFP (10,932 out of a total of 15,664 primary schools), while 60 percent of teachers in the non-public sector are not appropriately qualified. Only 360 school inspectors are responsible for accreditation, pedagogical supervision and administrative support, or an average of one inspector for every 6,000 students. Also, inspectors are poorly trained and equipped. Because of the increasing number of non-public schooïs and inadequate regulation, the education sector is increasingly segmented, with little standardization or curricula, pedagogy and/or assessment, making systemic qualitative improvements difficult to achieve, much less measure. Only a minority of non-public education providers belong to formal school associations (for example FONHEP and CONEP) and aim to provide the conditions needed for quality education. À formal link with the public sector is missing to harmonize quality standards and coordinate education policy and reforms in the education sector. 5.33. Another issue in education expenditures management concerns the capacity of the Ministry to better manage its own human resources. For instance, there is a lack of qualified teachers while the MENFP or the University offers several scholarships to students to study abroad. The future of these students is not guaranteed and most of them do not come back to the country because incentives are not in place. The weak human resource capacity becomes a recurrent phenomenon. This shows that improving budget management in the education sector goes beyond the simple policy of increasing public resources. The design and implementation of an effective human resource management policy would be critical if the education sector is to improve public spending effectiveness. : E 5.15 Policy Recommendations and Priorities 5.34. Seven policy recommendations appear as priorities to ensure improved education outcomes in view of achieving EFA goals. + Increase the allocation of resources to the education sector, with a focus on primary education. As documented above, low levels of education indicators in Haïti result in part from the very low public education spending, about half of which goes to primary education. Improving education outcomes require that the level of resources be increased. More specifically, as mentioned above, putting Haïti on the right track to achieve the EFA targets by 2015 would require that the education sector receives about 21 percent of total government recurrent spending (net of debt service), of which at least 50 percent goes to primary education throughout this period. Rapid expansion of primary education access (and more gradual improvement of education quality) would improve basic service provision and would lead to sustainable job creation, through employment of thousands of new teachers: the education sector is the largest source of employment in the country after agriculture. Recent increases in allocations go in the right direction. But the challenge is now for the Government to sustain these flows of resources over a medium to long-term period to ensure that Haïti stays on the right track to achieve the EFA goals. On the one hand, the low resource base makes it difficult for Haïti to provide required recurrent spending to achieve the EFA goals. On the other hand, volatility of donors’ resources does not provide any guarantee for sustained investment flows in the future. 105 [page 140] Haiti: Public Expenditure Management and Financial Accountability Review e Execute the Medium-Term Expenditure Framework (MTEF). Improving education outcomes requires that the Government has a medium-term perspective. To this end, the execution of the MTEF, adopted in the context of the development of Haitis national strategy known as Education for All, should ensure that required level of resources to the primary education are protected. However, an effective execution of an MTEF is linked to a sound budget preparation and execution process. Currently, weaknesses identified in this area calls for strengthening of yearly preparation and execution of an education budget. Establishing a clear timetable, setting responsibilities for the preparation process, and linking budget proposals to the sector Education for All strategy will help reinforce the execution of the adopted MTEF in order to make it a sound policy tool. The modernization of the Department of Administrative Affairs (D'AA) is crucial. The DAA is responsible for the overall budget execution (in collaboration with the Regional Education Departments, DDE), and is the primary interface with the Ministry of Finance. The World Bank’s ongoing Phase One of An Education for All Adaptable Program Grant could serve as the main instrument to reinforce technical capacity of the DAA. In the context of the project, capacity building assistance will be provided to reinforce the ability of the DAA to manage public resources. e _Improve budget data and information. This is perhaps the utmost priority for improving budget management in the education sector. Budget data would need to be improved to ensure that: (1) sector budget proposals are meaningful; and (ii) the tracking of expenditure execution is done. Ensuring an updated database of budget proposals and allocations would help the MENFP prepare more accurate and realistic budget proposals. The MENFP would | also need to prepare data on quarterly execution of government spending in the education ‘ sector. This would help facilitate the tracking exercise of Government spending and their . - impact on education outcomes. Following ‘up the execution of spending and assessing . whether actual expenditures are in line with the EFA goals cannot be done with data that currently is weak and inaccurate. e __Improve public resource management. Increased resources to the education sector would not achieve higher education outcomes unless public resources are managed effectively. The education sector currently faces issues of transparency, accountability and effectiveness of use of public resources. There is a need to strengthen transparent, participatory procedures for decision-making and resource management. Specifically, involving parents in school management decisions will improve transparency, accountability and effectiveness of the use of public resources at the school level. This requires strengthening the role of parent association and school management committee. While currently more than 70 percent of all schools have some form of parent association and/or school management committee, many of these communities are still weak and dominated by the school director and his/her associates. e Ensure sustained investment flows and targeting specific investment programs. Education outcomes will not improve on a sustained basis unless investment needs are met. This requires that investment resources are provided on a medium-to-long term basis. More specifically, targeting investment programs will help improve access and quality. An area of particular focus is the pre-service teacher training, which has not benefited from any investments in at least a decade. Facilities are in poor condition, teacher trainers emphasize out-dated teaching methods, and trainees lack the material they need to develop both theoretical and practical pedagogical competencies. Sustaining investments in the education sector also requires that disbursements of aid flows match commitments to 106 [page 141] Haiti: Public Expenditure Management and Financial Accountability Review ensure predictability of resources and the execution of investment programs. Moreover, sustained investment flows need to be accompanied by sufficient recurrent resources. In turn, this implies that the Government’s budget is able to support additional recurrent spending and calls for an effort on the Government side to increase domestic revenue through adequate revenue-enhancing measures. e Create and Reïnforce Public/Non Public Sector Partnerships. Because of the large share and critical role that the non-public sector plays in the education sector in Haïti, improving education outcomes can not be achieved by implementing policies focusing solely on public education. In fact, even large increases in resources and improvement in management of public resources in the public education system would not be enough to achieve the EFA goals. Public/non public sector partnerships should be created and reinforced. Access to non-public schools stands out as an area where this partnership could be explored. À possibility that could be explored is the provision of subsidies to poor students currently not enrolled in school so they could attend non public primary schools free of charge.“ e Reïinforce technical capacity in public finance management. Technical capacity in public finance needs to be reinforced as it has been detrimental to the quality of budget preparation, planning and execution. As a first step, the MENFP would need to reinforce ‘_ capacity of staff involved in budget preparation and execution to ensure that the production of detailed budget data is made on a regular basis. An area of particular emphasis is the investment budget, where lack of capacity has resulted in a lack of good understanding of -: . : the investment budget. Most notably, it is critical that the MENFP develop technical capacity to track and quantify donors’ resources injected into investment programs and . projects, and reconcile this information with the investment budget as currentiy recorded. —_- This requires that technical assistance is provided to staff concerned with the preparation ‘ and execution of the budget. But this is not a specific issue to the education sector. [touts . | across sectors and calls for a comprehensive approach, which might require full-fledged : capacity building in the specific area of the investment budget. 5.2 HEALTH SECTOR 5.2.1 Background and sector objectives 5.35. Food deprivation and limited access to health care, because of poor infrastructure, lack of public funding and lack of qualified personnel and drugs, has resulted in dire health conditions for Haïti’s poor. Table 49 provides some background statistics pertaining to the health sector. Only 28 percent of the population has access to health care. Health services are predominantly provided by non-public institutions (70 percent) and the quality is poor. Infant and maternal mortality is the highest in the Americas, more than four times the regional average. Of children younger than 5 years of age, 23 percent endure chronic malnutrition, and 5 percent suffer from acute malnutrition (which causes stunting and reduces brain development). The mortality rate 5 In the context of the Education for Ail Adaptable Program Grant, Bank staff calculated that the amount of the per student subsidy to US$90 to cover average tuition fees (US$70) and learning material costs (US$20) in non public schools. The total cost of this program is estimated at US$19 million. See World Bank Education for Al! Adaptable Program Grant, April 2007. 107 [page 142] Haiti: Public Expenditure Management and Financial Accountability Review for children less than 5 years of age is 86 per 1,000, high by LAC standards.! The life expectancy at birth of 53 years is lower than the average for Low-Income Countries. Haiti also faces a high incidence of HIV/AIDS with UNAIDS estimating that 5.6 percent of the adult population is HIV positive. 5.36. Authorities have defined a health sector reform, which aims to improve the coverage and the efficiency of the health sector. The companion National Strategic Plan for Health Sector Reform has been defined for the 2003-2008 period and aims to enhance the Haïtian populations health status in the context of achieving the MDGs. Box 8 summarizes the objectives and policy actions (See Appendix 5.1 for more details). But, this strategy does not include spending targets and appears relatively ambitious, according to the low level of resources devoted to the health sector. Per capita expenditure on health in Haiti is only US$26, while it averages US$30 in LIC, US$36 in sub-Saharan Africa and US$222 in LAC. Furthermore, nearly half of this total expenditure is financed by Haïîtian households, despite their low income level. 5.37. Implementing this strategy successfully and achieving higher health outcomes would require increasing the level of resources to the health sector and improving the resource management. However, increased allocations to the sector would not be enough. Ensuring that public resources have impact on access and quality of health services is conditional on improving the quality of spending in the sector. Overall, increasing health outcomes to international standards depends on the effectiveness of public expenditure management in the sector. But given the importance of the private-sector, it is also linked to the ability of the public sector to create/reinforce partnership with the private-sector. —- #l The high level of under-five mortality could be partly explained by the low level of immunization and the default in the management of diarrhea and Acute Respiratory Infection (ART). According to the preliminary report of the last DHS (EMMUS IV, 2005-2006), only 41 percent of children aged between 12 and 23 months have been completely immunized; 48 percent have been partially immunized and 11 percent have not been immunized. According to EMMUS IV, 2005-2006, only 20 percent of children suffering from fever or ART have their mothers (or relative) request advice or treatment to health services; while 40 percent of under- five children suffer from these symptoms and more that 20 percent of deaths of under-five children were caused by pneumonia in 2000 (See WHO database). 108 [page 143] Haïti: Public Expenditure Management and Financial Accountability Review Table 49. Health Indicators. Comparison Haiti and regional averages (LAC, SSA, and LIC fn a tt 1905 2000 200 Éatn on SUD. Life Expectancy (years) 49.0 50.7 53 72.3 58.8 46.2 Child health Infant Mortality (per 1000) 86 83 57 26.5 79.5 100.5 Under 5 Mortality (per 1000) 135 118 86 314 121.6 168.2 Prevalence of immunization (EIP, %) 30 34 41 . . … Prevalence of Child Malnutrition, 17.2 73 38.9 29.4 underweight (%) Reproductive health Maternal Mortality (per 100 000) 476 523 194% 921* 684* Birth attended by skilled staff (%) 60 882 40.7 423 Prevalence of contraception (%) 12 28 32 723 39.5 21.9 Fertility Index 4,7 4 2.5 3.7 5.3 Diseases AIDS Prevalence (%) 3.8 0.5 17 6.1 Malaria Prevalence (%) Tuberculosis Cases (per 100 000) 386 63.6 224.2 . DOTS detection rate (% 4.9 61.7 438 50.9 * These numbers are modeled estimates which usually overestimate the maternal mortality compare to national estimates. For example, for 2000 the modeled estimate for Haiti is 680, while the national estimate is 523. Sources: EMMUS IT and IV, and WHO online database. . 109 [page 144] Haiti: Public Expenditure Management and Financial Accountability Review Box 8. Strategy for the Health Sector in Haiti General Objectives of the 2003-2008 National Strategy Plan for Health Sector Reform "A reduction of at least 50 percent in maternal mortality; “A reduction of at least 50 percent in the rates of infant and under-five mortality; "A reduction of 30 percent in the incidence of HIV/AIDS infection; “A reduction of 30percent in mortality associated with HIV/AIDS; "A reduction of 10 percent in mother-to-child transmission of the infection; “A reduction of 30 percent in the incidence of Tuberculosis; " A reduction of 50 percent in mortality associated with malaria; "A reduction of 50 percent in disorders due to lack of iodine; and “Control of some diseases (lymphatic filariasis) and elimination (neonatal tetanus) or eradication of other diseases (poliomyelitis, measles). Intermediate Objectives 1) Decentralize the health system; 2) Improve the supply of health care; 3) Revitalize and expand the public hospital network in order to increase the supply of health care and improve its quality; 4) Improve regulation of the sector by giving the MPHP tools for managing the entire sector, thus ce strengthening the leadership of the MPHP and its regulatory role; " 5) Modernize the health information system; : 6) Develop human resources; . . - . : : 7}. Guarantee the population’s access to essential drugs; and : . + |: 8). Increase and rationalize financial resources in order to allow for improvements in the supply service in the context of sector-based reform. Source: Ministry of Public Health and Population, Strategic Plan for Health Sector Reform, March 2004. : 5.2.2 Trends and Structure of Health Expenditures 5.2.2.1 Total Health Allocation 5.38. Allocation to the health sector doubled in real terms from 1.2 billion gourdes to 2 billion on average between FY2001/02 and FY2006/07, following the government budget increase by 30 percent over the same period. As a result, the share of Ministry of Health in total budget increased from 5.4 percent to 6 percent on average between FY2002-04 and FY2005-07. 5.39. However, allocations to the health sector still compare poorly by international standards. It stands below Madagascar’s figure (8.4 percent)? and it is far below that of the Dominican Republic (10.3 percent)” , Burkina Faso (10.3 percent} and Zambia (13.1 percent)”. 5.40. The priorities set for the health sector have not yet translated into a sufficient increase in budgetary allocations to the sector. According to the World Health Organization, #? Madagascar - Public Expenditure Review (PER) 2004 - The challenge of poverty reduction, World Bank (2005). Note that the figure for Dominican Republic refers to executed spending. See Dominican Republic - Public Expenditure Review: Reforming institutions for a more efficient public expenditure management, World Bank (2004). “Burkina Faso - The budget as centerpiece of PRSP implementation - Public Expenditure Review, Word Bank (2005). $ Zambia - Public Expenditure Management and Financial Accountability Review, World Bank (2003). 110 [page 145] Haiti: Public Expenditure Management and Financial Accountability Review Haiti devotes only US$84 per capita to health services (see Figure 12), less than Ghana (US$98), and Guinea (US$95). In fact at less than 3 percent of GDP, the public sector’s contribution to the health sector accounts for only about 40 percent of total health expenditures (estimated at about 7.5 percent of GDP according to the World Health Organization). Figure 12.Per capita total expenditure on Figure 13.Total Health expenditure in LIC in 2003 health in US S in LIC in 2003 (% of GDP) ———© ©" “ES | | ji | il Me re | | ju Madgsca = | | | ns || cne.om Stan ll il nl NES a | . Li L i . 0 0 100 150 20 250 | seras mn cn j Ô 2 4 6 8 10 12 Source: WDI, 2006 ource: WDI, 2006 «541. Thus, the private sector contribution to health expenditure is quite high by regional standards and comparable countries. For instance, in Nicaragua, the contribution of the: private sector to the health expenditure is 10 percentage points lower than that of Haiti. Furthermore, “out- of-pocket expenditure”* represents about 70 percent of private expenditure (which represents 62 percent of total health expenditure). In other words, Haitian households directly finance nearly half of the total expenditure on health (43 percent), i.e. the same proportion of spending made by Nicaraguan households whose income is twice as high. 5.42. These figures suggest that the limited impact of public spending on health outcomes might result from the combination of low levels of public resource allocation to the health sector and the inability of the private sector to deliver basic and quality health services affordable to the poor Haïtian. This, combined with inefficiency of spending, lock Haïti in abysmal health conditions. The figures also suggest that under these circumstances, reaching the international goal of 15 percent of the budget to the health sector by 2015 set forth in Abuja (Nigeria) would be a daunting challenge that Haïti’s own resources cannot afford. Pulling external resources to finance health spending is therefore a priority for Haïtian authorities. 5.43. Unfortunately, despite consistent efforts undertaken, external resources allocated to health remain among the lowest within the LIC group. The World Health Organization estimated that in 2003, the external contribution to the health expenditure was only about 12 percent of total expenditure, lower than for Rwanda and Liberia at 54.5 percent and 32.3 percent, respectively. #6 “Out of pocket expenditure” is any direct outlay by households, including gratuities and in-kind payments, to health practitioners and suppliers of pharmaceuticals, therapeutic appliances, and other goods and services whose primary intent is to contribute to the restoration or enhancement of the health status of individuals or population groups. It is a part of private health expenditure (WDI, 2006). 111 [page 146] Haiti: Public Expenditure Management and Financial Accountability Review Figure 14.Private health expenditure in selected Figure 15.Public health expenditure in selected LIC in 2003 (% of GDP) LIC in 2003 (% of GDP) L 2 4 6 8 10 | | 0 25 L 15 2 25 3 35 4 | Source: WDI, 2006 Source: WDI, 2006 5.2.2.2 Analysis of Budget Structure 5.44. While recurrent spending accounted for more than 70 percent of Health total budget over FY2002-04, the structure of health budget has shifted toward a larger share of investment, which accounts for more than 60 percent of total budget in FY2005-07. However, this shift results mainly from the large allocations provided to the investment budget in FY2006/07 (see Figure 16), in the amount of 4.2 billion gourdes (nearly 80 percent of total FY 2006/07 health budget). n. _- 112 [page 147] Haiti: Public Expenditure Management and Financial Accountability Review Figure 16. Allocation Distribution, FY2004-05 to FY2006-07 FY2006-07 Investment e— Recurrent Sources: Le Moniteur, Journal Officiel de la République d'Haïti and Staff Calculations. : 545. As a result, the increase in - - : allocation of resources to the health %able50. Allocations to Health Sector (real HTG' sector stemmed mainly from the rise in : million}, FY2001/06 : ii — the investment budget, which saw à 0 Average |. : three-fold increase in real terms over ; Le Le UFYO2/94 | FYe5/07: “. the period under review: 364.4 million | Total Health Budget 12336 2046,5 ‘ des on average in FY2002-04 to Total Recurrent Budget 869.2 793.1 gources ge Total Investment Budget 3644 1253.4 1.2 billion gourdes in FY2005-07 (see Total Recurrent in % of total budget 73 37 Table 50). This sharp increase in the Total Investment in % of total 27 63 investment budget more than me Budget 20646 351010 nn otal Nation Budge: + « compensates for the 9 percent decline in Shares of Health sector in Nation 54 6.0 recurrent budget on average, over the | Budget (in %) same period. This decrease in real Total Nation Recurrent Budget 14073.6 117925 recurrent expenditure is mainly due to a (xcl. Interest Payments) decline in expenditure on goods and Percent of Total (Excel. Interest 5.7 6.6 services, which fell by more than 45 Payments) ? y . Memo Item: percent on average over the period under Nominal GDP 85,700 94,028 review. Sources: Le Moniteur, Journal Officiel de la République d’Haïti and Staff Calculations. 113 [page 148] Haïti: Public Expenditure Management and Financial Accountability Review 5.46. These figures raise two major concerns. First, the large increase in the investment budget during the recent Years might face limited Figure 17.Recurrent Expenditure (HTG million), absorptive capacity and further result in FY2001/06 inefficiency of spending. However, this does not mean that investment resources ADD need to be limited to the sector’s current ÉDITER absorption capacity. Indeed, reaching ENS TT internationally required levels of health ET mn ; expenditure implies the increase in 5 . DE Î allocations of resources to the sector. It 5 LE : also implies that the sector’s technical and E® human capacity as well as management of FY01-02 FY02-03 FYO3-04 FY04-05 FY05-08 FY06-07 Fo nes resources be significantly improved. Second, the decline in expenditure on = = a goods and services is worrisome as it Soree Le Moniteur, Journal Officiel de la République k L aïti and Staff Calculations. might have affected the delivery of health services. Some health centers in Port-au-Prince lack basic functioning resources and cannot provide the basic services to the population. Table 51. _ Financing of Public Investment Plan, FY2004-05 to FY2006-07 : ‘ Value (real HG millions)" 1! Share(%). 0 É: Domestic : : External. _‘Fotal Domestie External: Total PIP 2904-05 136.5 303.6 . 440.6 310 69.0 100 Le PIP 2005-06 60.3 209.1 269.4 224 77.6 100 ce PXP 2006-07 69.8 2996.1 3065.0 2.3 97.7 100 | Sources: Ministry of Planning and External Cooperation. : : : 5.2.2.3 Analysis of Budget Execution 547. Because of the poor quality of data, the analysis of the execution of expenditure ‘able52. Health Sector. Budget Execution in the Health Ministry should be interpreted real HTG million), FY2002/07 perde decined Fm an avenge of 02 Luieutte Lever | spending declined from an average of 92 J vaxos | E SVT percent of the Health Ministry’s total budget | Total Budget allocated 1233.6 1125.1 over FY2002-04 to about 60 percent on average | Total Budget executed 10979 682.4 : : Execution rates (in %) 92.5 60.3 over the period FY2005-07. The execution of | Total recurrent allocated 869.2 777.9 the investment budget has been particularly | Total recurrent executed 954.7 636.8 slow since FY2004/05, reflecting the slow pace | Execution rates (in %) 109.9 81.2 of execution of projects and programs, limited | Total investment allocated 364.4 3472 à : : . Total investment executed 143.1 45.6 expertise and experienced staff in the Ministry | beecution rates (in % 454 126 to accelerate spending procedures and satisfÿ Sources: Le Moniteur, Journal Officiel de la procurement requirements. However, it also République d’Haïti and Staff Calculations. reflects poor budget planning in particular during the preparation of the investment budget. 114 [page 149] Haiti: Public Expenditure Management and Financial Accountability Review 5.48. Contrary to the investment budget, the execution of the recurrent Table 53. Health Sector. Recurrent Budget budget has been remarkable, varying at Execution (HTGT million), FY2002/07 high levels between 85-100 percent over ai je VéraBe ï QT the past five yeurs (ace Table 53), The || À un voor | execution rates of recurrent spending are | Total recurrent allocated 869.2 777.9 mainly driven by spending on wages and Of which salaries, which account for on average Wages and salaries 657.9 655.1 : Goods and services 184.6 103.2 about 90 percent of total expenditures Others 26.6 19.6 executed over the period FY2004-06. This Total recurrent executed 954.7 636.8 expenditure category is generally executed Of which in full, reflecting the Government’s resolve Wages and salaries 643.2 571.8 to meet its salary payment obligations to the goss and services NS se civil servants employed in the health sector. Execution rates (in %) ‘Direct payment” procedures are used to Wages and salaries 98.2 86.5 process the payments of the wages and Goods and services 165.7 62.1 salaries, leaving a marginal recourse to the Sources: Le Moniteur, Journal Officiel de la République use of comptes courants. Only about 1 d'Haïti and Staff Calculations. percent of total personnel expenditures were processed through comptes courants during the period FY2001/03.5 ——- 5.49. The execution of spending on goods and services has been on a declining trend since Fo 2064, reflecting mainly tighter control over the use of comptes courants, increased delays in :. _ . processing payment documentation (on the part of the Ministry), and the payment order (on : — the part of the Treasury). A large share of these expenditures was executed through the: use.of . Lo comptes courants over that period. For instance, more than 60 percent of spending on goods and … ° services were processed through comptes courants in FY2001-03. However, the use of comptes : : courants has been gradually reduced. In FY2002/03, only 17 percent of those expenditures were ‘ executed through comptes courants, as the result of the Government’s actions to gradually phase out the use of comptes courants. 5.50. The low levels of the execution of spending on goods and services is symptomatic of the ill functioning of most of the health centers, which operate more often without the basic needs (essential drugs, vaccines, small equipments, etc.). It also highlights the limited impact that health spending has had on health outcomes in an environment where intra-sectoral efficiency of spending (‘’value of money”’) is weak. 5.51. Table 54 below presents the shares and execution rates of selected items during the FY2003-06 period. Spending on maintenance of equipment and building averaged only 0.2 percent and 0.4 percent of total recurrent budget, respectively. Moreover, their execution rates are relatively low (57 percent and 47 percent on average) and exhibit a downward trend over the period. This negative trend is worrisome given the importance of maintenance spending for investment stock. Small equipment and medical and surgical supplies represent 0.1 percent and 2.5 percent, respectively, on average of total recurrent budget. Their average execution rate, although higher than those of maintenance items, declined over the period FY2005-07 compared to FY2002/04: from 84 percent to 76.4 percent (health supplies and small equipments); and from 89.4 #7 Starting in FY2004/05, the execution data do not unfortunately recorded the spending made through the ‘’comptes courants”. 115 [page 150] Haiti: Public Expenditure Management and Financial Accountability Review percent to 44.6 percent (medical and chirurgical supplies). More troubling is the large decline recorded in the execution of spending allocated to medical and surgical equipment. Put together, the declining trend might explain the low health outcomes of Haiti. Table 54. Health Sector. Share of selected items in Recurrent Budget and execution rate (in %), FY2002/06 8 Allocated 0.39% 0.68% 0.14% 3.92% 345% S Executed 0.18% 0.24% 0.09% 3.56% 322% & Execution rate 40.98% 31.57% 56.46 80.22% 82.45% ë Allocated 0.14% 0.25% 0.06% 1.26% 1.22% S Executed 0.13% 0.18% 0.07% 131% 0.72% È Execution rate 85.28% 69.26% 111.76% 98.57% 56.42% 8 Allocated 0.16% 0.37% 0.05% 2.03% 121% È Executed 0.10% 0.18% 0.04% 1.00% 0.00% È Execution rate 55.14% 45.60% | 81.15% 45.22% 0.00% 8 Allocated 0.15% 0.34% 0.04% 2.65% 0.00% $ .. Exeçuted 0.08% 017% . : 004%., 1.43% / | . l Ë - , Execution rate 46.30% 40.12% -71.60% . 44.02% / - : Sources: Le Moniteur, Journal Officiel de la République d'Haïti and Staff Calculations. mie! | 5.2.3. Public Investment Programs in the Health Sector Li 5.52. ‘While resources devoted to thé health sector’s investment programs (including vo foreign aid), decreased over the past two fiscal years, they are projected to increase nearly seven-fold, reflecting huge flows of expected resources from the donor community. However, four main issues are worth mentioning. First, the large increase in the projected investment flows reflects the low base of resources in the previous fiscal years 2004-06. Second, the extent to which these resources reflect the required spending levels to implement the National Strategic Plan for Health Sector Reform is unknown as the strategy does not have clear spending targets. Third, a large share of donor resources is provided outside the budget and is not accurately captured in the PIP. Fourth, the level of resources projected in the PIP takes little or no account of the associated recurrent spending that the execution of the PIP might bring about. But this is not a specific issue of the health sector. It is a more general issue of a parallel budget preparation process, which is characterized by the MEF preparing the recurrent budget while the Ministry of Planning is in charge of the PTP. 116 [page 151] Haïti: Public Expenditure Management and Financial Accountability Review 5.53. Similar to most priority sectors, investment programs in the Table 55. Resources for PIP in the Health Sector. health sector are mainly financed Comparison to other Priority Sectors, by donors. Nearly 80 percent of the _ FY2004/05-FY2006/07 real HTG million sector FY2005/06 PIP was financed | Average FV20007 by foreign aid (see Table 55). Thisis |. Done ion Total in the same range of donors’ share of [Total Sectors 834,8 85590 9308 the PTP in other priority sectors, most | Health 233 998,7 1022,0 notably health, agriculture, and | Other sectors 811,6 7560,3 8371,9 transports. Shares of Health in total 6,1 (% 5.54. Table 56 below provides Sources: Ministry of Planning and External Cooperation and Staff details on donors’ interventions in Calulations. the health sector through the ICF for the period 2004-006. USA, Canada and UN stand out as key players in the sector. Altogether, they account for about 85 percent of the sector’s investment program over the 2004-06 period, with USA representing about 40 percent of the sector’s investment pledges and 60 percent of disbursements over the period June 2004-December 2005. 117 [page 152] Haiti: Public Expenditure Management and Financial Accountability Review Table 56. Donors’ financing under ICF (in million $US unless otherwise indicated), June 2004- December 2005 Budget allocated in ICF Rationalization of the 21.15 / / / / Î / / 21.15 Sector Fight against / 15.46 / 12.8 2.06 / / / 30.32 HIV/AIDS Fight against Maternal / 10.10 Î 6.56 / / / / 16.66 and Infant Mortality Immunization / 5.0 Î 4.0 / / / / 9.0 Health emergencies / 1.73 25 3.8 / / / / 8.03 Equipment and Material / / / / / 0,07 / / 0.07 Personnel Training / / / 8.95 / / / Î 8.95 Health Facility Î / / / 0.70 1 1 / 0.7 Restoration HIV/AIDS + Child / / / / / / 91.96 / 91.96 survival Other / 2.03 / 35.3 4.69 4.08 0.5 121 47.81 Total 2115 3392 2.5 71.44 : 7.45 4.15 92.46 1.21 234.28 ‘ | Percent of total 9.03 1448 1.07 30.49 3.18 17 39.47 0.52 100 ce Contributions : : - Spernit Budget 2004-05 3.25 23.62 0.42 19,89 3.30 4.30 77.90 0.34 133.02 : : Source : Bilan des Financements et des Réalisations - Période : juin 2004-décembre 2005 ; mars 2006 5.55. In terms of components, support to fight HIV/AIDS and for child survival account for the largest shares of donors” interventions in the health sector. They represent about 99 percent of USA financing”* and more than 50 percent of the total donors’ financing, respectively. 5.56. Although several donors are active in the health sector, there is still a significant gap between available resources and needs on the ground. While there has been progress under the ICF, results on the ground have been slow because conventional modalities for delivering health services to the poor are limited by the lack of institutional capacity. Furthermore, most of the external health funding committed under the ICF aims at improving health care quality in public health facilities. Much more needs to be done to expand access by addressing both demand- and supply-side constraints, particularly in rural areas. 5.24 Weaknesses, Issues, and Challenges in Public Expenditure Management 5.57. Similar with most line ministries, the budget preparation process in the Health Ministry is weak. There is no formal planning and consultation mechanism within the Ministry. There is also no specific timetable to prepare the budget. While there is a sector strategy and clearly defined actions to improve the health outcomes, they have not served to inform budget # The different components are not disaggregated. 118 [page 153] Haiti: Public Expenditure Management and Financial Accountability Review proposals. As a result, proposals for allocations made by the Health Ministry do not reflect any strategic objective. They are not often substantiated by spending targets. In fact, like for most of the other sectors, budget allocations to the Ministry of Health are just the renewal of allocations of the past year with an increase not often substantiated by clear justification and spending targets. 5.58. The dual preparation process of the budget results in poor planning of the investment budget in the Ministry of Health. Moreover, recording problems occur. Expenditure recorded as investment under “Programmes et Projets” certainiy includes recurrent spending, such as wages of staff in charge of the execution of these projects. However, the lack of disaggregated figures on the investment budget does not provide clear information on items contained in the investment spending. It is worth mentioning that this is a general issue of the budget framework belonging to Haiti (and most of the LICs). 5.59. The sector intends to adopt a programmatic budgeting approach, with the development of MTEF and budget-program tools. Linking public spending with health outcomes would indeed require having programmatic budget tools to ensure that budget allocation and execution are in line with the multi-year sectoral objectives. However, given the current status of budget preparation and execution, adopting a programmatic budgeting approach might not be a priority. Indeed, firming-up the basis for budget preparation would be the utmost priority to build the pre-requisites for programmatic budgeting. 5.60. : Similar to most line ministries, budget execution in the health sector suffers from a ‘lack of detailed, accurate data. Also, lack of clear spending targets makes it difficult to assess:the Don effectiveness of budget execution in terms of achieving the objectives set. The recently developed … _: : classification of poverty-reducing expenditures under 10 subcategories offers an opportunity for the: Ministry of Health to link budget allocation with poverty reduction items and track their execution - - throughout the fiscal year. However, to what extent the classification is consistent with the sector . priorities is questionable. Moreover, as the classification remains broad, the challenge. for the Ministry of Health, with limited capacity, is to design specific poverty-related budget lines with ‘ spending targets and follow-up their execution on a regular basis. The effectiveness of a tracking mechanism for poverty-reducing expenditures is conditional on having detailed information on the execution of budget lines. 5.61. Weak capacity of the Ministry of Health results in poor expenditure management in the sector. Issues of transparency, accountability and cumbersome budget procedures adversely impact the effective use of public resources and, ultimately, their impact on health outcomes. Additionally, the lack of adequate resources and weak capacity have prevented the Ministry of Health from effectively overseeing and regulating the private sector. As a result, the quality of health services provided is poor and contributes to low levels of health conditions in Haïti. Harmonizing quality standards and coordinating the health policy and reforms are critical to ensure that the limited resources available in the sector translate to improved health outcomes. 5.62. Human resource management is also an issue that impacts expenditure management. Lack of qualified staff well acquainted with budget procedures limit the effectiveness of budget preparation and execution. Few staff of the Ministry of Health is devoted to the preparation and execution of the Ministry budget. Because of the limited human and technical capacity, there is no systematic follow-up of the execution of the budget and the Ministry does not produce a regular execution report. Data on the execution is scarce and more often outdated, reflecting the lack of a well-equipped statistical unit within the Ministry. Designing a full-fledge 119 [page 154] Haïti: Public Expenditure Management and Financial Accountability Review human resource management policy is therefore an important part of the required policy actions to improve budget management in the Health sector. 5.63. The weaknesses and challenges emphasized above suggest that a strategy to improve health outcomes goes beyond the increase of resources to the sector and embraces a large scope of issues that would need to be addressed to create a nexus and positive dynamic between health expenditures and health outcomes. 5.2.5 Policy Recommendations 5.64. Based on the findings of the PER, the following policy recommendations are made and will be further discussed with the Government and the donor community: e Increase allocations to the health sector, focussing on delivery of basic health services. Afocations to the health sector should be increased to enable the execution of the health strategy. However, the increases in expenditures should reflect the sector spending targets, which the current strategy does not contain. This implies that the first step is for the Ministry of Health to complement the current strategy with spending targets and clearly defined budget allocation priorities. It is also critical that the links between the sector’s strategic objectives (and expected outcomes) and spending targets are reinforced and progress toward achieving the objectives is closely monitored. Specifically, spending requirements to achieve the health MDGs should be evaluated. The second step involves : _defining a list of poverty-reducing health items that should be protected from any eventual | ! .shortfall in resources. A regular follow-up of their executiôn, for instance on a quarterly : | | basis would be needed. This would increase. the effectiveness of a tracking mechanism of poÿerty-reducing expenditures and ultimately improve the impact of spending on health Le _outcomes. . °__Improve the budget preparation and planning process. Increasing the allocations to the health sector would be meaningless unless this is supported by a sound budget preparation process. To this end, the Ministry of Health should elaborate a clear timetable and define the responsibilities of each actor involved in the preparation of the budget. Three main issues should be addressed at the preparation stage. First, the Ministry of Health should clearty define the items that should be considered as investment. This means that the budget line “Program and projects” should be scrutinized to ensure that items included are truly investment spending. Second, the Ministry budget proposals should be based on realistic figures, which should account for the previous year’s actual spending. This will avoid large discrepancies generally observed between budget proposals and allocations. Third, there is a need to initiate budget scenarii, accounting for resource constraints. A first scenario (low case scenario) could be based on an eventual shortfall in resources and should discuss the spending priority. A second scenario (a baseline scenario) should be based on actual spending during the previous year. A third scenario (high case scenario) would assume that the sector receive all the resources required to achieve its objectives. In this context, the Ministry should carry out an analysis of needs and financing gaps in the context of an assessment to achieve the MDGs. Such analysis and assessment could be used to engage in a policy dialogue with the donor community to ensure that donors’ interventions reflect the need’s requirements. This will also help avoid overlapping of interventions. 120 [page 155] Haïti: Public Expenditure Management and Financial Accountability Review e Set the foundations for programmatic budgeting. Achieving higher health outcomes would require strategie budget planning; in other words, adopting a medium-term budgeting approach. However, given the current status of budget processes and the limited human capacity within the sector, a shift toward a MTEF might be premature. Rather, an effective sequencing of such shift would require a focus on creating or strengthening the prerequisites of an MTEF. A first step is to reinforce technical capacity to improve resource and spending projections, account for aggregate budget constraints, and track with accuracy donors’ investment flows. À second step is for the Ministry to be able to produce a full-fledged sectoral PIP, which should translate the strategic objectives of the health sector into medium-term expenditure requirements. À third step is to design a road map toward the preparation of an MTEF. Only when these prerequisites are in place, should the sector move to programmatic budgeting. ° _Improve transparency and accountability in the use of public resources. Principles of sound budgeting and financial management should be fully applied to the health sector. Like in most of the line ministries, there is a need for increased transparency and accountability through, for example, the issuing of regular public expenditure reports for the sector to monitor the execution of spending. Another measure to improve transparency in budget execution is for the Ministry of Health to reduce the number of comptes courants : and set a clear timetable for completely phasing out use of these discretionary accounts. + Execute a fiscal sustainability assessment of health programs. Programs developed in : : the health sectors should be subject to an analysis of their fiscal sustainability given re - expected levels of national and international resources available. In particular the capacity . - . of domestic resources to support recurrent. spending associated with investments in the ; L | sector should be systematically assessed. | _ ‘ + Reinforce donors’ financial commitment in support of the health sector. Similar to : ° no ° most sectors, predictability of external support is essential for the success of reforms in the health sector. The Government and donors should coordinate medium-term financial commitments in support of the health strategy and programs. Commitment should be based on the sector PIP and in line with the objectives of achieving the health MDGs. Efforts should also be made on the part of the donor community to put more resources into the budget. This would allow the sector to have a better understanding of resources allocated to the sector and facilitate the monitoring of the execution of expenditures. In the meantime, there is a need for the sector to develop a mechanism to track donors’ resources provided outside of the sector’s budget. ° Strengthen human resource management and reïinforce capacity in budget processes and spending management. This requires that the Ministry develop a comprehensive human resource management strategy, including the possibility of hiring new staff, with associated spending requirements. The strategy and its financial feasibility should be discussed with the MEF. In particular, implications on the Government wage bill should be evaluated closely with the MEF. 121 [page 156] Haiti: Public Expenditure Management and Financial Accountability Review CHAPTER 6 : JUSTICE AND SECURITY EXPENDITURE REVIEW 6.1. This chapter reviews the broad trends of allocation and execution of public spending in the justice and security sector. The lack of an integrated sectoral strategy and weak budget and expenditure management processes limits the ability of this review to assess the quality of allocations and spending for the justice and security sector. Therefore, the analysis focuses largely on the recent trends of allocations of expenditure, the structure and execution of the budget, and questions of fiscal sustainability of the projected increase in the police wage bill. 6.2. Key findings of the chapter are summarized as follows. First, total yearly allocations to the Justice and Security sector nearly doubled in real terms between FY2002-04 period and FY2005-07, in line with the increase in the Government overall budget. Second, at less than 9 percent of total FY2006/07 budget, the allocations are, however, relatively low when compared to figures in other post-conflict countries and fragile states. Third, the budget structure of the Justice and Security sector is dominated by recurrent expenditure, which accounts on average for more than 70 percent of total resources allocated to the sector over FY2005-07. Fourth, the intra- sectoral expenditures dominated by allocations to the National Police, which account for more than 85 percent of the total allocations to the Justice and Security sector on average over FY2005-07. Partly as a result, allocations to justice are insufficient to cover basic functioning of the courts, which lack basic infrastructure and materials, qualified personnel and modern case management . capacities. Fifth, the projected increase in the police wage bill might not be sustainable given the Government’s limited resources. Sixth, the justice and security sector is expected to benefit from significant donor financing. But, little is known of the sector’s ability to manage huge flows. of resources effectively (absorptive capacity issue), and in a transparent and accountable way ; (governance issue). Seventh, weaknesses and issues in management of public resourcés in the ; justice/security sector would need to be addressed. 6.3. Based on these findings, the chapter recommends: (i) preparing a comprehensive and integrated sector strategy with spending targets; (ii) improving budget preparation and planning; Gü) prioritizing spending in line with sector strategy; (iv) re-assessing the fiscal implication of the police wage bill and its feasibility; (v) adopting an integrated approach for preparation of the investment budget; (vi) implementing budget transparency and accountability principles; (vii) accelerating administrative reforms to strengthen financial management capacity; and (vüi) Ensuring predictability of external resources. 6.1 Background and Sector Strategy and Objectives 6.4. In recent years, Haïti has been plagued by widespread, escalating violence and insecurity. Murder, rape, torture, kidnappings, car hijackings, drug trafficking and money laundering are now frequent, if not regular, risks for Haïtians, particularly those living in the greater metropolitan area of Port-au-Prince. In the face of this escalating violence, the state has at its disposal a police force of some 8,000 ill-equipped and poorly trained officers.®” According to # The army was disbanded in 1995, so the police is the only national security force responsible for all aspects of internal and external security. Aside official security forces, there are numerous private security companies, with approximately 6,000 armed but largely untrained personnel. The United Nations Stabilization Mission in Haiti (MINUSTAH) currently maintains a multinational force of some 7,500 122 [page 157] Haïti: Public Expenditure Management and Financial Accountability Review Haitian authorities and international assessments, the police force cannot provide security for the majority of Haïtians; the judiciary suffers from inefficiency, corruption and a lack of independence: and the prison system is overcrowded, insecure and at risk of collapse. As a result, there is widespread impunity for crime and violence in Haïti. 6.5. Cognizant of the key role that improved security could play in a growth and poverty reduction strategy, Haitian authorities have placed an emphasis on the justice and security sector for priority policy actions. Justice and security were central components of the Interim Cooperation Framework (2004-06) and the I-PRSP (2006) identifies justice and security as one of the key sectors of the government’s growth and poverty reduction strategy. The Minister of Finance re-iterated this message during the IDB’s 2007 annual meetings and identified modernization of the police forces, building prisons and training judges as government priorities for the allocation of budget resources becoming available through debt relief initiatives. 6.6. Plans for the reform of the police, justice and prisons provide some important elements of the Government’s strategy for the sector. The National Police Reform Plan is the most fully developed of the three institutional strategies and it has been published as an official document of the UN Security Council.” It presents overall objectives, specific activities and sequencing for reform and development of the Haïitian National Police (HNP) with an estimated cost of about US$700M over five years (2006-11). The Plan anticipates that the national budget will be able to support projected staffing increases and basic operating costs, but that capital investments will rely heavily on external donor financing. At a November 2006 international !‘donors conference in Madrid, the Minister of Justice and Public Security outlined the government’s - . priorities for short, medium and long-term justice reforms (2006-2011), including institutional Lo reform, increasing access to justice, strengtheñing the independence of the judiciary, fighting : . corruption and impunity, and criminal justice reform. The prison administration, which is a L . Department of the HNP, has developed project proposals for increasing the security of correctional : | facilities and improving the conditions of detention, as well as for the professionalization of the . prison administration. 6.7. However, achieving the Government’s reform objectives will require the development of an integrated strategy for the justice and security sector with clearly defined objectives and indicators linked to the budget process. It will also require sufficient allocation of domestic and external resources to implement the strategy, efficiency of intra-sectoral allocations and expenditures, as well as effective and transparent management of expenditures. The lack of an integrated sectoral strategy and weak budget and expenditure management processes limits the ability of this review to assess the quality of allocations and spending for the justice and security sector. It will therefore focus largely on the structure of the budget, the efficiency of expenditures, and questions of fiscal sustainability. military peacekeepers and 1,500 civilian police with a dual mandate to provide security and to support national police reform. % UN Doc. S/2006/726 (12 Sept. 2006) 123 [page 158] Haiti: Public Expenditure Management and Financial Accountability Review Box9. Main Features of the Justice and Security Sector Objectives and sector mandate. The core objective in the justice and security sector is to ensure and protect the fundamental rights and freedoms of Haitian citizens. The immediate and urgent task though, is simply to restore basic security and access to justice. Sector structure. The main state institutions of the justice and security sector are (i) a four-tiered court system, (ii) a police force and (ïii) a prison system. These all fall under the administrative responsibility of the Minister of Justice and Public Security (MJSP). Significant international support was provided during the 1990s to hire and train personnel, provide equipment and infrastructure, particularly for the police. However, much of the progress achieved in the 1990s was stalled and even reversed during the subsequent period of political crisis and insecurity. Maintenance was not what it should have been and much infrastructure and equipment was severely damaged during the 2004 events. Today, the sector’s key institutions continue to be in crisis. The justice system. Haïiti’s justice system is modeled largely on French civil law in both its judicial structure and its system of codified law. The penal and criminal procedure codes are largely unchanged from the Napoleonic models adopted in the early 1800s resulting in serious inefficiency in the administration of justice. À recent report on pre-trial detention placed the conviction rate in criminal cases at 3 percent, while 80 percent of all files referred to prosecutors are dismissed. The judiciary is organized around 16 geographic jurisdictions. Each jurisdiction has a Court of First Instance that represents the judicial branch of power, and a public prosecutor representing the executive branch of power. At the lowest level of the system, there are Justices of the Peace (juges de paix) with jurisdiction . over minor civil and criminal matters in each of the country’s 140 communes, the smallest administrative . division. There are five regional Appeals Courts and the Supreme Court (Cour de Cassation) is the final highest judicial authority. The system also comprises a few special courts of law. | The police force. A Director General leads the HNP and oversées a number of central and territorial | : directorates. Each of Haïtis nine administrative Departments has a director, and there are 200 ° commistäriats headed by police chiefs (commissaires) in larger centers, with sergeants (inspecteurs) in. | - smaller town$ and communes. At the central level there are separate administrative police (the main police corps) and judicial police (an investigative unit linked to the judiciary), an Inspector General, and |. a number of specialized units. The Inspector general is responsible for internal financial accountability and control within the HNP. He is also currently the Director of Central Administration and General Services responsible for the preparation and execution of the annual HNP budget as well as personnel and asset management. The Haitian National Police had a staff of close to 8,000 people at the end of 2006. Part of this workforce consists of administrative and support personnel. The prison system. The prison administration is under the Department of a Haitian National Police and thus reports to the HNP Director General. Besides its Central offices and facilities in Port-au-Prince, the prison administration has four Regional Directorates (North, South, West and Artibonite). At the lower level, all penitentiary facilities report to their local Regional Directorate. There are currently 17 functional prison facilities in Haiti. The Prison administration reports 533 corrections officers and some 600 administrative and support staff in the system. Some 300 persons are actually in training at the Police Academy in order to join the correction officer force later this year. 124 [page 159] Haiti: Public Expenditure Management and Financial Accountability Review 6.2 Trends and Structure of Justice and Security Sector Expenditures 6.2.1 Trends in Allocations 6.8. Total yearly allocations to the Justice and Security sector nearly Table 57. Allocations to Justice and Security Sector doubled in real terms between (ln real HTG million), FY2002/07 - FY2002-04 period and FY2005-07: À. : ... Average from an average of 1.5 billion gourdes PR Ne ere 6v02/04 7 EV05/07 8 A ‘ 80 ne Total Justice and Security 1,547.4 2,675.7 to about 2.7 billion gourdes. This is in Budget line with the increase in the overall Of which HNP NA 2,334.7 Government budget over the same Sharc of HNP in Total NA 86.7 period. Including external aid to projects, esp pudget Gin %) 14136 20415 : 0 ecurrent Budge 4134 ,041. as well as debt Service outlays, the Total Investment Budget 133.8 717.6 justice and security 2006/07 budget | Total Recurrent in % of total 92.0 724 represents 2.9 percent of the projected budget GDP for the same year, which Total Investment in % of total 8.0 27.6 budget Tan ss to an expected outlay of | TE Nation Budget 2,12647 324603 . ‘ per capita. Shares of Justice and Security in 7.2 83 . Nation Budget (in % 6.9. Although levels of spending Sources: Le Moniteur, Journal Officiel de la République : might appear less important than the d'Haïti and Staff Calculations. purée or it effectiveness of spending in relation to | D justice and security objectives, at less than 9 percent of total FY2006/07 budget, :the: : mt allocations can be considered as relatively low since security and justice often account for 4° Fri muck iarger share of between 20-30 percent of public expenditures, especially in other:post: or conflict countries and fragile states. For example, the security sector constituted 33 percent of. - total core and external budget expenditures in Afghanistan in 2005/06 while in the Central Africa ‘ Republic, security sector expenditures constituted 28 percent of public expenditures for that same year.” 6.10. A budget structure dominated by recurrent expenditures. The budget structure of the Justice and Security sector is dominated by recurrent expenditures, which accounts on average for more than 70 percent of total resources allocated to the sector over FY2005/07. Investment budgets account for slightly above 25 percent over FY2005-07. F'tis however worth noting that unlike Haiti, both these countries retain armed forces in addition to police in response to internal and regional instability. 125 [page 160] Haiti: Public Expenditure Management and Financial Accountability Review 6.11. Recurrent budget has also been on a rising trend since FY2001/02. It increased by Table58. Recurrent Budget Allocations to more than 40 percent in real terms on average Justice/Security Sector (In real HTG between the period FY2002-04 and the period pere On) FY2002/07 FY2005.07 (see Table 58). As a result, ed ec cou . UN LL MO2 04 | ENO4/07 share of recurrent budget allocated to the Justice istice and Security 14135 20414 and Security sector increased from an average Total Nation Recurrent 12,955.5 11,792.5 of 10.5 percent in FY2002-04 up to 17 percent proet Vous Interest of total recurrent expenditure (excluding ayments interest payment) in FY2004-06 (see Table 58). Pen SU 10 17.0 This reflects the new authorities’ efforts to Sources: Le Moniteur, Journal Officiel de la allocate much needed resources to the Justice République d’Haïti and Staff Calculations. and Security sector, with a view to improve security, a pre-condition for a stable environment conducive to growth and favorable to the fight against poverty. At the same time, the investment budget increased significantly in FY2006/07 and accounts for more than 46 percent of total allocations to the sector. However, high yearly fluctuations of the investment budget, with one year of strong increase followed by another year of sharp decline, illustrate the difficuity for this sector to conduct a sound, sustainable and predictable investment policy. However, this is not a specific issue to the justice and security sector. It reflects a more general concern of high dependency of Haitis investment budget on volatile donors’ aid flows as discussed in Chapter 2. However, the issue is more acute in the Justice and Security sector ‘because of the central role that this sector plays in Haiti’s development strategy. Long-term growth and poverty reduction cannot be achieved . . without-significant improvement in security. The current short-term strategy of increasing the size . of the: police force has helped improve security (quick win), the challenge is now to develop a medium to long-term investment strategy to ensure a long-lasting security (long-term win). : 6.2.2 Intra-Sectoral Allocations of Expenditures É : : 6.12. Intra-sectoral expenditures are dominated by allocations to the National Police. Because of lack of data, the analysis of intra-sectoral allocation of expenditure is limited to FY2005-07 period. More than 85 percent of the total allocations (or more than 90 percent of total recurrent allocations) to Justice and Security sector on average over FY2005-07 go to the Haitian National Police (HNP) in line with the authorities’ efforts to provide adequate resources to HNP to help ensure its mandate of restoring security, particularly in Port-au-Prince. Recurrent allocations to the HNP (including prisons department) increased by more than 8 percent in real terms between FY2005/06 and FY2006/07 (see Table 59). As a result, little allocation has been provided to the daily functioning of the MJPS. 126 [page 161] Haiti: Public Expenditure Management and Financial Accountability Review Table 59. Evolution of the intra-sectoral allocation of recurrent expenditures FY2005-(In real | nn a oi °w2005 | où lol il | ho À | _ _ ll . . Lo ol 0 | ren Minister’s Office 15 8.8 10.8 104 0.5 HNP 1,927.6 1,828.7 1,993.0 1,916.5 93.8 UCREF 184 19.8 17.9 18.7 0.9 Public Security Secretariat 5.9 5.5 7.7 6.4 0.3 Identification Office NA 9.5 8.6 NA 0.5 Justice Secretariat NA NA 64 NA 04 Total for MJPS 2,042.9 1,953.3 2,128.3 2,041.5 100 Source: Le Moniteur, Journal Officiel de la République d’Haïti and Staff Calculations. 6.13. Insufficient allocations to meet the basic functioning needs. Accounting for about 4 percent of total allocations on average over FY2005-07, allocation to internal services of the MIJSP (100 million gourdes or US $ 2.8 million) are not enough to ensure a good quality of services. Staff of the MJPS thus lacks the basic material to perform their routine work activity. More troubling is the low level of resources provided to the Anti-Money Laundering Unit (UCREF), which does not allow the unit to perform its planned activities. The same applies to the Public Security Secretariat, the Identification Office (responsible for the civil registry) and the Justice Secretariat. Because of the resource constraints and the pressing need to strengthen the HNP, these entities have not been priorities for allocation of the MIPS budget. 6.14. Budget allocations to justice are insufficient te cover basic functioning of thé courts, which lack basic infrastructure and materials, qualified personnel, and modern case management capacities. Of the total resources allocated to Justice and Security sector for FY 2004-06, less than 15 percent go to the administration of justice. According to both Haïtian judicial authorities and international experts, this is insufficient to cover the basic functioning of the courts and, as a result, negatively impacts the rule of law in Haiti. 6.15. A difficult trade-off issue in the face of limited resources and emergency security needs. The current structure of the justice and security budget skewed by allocation to Haïtian National Police is dictated by the limited overall budget allocated to the sector (à macroeconomic issue) rather than a deliberate policy choice by the sector (a microeconomic and sectoral issue). Allocating more to the other entities (Public Security Secretariat, Identification Office, and UCREF) would mean allocating less to the police: a difficult trade-off that the sector could not respond to, given the current status of emergency security needs. In fact, restoring a minimum level of security in the country has meant providing sufficient resources to the police force to perform routine operations. 6.16. In addition to limited allocations of resources, the MJSP and judicial authorities suffer from weak financial planning and management capacities, while internal accountability and oversight mechanisms are largely non-existent. As a result, it has not been possible to gather detailed information regarding budget planning and execution for the judiciary. In order to achieve objectives outlined in the government’s justice reform plans, there is a clear need to strengthen capacities for financial planning and management in the administration of justice. Proposed legislation on the status of the judiciary foresees increased autonomy in the 127 [page 162] Haiti: Public Expenditure Management and Financial Accountability Review administration and financial management of the courts, while the MJSP would retain financial responsibility before parliament and the supreme audit institution (Cours des Comptes et Contentieux Administrative). It is thus important to proceed with the establishment of a Judicial Audit Unit within the MJSP responsible for verification and oversight of the administration and financial management of the court system. Another reform that will contribute to improved transparency and accountability of the judiciary would be the standardization and official publication of judicial tariffs (fees for service) for which preparatory work has already been undertaken by the MISP. 6.17. In order to meet minimum prison capacity requirements, significant investment in infrastructures will be needed. The prison system in Haiti has a capacity for approximately 2,000 prisoners, but currently houses more than 4,800 detainees, the great majority of whom are in pre- trial detention. By international standards, this rate of incarceration as a percentage of population is still extremely low”? Thus prison overcrowding is due to a lack of capacity rather than from high rates of incarceration. Before the events of 2004, there were 21 prisons in operation, albeit in poor condition and all badly overerowded (less than 1 square meter per inmate). During the 2004 events, there were massive escapes and five prisons were totally destroyed while five others were severely damaged. Since then, some prisons have been rehabilitated, so there are now 17 functional facilities. However, most prison facilities are former military barracks that lack health and sanitation facilities and adequate security. Thus the prison system faces serious capacity problems that will require significant capital investment. 6.2.3. Economic composition of expenditure ° © 6.18 Over FY2002/2007, a five-year period, . . ‘salaries have represented on average more than Table 60. Evolution of the composition of * 60 percent of expenditures (see Table 60). It'is expenditure (in % of total exp. . . NE excel, aid project), FY2001/06 worth noting the extent to which locally financed D Aves || a mas ee mo canene el described as an insignificant portion of expenditures |’Salaries 61.5 63.3 in the sector. However, efforts are being made by | Goods and services 26.7 28.6 the authorities to increase government’s contribution to finance capital expenditures. Total expenditures 100.0 100.0 Sources: Government Data and Staff calculations. 6.19. Personnel expenditures. Based on the budgeted figures for fiscal year 2006/07, Security and Justice accounts for some 12,000 employees (including the personnel to be hired during the year), of the roughly 40,000 total civil service force. Personnel in the security and justice sector thus account for 31 percent of all govermment’s employees and salaries of the sector represent 26.5 percent of the government’s payroll. According to figures appearing in the current budget documents, the average salary would stand at US$4,862 per year on the side of the Ministry of Justice and Public Security while the average salary for the whole civil service force is US$ 5,558 per year. À review of salary scales and levels should be a priority for the justice and security sector. 6.20. Capital expenditures. All capital expenditures financed through local resources, both for the ministries’ equipment and the investment projects, amounted to slightly more than 40 million gourdes (US$ 1 million) in FY2005/06. Vet, they are projected to reach US$18 million in 2006/07. 92 Incarceration rate in Haiti of approx. 40:100,000 compares to rates in Canada of approx. 100:100,000 and the US of 600:100.000. 128 [page 163] Haiti: Public Expenditure Management and Financial Accountability Review It thus follows that capital expenditures, including capacity building and training, will be financed for the most part by the donor community. Available figures suggest these foreign financed capital expenditures that amounted to US$45 million in 2005/06 as disbursements of the fiscal 2006/07 are projected to reach US$52.4 million. Most of the contracts financed by foreign aid are issued and managed directly by the donors themselves. In those circumstances, figures pertaining to external aid disbursements are difficult to collect and estimate, even more so for Haitian government officials than for donor missions. The current level of capital expenditures paid out of foreign aid appears to be about US$ 50 million. 129 [page 164] Haiti: Public Expenditure Management and Financial Accountability Review 6.21. Goods and services. As a whole, the Justice and Security . : | . sector was granted a 1.1 billion Table 61. Justice and Public Security. Credits and ste expenditures for selected goods and services gourdes (US$ 26 million) budget FY2002-FY2007 in real HTG thousand - allocation for recurrent goods and Excluding aid project services for the 2006/07 fiscal year. ARS ES | x . Budgets department obtains by far the largest | Traveling expenditures 6370 6 602 share of credits voted, that is some 966 | Renting of building 2 967 8 820 million gourdes (US$23 million). The | Renting of vehicles 1834 5291 ratio of goods and services to salaries | Maintenance of office equipment 1 990 1 435 stands at 46.5 percent in the 2006/07 | Maintenance of vehicles 5156 3 961 budget, which is quite close to what it | Maintenance of building 13 013 15915 was in 2005/06, as well as the year | Office supplies 22 221 18658 before (2004/05), in terms of actual | Fuel 54819 69 056 salaries paid and actual expenditures on | Food 58 224 250 876 good and service. As a matter of fact, | Office material & equipment 49 187 24 307 this ratio is much lower on the side of | Transport equipment 16471 3283 the courts and tribunals. Given the |B. Expenditures actual state of destitution and the | Traveling expenditures 1 052 992 general lack of means in the judiciary, | Renting ofbuilding 1 528 3.023 it would seem that the allocation for | Renting of vehicles 899 292 reçurrent goods and services. is well | Maintenance of office equipment 315 292 under the required level needed to | Maintenance of vehicles 2382 2611 | assute the justice system functions. Maintenance of building 6119 6515 Office supplies 16 641 12 408 6.22. Food and fuel are the most | Fuel 54 273 65.542 significant goods and services | Food 57 643 246 662 purchased by the MJSP, respectively | Office material & equipment 6 820 7 891 accounting for 44 percent and close | Transport equipment 12 836 484 to 60 percent of the expenditures for |C. Execution rates (%) goods and services in FY2004/05 and | Traveling expenditures 17 14.8 FY2005/06. The HNP provides a daily | Renting of building 32.1 35.1 meal to its officers and the prison | Renting of vehicles 48.7 5.5 administration provides food for | Maintenance of office equipment 16.4 34.9 inmates. Furthermore, expenditures on | Maintenance of vehicles 47.2 65.5 these two main items show, by far, the | Maintenance of building 474 404 highest rates of execution, which is | Office supplies 994 66.3 indeed close to 100 percent (see Table | Fuel 98.9 94.7 61). This constitutes a very strong | Food 99 98.3 performance given the fact that the | Office material & equipment 13.1 32.6 budget for fuel doubled in just two LTransport equipment 79.3 144 years, and the food budget increased Ources: Government Data and Staff calculations. ten-fold during the same short period of time. All other categories of goods and services showed quite low rates of execution and in many instances varied significantly over the years. 130 [page 165] Haiti: Public Expenditure Management and Financial Accountability Review 6.24 Projected Trends in Police Wage Bill and Fiscal Sustainability Issue 6.23. The wage bill for police is set to increase significantly over the next five years as the HNP intends to hire some 1,500 new officers each year, in order to reach a force of 14,000 officers in 2011. The National Police Reform Plan’s target is to reach a force of some 20,000 officers — identified as the number of police and other security officers who would be required to cover the full range of security needs in Haiti and thus bring the ratio of police to inhabitants close to 1:500.° Às a result, staff estimates that the total wage bill would almost double within a 3-year period, from US$48.8 million in FY2006/07 to US$85.3 million in FY2009/10.(see Table 62). In the meantime, the Government wage bill is expected to increase from US$202 million to US$270 million in FY2008/09 (see Table 63). This means that the justice and security wage bill could account for 25 to 30 percent of total Government wage bill. Table 62. Justice and Public Security. Projected Salaries Expenditures (million constant USS lil anne 200708 200800 2000/10 201041 20112 201213 | 201814. ‘Work force 10,018 11,268 12,518 13,768 15,268 16,518 17,768 19,018 Of which new 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1,250 hirin, Average 4,875 5,363 5,899 6,194 6,194 6,194 6,194 6,194 salary (US$) . Salary 10 10 s] 0 0 0 0 © [increase (%) ‘ Ê : "| Total wage 48.8 60.4 73.8 : 853 94.6 102.3 110.1 117.8 - . bi (USS Lo. . ; h million oo . Sources: Government Data and Staff projections. ro Lors ess. | Note: AlE expenditures are expressed in constant 2006/07 prices. The Justice and Public Security sector includes fhe sors Department of Prison Administration. The work force is taken from budget documents. It is implicitly assumeü here . that new employees are hired on the first day of the year. For 2006/07, that year’s hiring are already included in the salary budget. The same is true for salary increases awarded in that same budget. It is also assumed that hiring 1,500 new employees a year translates into a net addition of 1,250 employees to the force because of vetting, retirements and deaths. 6.24. The extent to which the Government could afford this larger wage bill is a matter of concern, and raises three issues. First, the Government’s current revenue is projected to increase slowly to reach less than US$650 million by FY2008/09 (i.e. 10.9 percent of GDP) (see Table 63). In other words, more than 40 percent of Government revenue would be granted to support the justice and security wage bill. Second, perhaps a downward adjustment of expenditure in goods and services could provide some room of maneuver for increasing the wage bill. However, spending on goods and services are also projected to increase. Third, recourse to donors’ aid flows could help the Government afford the projected increase in the justice and security wage bill. Unfortunately, grants are expected to decline from US$291 million in FY2006/07 to US$240 million in FY2008/09. The issue here is the financial sustainability/feasibility of an inflated wage bill of the Justice/security sector given the Government’s limited room of maneuver. Dealing with this issue would require both the Government and the donor community to redesign the National Police strategy, including setting the objectives in line with expected increases in domestic revenue and aid flows. % Atits current force level of 8,000, the HNP is one of the most numerically weak police forces in the world with 100 officers per 100,000 citizens. This compares, for example to 285 per 100,000 in the LAC region. 131 [page 166] Haiti: Public Expenditure Management and Financial Accountability Review Table 63. Projected Justice/Security Salaries Expenditure and Total Government Salaries, FY2007-09 (in Million of Constant USS enoenr poonm mm | Total Justice/security wage bill ( 48.8 60.4 73.8 Total Government wage bill 202.3 240.6 270.4 Shares of wage bill in total 24.1 25.1 27.3 Government wage bill (in %) Goods and services 26.8 30.4 33.5 Total Revenue and Grants 813.8 825.8 889.5 o.w. Total current revenue 522.5 589.7 647.9 Total grants 291.3 236.1 241.6 Sources; Government and IMF Data, and Staff projections. 6.2.5 Budget Execution Trends 6.25. Overall, the rates of execution have been declining over the period under review, but remain relatively high. Table 64 gives a more precise and detailed view of intra-allocations for the credits and expenditures of the MJPS over the years from FY2003/04 up to FY2005/06 for allocations and expenditures. The execution rate stood at nearly 89 percent during the first year and then fell suddenly to 80 percent during FY2004/05, and remained at that level the following year. 6.26. As indicated in Chapter 1, falling execution rates might result from three factors: (i) cash rationing decision; or (ii) poor budget planning; and (iii) limited absorptive capacity. The justice and security sector has not experienced a sudden cut in expenditures during the fiscal years, which might have prevented it from fully executing its planned spending. In fact, the fall of the execution rate is essentially due to the poor planning of budget needs and the limited absorption capacity of the Haitian police force. This performance might not be surprising given that the Police : budget more than doubled between FY2003/04 and FY2004/05. Indeed, it is rather surprising in that particular context that the execution rate remained as high as 80 percent. 132 [page 167] Haiti: Public Expenditure Management and Financial Accountability Review Table 64. Intra-allocation of credits and expenditures, and execution (In real HTG million), Ë Eure EXPD0004 VAUT 0e A ARITE RUE A A. Budget allocations Minister’s Office 84 11,5 8,8 9,6 Internal Services 624 79,3 81,0 742 HNP 1166,2 1927,6 1828,7 1640,9 UCREF 13,9 18,4 19,8 17,4 Public Security Secretariat NA 5,9 5,5 5,7 Identification Office NA NA 9,5 9,5 Justice Secretariat NA NA NA NA Total for MJPS 1250,9 2042,9 1953,3 1749,0 B. Expenditures Minister’s Office 7,7 10,1 5,6 7,8 Internal Services 59,8 68,1 52,0 60,0 HNP 1041,1 1539,9 1490,2 1357,0 UCREF 0,3 18,4 12,9 10,5 Public Security Secretariat NA 1,3 2,8 2,0 Identification Office NA NA 3,7 3,7 Justice Secretariat NA NA NA NA . : Total for MJPS : 1109,0 1637,7 1567,; 1438,0 - C. Execution Rates (%)} : . oe . L Minister’s Office 93.7 87.4 64.5 81.1 : . Internal Services 95.8 85.8 642 79.3 : ‘ D HNP oo 89.3 79.9 81.5 82.4 or UCREF 23 ‘ 100.0 644 62.8 Pc : - Public Security Secretariat :NA 21.5 50.7 36.6 ! | : Identification Office NA NA 39.0 NA Justice Secretariat NA NA NA NA Total for MJPS 88.7 80.2 79.1 82.0 Source: Le Moniteur, Journal Officiel de la République d’Haïti and Staff Calculations. 6.3 Public Investment Programs in the Justice and Security Sector 6.27. Figures pertaining to investment programs in the justice and security sector are incomplete, in most cases preliminary, and can be confusing at times. For consistency purposes, one single source of data was used: the PIP prepared by the Ministry of Planning and External Cooperation (MPCE). 6.28. Table A.5.8 in Annex shows that investment programs in the justice and security sector have been marginal. Resources devoted to the sector’s investment programs (including foreign aid) over the past two fiscal years are the lowest allocations to be selected priority sectors. Accounting for about 3.4 percent of total PIP on average over FY2004-07 (see Table 65), they represent about 17 percent of total allocations to investment programs in the agriculture sector and only 2 percent of allocations for the transport sector. 133 [page 168] Haiti: Public Expenditure Management and Financial Accountability Review 6.29. Also, according to MPCE data, donors’ financial involvement in the justice and security sector Table 65. Resources for PIP in Justice and Security PIP has been relatively marginal. Sector. Average over FY2004/05-FY2006-07 Only about 25 percent of total PIP = —(n real HTG million &; EE allocations on average over the past two years were financed by donor Lun TU NE Resources Ressources" | resources. This compares poorly with Total sectors 834.8 3559.0 9393.8 the other priority sectors where more Justice/Security 148.7 499.9 648.6 than 90 percent (agriculture and ecurity in Total PIP transports sectors), and more than 70 Sources: Ministry of Planning and External Cooperation and percent (education and health sectors) Staff Calculations. of total PIP allocations originated from foreign aid on average over the same period. About 75 percent of total PIP allocations of the justice and security sector on average over the past two fiscal years were financed by domestic resources. Actually 100 percent of the sector investment program was supported by the Government’s own resources in FY2005/06. More troubling is the fact that the allocations (thus the share in total PIP) to the sector PIP declined in FY2005/06 as a result of a reduction in domestic resource allocations and a zero flow of foreign aid. 6.30. However, this picture is expected to change dramatically in FY2006/07. The justice and security sector is expected to benefit from significant donor financing (see Table A.5.8 in Annex). The amount of foreign aid given directly to projects in the justice and security sector is - projected to amount to roughly US$50 million in FY2006/07. This signals donors’ strong - : LL commitment to support the security sector, a:cornerstone of Haïti’s growth and poverty reduction : strategy. But three issues are worth emphasizing. First, the projected increase in external financing ‘ comes from a relatively low basis. Second, the extent to which these resources are backed-up by well designed sectoral projects and programs is unknown given that the sector does not have a fuli- fledged integrated strategy and financing plan. Third, it is true that, ensuring lasting security and improving justice in the medium to long-term will require significant investment in the sector. It is also true that Haiti”s scarce resources cannot afford the required investments; donors have to back- up the Government’s efforts. But at the same time, little is known on the sector’s ability to manage huge flows of resources effectively, and in a transparent and accountable way (governance issue). 6.4 Weaknesses, Challenges and Recommendations 6.4.1 Weaknesses and Challenges 6.31. The security and justice sector has suffered from decades of lack of vision and resources, mismanagement, corruption and political interference. The budget information is scarce and unreliable, informal practices override rules and procedures, and financial reports are practically non-existent.* Oversight and accountability mechanism are weak or non-functional. Improving sector management will be challenging given the deep-seated informal practices and the lack of adequate resources. * The publication of a detailed Financial Report for the HNP (2005-2006) is a notable exception that will hopefully become standard practice. 134 [page 169] Haiti: Public Expenditure Management and Financial Accountability Review 6.32. Budgetary processes are far from being effective. Information needed for programming and budgeting is scarce and often unreliable. Because of a lack of precise and reliable information on the actual stocks and assets, and in the absence of unit prices and technical indicators, the MJPS, like most other departments, basically increases budgetary allocations received the previous year by some given percentage instead of going through the process of defining and measuring needs and then estimating their costs. It is worth noting that this reflects the general budgetary process, which is to a large extent a more or less top down mechanical exercise instead of being an informed bottom up exercise under constraint. Most managers in the sector consider the budget as being imposed by the finance and planning ministries. This might explain why there are only partial cost estimates available from the reorganization and the reconstruction of the security and justice services and infrastructures. Thus, improving budgetary processes at the level of MJPS involves addressing weaknesses at the central level of the central government’s budgetary procedures. 6.33. Expenditure procedures are cumbersome. Like in other ministries, capital expenditures are budgeted and monitored in two different accounts, depending on whether they are intended to equip the ministries themselves or if they are destined to finance, or co-finance, projects and programs. Furthermore, those expenditures for small materials and office equipment as well as immaterial expenditures are in some tables and documents classified as recurrent expenditures. The execution of spending is affected by the use of current accounts. As in other departments, the MJPS maintains a certain number of current accounts at the Treasury in order to facilitate and accelerate . the payment of recurrent as well as capital goods and services. The police department operates four such accounts, the prison administration keeps one of them open. The number and the value of ee current accounts maintained by the judiciary administration as well as by each tier of courts, at the i. central as well as the local levels, are unknown. These accounts that operate more or less as cash advance accounts often help process payments of contracts overlapping two consecutive fiscal : years. However, the lack of transparency and effectiveness in their execution complicate the expenditure process. - 6.34. The MJSP is characterized by a lack of transparency and accountability regarding expenditures. It is virtually impossible to get from the Ministry any information on actual expenditures managed and recorded in the justice sub-sector. Both the Police and Prison administrations keep records of credits and expenditures pertaining to the recent fiscal years. In recent years, HNP has made some improvement regarding budget preparation and expenditure monitoring including the production of annual expenditure reports. In general, there is a need to enhance the capacity of financial managers and of oversight mechanisms (both internal and external) to improve the financial management in the justice and security sector. 6.35. While there are separate plans to reform police, justice and prisons, the sector does not have an integrated sector strategy with a clear implementation plan identifying domestic and external resource requirements. As a result, budget proposals are not backed-up by a sectoral strategy and actions plans. In addition, spending targets do not exist. 6.36. The government has clearly recognized the restoration of security and the rule of law as key priorities for achieving growth and poverty reduction in Haiti. However, the system developed for classifying poverty-related expenditures in the FY2006/07 budget identifies spending on justice and security only indirectly (in relation to investments for infrastructures and education). Ït does not identify recurrent costs of providing justice and security per se as contributing to the reduction of poverty. 135 [page 170] Haiti: Public Expenditure Management and Financial Accountability Review 6.37. While external assistance to the investment budget will increase, investments might not be sustainable if insufficient attention is given to the development of a sector financial management capacity and to the fiscal sustainability of recurrent costs (especially salaries and asset maintenance). Investment levels and recurrent budgets have to be consistent, coherent and thus synchronized. Unfortunately, current (and planned) investment programs do not factor m the recurrent costs associated with those investments. Given the scarcity of resources, this raises the question of the sustainability of investments in justice and security sector. 6.38. Human resource management and asset maintenance is very weak across the sector. While it was possible to obtain some information regarding numbers, pay scales and grades of officers in the police and prisons services, it was not possible to obtain similar information regarding judges, prosecutors, clerks and other administrators in the judiciary. There is also little information available regarding the management of sector assets, especially security equipment and infrastructures. In order to ensure sustainability of investments in the police, judiciary and prisons, there is a need to establish systems for the management of these assets. 6.4.2 Main Policy Recommendations 6.39. Based on the findings of the PER, the following policy recommendations are made and will be further discussed with the Government and the donor community: e Prepare a comprehensive and integrated sector strategy with spending targets. The justice and security sector should develop à full-fledged integrated, coherent, and forward- . looking strategy, which encompasses all institutional aspects of the sector. Such a strategy should be fully costed and comprise of specific objectives, inputs, outputs and outcome ‘ - indicators. This strategy should be translated into operational policies and programs with - budgets that identify internal and external resources-available and needed. These programs : . ” should be subject to an analysis of their fiscal sustainability given expected levels of . national and international resources available. The strategy should also include associated spending targets to enable the evaluation and monitoring of progress achieved toward achieving the objectives and meeting the outcome indicators. The strategy should elaborate an investment program and the needs should be costed. Human resources needs to implement the plan, which should also be costed and the sustainability of associated costs should be discussed with the donor community. HNP action plan could serve as a basis for designing such a strategy. This medium-term sectoral strategy should be integrated within the National Strategy for Growth and Poverty Reduction currently being prepared. More importantly, the preparation of the PRSP should offer the opportunity to revise the classification of poverty-related expenditures in the justice and security sector. e__Improve budget preparation and planning. Budget preparation and planning needs to be improved. This requires that three elements ensue. First, the Justice and Security sector should produce a clear timetable for preparation of its budget, with clearly defined responsibilities for actors involved in the preparation process. Second, the budget should be linked to the sector’s full-fledged strategy (as envisaged above) and translates the strategy spending targets into yearly budgetary proposals. This would avoid budgetary envelops becoming a renewal of past year allocations. In addition, the proposals need to be discussed with the Ministry of Economy and Finance before the launch of budgetary conferences. This would allow the sector sufficient time to revise its budgetary proposals if need be and submit a realistic budget proposal accounting for the overall budgetary constraints. Third, budgetary planning should be reinforced by reinforcing the technical 136 [page 171] Haïti: Public Expenditure Management and Financial Accountability Review capacity of staff of the Ministry in charge of preparing the budget. Moreover, it will be important to strengthen the planning capacity in each institution as well as develop the MJSP's integrated sectoral planning capacity. °__ Prioritize spending in line with sector strategy. Prioritization of spending in the justice and security sector should be done in the context of the overall sector strategy and sub- sectoral action plans (police, justice, prisons). Because of the limited resources, the budgetary trade-offs would need to favor policy actions that consolidate the gains achieved so far in stabilizing the security situation (quick wins). However, it will also be important to evaluate whether the current prioritization of the police in intra-sectoral budget allocation has left other institutions without adequate resources to ensure their basic functioning. In particular, lessons learned from efforts to reform the criminal justice system during the 1990s suggest that while significant external resources were invested, results have been largely lost, in part due to a lack of sequencing, prioritization and integration of reforms and investments across the police, justice and prison institutions. e Re-assess the fiscal implication of the police wage bill and its feasibility. The issue of an inflated police wage bill should be re-evaluated. As a first step, there is a need for a thorough assessment of the projected wage bill and its budgetary implications. Carrying out a fiscal sustainability exercise of the projected wage bill should provide clarity on the feasibility of the police reform. This would require that the Ministry of Justice and Public : . Security adopt an integrated approach that should involve the MEF, the Ministry of 2 d planning, and the-donor community. re . ; _. . e Adopt an integrated approach for the preparation of the investment budget. The Lu : investment budget should be prepared jointiy with the Ministry of Planning and involve the . ne donor community at the very outset of the preparation process. Because of the central role of the Justice/Security sector in Haiti’s development agenda, securing donor funding to . « execute the sector investment program is critical for a long-lasting security in Haiti. The : sector PIP should derive from the overall sector strategy, and implemented through a rolling MTEF so that expenditure targets and sector projected outcomes can be revised according to resources expected. In this perspective, a first priority is to create/reinforce the pre-requisites for a medium-term budgeting approach, including better budget planning, improved preparation of annual budget, and spending linked to sector objectives. e Implement budget transparency and accountability principles. Principles of sound budgeting and financial management should be fully applied to the justice and security sector. While discretion might be appropriate in the discussion of some sensitive security matters, the management of public resources in this sector should be subject to the same oversight and accountability requirements as all other sectors. In particular, there is a need for increased transparency and accountability through, for example, the issuing of regular public financial reports for police, judiciary and prisons. e Accelerate administrative reforms to strengthen financial management capacity. Priority administrative reforms must be undertaken to improve justice and security sector management and oversight capacity. În particular, for broader institutional reform to succeed, it will be essential to develop solid financial management capacity and practices within the Ministry of Justice and Public Security, as well as within the institutions it oversees. The strengthening of internal audit functions, human resource management and the capacity to manage physical assets in the judiciary, police and prisons, and ensuring that these are linked into central PFM systems are specific areas requiring attention. 137 [page 172] Haiti: Public Expenditure Management and Financial Accountability Review e Ensure predictability of external resources. Significant and predictable external resources will be required to attain police, justice and prison reform objectives. Allocations from the Haitian treasury will not be sufficient to cover investments required to achieve the objectives of reform of the police, justice and prisons. In particular, external financing is required for the training and equipping of a national police force, rehabilitation and construction of prison facilities, and modernization of the judiciary. While donors are making significant contributions to these areas, this is largely outside of the budget and has varied significantly from year to year. By channeling more of their assistance through the budget and ensuring that timely and accurate information is made available to the authorities for aid provided outside of the budget, donors could further support strategic management of the justice and security sector. Donors should establish and coordinate their medium-term financial commitments in support of a justice and security sectoral strategy and programs. The aid coordination mechanism under preparation should serve as a framework to inform both the Government and the donor community of the needs of the sector. 138 [page 173] Haïti: Public Expenditure Management and Financial Accountability Review 139 [page 174] Haïti: Public Expenditure Management and Financial Accountability Review : PART II: Addressing Growth And Poverty Challenges: A 1 ‘ Macro-Modeling Approach ; | 140 [page 175] Haiti: Public Expenditure Management and Financial Accountability Review 141 [page 176] Haïti: Public Expenditure Management and Financial Accountability Review CHAPTER 7 : ASSESSING THE IMPACT OF FISCAL POLICY ON GROWTH AND POVERTY: A MACROECONOMIC FRAMEWORK 7.1. This Chapter provides an overview of the model used to study the impact of the composition of public expenditure on growth and poverty in Haiti in various part of this report.” A key feature of the model is that government spending is disaggregated into various components, including maintenance, security and investment in education, health and core infrastructure. It also accounts for the externalities associated with infrastructure, in terms of its impact on education and health. In addition, the model accounts for improved political stability and reduction in violence. Improvements in economic security contribute to the rise of private investment by decreasing downside uncertainty on the return to investment and securing property rights. Moreover, improved security may enhance the efficiency of resource allocation and thus growth. In the model, spending on security lowers violence and increases private sector confidence in the economy’s prospects; this tends to reduce the rate of time preference and to increase private saving — which in turn stimulates private investment and growth. 7.2. The first part of the chapter describes the key features of the model and the second part describes the calibration procedure. L : 7.1 Description of the Key Features of the Haiti Macro-Model Vo 71.1 The Supply side " | | Ci : ; 7.3. The supply sidé represents the heart of the model and is Summarized in Figure 18. Four categories of goods and services are produced in the economy: a commodity (produced by the private sector), and three types of services — education and health (both of which produced by the Government and the private sector) and infrastructure (produced solely by the Government). The privately-produced commodity is a tradable good whose price is taken as given; it can be used for either consumption or investment. Production is consumed only domestically and represents the sole source of supply on the domestic market.” The provision of education and health services by the public sector are free of charge, whereas public infrastructure services are sold at a nominal price that is fully indexed on the price of the private good.’ Excess demand for all services prevails; quantities consumed are thus supply-determined. There is a single household-producer, which includes all workers (educated and non-educated, employed in either the public or private sector) in the economy. %A more detailed technical presentation of the model, as welll as a description of the calibration procedure, are available in E. Pinto Moreira and N. Bayraktar, “The Composition of Public Expenditure and Growth: A Small-scale Intertemporal Model for Low-Income Countries.” Unpublished, World Bank (February 2007). We therefore abstract from trade flows and balance-of-payments considerations. Because, as discussed below, borrowing is fixed as a proportion of output, and aid (in the form of grants) adjusts residually to balance the budget, issues of external debt sustainability do not arise. The price of the private good is therefore used as the numéraire. 142 [page 177] Haiti: Public Expenditure Management and Financial Accountability Review Figure 18.The Supply Side Public capital Medical Public capital in education personnel in health y J Quality | Teachers Health services Population Ÿ Production K : # ductio Private health Educated labor—— | commodities eu Private î Public capital in education infrastructure Students Quality À | Quality k Effective labor Private capital} Raw labor A » À Private investment Labor force | _—- 74. First, consider the production of health services and effective labor. Production of public health services requires combining inputs at several levels. At the first level, public capital in infrastructure and public capital in health are combined to obtain the “effective” capital stock in the production of health services. At the second level, the effective capital stock is combined with medical personnel, which represents a fixed fraction of the public labor force, to produce public health services. The private sector also produces health services. The value of that production is assumed equal to the household”’s spending on health services, which is a constant fraction of total private spending. Assuming that private and public services are perfect substitutes, the total supply of health services is simply given by the sum of the two outputs. Effective (educated) labor employed in private production is produced by combining the supply of health services to the prevailing stock of educated labor in that sector. 7.5. Second, consider the production of commodities. It is also specified as a multi-level (Cobb- Douglas) process. At the first level, production requires combining effective educated labor and private physical capital to produce a composite input; at the second level, this composite input is combined with uneducated labor to produce a composite input, V. At the final level, the supply of commodities is obtained by combining the composite input V with (quality-adjusted) public capital in infrastructure. 7.6. Third, consider population, schooling technology and the labor supply. Total population grows at a constant rate. The active population is a fraction of the total population. The supply of raw labor is the difference between the active population and the total supply of educated labor. 143 [page 178] Haiti: Public Expenditure Management and Financial Accountability Review The transformation of raw labor into educated labor requires an accumulation of skills that takes place in part through a publicly-funded education system, which is free of charge. As before, a multi-level nested structure will highlight the role of infrastructure and health on education. 7.7. At the first level, the stock of public capital in infrastructure and the stock of public capital in education produce a composite input, which is referred to as “effective” education capital. At the second level, effective education capital and the number of teachers on government payroll (which represent a fixed fraction of total public employment) are combined to produce a composite public education input, denoted Z. At the third level, the total number of students is combined with the supply of health services to determine a composite input, which we refer to as the “effective” supply of students. At the fourth level, the “production” of newly-educated workers by the public sector depends on the fraction of the effective supply of students attending public schools, as well as the composite public education input, Z. The value of that production (measured in terms of the number of educated individuals “produced” by private schools) is assumed to be proportional to household spending on education services, which is given as a constant fraction of total private spending. Assuming that private and public services are perfect substitutes, the total number of educated workers produced in the economy is again obtained by adding the two outputs. Given this new flow, the total stock of educated labor in the economy can be calculated, for a given rate of attrition. Assuming that public sector employment (which consists only of educated workers) is fixed as a proportion of total supply, the supply of educated labor involved in private production of commodities is determined residually, given the shares of the educated labor force involved in the private production of education and health services. Finally, wages in the private sector are assumed to be fully flexible; there is therefore no open unemployment of either category of labor. ‘ : Box 10. How Public Infrastructure can Foster Growth: Lessons from Recent Studies98 : Public infrastructure is usually viewed as promoting growth through its impact on the productivity of private inputs, production costs and private investment (as a result of complementarity between public and private capital) whereas it tends to hamper growth and the allocation of resources through crowding-out effects on private capital formation. Recent analytical and empirical research has highlighted the fact that, in addition to these “conventional” effects, core public infrastructure may spur growth through a variety of other channels.” Independent of its direct impact on the marginal product of production factors, public infrastructure may enhance further the productivity of labor if better access to means of public transportation (such as roads or railways) allows workers to get to their jobs more easily, therefore cutting the time spent commuting. By facilitating the reallocation of capital across sectors following from shocks to relative prices (e.g., an increase in the relative price of tradables, which would draw resources away from the nontradables sector), public infrastructure may reduce the magnitude of adjustment costs associated with increases in private capital formation. An expansion in the road network may not only reduce congestion and facilitate the shipment of goods across the country (thereby reducing unit production costs, as noted earlier} but it may also reduce the cost of building a new plant or the transportation of heavy equipment for installation to a new location for future production. The durability of private capital may be significantly improved by improving the availability, and quality, of core ublic infrastructure. Reliable power grids and well-maintained roads tend to reduce the need for the private sector to spend on #This box dwells largely on Agénor, Pierre-Richard, and Kyriakos Neanidis, “The Allocation of Public Expenditure and Economic Growth,” Working Paper No. 69, Centre for Growth and Business Cycle Research, University of Manchester (March 2006), and Pierre-Richard, Agénor and Blanca Moreno-Dodson, “Public Infrastructure and Growth: New Channels and Policy Implications,” Policy Research Working Paper No. 4064, World Bank (October 2006). “Core public infrastructure refers to energy (namely, electricity), transportation (roads, railways, etc.), telecommunications, and water and sanitation (including irrigation in rural areas). 144 [page 179] Haiti: Public Expenditure Management and Financial Accountability Review maintenance of its own stock of physical capital (for instance, the trucks that are used to move goods across the country). For instance, it has been estimated that for Latin America and the Caribbean, each dollar not spent on road maintenance leads to a $3 increase in vehicle operating costs as a result of poor road conditions.\® Better roads, by reducing the rate of depreciation of private capital, may raise the rate of return on physical assets, thereby stimulating private investment and growth. A large body of microeconomic evidence suggests also that core infrastructure (most importantly, electricity, roads, and sanitation) may have a significant impact on health and education outcomes — particularly in countries where, to begin with, infrastructure assets are low. Access to clean energy for cooking and better transport (particularly in rural areas) may contribute significantly to better health. According to the latest World Development Report of the World Bank, the dramatic drop in the maternal mortality ratio observed in recent years in Malaysia and Sri Lanka (from 2,136 in 1930 to 24 in 1996 in Sri Lanka, and from 1,085 in 1933 to 19 in 1997 in Malaysia) was due not only to a sharp increase in medical workers in rural and disadvantaged communities, but also to improved communication and transportation services — that helped to reduce geographic barriers.! Transportation (in Malaysia) and transportation subsidies (in Sri Lanka) were provided for emergency visits to health care centers. Conversely, recent data produced by national Demographic and Health Surveys in Sub-Saharan Africa show that a majority of women in rural areas rank distance and inadequate transportation as major obstacles in accessing health care." Studies have also found that access to clean water and sanitation has a significant effect on the incidence of malaria, and more generally on child mortality. In the cross-section regressions for developing countries reported by McGuire (2006) for instance, average years of female schooling have a statistically significant impact on under 5-years-oid mortality rates. At the same time, infrastructure may have a significant effect on education outcomes. Studies have shown that the quality of education tends to improve with better transportation networks in rural areas, whereas attendance rates for girls tend to increase with access to sanitation in schools. In Morocco, for instance, after rural roads were built, girls’ enrollment rates rose from 28 percent to 68 percent."* Electricity allows for more studying and access to technology, such as computers, which enhance the quality of human capital. It is also worth noting that the impact of infrastructure on health and education outcomes can be magnified through ‘ interactions between health and education themselves. There is strong evidence that health has an impact on both the quantity : and quality of human capital. In most developing countries, schools that lack access to basic water supply and sanitation ° services tend to have a higher incidence of illnesses among their students. In turn, poor health is an important underlying factor . . | for low school enroliment, absenteeism (often the result of respiratory infections, as noted by Bundy and others (2005), poor : classroom performance, and early schoo! dropout."® Inadequate nutrition, which often takes the form of deficiencies in . : micronutrients, also reduces the abitity to learn. ! : Conversely, healthier and better-fed children tend to perform better in class. Bundy et al. (op. cit.), in their overview : 19Gyamfi, Peter, and Guillermo Ruan, “Road Maintenance by Contract: Dissemination of Good Practice in Latin America and the Caribbean Region.” Latin America and the Caribbean Regional Studies Program Report 44, World Bank (October 1996, p. 5). 1$ee World Bank World Development Report 2006: Equity and Development, World Bank and Oxford University Press (Washington DC: 2005c). African Union, Transport and the Millennium Development Goals, Addis Ababa (February 2005). 10See McGuire, James W., “Basic Health Care Provision and under-5 Mortality: A Cross-National Study of Developing Countries,” World Development (March 2006), 405-25. See also McCarthy, Desmond, Holger Wolf, and Yi Wu, “The Growth Costs of Malaria,” unpublished, Georgetown University (December 1999), and Philip Stevens, The Real Determinants of Health, International Policy Network (London: 2005). 1%See Levy, Hernan, “Rural Roads and Poverty Alleviation in Morocco,” unpublished manuscript, World Bank (May 2004). %Bundy, Donald, and others, “School Health and Nutrition Programs,” in Disease Control Priorities in Developing Countries, ed. by Dean Jamison and others, 2nd ed., Oxford University Press (New York: 2005). 1%See Bloom, David E., David Canning, and Mark Weston, “The Value of Vaccination,” World Economics, 6 (July 2005), 1-13. 19%See Glewwe, Paul, “Why does Mother's Schooling Raise Child Health in Developing Countries”? “ Journal of Human Resources, 34 (- 1999), 124-59; and the cross-country regressions in Wagstaff, Adam, and Mariam Claeson, The Millennium Development Goals for Heath: Rising to the Challenges, World Bank (Washington DC: 2005). 18See Agénor, Pierre-Richard, “A Theory of Infrastructure-led Development,” Working Paper No. 83, Centre for Growth and Business and Business Cycle Research (December 2006). 145 [page 180] Haiti: Public Expenditure Management and Financial Accountability Review of experience on the content and consequences of school health programs (which include for instance treatment for intestinal worm infections), have emphasized that these programs can raise productivity in adult life not only through higher levels of cognitive ability, but also through their effect on school participation and years of schooling attained. Along the same line, Bloom, Canning and Weston (2005) found that children vaccinated (against a range of diseases, including measles, polio and tuberculosis) as infants in the Philippines performed better in language and IQ scores as 10-year-olds as compared to unvaccinated children — even within similar social groups." Thus, early vaccination may have a sizable effect on education outcomes and economic growth. At the same time, a number of empirical studies have found that higher education levels can improve health. Studies have shown indeed that where mothers are better educated infant mortality rates are lower, and attendance rates in school tend to be higher.” Better-educated women tend, on average, to have more health knowledge and be more aware of the myriad of health risks that their children face. During the period 1970-95, improvements in female secondary school enrollment rates are estimated to be responsible for 43 percent of the total 15.5 percent reduction in the child underweight rate of developing countries. The foregoing discussion suggests that the positive externalities associated with core public infrastructure may be substantial in low-income countries and must be accounted for in the design of strategies aimed at fostering growth and reducing poverty. If the production of health services is constrained by the lack of availability of infrastructure (lack of electricity to run hospitals and refrigerate vaccines, lack of roads to allow easy access to hospitals and clinics, etc.), a strategy designed to spur growth may need to rely heavily on a large, front-loaded increase in core public infrastructure. Size matters here not only because infrastructure investments are often lumpy in nature, but also because the network externalities associated With infrastructure, which translate into strong increasing returns (at least initially) in the productivity of public capital, tend to “kick in” only after the stock of infrastructure assets itself has reached a certain threshold.!?* Source: The authors. 7.1.2 Consumption and investment - ne 7.8 Consider now consumption and investment decisions. There is a unique household- producer who maximizes the present discounted value of utility, which in turn depends not only on : consumption of commodities but also consumption of health services. The discount rate p is Fo endogenous as a result of three factors. First, it depends negatively on consumption of health : services, to capture the idea that better health leads to a greater weight being attached to future ° consumption, and therefore tends to lower the degree of impatience. Second, it depends also negatively on total government spending on security, defined as the sum of spending on salaries of public employees involved in security (the army, the police and the judiciary). The view here is that spending on security lowers violence, improves political stability, and raises private sector confidence in the economy”’s future prospects; this tends to reduce preference for the present. Both of these effects tend therefore to increase private saving — and thus to stimulate investment and growth over time. Third, the rate of time preference is positively related to wealth — that is, the stock of private capital in the present context. This tends to lower saving and thus the rate of economic growth. 7.9. The resource constraint faced by the household-producer equates consumption spending (inclusive of taxes), physical capital accumulation, and user fees on public infrastructure services to factor income (net of taxes), the public sector wage bill, transfers from the government, and net transfers from abroad.” In the accumulation equation for private physical capital, the rate of depreciation is taken to depend inversely on the ratio of public spending on core infrastructure maintenance to the stock of private capital. Thus, maintenance expenditure on public infrastructure enhances the durability of private capital. The budget constraint of the private sector, together with 1®{n addition, given that the household holds no domestic debt, interest payments on that debt do not appear as a resource. 146 [page 181] Haiti: Public Expenditure Management and Financial Accountability Review the capital accumulation constraint, and the assumption that transfers are fixed as a fraction of output, is used to determine residually private investment. 7.13 Composition of public spending 7.10. The government collects taxes (on wages of educated workers, private capital income, and private consumption), and spends on goods and services (including for maintenance and security purposes). It also services its debt and invests in education, health and core infrastructure. Education and health services are provided free of charge, whereas core infrastructure in is subject to fees. It receives foreign assistance, which serves to balance the budget. 7.11. More explicitly, total government spending, whose composition is described in Figure 19, is given by the sum of consumption (current) spending, capital (investment) spending and interest payment. Current spending consists of salaries to public sector workers, spending on maintenance, spending on security (other than salaries for the army, police, and judiciary), and other spending on private commodities. Spending on security and other items are both taken as a fixed fraction of output, whereas maintenance outlays are assumed to be proportional to total depreciation of all components of the public capital stock. Figure 19.Composition of Public Expenditure Investment Investment Investment | in infrastructure in education in health Wages É y . and saiaries Public | Securit | investment Pate ° Efficiency | N int t | ONTINETEST @_ Maintenance Public expenditure capital Interest | VF Other spending P nter en ts on goods/services aym y Total _ + expenditure Transfers Depreciation of public capital . Depreciation of private capital 7.12. Total public investment is taken to be a fixed fraction of output. Public investment is allocated to education, health and core infrastructure as well as a residual item. Each component is given as a fixed fraction of total investment. Stocks of public capital in education, health and 147 [page 182] Haïti: Public Expenditure Management and Financial Accountability Review infrastructure are determined by using the perpetual inventory method, modified to account for partial efficiency of public investment. The rate of depreciation of each public capital stock is taken to depend inversely on the ratio of public spending on infrastructure maintenance to the relevant stock of public capital. Thus, maintenance expenditure enhances the durability of public capital. 7.1.4 Taxes and the government budget constraint 7.13. Taxes are subject to collection costs; these costs (which are measured in terms of the private commodities) reduce the yield of each tax by a fixed proportion. ° User fees are also subject to the same type of collection costs. Total government revenue is determined as the (cost adjusted}) Income and consumption taxes, as well as user fees. With borrowing fixed as a fraction of output, the government budget balance is used to determine the flow of aid (grants). Therefore, in this mode, the model allows one to calculate aid requirements, for a given path of spending, taxes (net of collection costs) and borrowing, as illustrated in Figure 20.11! Figure 20. Government Budget--Overall Structure Public Public Transfers Non-interest Capital Éficiency INVeStment wages expenditure | « Foreign borrowing Tax + Overall deficit V revenues (before grants) ! Interest payments | Foreign . î . aid <—— Domestic borrowing Aggregate demand À Consumption Private disposable investment _< income Collection costs refer here only to direct administrative costs incurred by governments. See Bird and Zolt (2005) for a further discussion. Ml Alternatively, the model could be solved for a specific component of spending or taxes, for a given level of aid-—as a share, for instance, of output. 148 [page 183] Haïti: Public Expenditure Management and Financial Accountability Review 7.15 Public capital: quality indicators 7.14. Finally, indicators of quality of public capital are all related to indicators of excess demand (or congestion) on public services. The indicator of quality of public infrastructure, for instance, is related to the ratio of public infrastructure capital itself to the stock of private capital, whereas the indicator of quality of public capital in health is related to the ratio of the stock of public capital im health to the size of the population. Finally, the indicator of quality of public capital in education is related to the ratio of the stock of public capital in education itself to the number of students attending public schools. This specification captures congestion effects in the public education system due to overcrowded classrooms, as discussed elsewhere in the literature. 7.2 Calibration 715. The model is calibrated for 2005, the most recent year for which a complete set of macro accounts could be constructed. Data on national accounts and fiscal accounts were used to produce estimates. 7.16. Consider first the production of health services. The share parameter BHC, which determines the roles of public capital in infrastructure and public capital in health in determining the “effective” capital stock in the production of health services (see equation (1) is set at 0.3.1? The share BH of medical personnel in the public production of health services (see equation (2)) is set at 0.6. In the same equation, the fraction %6x of the total public labor force that is employed as Ve medical workers is set at 0.015, which corresponds to the value for Haiti in 2005. In equation (3), Do the share %pu of total private spending allocated by households to expenditure on health services. is men set at 0.032 for Haiti äs well. 7 © 7.17. The share parameter BT in equation (4), which'determines how the prevailing stock of ". ° educated labor in thé private sector and health services are combiried to create effective (educated) D labor, is set at 0.7. 7.18. In the production of commodities, the share parameter BJ, which determines how effective labor and the private capital stock are combined to produce the intermediate input J (see equation (5), is set at 0.7. Similarly, the share parameter BV, which determines how the composite input J and raw labor are combined to produce the intermediate input V (see equation (6)), is set at 0.8. 7.19. In equation (7), we normalize output of commodities, Y at 168 billion gourdes, which corresponds to the value of Haiti’s GDP in 2005. The stocks of public capital in infrastructure, health and education are taken to be relatively small to begin with. The infrastructure capital-output ratio is set at 0.6, the education capital-output ratio at 0.3, and the health capital-output ratio is set at 0.3. Overall, the aggregate (weighted) public capital-output ratio is quite low by industrial- country standards, but it is consistent with the average estimate of the net public capital stock obtained by Arestoff and Hurlin (2005b, Table 3) for a large group of developing countries.!? The ratio of private capital to output is set at 1.4. The resulting private-aggregate public capital ratio is thus about 1.1. Put differently, of the two components of physical capital, public capital is the relatively scarce factor; this is consistent with the view (shared by many observers) that lack of "12 AI the equations of the model are listed in Annex to Chapter 7. The Arestoff-Hurlin estimates are based on the perpetual inventory method, which consists essentially in cumulating total capital expenditure flows by central governments. 149 [page 184] Haïti: Public Expenditure Management and Financial Accountability Review public infrastructure in low-income countries (including Haïti) is a major impediment to growth and private capital accumulation. Coefficients BY1 and BY2, which determine directly the relative importance of the composite input V and land, are set at 0.7 and 0.15, respectively; by comparison, the value of BY2, used by Hansen and Prescott (2002), for instance, is 0.3. 7.20. The estimates of BY1 and BY2 imply that the elasticity of output of commodities with respect to public capital in infrastructure, given by 1-BY1-BY2, is equal to 0.15. This value corresponds to the one estimated by Easterly and Rebelo (1993) and used by Rioja (2005). By comparison, Baier and Glomm (2001) and Rioja and Glomm (2003) use an estimate of 0.1 which is close to the figure of 0.11 estimated by Hulten (1996).!"* Calderon and Serven (2005) also estimate the elasticity of GDP to infrastructure (proxied by a synthetic index of physical assets that includes energy, roads and telecommunications) to be 0.138 for a group of developing countries, whereas Suescun (2005, p. 15) focusing only on Colombia, found a value of 0.147. By comparison, Esfahani and Ramirez (2003, Table 4) found estimates of the elasticities of per capita GDP growth ranging from 0.08 to 0.16, when infrastructure capital is measured as the number of telephone lines or power generation capacity, whereas Canning (1999) estimates an elasticity of output per worker with respect to infrastructure (as measured by the number of telephone lines) that is on average 0.14 for his full sample, and close to 0.26 for higher-income countries. Similarly, Arestoff and Hurlin (2005b, Tables 2 and 7) found elasticities of output per worker ranging from 0.05 to 0.19 when infrastructure stocks are used, and from 0.04 to 0.22 when estimates of public capital stocks are used, in the absence of threshold effects. Thus, the estimate used here is consistent with the - upper range of the values estimated by Esfahani and Ramirez, and Arestoff and Hurlin, as well as | L the lower range of Canning’s results.” 721. It should also be noted that, given the multi-level Cobb-Douglas specification adopted here, the “true” elasticity of output with respect to educated labor is BT-BJ-BV-BY1, whereas the elasticity of output with respect to private capital is given by (1-BJ)BV-BY1, given the above : estimates, we obtain, respectively, 0.27 and 0.17. The latter estimmate is significantly lower than the share of private capital in output used in other studies, which is 0.36 for Alonso-Carrera and Freire- Serén (2004, p. 852), 0.4 for instance in Ortigueira (1998, p. 337) and Rivas (2003, Table 1), and 0.45 in Rioja and Glomm (2003, Table 2). 7.22. Consider now population and the production of education labor. The initial level of population is set at 8.5 million, which corresponds to Haïti’s population in 2005. The autonomous growth rate of the total population in equation (9), g°, is set at 2.2 percent, which corresponds to Haïti’s value in 2005, whereas Bx and Bin are set at 0.01 and 0.005, respectively. 7.23. In equation (10), coefficients ab and as, which measure respectively the share of dependents and the share of students (both as a share of the total population), are set at 0.252 and 0.163. 7.24. The share parameter BEC, which determines how the effective stocks of public capital in infrastructure and education are combined to produce the composite input KGr(t) (see equation "éBaldacci, Hillman, and Kojo (2004, p. 533) found an elasticity of the growth rate per capita with respect to public capital expenditure that ranges from 0.06 to 0.08 for a group of 39 low-income countries for the period 1999-2001. "SColletaz and Hurlin (2006, Table 5), using a smooth threshold regression approach, found estimates ranging from 0.07 (for France, Ireland, and the United States, for instance) to values as high as 0.29 for Norway and 0.38 for Portugal. Their average for 21 OECD countries is - 150 [page 185] Haiti: Public Expenditure Management and Financial Accountability Review (12)), is set at 0.35. Thus, infrastructure plays a relatively important role in determining how much physical capital is used in the education technology. In the next section, we will perform some sensitivity tests with respect to the value of this parameter. 7.25. In equation (13), the share parameter BZ, which determines how the composite public capital input and the number of teachers on government payroll are combined to produce the composite input Z, is set at 0.8. Thus, physical capital is as important as teachers in producing educated labor. In the same equation, the fraction xs representing the share of teachers in total public employment is calibrated as 0.176, equal to Haïti’s value in 2005. 7.26. The share parameter $S, which determines how health services and the number of students are combined to determine the composite input SH (see equation (14)), is set at 0.8. In equation (15), the share parameter BE, which determines how the composite imputs SH and Z are combined to determine the number of newly-educated workers by the public sector, is set at 0.6. In that equation, the fraction Xsu°, which measures the share of the effective supply of students attending public schools, is set at 0.3. In this equation, the share of the “effective” supply of students enrolled in the public schools, ka, is set equal to the share of actual students enrolled in that sector, which is 0.185 for Haïti in the base period. 7.27. Given the nested structure of the model, the “true” elasticity of the production of newly- educated workers by the public sector with respect to the public capital stock in education is given *‘: | by (1-BEC)(1-BEC)(1-BE). From the estimates above, this value is 0.052. Although our estimate : is smaller than the value used by Chen (2005), it is close to the value used by Rioja (2005 and the . : : econometric estimate obtained by Blankenau et al. (2005) for their full sample. Similariy, Perli and no . Sakeïlaris (1998) used a share of physical capital in final output of the education sector between - :.. 0.11 and 0.17. The estimate used here is probably quite appropriate for the group of lew-income . . LE | countries where education (at least at the primary and secondary levels) is to a very large extent ‘ - publicly provided.!'$ un. 7.28. In equation (16), the share rs of total private spending allocated by households to expenditure on health services is calibrated as 0.047 for Haiti in the base year. The share nxe, which measures the base-period ratio of the number of educated individuals “produced” by private schools and private spending on education, is set at 0.00002, which represents the figure observed for Haïti in 2005. In (15) and (16), to estimate the flow variables NE(t) and NE‘(t), we proceed as follows. We first calculate the change in the total number of people who become literate within a year, by taking literacy rates in two consecutive years, multiplying them by the total population in that year, and taking the absolute difference. This gives us an estimate of NE(t). We then apply to that estimate the actual share of students enrolled in public schools to obtain an estimate of NE“(t). 7.29. In equation (17), the rate of attrition of the educated labor force is set at 0.05. This compares to a value of 0.01 used by Alonso-Carrera and Freire-Serén (2004, p. 852) as an estimate of the rate of depreciation of human capital. In equation (18), the coefficient proportion a6r, which measures the share of public sector employment in the total supply of educated workers, is calculated as 0.015, whereas apg and ap, the shares of the educated labor force involved in the private production of education and health services, respectively, are calculated at 0.0017 and "éBlankenau et al. (2005) found that the elasticity of human capital with respect to government spending on education is close to zero for low-income countries, but this runs counter to intuition. It also does not account for the heterogeneity in public school enrollment discussed in the conclusion. 151 [page 186] Haiti: Public Expenditure Management and Financial Accountability Review 0.001 all of which are the values for Haïti in 2005. By implication, the share of educated workers employed in private production of commodities, l-aps-apx-aor, is equal to 0.967. This gives an initial private capital-educated labor ratio in private production of 78,581, and an overall capital- labor ratio of 87,480. Keeping in mind that "educated labor" in the present context includes both skilled and unskilled workers employed in production, these ratios (together with the capital-output ratios mentioned earlier) capture fairly well the view that the country considered is poor and endowed with a relatively abundant supply of labor (with only part of it educated), while facing at the same time a relative scarcity of physical (particularly public} capital. 7.30. In equation (20), o, the intertemporal elasticity of substitution, is set at 0.3. This relatively low value is consistent with the evidence indicating that the intertemporal elasticity of substitution tends to be low at low levels of income (see Ogaki, Ostry and Reinhart (1996) and Agénor and Montiel (2007)), a result that may reflect either short planning horizons or liquidity constraints, as discussed for instance by Agénor (2004, Chapter 2). 1? 7.31. In the resource constraint of the private sector, equation (21), private consumption is set at 93.3 percent of output. This value is quite sensible for many low-income countries, where limited private resources are allocated to savings and investment. It corresponds to the value observed for Haïti in 2005. The tax rate on (factor) income, 1, is set equal to 0.042, whereas the tax rate on consumption is set equal to 0.057, both of which correspond to the values observed for Haiti nm 2005. The first value is in line with actual ratios for many low-income countries, where taxation . (which is essentially indirect in nature) provides a more limited source of revenue than in higher- ‘ ‘ income countries. The coefficient 00 in that equation, which measures the share of other current . government spending allocated to transfers to households, is calculated as 0.009, which corresponds to the value observed for Haiti in 2005. : : : : .7.32. Coefficients pH and pS in the discount rate function (equation (22) are set at 0.01. The : estimate of the first coefficient is based on the results in Lawrance (1991), who identified an (inverse) relationship between the rate of time preference and the level of income, with an elasticity of 0.058. Assuming that spending on health is services is more or less proportional to income (or expenditure, given the low degree of intertemporal substitution), this elasticity can be used as an approximation proportional to pH. To ensure a reasonable initial value of the discount rate (given the values of pH and pS and the initial values of H(t)/K?(t) and CGs(t)/Kp(t)), we set po such that the value of p in the initial period is equal to 0.0037. The rate of time preference, p, is set at 4 percent, a fairly conventional choice in this literature. This leads to a discount factor of approximately 0.96 (see, for instance, Canton (2001, Table 1), and Ghosh and Roy (2004, Tables 1 and 2)). 7.33. In equation (24), the rate of depreciation of the private capital stock, 6P(t), is defined in such a way that its initial value is equal to 6.8 percent. This value corresponds to the average value estimated by Bu (2006, Table 8) for three low-income countries in Africa. In that equation, we also set 4P = 0.002, and then calibrated ep = 0.94. 7.34. Tuming now to the government budget, in equation (27), the effective interest rate on the public debt is calculated as 0.024. The shares of current and capital spending in total government IUOf course, using even lower values of the ntertemporal elasticity of substitution would "flatten" the response of consumption to shocks. However, they would not affect the direction of the effect discussed below. 152 [page 187] Haiti: Public Expenditure Management and Financial Accountability Review spending are set equal to 0.64 and 0.3, respectively, implying a share of interest payments of 0.06. These shares correspond to those observed for Haïti in 2005. 7.35. In equation (28), the shares of salaries to public sector workers, maintenance, spending on security (other than salaries) and transfers in total current spending are set equal to 0.38, 0.11, 0.15, and 0.27 respectively, implying a share of spending on other categories of 0.25. These shares imply that, the coefficients 8; in equations (29), which measure the shares of spending on security (excluding salaries of security personnel), transfers, and other items in GDP, are equal to 0.014, 0.009, and 0.024, respectively. In equation (30), the coefficients Our, Guu, and Our are set so that the value of total spending on maintenance for each item is indeed equal to its share in total current spending, that is, 0.40, 0.23, and 0.21, respectively. 7.36. Coefficient 6. which measures in equation (31) the share of total public investment in GDP is set equal to 0.04, the value for Haïti in 2005. This number is consistent with the share of public investment in total government spending. The allocation of public investment between education, health, infrastructure, and other categories, is determined by the coefficients kr, Kx, Kk Ko, which are calculated as 0.053, 0.054, 0.36, and 0.53, respectively. These ratios correspond to those observed for Haiti in 2005. 7.37. In equation (34), the degree of (in) efficiency of public investment, that is, o for h = EH, is set uniformly at 0.5. Arestoff and Hurlin (2005) found values of @ ranging from 0.4 to 0.6.for a : group of developing countries. In the experiments reported below, we use at first the uniform value oc of 0.5, and perform subsequently a sensitivity analysis. In equation (35), the rates of depreciation of noi each capital stock, Sat), is set so that the ratios are equai to 3.5 percent in the base period. Similar ‘ no values are used by Agénor, Bayraktar, and El Aynaoui (2006), and. Pinto Moreira and Bayraktar re (2006). The coefficients £cn and 4Gh is set at 0.001, and ecx is calibrated as 0.979. se 7.38. In equation (36), the coefficients measuring the tax collection costs, qe and qy, are set at : 0.03 and 0.06 respectively, whereas the cost of collecting infrastructure fees qr, is set at 0.06. Thus, collecting income taxes and fees are assumed to be twice as costly as collecting consumption taxes. The value of 0.03 corresponds to the average of administrative costs (in proportion of taxes collected) estimated by Gallagher (2005, p. 127) for a group of low-income developing countries. In equation (38), the coefficient 6h, which measures the ratio of borrowing (both domestic and foreign) as a fixed fraction of output is set at 0.007, which corresponds to the value observed for Haiti in 2005. 7.39. In the private investment equation (40), the share of foreign transfers as a proportion of GDP, 68, is set at 0.21, which corresponds to the value observed for total transfers for Haiti in 2005. Finally, for the quality indicators defined in (41), (42) and (43), coefficients 0h, are chosen 80 that the initial values of these indicators is relatively low, at 0.4. ÉNote that we assume that the cost of collecting taxes on both components of factor income (wages and profits) is the same. In practice, however, collection costs may be higher for non-wage income. See Agénor and Neanidis (2006b) for a more detailed discussion. 153 [page 188] Haïti: Public Expenditure Management and Financial Accountability Review CHAPTER 8 : ADDRESSING GROWTH AND POVERTY CHALLENGES: FISCAL REFORMS AND AID REQUIREMENTS 8.1. This chapter presents policy experiments carried out using Haïti macro-model, including: G) increase in public investment with low and high efficiency of investment; (ii) budget-neutral reallocation of spending toward health; (iii) an improvement in fiscal management; (iv) an increase in user fees on core infrastructure; (v) an increase in security spending; and (vi) a composite fiscal package. 8.2. The key findings are the following. First, an increase in public investment leads to higher growth rates compared to the baseline. However, although growth is higher, it is not enough to entail a substantial drop in the poverty rate. But when efficiency of public investment is higher, growth rates are much higher, and the poverty rate drops much faster and to lower levels than in the case of low efficiency. Second, a reallocation of spending toward investment in health has limited impact on growth and poverty reduction. Third, a reduction in collection costs combined with an increase in effective direct tax rate has a negative impact on growth and worsens poverty, assuming that public spending remains unchanged. However, if the additional revenues generated by higher income taxes and lower collection costs, are reallocated (across the board) to public investment, the growth rate of output per capita increases and the poverty rate declines. Fourth, a permanent : increase in user fees combined with the reallocation of additional revenues across the board to . spending on maintenance results in a small positive impact on growth and lower poverty rate. e ot Fifth, an increase in security spending (per se) has almost no discernible effects on growth and poverty. However, when spending on security have a relatively large impact on agents’ rate of preference for the present; in such conditions, improvements in security, to the extent that they . translate into reductions in crime and violence leads to higher growth rates and lower poverty rates. - ._. Sixth, a composite fiscal package combining several of the previous experiments, results in higher growth rates and lower poverty rates. Seventh, the different components of the fiscal reform package point out the dynamic trade-offs between growth-poverty and improvement in public finances. 8.3. The main policy lesson drawn from our analysis is that a fiscal reform package should be designed not only for the objective of improving fiscal performance but also with a view to assess its impact on growth and poverty. This requires a dynamic macro-model. 154 [page 189] Haiti: Public Expenditure Management and Financial Accountability Review 8.1 Baseline Scenario, 2007-2015 84. We need to build a Figure 21.Baseline scenario, 2007-15 baseline scenario to be able to 2 56 conduct policy experiments with : Le the model. In the baseline La RS ts Le scenario, budget deficit as a share . Le of GDP is taken fixed to make aid | endogenous. It should be noted $ Re RE Da that this closure rule can be PRES 53 changed. The shares of all other 58 components of spending remain 2 52 constant at base period values. A eme — The efficiency parameter of 2007 2008 2009 2010 2011 2012 2013 2014 2015 public investment is equal to the = hoal GOP per caphs at market prices (2 change) uniform value of 0.5. 2222222 Foreign aid (% of GDF) ——— — Total revenues (% of GDP) 8.5 . Table A. 8. 1 in Annex —s— Poverty rate-Grow th elasticity of -1.0 {right scale) presents the baseline scenario. Source : Authors’ Calculations. _- Given that current conditions . L . continue, the growth rate of real GDP per capita at market prices is estimated to increase only slightly, which is basically caused by the suppiy side effect of increasing public investment as a ie | share of GDP from 4.5 percent to 5.7 percent, and private investment from 32.3 percent in 2007 to *: * 38.1 percent in 2015. The low growth rate leads to a minor drop in the poverty rate whether we use ce Ravallion’s adjusted elasticity or the growth elasticity of -1.0. For example, the poverty rate with : :": . Ravallion’s adjusted elasticity decreases from 55 percent in 2007 to 52.8 percent in 2015. If the. : current trends were to be maintained, the prospects of reducing poverty would not be realized and : . the MDGs of halving poverty by 2015 would not be achieved. Thus the results indicate that foreign aid at the level of five percent of GDP wouid not be enough to obtain desired growth rates to reduce poverty. 8.2 Policy Experiments 8.6. This section illustrates the properties and implications of the model by considering six different policy experiments: an increase in public investment (financed by aid); a budget-neutral reallocation of spending toward health; an improvement in fiscal management that takes the alternative forms of a reduction in collection costs, an increase in user fees on core infrastructure, and an increase in security spending; and a composite fiscal package, that combines elements of all the individual experiments listed above. In line with the favorable international environment that Haïti faces currently, all experiments are conducted under the assumption that the overall budget deficit is constant and aid is the balancing item in the govemment budget.!!° As indicated earlier, one could also consider the case where aid is fixed in proportion of GDP, with the balancing item in the budget being either a component of non-interest expenditure, or a tax rate. 155 [page 190] Haïti: Public Expenditure Management and Financial Accountability Review 8.2.1. Increase in Public Investment 8.7. Our first experiment consists of a temporary increase in total public investment as a share of GDP by 5 percentage points starting in 2008 until 2011, then dropping by 1 percentage point each year after that, to eventually return to the initial baseline value. We consider two variants: first, the case where the efficiency parameter of public investment is constant throughout at 0.5, and the second case where the efficiency parameter (for all categories of public investment) improves gradually over time. In both scenarios, investment is totally financed by foreign aid, due to the closure rule described earlier. 156 [page 191] Haiti: Public Expenditure Management and Financial Accountability Review 8.8. Simulation results for the first variant are shown in Table A.8.2. As Figure 22.Higher Total Public Investment, 2007-15, in all subsequent tables, they are (Deviation from the Baseline scenario) displayed as absolute differences 05 ,6 from the baseline scenario. va | , 89. The direct effect of the 02 H Es La increase in public investment is on 94 H Ua the stock of public capital in H EE D infrastructure, which tends to 4,1 Fu 2 stimulate output. Because the growth ” Ë ee | in output exceeds the increase in +4! ÿ men ex pan Re By ce . 20 2008 2009 2010 2011 2012 2043 2014 2015 ° private investment increases by RS nearly 1.7 percentage points of GDP. = Tota revenue (7% of GDP) Thus, the rise in public investment 7777722 Ferekon ai of CDR rt scae) crowds in private investment through Source : Authors’ Caleulations. an indirect complementarity effect. In turn, the increase in private Figure 23.Higher Total Public Investment and Higher investment raises the stock of private Efficiency of Public Investment, 2007-15, ot : capital over time:; this, combined with (Deviation from the Baseline scenario) ‘ : the increase in the stock of public ; ‘ ° Le capital in infrastructure, tends to 1 Fu ; increase the marginal productivity of 06 ee, +8 all other production inputs. At the 04 4 7 Ua x no same time, the rise in public 92 if Es ‘ . investment in education leads to an mn 3 RE : | increase in the stock of capital in 04 H = ? education and the public education 08 Î Fa input, and therefore to a higher #1 ? 7 4 supply of educated workers." In mn À o addition to improvements in the Î 2007 2008 2009 2010 2oit 2012 2013 2014 2016 public infrastructure and education ___ posi GO per pis atmaret prices (2 change) capital stock, the increase in the stock —æ— Poverty rate-Growth elasticiy of -1.0 of public capital in health raises the 7777 Total revenues (4 of 60m) : . ace. Foreign aid (% of GDP, nght scale) efficiency of educated labor in production. The productivity gains Source : Authors’ Calculations. associated with the combined effect of improved effective labor, and increased marginal productivity of all inputs, contribute to higher output. In terms of growth rates, output per capita remains on a sustained basis at 0.3 percentage points above its level in the baseline case. However, although growth is higher, it is not enough to cause a substantial drop in the poverty rate; even in the case of neutral growth elasticity, the poverty rate drops by only 1.1 percentage points by 2015. 1] the model, given that the estimate of the intertemporal elasticity of substitution that we use is relatively low (in line with the evidence for low-income countries), consumption smoothing is significant, implying relatively small changes over time in private expenditure. The ratio of educated workers to population changes only slightly, however, due to a relatively low degree of substitution between teachers and public capital stock in the production of education services. 157 [page 192] Haiti: Public Expenditure Management and Financial Accountability Review 8.10. Inthe second variant, in addition to higher public investment as described above, efficiency of all categories of public investment is assumed to improve uniformly over time. Specificaliy, it is assumed that the efficiency parameter remains constant at 0.5 in 2006 and 2007, and then increases to 0.8 by 0.1 point each year between 2008 and 2010. After 2010, it remains constant at 0.8. This case may represent the reforms aimed at improving governance and eliminating mismanagement of public resources — a key policy challenge in Haiti, as in many other developing countries. 8.11. Table A.8.3 summarizes the simulation results. Now, because of improved efficiency of public investment, the rate of accumulation of all categories of public capital is higher, thereby magnifying productivity effects on private inputs. In turn, higher rates of factor accumulation lead to higher growth rates of GDP per capita, relative to the first variant. For example, Table A.8.3 shows that the growth rate of output relative to the baseline value rises to 0.6 in 2015, whereas it was only 0.2 in Table A.8.2. This higher growth rate of GDP per capita translates into a lower poverty rate. With a growth elasticity of -1.0, the drop in the poverty rate reaches 2.5 percentage points by 2015 (relative to the baseline scenario} in case of higher efficiency of public investment, compared to 1.1 percent drop with the first variant of the experiment. 8.2.2 Spending reallocation 8.12. Our third experiment is a typical “fiscal space” experiment. It consists of two Figure 24.Reallocation of spending to health , 2007- : components. First, starting in 2008, there is 15 (Deviation from the Baseline scenario) | ‘ | a permanent reduction of 1 percentage point om. of GDP in “other” publie spending which is 006; Li : ° oi reallocated to investment (across the board, 004 | oo - . Loi : that is, keeping constant the initial shares in cu fe : public capital formation). Second, the share o eee rennes : | of the residual category “other” in public -0.02 - investment is reduced permanently by 5 2m percentage points, with the whole amount reallocated to investment in health. Given sos] 2007 2008 2009 2010 2041 2012 2013 2014 2015 that the experiment consists of a spending reallocation, foreign aid requirements do not ie Gate 0 change on impact (although they may Leon crnge nes sequently, given the dynamics of Source : Authors’ Calculations. 8.13. The simulation results are presented in Table A.8.4. The impact on output growth per capita is relatively weak. It increases only by 0.1 percentage points by 2015. As a result, the effect on poverty is weak as well. The proportion of poor drops by only 0.2 percentage points in the case of a neutral-growth elasticity. Thus, the results indicate that, by itself, and given the magnitude of the shock, higher public health investment is not enough to have a strong impact on growth, despite its positive effect on the productivity of the labor force and its positive effect on the incentive to save (which results from a reduction in the rate of time preference). 158 [page 193] Haiti: Public Expenditure Management and Financial Accountability Review 8.2.3 Tax Reform . . Figure 25.Lower collection cost, higher direct tax rate. Se : In ms set ou pra. k 2007-15 (Deviation from the Baseline collection costs are reduced by ha scenario starting in 2008 and the effective direct ) tax rate is increased by 1 percentage point $ LL over three years, starting in 2008. We à D consider again two variants: first, we #1 on assume that public spending does not ] T change; second, we consider the case D — where the additional resources generated “ Ur by tax reform are allocated to investment. :l A sl 5 " me Rien QE Rs venant re * . 2007 2008 2009 2010 201 2012 2013 2014 2015 shown in Table A.8.5. The direct effec of the tax reform is an increase in tax ZE mnnnapee revenues. But given that public spending LIT ne 4 1 09 does not change, and that the budget Source : Authors” Calculations. deficit is constant, the increase in revenues translates almost one to one into . k . . : : . k . . Figure 26, Lower collection cost, higher direct tax rate, . . a fall in foreign aid requirements. : Los 2 Moreover, the impact on growth is “new revenue to investment in infrastructure, : . se _ | 2007-15 (Deviation from the Baseline u largely negative: higher income taxes scenario) ‘ : tend to induce households to consume : : more today and to reduce saving rates. As °°] D Lo _ | a result of this intertemporal effect, : Pe DIET, . private investment drops, thereby à pd ‘ | : lowering the marginal productivity of all 15 a production inputs. As a result, output 1 Pa drops and poverty worsens. . Le 8.16. In the second variant, we reallocate (across the board) the ni Î additional revenues generated by higher 2007 2008 2009 2010 2011 2012 2013 2014 2015 income taxes and lower collection costs, _——— Real GP por capta at maret prices (% change) to public investment. The results are mon shown in Table A.8.6. This time around, == = Totalrevenues {3 of GOF) private investment increases as well due Source : Authors’ Calculations. to the improvement in the public infrastructure capital stock which stimulates output (and thus after-tax income) and savings. As a result, the impact on growth is positive. The growth rate of output per capita increases by 0.8 percentage points by 2015, compared to a 0.1 percentage point drop in Table A.8.5. Thus, the poverty rate declines now by 2.4 percent by 2015, in the case of a neutral growth elasticity. This last experiment illustrates well the importance of reallocating additional revenue from fiscal reforms to investment (assuming that external financing conditions do not change). Otherwise, the disincentive effects of taxation on private savings and investment may well lead to lower growth and higher poverty. 159 [page 194] Haïti: Public Expenditure Management and Financial Accountability Review 8.2.4 Increase in security spending Figure 27.Higher security spending, 2007-15 (Deviation . . . from the Baseline scenario) 8.17. This experiment consists of an increase in security spending by 3 99087 TS percentage points of GDP between 2008 ce po 3 and 2011, followed by an increase of 2.5 oo01 À Us, 25 percent in 2012, 2 percent in 2013, and ° “ PT 2 1.5 percent in 2014 and 2015. Giventhe D Tu Lis budget closure rule, higher security 450 Î TL l spending is essentially financed by oo À LL foreign aid, which rises at about the same | Î Fe |" rate. Table A.8.7 presents the simulation Le 2007 2008 2009 2010 2011 2012 2013 2014 2015 ° results when the elasticity of security = an GOP por capte tarte pres (4 change) spending, pS, in Equation (22) is taken to tee be 0.01. In this case, there are almost no Lee Foro si (4 of GO. int see) discernible effects on growth and Source : Authors’ Calculations. poverty. Figure 28. Higher security spending and Elasticity of . p ending, pS, is equal to O1. the Baseline scenario) - Conceptually, this case corresponds to a ce Ts . Situation where security concerns have a | | pee |, ! © relatively large impact on agents’ rateof ‘| | | DT Les Lo preference for the present, in such “1. À Ta, k, | conditions, improvements in security, to un So : Le the extent that they translate into M É a RL reductions in crime and violence, may 008 H Te L translate into greater incentives to “think 4] À Dei dos about” the future, and thus to save. oil À o Indeed, the results show that the impact 2007 2008 2009 2010 2011 2012 2013 204 2015 of higher security spending on growth is Real GDP per capia at market prices (% change) now quite significant. The growth rate en rises by about 0.1 percentage points by 2222222 Foreign alé (% of GDP, ia sc) 2015, whereas the poverty rate drops bY Source : Authors’ Calculations. about 0.12 by 2015 when the growth elasticity is neutral. Again, the higher value of pS leads to a higher growth rate because private sector confidence in the economy’s future prospects improves more with higher security spending. By inducing a greater reduction in preference for the present, private saving increases. Therefore, this generates a stronger effect on private investment and growth. 8.2.5 A composite fiscal package 8.19. We now consider a composite fiscal package, which combines several of the previous experiments. ° An increase in total public investment in GDP by five percentage points beginning in 2008 until 2011, then dropping by 1 percentage point each year after 2011; 160 [page 195] Haiti: Public Expenditure Management and Financial Accountability Review e À permanent reduction of one percentage point of GDP, starting in 2008, in the “other” category of public spending which is reallocated (across the board) to investment, with at the same time a permanent reduction in the share of the category “other” in public investment by five percentage points, reallocated in its entirety to health; e An increase in the effective indirect tax rate to six percentage points beginning in 2008; e An increase in the direct tax rate by 1 percent for three years, beginning in 2008; e+ An increase in security spending by three percentage points of GDP between 2008 and 2011, 2.5 percent in 2012, 2 percent in 2013, and 1.5 percent in 2014 and 2015. e A reduction in collection costs by half, starting in 2008. Figure 29.Combined shock with lower Figure 30.Combined shock with higher security collection cost, higher direct tax and expenditure, direct taxes, and elasticity security spending, 2007-15 (Deviation of security expenditure, 2007-15 from the Baseline scenario) (Deviation from the Baseline scenario) 5 en. T 3 : 2 H Pa Un, : 2 Î ee Ua, x Le . + ; Î H re va î 2007 2008 2009 2010 2011 2012 2013 2014 2015 2 ] : . L 2007 2008 2009 2019 2041 2012 2013 2014 2015 —— Real GDP per capita al market prices (% change) L —#— Poverty rale-Grow In etestchy of -1.0 Real GOP per capita at market prices (% change) === Toisrevenues (% of GDF) —#-— Poverty rate-Grow th élastichy of -1.0 222 eee Foreign aid (% of GDF, nght scale} ———- Total revenues {% of GOP) Source : Authors’ Calculations. 2272777 Foren ai (2 of GDR, rt ca) Source : Authors” Calculations. 8.20. Table A.8.10 presents the simulation results. We observe two opposite effects on growth and poverty. As the tax rates increase, people start saving less, as discussed earlier. As a result private investment and private capital accumulation slows down. This leads to an initial negative impact of the fiscal package on growth and poverty. But at the same time, the higher tax rates and lower collection costs raise government revenue, which increases public investment and thus the various components of public capital. Over time, the larger public capital stock, directly and indirectly, raises saving and investment, increases output, and lowers poverty. In the medium term, the impact on growth turns out to be positive. While the growth rate of real GDP per capita increases by 0.6 on average, the poverty rate with a growth elasticity of -1.0 drops by 2.2 percent in 2015. 8.21. If the elasticity of security spending, pS, rises, the effect on growth improves slightly. Table A.8.10 shows the simulation results when pS is taken as 0.1 instead of 0.01, as in Table A.8.9. In this case, private investment increases more, because (as discussed earlier) private sector confidence in the economy’s future prospects improves. This leads to a higher rate of output growth and lower poverty. 161 [page 196] Haiti: Public Expenditure Management and Financial Accountability Review 8.22. The impact on growth improves even more if the government applies a lower increase in the direct tax rate and makes it effective later. Tables A.8.11 shows the case when the direct tax rate increases by 0.5 percentage points only between 2010 and 2013 and then stays constant. The lower rise in the direct tax rate leads to a lower drop in savings during the initial phase of adjustment, and therefore to a smaller negative effect on private investment. In this case, the growth rate of real GDP per capita increases by 0.7 percentage points on average, compared to the 0.6 increase shown in Table A.8.9. As a result, the poverty rate (with a growth elasticity of -1.0) decreases by 2.6 percentage points in 2015, instead of 2.2. Table A.8.12 shows that the effect of changes in fiscal policy on growth and poverty get even better when the elasticity of security spending is raised to 0.1, given that in this case it leads to higher private investment. Figure 31.Combined shock with lower collection Figure 32.Combined shock with lower collection cost, higher security spending, and cost, higher security spending, elasticity direct tax increasing later, 2007-15 of security spending, and direct tax (Deviation from the Baseline scenario) increasing later, 2007-15 (Deviation a : from the Baseline scenario) 2 : ne H es 2" 15 H ee Fu, 5 : A er $ ' d iT = ‘ 15 Î TT E $ 0 É nee i À ovennnst — . rare anne 0 “ 27 2m 2m Zn 20 202 is 2014 26 ° Source : Authors’ Calculations. k LT rar ue GE on see) . Source : Authors” Calculations. 8.23. Overall, the results of our experiments illustrate that the impact of changes in fiscal policy will depend on how it affects the behavior of the private sector (notably through incentives to save and invest) and how additional revenue is allocated by the government. Regarding the latter, it is worth pointing out that even tax reforms that are considered to be highly regressive (involving sharp increases in indirect tax rates) may end up being beneficial to the poor, to the extent that the resources that they generate are allocated to productive capital accumulation. Moreover, these effects may vary in opposite direction over time: effects on poverty may be negative in the short- term but may become favorable over time. 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Morrison. 2005. “Infrastructure in Latin America and the Caribbean: Recent Developments and Key Challenges” World Bank, Washington, D.C. Gajdeczka, P., Jaramillo, L., Everaert, G.,Sancak, C., Dalsgaard, T., and Maticen, J. 2005, Haïti, Selected Issues, International Monetary Fund. Government of Haiti. Loi de Finances 2001-2002; 2002-2003; 2003-2004; 2004-2005; 2005-2006; 2006-2007. Le Moniteur. Journal Officiel de la République d’Haïti. Numéros Spéciaux. IDB and IMF. Examen des dépenses publiques d'Haïti. Notes 1-9. mars 1997. 163 [page 198] Haiti: Public Expenditure Management and Financial Accountability Review IMF. 2005. Staff Report for the 2005 Article IV Consultation and Review of the Program Supported by Emergency Post-Conflict Assistance. April 29, 2005. Institut Haitien de Statistique et d'Informatique, Enquete sur les Conditions de Vie en Haiti (ECVH-2001). IMF. Programme de Renforcement de la Politique Fiscale et des Administrations Fiscale et Douanière. 16 mai 2005. IMEF. 2006. Fiscal Adjustment for Stability and Growth. Pamphlet Series No. 55. Interim Cooperation Framework (ICF). Summary Report. July 2004 IMF. Haïti. Request for Three-Year Arrangement Under the Poverty Reduction and Growth Facility. November 7, 2006. Jha, A. K. (Ed.). 2005. “Institutions, Performance and the Financing of Infrastructure Services in the Caribbean.” World Bank - Working Paper No. 58, Washington D.C. KPMG. 2004. Corporate Tax Rates Survey. January 2004. : Lundahl., M. 2004. Sources of Growth'in the Haitian Economy. Inter- American : Development Bank. - La - . Ministry of Agriculture and Woridbank. 2005. Diagnostic and Proposals for Agriculture and Rural Development Policies and Strategies, October 5, 2005. EL Ministère de la Planification et de la Coopération Externe (Direction d’Evaluation et de Contrôle, DEC). Programme d’Investissement Public 2004/2005. Bilan d’Execution. Décembre 2005. | Ministère de la Planification et de la Coopération Externe. Carte de Pauvreté d'Haïti. Version 2004. Ministère de la Santé Publique et de la Population. Plan Stratégique National pour la Réforme du Secteur de la Santé, 2005-2010. Novembre 2005. Nexant and Econergy (for USAÏID). Haïti — Energy Sector Assessment, March 2005. Orozco, M. 2006. Understanding the remittance economy in Haïti, Inter- American Dialogue, World Bank. PNUD. Situation économique et sociale d'Haïti en 2004. Ratha, D. 2005. “Workers’ Remittances: An Important and Stable Source of External Development Finance”. In: Remittances. Development Impact and Future Prospects. Edited by Samuel Munzele Maïbo and Dilip Ratha. Republic of Haïti. Conférence Internationale pour le Développement Economique et Social d'Haïti. Document de Travail. Port-au-Prince. 25 Juillet 2006. 164 [page 199] Haïti: Public Expenditure Management and Financial Accountability Review _ Interim Poverty Reduction Strategy Paper (I- PRSP). September 2006. Schiavo-Campo, S. 2003. Financing and Aid Management Arrangements in Post-Conflict Situations. World Bank — CPR Paper No. 6, Washington D.C. Schwartz, J., S. Hahn, L. Bannon. 2004. “The Private Sector’s Role in the Provision of Infrastructure in Post-Conflict Countries: Patterns and Policy Options.” Social Development Papers: Conflict Prevention and Reconstruction Paper No. 16. World Bank, Washington, D.C. Verner, D. 2005. Making Poor Haïtians Count, Labor Markets and Poverty in Rural and Urban Haïti, Based on the First Household Survey for Haïti, October 25, World Bank. World Bank. 1998. Haïti: The Challenge of Poverty Reduction, Volume I. PREM. - Database. Various years. — Colunbia Public Expenditure Review. Report No. 25163-CO. April 16, 2005. — Sierra Leone. Public Expenditure Review: From Post-Conflict Recovery to Sustained Growth. Report No. 20075-SL. August 31, 2004. - Republic of Niger. Public Expenditure Management and Financial Accountability Review . (PEMFAR). Report No. 29752- NE. December 2004. ‘ - Improving the Dynamics of Aid. Towards More Predictabie Budget Support. - Haïti Country Economic Memorandum. Options and Opportunities for Inclusive Growth. June 1, 2006. - Development Policy Grant. Economic Governance Reform Operation II. December 12, 2006. Report No. 38325-HT. _ Assistance to the Republic of Haiti Under the Enhanced HIPC Debt Initiative. October 25, 2006. Report No. 37394-HT. _ Social Resilience and State Fragility in Haiti. À Country Social Analysis. April 2006. 165 [page 200] Haiti: Public Expenditure Management and Financial Accountability Review 166 [page 201] Haiti: Public Expenditure Management and Financial Accountability Review ANNEXES 167 [page 202] Haiti: Public Expenditure Management and Financial Accountability Review 168 [page 203] Haiti: Public Expenditure Management and Financial Accountability Review ANNEX 1 Table A1.1. VAT in Selected Countries RE MNEESIEN on UE Argentina 21.0 6.2 35 Bolivia 14.9 5.7 25 Brazil 20.5 8.6 34 Chile 18.0 8.5 17 Colombia 15.0 49 35 Costa Rica 15.0 6.5 30 Dominican Republic 8.0 3.1 25 Ecuador 12.0 4.4 36.2 El Salvador 13.0 53 25 Guatemala 10.0 3.7 31 Haïti 10.0 2.2 35 Honduras 12.0 3.8 25 Mexico 15.0 32 33 Nicaragua 15.0 10.0 un : Panama 5.0 2.0 30 Paraguay 10.0 4.5 30 Peru 18.0 6.3 30 Uruguay 23.0 84 35 Venezuela 15.0 3.2 34 . Average (LAC) 14.3 5.3 : Source: Keen, et al. (2001), KPMG (2004), and IMF (2005) Table A1.2. Average Annual GDP growth between 1995 and 2004, Haïti compared to selected Sub- Saharan Africa countries. nan RE) Haiti 0.9 Guinea 4.0 Rwanda 10.0 Gambia 3.9 Mozambique 8.2 Seychelles 3.5 Uganda 6.5 Niger 3.5 Mali 6.1 Togo 34 Cape Verde 6.0 Namibia 3.3 Botswana 5.8 Swaziland 3.1 Benin 5.3 Malawi 3.0 Mauritius 52 Senegal 5.0 Tanzania 48 Cameroon 47 Ethiopia 4.6 Burkina Faso 4.5 Ghana 43 Mauritania 4.2 Sources: Government Statistics, World Bank Database, African Action Plan, and Staff calculations. 169 [page 204] tom #22 Si + ei F3 aus SRÉR Lu - 23722884 n L Sa5sgca 233295 F Î SoSas* Fi. ÉPREÉE He La] ”. Elu om case = : | è PAPERS gènes | Grise œæ a 1% S ei RS + 322 "AT ES : Le Te use - ÉS 213258 . 2 TRE Le Sr :2%20 - : Nm °& = 32*42 22 ‘ savsñia … JS 229223 Lucas Le 29 gp: k Tags + : cLe a a a 5 el SiéSs LS SPRRRE lé g<ss we S5 FRS [RS ae de 1 senzvie . j + TT SNS = : Li Ésrsss CE ST le a Sé as L- SG + ji conne : : il SC + te one JRissse Daene dites ire La] : 23998 = | + ae 33 N Jessaess M 51 6 CRE _° ras US = . . En eus == se Ne] RERETRE ” . + PÉERE co 332288 FT Re: è 1. (L - Lt ré S Le sec ae . ii EÉPRERE Fe | aa nn ' ; £è : DRE D Se NS 2S:20 le F+É6 &8 x oo. | © F6 h ll PER ë à . |FÉPRLE , Î Lu Fa. à Fr: — s La . « | RER PE hs il Seat | Li Fe ù TS ñ ile € Li. | L Ra gs hi 3293254 CT ile RE : FL Fi 2 ss a Le Sac 84 ñ É ÉRPERRE L la MERE . un. ER LI h . ile & _ nn = is aus 8 | 229 L Î © dssitee nee lun ijuas . » | SERRE œ un PRrE Ë co | 18 à . LS __. - | na _ ; LES 255 x | RSazss | [ Ê Ë HÉS iles k | l SE a 805 . BESS £ 22523 be: > 528,5 222 : Fe 8 _T 28820% R£ Ê . HÉIBES # "s.2 ë 8 LE HSE ÊS LÉFFLE LE [page 205] Haïti: Public Expenditure Management and Financial Accountability Review Table A1.4. Composition of Government Revenue in Percent of GDP, 2000-2006 ! ET au | ol FX | FN | Fy FN | | EX | ANCHAUES | Es ul il nn tee Ant EE il NP 003 08 4 bé) Total revenue and grants 8.4 8.0 8.4 9.1 10.2 13.1 13.9 8.6 12.6 Total revenue 8.1 76 83 9.0 8.9 9.7 10.0 83 9.6 Current revenue 8.1 7.6 83 9.0 8.9 97 10.0 83 9.6 Domestic taxes 5.6 53 5.9 6.2 6.2 6.3 6.4 5.8 6.3 Customs duties 2.1 2.1 2.2 23 2.5 2.5 3.0 2.2 2.7 Other current revenue 0.3 03 0.1 0.4 0.1 0.8 0.6 03 0.5 Transfers from public enterprises Grants 0.3 0.4 0.1 0.1 13 3.5 3.8 0.2 3.0 Budget support .. ne .. 0.0 03 14 1.0 . 0.9 Project grants ce .. eu. 1.0 2.0 2.9 cu 2.1 Sources: Government statistics, IMEF, and Staff calculations. Table A1.5. Shares of recurrent spending categories in total recurrent, FY2000-06 (in percent unless TEE Ca 0 INIQIREUIN D Zi 2 Zn 2 2 2 LE | ALMA OR OR 6) 09 00m | 20 06 Wages and salaries 56.0 47.4 39.3 34.6 37.4 35.3 341 443 35.6 Net operations 28.2 36.7 452 43.4 40.7 26.6 27.7 38.4 31.6 Interest : , | payments 108 107 82 94 10.5 7.0 8.9 9.8 8.8 Transfers and .. subsidies 5.0 5.2 8.7 12.5 114 31.1 29.3 7.8 | 23.9 Total recurrent 100 100 100 100 100 100 100 106 100 Sources: Government statistics, IMF, and Staff calculations. Table A1.6. Composition of Government Expenditure. in Percent of GDP, FY 2000-06 TT TU Qi Fe RER RER EE nn zoo hi il 200 il | LL Em HU til 2000.03 2 004 0 B Total expenditure 10.1 10.2 115 12.6 11.4 13.7 1438 113 13.5 Current expenditure 7.5 8.3 9.4 9.3 7.9 9.6 9.5 8.7 9.1 Wages and salaries 42 4.0 3.7 3.2 2.9 3.4 3.2 3.7 3.2 Net operations! 21 31 43 4.0 3.2 2.6 2.6 3.5 2.8 Interest payments 0.8 0.9 0.8 0.9 0.8 0.7 0.8 0.8 0.8 External 04 05 04 0.5 0.5 04 04 04 04 Domestic 04 0.4 04 0.4 0.3 0.3 0.4 04 0.4 Transfers and subsidies 0.4 04 08 12 0.9 3.0 2.8 0.7 23 Capital expenditure 2.7 18 2.0 3.3 3.5 4.1 5.3 2.5 4.4 Domestically financed en .. ee 2.2 13 10 en 1.4 Foreign financed 1.3 2.9 44 3.0 ources: Government statistics, IMF, and Staff calculations. 1 Includes statistic discrepancy. 171 [page 206] Haiti: Public Expenditure Management and Financial Accountability Review ‘Table A1.7. Overall Fiscal Balance (In Million of Gourdes), FY2000-2006 D Ev n mn ITU LR | AOL | PUU2 | (700 | 20 | EU | PMP) | omuigs) | one ne Overall Balance Including grants -1,699 -2,070 -2,849 -4,167 -3,441 -1,041 -1815 -2,6696.3 -881 Excluding grants -1,964 -2,440 -2,962 -4,338 -5,265 -6,841 -9525 -2,926.0 -7,210.3 Excluding grants and NA NA NA NA -1671 -2036 -777 NA -1,494.7 externally financed projects Domestic financing 1,974 2265 2,561 3,470 2,825 — -695 2,567.5 707 BRH 1,935 2,248 2,897 3,720 2,838 -21 -333 2,700 828 Banks -94 7 -103 -108 -32 -29 -290 -74.5 -117 o.Ww. Other nonbank -i] -9 0 0 0 0 -120 -5.0 -40.0 financing Arrears (net) 144 19 -233 -142 18 41 48 -53.0 35.7 External financing -274 -195 288 697 592 1,050 2,509 129 1,383.7 Loans 139 50 102 1,583 897 4,010 3,729 468.5 2,878.7 Amortization -429 -53] -584 -953 -1,136 -1,274 -1,606 -6,24.3 -1,338.7 Sources: Government of Haïti, IMF and Staff Calculations. 172 [page 207] Haiti: Public Expenditure Management and Financial Accountability Review Appendix 1.1 Creating Fiscal Space: Old Wine in New Bottles? Fiscal space can be defined as “the availability of budgetary room that allows a government to provide resources for a desired purpose without any prejudice to the sustainability of a government’s financial position.” 7? There has been much debate in recent years on how countries can create fiscal space, to help them achieve the Millennium Development Goals (MDGs). While much of the early discussion was focused on public investment on infrastructure (given the associated large externalities, as discussed in Box 1), it has been recognized that some components of current spending (such as spending on health and education, for instance) may bave significant effects on growth as well. To the extent that governments borrow in the short run to finance productive spending, higher growth may well raise the tax revenues needed to repay in the longer run. In a sense, therefore, higher public spending may eventually “pay for itself,” creating thereby dynamic trade-offs among various components of expenditure. How can low-income countries create fiscal space? Essentially, there are three ways to make additional resources available for productive government spending, without compromising the sustainability of public finances in the medium term: through improvement in expenditure efficiency and reallocation of spending, through higher tax revenues, and through greater domestic or foreign financing at relatively low cost. Regarding expenditure efficiency and reallocation, a first option is to create fiscal space by reducing waste in public spending, particularly when it comes to public investment. This can be achieved by improving governance in a broad sense, that is, with tighter management and greater accountability. Another option is to reduce “unproductive” expenditures (or those considered:to have a lower priority) and reallocate available resources to more productive outiays. In doing so, : . . however, care must be taken in classifying expenditures as “unproductive.” In an environment . where crime and violence deter individuals from saving and investing, for instance, spending on ÿ . security should retain a high priority—despite the fact that it may not appear prima facie to be : - directiy productive. Similarly, attempting to create fiscal space by cutting spending on maintenance may be an ili-advised strategy; it may “work” in the short term (in the sense that: consequences for the quality of infrastructure may not be immediate), but only at a greater economic cost in the long term. Regarding tax revenues, it is possible that by broadening the tax base and strengthening tax administration (through, for instance, a reduction in collection costs and measures to reduce tax evasion) additional revenues can be raised to finance productive spending. In many poor countries, however, the capacity to raise resources through taxation remains limited by the very fact that incomes are low to begin with; and if the components of spending that are being contemplated for expansion require large or lumpy investments (as is often the case for infrastructure), relying solely on higher taxation to create fiscal space may be unfeasible. Regarding domestic or foreign financing, resources can be borrowed or received in the form of foreign grants. In many poor countries, the capacity to borrow domestically is often limited by the size of the financial sector.” As for foreign borrowing, unless it is at highly concessional terms, it may be a source of concern because of its implications for the sustainability of public debt. Debt relief, by contrast, frees resources that were previously earmarked for debt service ‘Peter S. Heller, “Understanding Fiscal Space,” IMF Policy Discussion Paper No. 05/4 (March 2005), page 3. See also Peter S. Heller, Menachem Katz, Xavier Debrun, Theo Thomas, Taline Koranchelian, and Isabel Adenauer, “Making Fiscal Space Happen!” World Economies, Vol. 7 (July-Sept. 2006), 89-132. The degree of financial development, together with other institutional factors (such as the nature of the country’s exchange rate arrangement) also limits the ability to raise revenues through seigniorage. 173 [page 208] Haïti: Public Expenditure Management and Financial Accountability Review operations, and may in principle provide a significant boost to outlays in some specific productive spending categories. #* An alternative financing option is foreign grants. What has become clear in recent years, however, is that grants tend to display a high degree of volatility. 2 This is particularly problematic if a country must finance a multi-year public investment program that requires (due to the lumpy nature of some outlays, for instance) a sustained inflow of resources; an unexpected shortfall could derait the program and annihilate its potential effects on growth and future tax revenues.!?# Another potential problem with foreign aid (in addition to short-term Dutch disease effects) is an adverse moral hazard problem—the fact that aid may weaken revenue performance and lead to higher spending. If so, then the fiscal space initially created by higher aid flows may vanish fairly quickly. There are two main lessons that can be drawn from the foregoing discussion. The first is that most of the issues that arise in discussing how “fiscal space” can be created are not new; they all boil down, to a significant extent, on ways to allow governments to expand expenditure, without jeopardizing fiscal sustainability. This suggests that considerations related to fiscal space are best made in the context of an explicit medium-term budget framework, with a clear outline of the government’s expenditure priorities—particularly in the area of public investment —and available financing options. In that sense, the current debate is “old wine in new bottles.” More specifically, there are two reasons why a medium-term perspective is essential. The first is because of the need to assess the impact of the higher public expenditure on the economy’s growth rate and the country’s capacity to generate the revenüe needed to service any debt that ‘ was occurred in the short term. The second is that, to the extent that higher expenditure in the | short term leads to higher future recurrent expenditures (such as maintenance spending, in the . . case of core infrastructure investment, for instance), one must dssess if these future outlays can be . financed from future revenues. Put differently, ensuring public debt sustainability implies that the spending programs for which fiscal space is created must be evaluated not only in terms of their short-term impact on the budget, but also in terms of their medium-term effect as well. The need to provide future budgetary resources may magnify requirements to create fiscal space. The second important lesson that can be drawn from the foregoing analysis is that assessing ways to create fiscal space, while ensuring sustainability of the fiscal stance, is inherently country specific and requires the use of a quantitative model that accounts for the country’s key structural economic features, its revenue and expenditure structure, the composition of its debt and its cash flow implications, and its prospects for greater access to foreign resources. Such models are essential to discuss how a reallocation of spending from “unproductive” outlays to investment in health and education, for instance, may affect growth and the budget, and whether “true” fiscal space can be achieved. As discussed elsewhere in this report, issues of efficiency and strengthening of fiscal institutions can also be framed, at least in part, in the context of these models. : Tee for instance John Weeks and Terry McKinley, “Does Debt Relief Increase Fiscal Space in Zambia? The MDG Implications,” Country Study No. 5, International Poverty Centre (September 2006), for a case study of the impact (or lack thereof) of debt relief on fiscal space. 1#See Ales Bulir and A. Javier Hamann, “Volatility of Development Aid: From the Frying Pan into the Fire?,” Working Paper No. 06/65, International Monetary Fund (March 2006), and UNCTAD, Doubling Aid: Making the Big Push Work, Geneva, 2006. Vin fact, as argued for instance by Pierre-Richar Agénor and Joshua Aizenman (“Aid Volatility and Poverty traps”, unpublished, University of Manchester, May 2007) a high degree of aid volatility may deter governments from implementing (costly) reforms aimed at raising domestic resources, and may well lead to a poverty trap. 174 [page 209] Haiti: Public Expenditure Management and Financial Accountability Review ANNEX 2 Table A2.1.: Budget Allocation Trends (million of nominat HTG re 02 03 04 05 06 07 04 07 [ECONOMIC SECTOR | 312.8 | 29373 | 18464 | 25152 | 18166.7 | 31272.6 | 25989 | 173182 | 41086 | 53352 . MIN SOCIAL AFFAIRS 1633 | 2019 418.6 54355. | [MIN YOUTE, SPORTS & SOCIAL ACTION |" |. RE [2948 | | | [OTHERS ADMINISTRATIONS | 1653.3 | 5522.0 | 816.5 | 86637 | 6013.8 | 90282 | 56639 | 7o019 | | 3. JUDICIARY POWER | 2642 | 1543 | 1645 | 2426 | 2538 | 4217 | 1943 | 3060 | [ SUPERIOR COUNCIL of JUDICIARY POWER [| À | | 2538 | 4217 | | | General Administration À À 30 À na | [7 Appeal Court "| 244 | 139 | 160 | 264 | 275 | 362 [181 | 300 | [ 4. INDEPENDENTS ORGANIZATIONS ___ | 2857 | 349.7 | 3166 | 450.6 | 5017 | 10032 | 3173 | 6518 | | ELECTORAL COUNCIL | 600 | 318 | 542 | 582 | 653 | 4221 | 487 | 1819 } | 5. PUBLIC DEBT AMORTIZATION À ss || | | Source : Le Moniteur, Journal Officiel de la République d’Haïti and Staff Calculations. 175 [page 210] Haiti: Public Expenditure Management and Financial Accountability Review Table A2.2 Budget Allocation Trends (million of nominal US$) CE LE A dE EE LL du 02 03 04 05 06 07 04 07 [ 1. EXECUTIVE POWER | asso | 1562 | 4583 | 2066 | s333 14782 | 4232 | 8604 | L'ECONOMIC SECTOR __ | 144.5 | 726 | 465 | 645 | 4325 | 7446 | #79 | 4139 | [MIN PLANNING & EXT COOP 2 | 33 | 30 | 14 | 68 | 147 | 2194 | 26 | 303 | | MIN ECONOMY & FINANCE | 167 | 174 | 166 | 354 | 564 | uso | 169 | 69 | | MIN AGRICULTURE NAT RES & RURAL DEV | 33 | 86 | 63 | 80 | 288 | 89 | 61 | 422 | [MIN PUB WORKS, TRANSP & COMM | 739 | 308 | 196 | 07 | 3135 | 2824 | 414 | 2019 [MIN TRADE & INDUSTRY "| 70 | 10 | 9 | 24 | 74 | 101 | 30 | 66 [MIN ENVIRONMENT 2 | 69 | 14 | 8 | 11 | 105 | 210 | 51 | 109 | [MIN TOURISM | 59 | 13 | 8 | 12 | 12 | 38 | 20 | 21 | | POLITICAL SECTOR | 943 | 714 | o12 | 1160 | 1204 | 219.6 | #56 | 1520 | | MIN HAITIANS ABROAD | us | 5 | 7 | 0 | 8 | 20 | 0 | 12 | [MIN FOREIGN AFFAIRS | 134 | 173 | 190 | 196 | 275 | 210 | 165 | 227 | | PRESIDENCY | 152 | 116 | 265 | 155 | 149 | 121 | 178 | 12 | OFFICE of PRIME MINISTER | 48 | 89 | 79 |'is2 | 103 | 137 | 72 | 131 | . [socra secroR 7 |iasz | 688 | 672 | 1054 | 1270 | 2851 | our | ins | [MIN SOCIAL AFFAIRS "| 286 | 75 | 42 | 42 | 4s | 108 | 135 | 66 | __ [eucruraLsecroR 7 | 70 | 69 | 60 | 104 | 101 | 139 | 66 | ns | [MIN of WORSHP | s | 16 | 18 [no | 17 | 19 | 14 | 18 [MIN of CULTURE | 62 | 54 | 42 | 85 | 84 | 120 | 52 | 96 | [PUBLIC DEBT SERVICE | 343 | 577 | 469 | i164 | 364 [1342 | 463 [957 | | 2. LEGISLATIVE POWER | 150 | 104 | 47 | 26 | 66 | 252 | 100 | 114 | | SENATE ofthe REPUBLIC | 70 | 45 [19 À 10 | 21 | 112 | 44 | 48 | | CHAMBER of DEPUTIES "| 80 | 59 | 28 | 15 | 4s |'140 | 56 | 67 | 3. JUDICIARY POWER | 98 | 38 | 41 | 62 | 60 | 100 | 59 | 74 | SUPERIOR COUNCIL ofJUDICIARY POWER | 0 | 0 | 0 | 0 | 60 | 100 | o | 54 [General Administration "2 0 | 0 [0 [0 | 1 | 0 | 0 | 0 [Cassation Cour" | 20 À 3 | 3 À 6 | 6 | 8 | 5 | 7 | [__ Appeal Cour À 9 À 3 À 4 À 7 À 7 | 0 | es | 7 [Cours 7] 69 | 32 | 35 | 49 | 47 | 83 | 45 | 60 | | 4. INDEPENDENTS ORGANIZATIONS ___ | 105 | 86 | 80 | 116 | 119 | 239 | #01 | 158 | | COUR SUP DES COMPTES CA | 16 | 13 | 58 | 27 | 27 | 41 | 16 | 32 L'ELECTORAL COUNCIL | 22 | 8 | 14 | 15 | 16 | 100 | 15 | 44 | CITIZEN SAFETY OFFICE | 2 | 5 | | 2 | 2 | 2 | 2 | 21 | STATE UNIVERSITY of HAITI" | 66 | 62 | 47 | 71 | 75 | 95 | 55 | 50 [ 5. PUBLIC DEBT AMORTIZATION À À À 425 À Crotan "| 4003 | 3790 | 4751 | 6000 | 900.4 | 15373 | 4482 | 0126 | Source: Le Moniteur, Journal Officiel de la République d'Haïti and Staff Calculations. 176 [page 211] Haiti: Public Expenditure Management and Financial Accountability Review Table A2.3. Total Spending by Broad Categories (in Million of gourdes), FY2002-06 l Î AT ER mo 2e cn es me LE, A A AR UN ï L ALLAN 200204 || 2608106 TOTAL 18,080.53 19,606.78 17,159.32 18,563.02 17,278.60 18,282.21 17,920.81 1. EXECUTIVE POWER 17,064.31 18,481.1t 16,468.15 17,867.16 16,491.75 17,337.86 17,179.46 ECONOMIC SECTOR 2,805.49 3,828.16 2,136.29 3,083.68 3,470.49 2,923.31 3,277.08 POLITICAL SECTOR 6,231.38 6,105.58 3,965.19 3,798.89 3,984.48 543405 3,891.69 SOCIAL SECTOR 4308.58 4,735.61 2,390.90 3,376.29 3,331.41 3,811.70 3,353.85 CULTURAL SECTOR 282.14 489.54 210.51 393.17 303.29 327.40 348.23 OTHER PUBS ADMINISTRATIONS 3,436.72 3,322.22 7,765.27 7,215.12 5,402.10 4,841.40 _ 6,308.61 2- LEGISLATIVE POWER 437.07 539.18 204.95 74.35 210.96 393.73 142.65 3- JUDICIARY POWER 246.70 238.21 155.70 213.53 197.23 213.54 205.38 4- INDEPENDENT ORGANISMS 332.45 348.28 330.52 407.98 378.65 337.08 393.32 Sources: Le Moniteur, Journal Officiel de la République d'Haïti and Staff Calculations. Table A2.4. Functional Distribution of Actual Total Expenditures—Payment basis (in million of Gourdes unless otherwise indicated) I ie Les em 0001. Agriculture, Natural Res. 258.8 324.6 303.9 3727 360.3 295.8 366.5 and Rural Development In millions of nominal USS 9.6 8.0 7.7 9.6 8.6 8.4 I. In millions of real gourdes 446.6 442.0 322.5 338.7 286.0 403.7 312.3 In % of GDP 0.3% 0.3% 0.3% 0.3% 0.2% 0.3% 0.2% Public Works, Transport 686.4 1,396.70 841.7 1,268.90 1,576.30 974.9 -1422.6 : and Communications In millions of nominal USS 25.3 34.5 21.2 32.5 37.5 27.0 35.0 In millions of real gourdes 1184.4 1901.7 893.1 1153.2 1251.1 13264 1202.1 In % of GDP 0.8% 15% 0.7% 0.92% 0.9% 10% 0.9% Justice and Security 1,087.90 1,496.20 1,131.50 1,991.30 2,365.70 1,238.5 2,178.5 In millions of nominal US$ 40.2 37.0 28.5 51.1 56.3 35.2 53.7 In millions of real gourdes 1877.2 2037.1 1200.6 1809.7 1877.6 1705.0 1843.7 In % of GDP 13% 1.6% 0.92% 14% 14% 13% 14% Education (nel. University 1,679.50 2,221.50 1,619.40 2,904.50 2,466.30 1,840.1 2,685.4 of Haïti) In millions of nominal USS 62.0 54.9 40.8 74.5 58.7 52.6 66.6 In millions of real gourdes 2,898.0 3024.7 1,718.3 2,639.6 1,957.5 2,547.0 2,298.5 In % of GDP 2.0% 24% 14% 21% 15% 19% 18% Heaiïth 771.8 930.3 655.3 890.4 1,003.20 785.8 946.8 In millions of nominal US$ 28.5 23.0 16.5 22.8 23.9 22.7 23.4 In millions of real gourdes 1,331.8 1,266.6 695.3 809.2 796.2 1,097.9 802.7 In % of GDP 0.92% 1.0% 0.5% 0.6% 0.6% 0.8% 0.6% Total priority sectors 4,484.40 6,369.40 4,551.90 7,427.70 8571.40 5,135.2 7,999.6 In millions of nominal US$ 165.6 157.4 114.7 190.5 204.1 145.9 197.3 In millions of real gourdes 7,738.0 8,672.2 4,829.9 6,750.2 6,803.1 7,080.0 6,776.6 in %of GDP 5.2% 6.8% 3.8% 5.3% 5.1% 5.3% 5.2% Total other sector 5,993.90 8,031.10 11,619.70 12,998.40 13,198.50 8,548.2 13,098.5 In millions of nominal USS 221.3 198.5 292.8 333.4 314.3 237.6 323.8 In millions of real gourdes 10,342.7 10,934.6 12,329.4 11,812.8 10,475.6 11,202.2 11,144.2 In % of GDP 7.0% 85% 9.7% 9.3% 7.9% 84% 8.6% TOTAL SPENDING 10,478.30 14,400.50 16,171.60 20,426.10 21,769.90 1,3683.5 21,098.0 In millions of nominal USS 386.9 356.0 407.5 524.0 518.3 383.5 521.1 In millions of real gourdes 18,080.6 19,606.8 17,159.3 18,563.0 17,278.6 18,282.3 17,920.8 In % of GDP 122% 153% 135% 145% 13.0% 13.7% 13.8% Source: Le Moniteur, Journal Officiel de la République d'Haïti and Staff Calculations. 177 [page 212] Haiti: Public Expenditure Management and Financial Accountability Review Table A2.5. Functional Distribution of Actual Public Recurrent Expenditures—Payment basis (million of HTG) pie FY FY FY FY FY Averages 1 2001/02 2002/03 2003/04 2004/05 2005/06 FY FY —— . __.. 2002-04 2005-06 AGRICULTURE, NATURAL RES. AND 176.9 217.8 209.5 286.3 289.5 201.4 287.9 RURAL DEVELOPMENT In millions of nominal US$ 6.5 5.4 5.3 7.3 6.9 5.7 7.1 In millions of real gourdes 305.2 296.5 222.3 260.2 229.8 274.7 245.0 % of GDP 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% PUBLIC WORKS, TRANSPORT AND 198.8 276 171.5 314.1 404.8 215.5 359.4 COMMUNICATIONS In millions of nominal US$ 7.3 6.8 4.3 68.1 9.6 6.2 8.8 In millions of real gourdes 343.0 375.8 182.0 285.5 321.3 300.3 303.4 % of GDP 0.2% 0.3% 0.1% 0.2% 0.2% 0.2% 0.2% JUSTICE AND SECURITY 905.2 1,23420 1,026.40 1,841.60 2,323.80 1,055.30 2,082.70 In millions of nominal US$ 33.4 30.5 25.9 47.2 55.3 29.9 513 În millions of real gourdes 15619 1680.4 1089.1 1673.6 1844.4 1443.8 1759.0 % of GDP 11% 13% 0.9% 13% 14% LI 13% EDUCATION (INCL. UNIVERSITY OF 1,520.3 1,9978 1,455.8 2,737.1 3,124.5 1,657.9 2,930.30 HAÏTI) In millions of nominal US$ 56.1 49.4 36.7 70.2 74.4 474 72.3 In millions of real gourdes 2623.3 2720.1 1544.7 2487.4 2479.9 2296.0 2483.7 % of GDP 18% 21% 12% 19% 19% 17% 19% HEALTH 686.8 790.3 568.2 798.8 930.2 681.8 864.5 In millions of nominal US$ 25.4 19.5 143 20.5 22.1 19.7 21.3 In millions of real gourdes 1185.1 10760 6029 725.9 738.3 954.7 732.1 % of GDP 0.8% 0.8% 0.5% 0.6% 0.6% 0.7% 0.6% TOTAL PRIORITY SECTORS 3,488.1 45162 3,431.5 5,9769 7,072.7 3,8119 6,524.80 In millions of nominal USS 128.8 111.6 86.5 153.3 168.4 109.0 160.9 In millions of real gourdes 6018.8 6149.8 36411 5431.7 5613.6 5269.6 5522.6 % of GDP 41% 48% 2.9% 43% 4.2% 3.9% 4.2% OTHER SECTORS 5,079.6 5,857.1 9,491.6 7,915.7 10,826.6 6,809.4 9,371.26 | In millions of nominal USS 187.6 1448. 239.2 203.0 257.8 190.5 230.4 In millions of real gourdes 8765.0 ‘79747 100713 Ÿ7193.7 85930 8937.0 7893.3 % of GDP 5.92% 62% 7.9% 5.6% 64% 6.7% 6.0% TOTAL RECURRENT SPENDING ALL 8,567.6 10,373.4 12,923.1 13,892.7 17,899.3 10,621.4 15,895.90 SECTORS In millions of nominal US$ 316.4 256.4 325.7 356.4 426.2 299.5 391.3 In millions of real gourdes 14783.7 O14123.8 137124 126255 142065 142066 134160 % of GDP 10.0% 110% 10.8% 9.9% 10.7% 10.6% 103% TOTAL RECURRENT SPENDING (Excel. 8,330.0 10,201.6 11,725.6 12,806.9 16,655.2 10,085.7 14,731.10 Interest Payments of the debt) In millions of nominal USS 307.6 252.2 295.5 328.5 396.6 285.1 362.5 În millions of real gourdes 14373.7 138899 12441.8 116388 13219.1 13568.4 12428.9 % of GDP 9.7% 108% 9.8% 9.1% 9.92% 10.1% 9.5% SHARE OF PRIORITY SECTORS IN 419 443 29.3 46.7 42.5 37.8 443 TOTAL RECURRENT SPENDING (Excl. Interest Payments of the debt Source: Le Moniteur, Journal Officiel de la République d’Haïti and Staff Calculations. 178 [page 213] Haiti: Public Expenditure Management and Financial Accountability Review Me el Political 141.4 155.2 111.6 92.4 99.2 134.6 96.0 Social 62.2 125.0 69.8 90.4 78.7 82.2 83.8 Total 80.5 93.9 97.2 87.3 57.6 91.3 68.9 , Sources: Government Statistics and Staff Calculations. 179 [page 214] FT on A sl LEY nÉ van NoT mn Dv— nŸ —eo— +4 US Da ROta cr 088 a 892 tan =<E à À — = LsSss ST SsSnhés -cssss 1 Sie ion Ho rom os LoSs—s w9 sers famoean gs 82 Êa LFfagea grand AÙ SLT Lrnee sé EN F à m-rRs<n FiSu- SR —KÈ- L'eai o S — 518 lors #80 © a Sa SARÉRRS 2% 8 +238 Zanduns CA eRRa Lana 2e ERSESS Id focare tan? 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È ÉÉEËle = cl Ÿ AE die e A ON =QRS w vos a DVVLS & nm ES É EE BR gorges ronts e8 ef: Qccîïclé Ÿ SFR 4 = NEunz © de ñ sis ss s |E D ES | = © ë # 3 GS A 5 tai = £ > lee pa EllBlélor à Dr. is A PASS CS 2EScRÉ Secure 88 co: HORRe|E DL 2 BL Sao moslsT nm mss su +S nm Sa | 5 = pe AIT ea Es c] mm 81 = T 5 Î 2 È ä Î £ A & | 8 = ë = É Fa à | SE 5 < ë 8 £ Î AE a d < | 35 È E + £3 Ë 5 8 2 © Î Æ Æ = & sl 8 — 12 EX = E 5 <$S 5 »5 À LE = S S 5 DE Ei 8 S||ÊS Besse 85 6% ÊS 2 £ 2E n. sâls 3 Î o = EE A ZT _ & FOR SSSs 2e$OmEmmtte Om 2 A% ZOÉ = NLURSS ENSSES SE O00< 72 0enR02L bu mR<BE)S Ë (és: ii3is2Sogsssisincessisssce Le UE SE £ £ & ELLSTENSSE 5 Ie DÉESÉSESSQUSESOÉSSAUÉSSESES0zES lite © D 9.580 m9 6EEOMO0AOES ROBES ORSNES + |) CÉXÉELÉÉMEERIEEETELTETIEEEETELEE [page 215] Haïti: Public Expenditure Management and Financial Accountability Review ANNEX 3 Table A3.1. PEFA Indicators A. PFM-OUT-TURNS: Credibility of the budget PI-1: Aggregate expenditure out-turn Le) Based on domestically-financed primary expenditure, deviations compared to original approved budget between original budget and outturns were: 2.8% in 2003/2004; 12.7% in 2004/2005 and 42.4% in 2005/2006. Thus expenditures deviated only in 2005/2006 for more than 15% from original budget. PI-2: Composition of expenditure out-turn C Based on domestically-financed primary expenditure, deviations compared to original approved budget between original budget and outturns were: 32.6% in 2003/2004, 9.1% in 2004/2005 and 1% in 2005/2006. Thus variance in expenditure composition exceeded overall deviation in primary expenditure by 10 percentage points in no more than one of the last three years PI-3: Aggregate revenue out-turn Actual revenue collections as a percentage of budgeted domestic : compared to original approved budget revenue were: 63% in 2003/2004; 57%% in 2004/2005 and:148% in . 2005/2006. Thus Actual domestic revenue collection was below . 92% of budgeted domestic revenue estimates in two of the last three Douce years. | PI-4: Stock and monitoring of expenditure À sectes payment arrears (i) Stock of expenditure payment arrears (as a C The accounting system used by the Directorate of the Treasury is a percentage of actual total expenditure for the single-entry system that does not take accruals into account. It is corresponding fiscal year) and any recent therefore not possible, under this system, to establish a treasury change in the stock. balance, and it does not identify payment arrears. Many expenditures-around 80 percent-are made according to a reverse procedure, i.e., before delivery of goods and services as stated above. This type of practice obviously limits the amount of arrears. Nonetheless, a large number of arrears, totaling a fairly substantial sum, have accumulated over the past few years upstream of the payment authorization [ordonnancement] phase (e.g., commitments made for unauthorized expenditures, or even expenditures made (ii) Avaïlability of data for monitoring the Data on the stock of arrears has been generated only recently and is stock of expenditure payment arrears. still incomplete. 181 [page 216] Haïti: Public Expenditure Management and Financial Accountability Review PI-5 “Budget classification” Budget classification has improved over the past few years. The classification now used consists of institutional, sectoral, administrative, and economic (1.e., by nature of expenditure and revenue) classifications. PI-6 “Comprehensiveness of information C The annual budget document contains information on: (i) included in budget documentation” macroeconomic assumptions; (ii) the budget deficit; (iii) funding of the deficit; and (iv) an explanation of the impact of any new budget initiatives by the public authorities. However, information on the following areas is either very inadequate or completely lacking: (v) debt stock; (vi) financial holdings; (vii) status of budget execution under the previous fiscal year, presented in the same format as the proposed budget; (viii) budget of the current fiscal year, presented in the same format as the proposed budget; and (ix) summary data on the public revenue and expenditure budget, in accordance with the main classification rubrics used. Thus, the budget documents meet four out of the nine criteria. P1-7: Extent of unreported government ce : operations : . [.() The level of extra-budgetary expenditure (other se than donor funded projects) which is unreported . | re - ie. not included in fiscal reports. Le 7, PS NES funded projects which is included in fiscal reports. 5 fiscal relations (i) Transparent and rules based systems in the horizontal allocation among SN governments of unconditional and conditional transfers from central government (both budgeted and actual allocations (ü) Timeliness of reliable information to SN governments on their allocations from central government for the coming year {äi) Extent to which consolidated fiscal data (at least on revenue and expenditure) is collected and reported for general government according to sectoral categories. PI-9: Oversight of aggregate fiscal risk from other public sector entities {i) Extent of central government monitoring of No annual monitoring of Autonomous Agencies takes place. AGAs and PESs. Autonomous Agencies are not producing financial reports on a regular basis and are not submitting their reports as required by the law to the MEF trough the State Enterprises Commission. (ü) Extent of central government monitoring of NR SN governments’ fiscal position. 182 [page 217] Haiti: Public Expenditure Management and Financial Accountability Review D | | to the public only one of the listed type of information. 183 [page 218] Haiti: Public Expenditure Management and Financial Accountability Review C. BUDGET CYCLE C() Policy-Based Budgeting PI-11: Orderliness and participation in the annual budget process Existence of and adherence to a fixed budget À clear annual budget timetable exists, but delays often occur in its calendar implementation. The timetable gives the sectoral ministries enough time (two and one-half months) to draw up their detailed estimates in an adequate and timely manner. Clarity/comprehensiveness of and political € A circular is issued by the Prime Minister. Ît informs the ministers of involvement in the guidance on the preparation the broad outlines of the draft budget as well as the macroeconomic of budget submissions (budget circular or framework and the broad budget outlook. But it does not specify a equivalent) ceiling envelope for each MDA. Timely budget approval by the legislature or Over the past three years, only one Annual Budget Act. (2003/2004) similarly mandated body (within the last three was voted after the beginning of the fiscal year. ears PI-12: Multi-year perspective in fiscal planning, expenditure policy and budgeting (i) Preparation of multi -year fiscal forecasts There are no medium-term perspectives... The Public Investment and functional allocations Program (PIP) covers one year only. (ii) Scope and frequency of debt sustainability There hasn’t been any debt sustainability analysis during the last analysis three years. (ïi) Existence.of sector strategies with multi- Some MDA (Education, Health, Public Transportation, year costing of recurrent and investment Environment, and Agriculture) are working on the elaboration of expenditure; their strategies. But this is at an early stage and they haven'’t been costed. (iv) Linkages between investment budgets and The investment and recurrent budgets are elaborated separately. As a forward expenditure estimates. result, recurrent costs estimates arising from the investments are not taken into account. PI-13: Transparency of Taxpayer Obligations and Liabilities (i) Clarity and comprehensiveness of tax À Regulations concerning customs and excise taxes are being liabilities reformed. Codes are being developed to incorporate all of the content of recent reforms. Legislation and procedures pertaining to all the main categories of customs and excise taxes might be considered. (ii) Taxpayer access to information on tax C Taxpayers have access to some information. DGI has made available liabilities and administrative procedures on the Web site tax liabilities and procedures. For the customs Authority, access to information is limited to taxpayers involved in the customs process. Information published on the Web site. (äi) Existence and functioning of a tax appeals Taxpayers might also seek redress through the administrative mechanism tribunal represented by the CSCCA. They also have the option of amicable recourse to the AGD and Tax Directorates. However, the efficiency of this system has not been verified. 184 [page 219] Haiti: Public Expenditure Management and Financial Accountability Review RS (i) Controls in the taxpayer registration system C À unique Taxpayer Identification Number (TIN) exists. The file containing this information is linked to taxpayer rolls. There is a commission responsible for checking registrations, but it is not operational due to the lack of capacity. (ii) Effectiveness of penalties for non- [ei Penalties for non compliance exist in the law but are not enforced compliance with regist declaratit due to the lack of capacity of RA as well as the recent political D troubles. There is a need of substantial changes to give them a real impact or ensure compliance. Güi) Planning and monitoring of tax audit and C The revenue agencies have annual plans on tax audit. However, fraud investigation programs these audits are not based on clear risk assessment criteria. The audit plans are not comprehensive and well documented. PI- 15: Effectiveness in collection of tax C PA payments {i) Collection ratio for gross tax arrears, being C The concept of arrears does not exist at AGD, since it is not possible the percentage of tax arrears at the beginning to make any deferred customs payment arrangements. With regards of a fiscal year, which was collected during to DGI, the Large Enterprise Management Unit achieves recovery that fiscal year (average of the last two fiscal rates of about 85 percent, but the average overall recovery over the years) - past two years has been about 60 percent. (ü) Effectiveness of transfer of tax collections C l'Revenue collections are transferred daily to the Treasury Account'in to the Treasury by the revenue administration - Port Au Prince whereas, in the provinces, it is done monthly. {ii) Frequency of complete accounts € Reconciliations of tax transferred are done monthly between the RA M reconciliation between tax assessments, and DT. However reconciliation of tax assessments, collections and . collections, arrears records and receipts by the arrears are done less frequently (more than 3 months delay). L Treasury : | “ PI-16: Predictability in the availability of D+ de É funds for commitment of expenditures one - pere | ne monitored (ä) Reliability and horizon of periodic in-year According to the Constitution, ceiling for expenditures commitment information to MDAs on ceilings for is limited to one twelfth of the annual budget allocation. expenditure commitment Authorization of expenditures commitment in SYSDEP is thus limited to one twelve. However, in practice, the system can be changed. (üi) Frequency and transparency of C À Supplementary Budget Act is not voted regularly. However, few adjustments to budget allocations, which are adjustments on budget allocations were made except for this fiscal decided above the level of management of year. MDAs P1-17: Recording and management of cash D+ balances, debt and guarantees {i) Quality of debt data recording and reporting |? | Debt data records are incomplete, particularly domestic debt. The government is making en effort to identify salary arrears. (ä) Extent of consolidation of the The Treasury cannot draw up a report on the cash status of government’s cash balances government accounts because it does not receive all the data it would need to ensure reconciliation of the Government’s bank accounts, an essential aspect of the reporting on funds encashed and their utilization. {äii) Systems for contracting loans and issuance € Central Government contracting of loans and issuance of debt and of guarantees guarantees are always approved by the Ministry of Economy and Finance and submitted to the parliament. However. there isn’t an 185 [page 220] Haiti: Public Expenditure Management and Financial Accountability Review | | FRANS SE {i) Degree of integration and reconciliation The Directorate of the Treasury (DT) calculates the monthly pay of between personnel records and payroll data, the Government’s 45,000 civil servants and issues salary statements. The DT uses a single computerized database that theoretically prevents duplicate payments. It should be pointed out t (ü) Timeliness of changes to personnel records The personnel roster is updated a long time after hiring and changes and the payroll in the personal and administrative status of employees have occurred. (ïüi) Internal controls of changes to personnel Measures in place to monitor the wage bill are inadequate. Indeed, records and the payroll. even though appropriations are a limiting factor, the ministries often take hiring initiatives that exceed budget authorizations. Payment arrears have thus accumulated, and are currentiy (iv) Existence of payroll audits to identify C Payment verification is performed on a monthly basis by the control weaknesses and/or ghost workers. Oversight Directorate of the DGB. This oversight is inadequate, however. Instances have occurred of payment to deceased employees and of payment that failed to take promotions into account. P1-19: Competition, value for money and NR . De controls in procurement : o : É P1-20: Effectiveness of internal controls for C | non-salary expenditure “ (i) Effectiveness of expenditure commitment C Meastires to supervise commitments are in place: the DCB exercises controls. | ex ante controls over expenditures, and payment authorizations are | _issued by the MEF afier being reviewed by the Financial Comptroller in the SYSDEP system. However, that these controls do (ii) Comprehensiveness, relevance and C Other internal control procedures exist, but they are imadequately understanding of other internal control rules/ documented and are neither widely disseminated among users nor procedures. thoroughly understood by them. (üii) Degree of compliance with rules for € Procedures are respected with regard to expenditures introduced into processing and recording transactions the normal circuit. As indicated above, however, many expenditures are executed via exceptional procedures (e.g., through comptes courants or using “own funds”.) ES (i) Coverage and quality of the internal audit The internal audit body, IGF was created very recently and is still function. not operational. Some MDAs have internal audit unit but they are basically duplicating the ex ante controls performed by DCB and don’t have professional standards, such as ISPPIA. Within (ii) Frequency and distribution of reports. As a result of the lack of proper internal audit mechanism, there is no report produced. (ii) Extent of management response to internal There is no action taken, in the absence of internal audit reports. audit findings. PI-22: Timeliness and Regularity of Accounts reconciliations 186 [page 221] Haiti: Public Expenditure Management and Financial Accountability Review Gi) Regularity of banking reconciliations D Banking reconciliation is not performed because the Treasury does not have the necessary banking information. The only kind of monitoring is a list of checks issued and receivable maintained at BRH. {it} Regularity of reconciliation and clearance D Reconciliation and Clearance of suspense accounts and travel of suspense accounts and advances. comptes courants maintained at DT take place at least quarterly, within a month from end of period and with few balances brought forward. However, reconciliations of comptes courants located in the MDA PI-23: Availability of information on D As was mentioned in the assessment of indicator n° PI-7, substantial resources received by service delivery units funds are collected by service-providing units and kept by those units. These sums are used to cover the operating costs of these units, and sometimes to pay staff. Over the past three PI-24: Quality and timeliness of in-year D+ budget reports (i) Scope of reports in terms of coverage and C Comparison to budget is possible only for main administrative headings. Detail of on-requisition expenditures as well as expenditures executed under comptes courants are not provided. The quarterly report is sammarized in one page. The in-year information (ii) Timeliness of the issue of reports [ D | In-year reports are produce with more than 8 weeks delay... (ii) Quality of information € As some of the expenditures are executed outside the system there . are some.issues with data accuracy. P1-Z5: Quality and timeliness of annual D+ ‘ financial statements () Completeness of the financial statemenis C À consolidated Annual Financiai Staternent i s prepared for central - government, covering MDAs. However, the information is prepared by DT does not include some information on revenues (own resources of MDA) and expenditures comptes courants, other expendi (äü) Timeliness of submission of the financial The annual financial statements are submitting with delays to the statements Auditor General. The table x shows the submission dates for the last three years. (üi) Accounting standards used C Statements are presented in consistent format over time with some disclosure of national accounting standards, which are however different from the IPSAS. PI-26: Scope, nature, and follow-up of D+ external audits {(i) Coverage and quality of the internal audit C Although the law requires that all government financial transactions function. be audited, only central administration entities, which represent at least 50% of total expenditures, were audited in reports pertaining to FY02-03 and FY03-04 (draft). The reports raise {ü) Frequency and distribution of reports. Audit reports are submitted to Parliament beyond the 12-month after the end of the fiscal period under review. For example, the most recent report available (FY02-03) has not yet been submitted to Parliament. (Gi) Extent of management response to internal There is very little proof that recommendations have been audit findings. implemented, or documentation of responses from the entities audited. 187 [page 222] Haiti: Public Expenditure Management and Financial Accountability Review PI-27: Examination of annual appropriation C+ law by the legislative branch (à) Scope of the legislature’s scrutiny. C The Parliament’s exercise of its authority to approve appropriation laws is relatively recent. Parliamentary oversight covers the details of expenditures and revenues, but only at the stage when detailed proposals have been finalized by the Government. (ä) Extent to which the legislature’s Simple procedures exist for the Parliament”s examination of the procedures are well-established and respected. budget. These procedures are generally followed. Gi) Adequacy of time for the legislature to Although the legal timeframe ( over two months, from June 30 to the provide a response to budget proposals both 2% Monday in September) is adequate, substantial delays have the detailed estimates and, where applicable, occurred in practice. The situation with fiscal 2006/07 is still an for proposals on macro-fiscal aggregates exception, however, since the new Parliament had just bee earlier in the budget preparation cycle (time allowed in practice for all stag (iv) Rules for in-year amendments to the Procedures for preparation and approval of Supplementary Budget budget without ex-ante approval by the Act are set forth clearly in the Decree of May 23, 2005, but they do legislature. not impose limits on administrative reallocations. PI-28: Legislative scrutiny of external audit reports 188 [page 223] Haiti: Public Expenditure Management and Financial Accountability Review Indicator Score | Comments D. DONOR PRACTICES D-1: Predictability of Direct Budget EE Support (i) Annual deviation of actual budget support Donor projections of budget support were more than 25% to actual from the forecast provided by the donor outturns for the last three years: 31% in 2003/2004, 29% in agencies at least six weeks prior to the 2004/2005 and 43% in 2005/2006. government submitting its budget proposals to the legislature (or equivalent approving bod: (ii) In-year timeliness of donor Data were not available to obtain the quarterly distribution of actual disbursements budget support inflows compared to the plan. D-2: Financial information provided by NR donors for budgeting and reporting on project and program aid (i) Completeness and timeliness of budget estimates by donors for project support. (ii) Frequency and coverage of reporting by donors on actual donor flows for project support. : D-3: Proportion of aid that is managed bÿ use of national procedures () Timeliness of examination of audit reports Over the last three fiscal years no audit reports were reviewed by the by legislature (for reports received the last parliament, given the political circumstances. The newly elected three fiscal years LL parliament was installed on last July 2006: - . (ii) Extend of hearings on key findings . Às a result, no hearings were conducted. undertaken by legislature (ïi) Issuance of recommended actions by No recommendations were issued by the legislature. This is expected legislature and implementation by the to change with the new parliament. Executive 189 [page 224] Haiti: Public Expenditure Management and Financial Accountability Review ANNEX 4 Table A4.1. Budgetary allocations (HTG millions, otherwise indicated) OUEN ENV OO FEV FY CC EY . FY . Averages Agriculture 887.2 348.8 251.1 507.6 12086 37776 495.7 18313 in real HTG 1530.9 474.9 266.4 461.3 959.3 2703.1 757.4 1374.6 in nominal USS 32.8 8.6 6.3 13.0 28.8 89.9 15.9 43.9 in USS/cap 3.9 1.0 7 15 3.2 9.8 1.9 4.8 in % of GDP 1.0% 0.4% 0.2% 04% 0.7% 19% 05% 1.0% Total 132784 153333 166347 233900 37816.6 645667 15082.1 419244 in real HTG 22912.3 20876.8 17650.7 21256.6 300148 462025 20479.9 324913 in nominal USS 490.3 379.0 419.2 600.0 900.4 1537.3 429.5 1012.6 in US$/cap 59.0 44.7 48.5 68.0 100.3 168.3 50.7 112.2 in % of GDP 15.5% 163% 13.92% 16.7% 22.5% 32.2% 15.2% 23.8% Source : Le Moniteur, Journal Officiel de la République d'Haïti and Staff Caleulations. Table A4.2. Budgetary Allocations Structure (HTG million, unless otherwise indicated), FY2001/06 de 200002. 200203 2009047 200405 200506 200607 jips … 0406 : Total allocated 887.0 348.8 251.1 507.6 1208.6 3777.6 495.6 1831.3 | . in real HTG 1530.6 474.9 266.4 461.3 959.3 2703.1 757.3 1374.6 . nt in nominal USS 32.8 8.6 6.3 13.0 28.8 89.9 15.9 43.9 Do : Personal 168.4 148.8 1743 246.1 252.1 304.8 163.8 267.7 : in real HTG 290.5 202.6 185.0 223.7 200.1 218.1 226.0 214.0 ° in nominal US$ 6.2 3.7 4.4 6.3 6.0 7.3 4.8 6.5 : - %° : 19.0% 427% 694% : 48.5% 20.9% 81% 43,7% 258% Other current exp. 58.3 512 43.2 57.0 513 56.1 50.9 548 in real HTG 100.6 69.8 45.8 51.8 40.7 40.1 72.1 44.2 in nominal USS 2.2 13 LI 1.5 1.2 1.3 15 1.3 Immob. 27.5 8.6 1.5 10.2 27.5 6.8 in real HTG 47.5 © 0 7.8 1.2 7.3 15.8 5.4 Total current exp. 254.2 200.0 217.5 311.8 304.9 371.1 223.9 329.2 in real HTG 438.6 272.3 230.8 283.3 242.0 265.5 313.9 263.6 in nominal USS 9.4 4.9 5.5 8.0 7.3 8.8 6.6 8.0 % 28.7% 574% 86.6% 614% 25.2% 98% 575% 322% Programs and projects 632.8 148.7 33.6 195.8 903.7 3406.5 271.7 1502.0 in real HTG 1091.9 202.5 35.6 178.0 717.3 2437.6 443.4 1111.0 in nominal US$ 23.4 3.7 .8 5.0 21.5 81.1 9.3 35.9 % 713% 42.6% 134% 38.6% 74.8% 902% 42.5% 678% Sources: Le Moniteur, Journal Officiel de la République d'Haïti and Staff Calculation 190 [page 225] Haïti: Public Expenditure Management and Financial Accountability Review Table A4.3. Structure of MARNDR’s Operating Budget (allocations), (HTG million, unless otherwise indicated), FY2005-2006 Déséription Ft :1: 2008-2006 %: 2006-2007 0% PERSONNEL EXPENSES 252.1 83% 304.8 82% in constant US$ 4.764 5,192 CONSUMPT. GOODS AND SERVICES 17.7 6% 23.1 6% in constant USS 0.335 0.393 GENERAL HARDWARE 22.3 T7 31.8 9% in constant USS 0.421 0.542 TANGIBLE ASSETS 14 0% 10.2 3% in constant USS 0.027 0.173 INTANGIBLE ASSETS 0.1 0% 0.1 0% in constant USS 0.002 0.001 SUBSIDIES AND SHARES il 4% 1.0 0% in constant US$ 0.210 0.017 OTHER PUBLIC EXPENDITURES 02 0% 02 0% in constant USS 0.003 0.003 TOTAL 304.9 100% 371.1 100% in constant US& 5.8 63 Sources : MARNDR data ; Le Moniteur, Journal Officiel de la République d'Haïti and Staff Calculations Table A4.4, Trends in MARNDR's Expenditures, (HTG million, unless otherwise indicated), FY200:-2096 | QT ll Qt QI oi AVCFAUES | D pl IA V Ml pli] il Il | | \ 2e0 1102 pl o2! D3 | 1112 dus 64) 11200 4 $ 12008 i 6 oh \ a À | en ii nn MNT 2001/08 | 2064006 | ALLOCATED 887.0 348.8 2511 507.6 1208.6 858.1 DT 1530.6 474.9 266.4 461.3 959.3 757.3 710.3 168.4 1488 1743 246.1 252.1 163.8 249.1 290.5 202.6 185.0 223.7 200.1 226.0 211.9 148.1 632.8 148.7 195.8 903.7 271.7 549.8 1091.9 202.5 178.0 717.3 TOTAL EXPENDITURE 258.8 324.7 304.0 372.7 360.3 295.8 366.5 322.5 338.7 286.0 403.7 | 3123 142.9 149.4 168.1 240.5 246.9 153.5 243.7 246.6 203.5 218.5 196.0 209.5 [Current expend. | 7340} 684 | 414 | 459 | 426 | 479 | 442 7 [Projects | 818 | 1068 141.2 100.2 128.9 EXECUTION RATE 29% 93% 121% 73% 30% 81% 52% 100% 134% 281% 122% Sources: MARNDR data; Le Moniteur, Journal Officiel de la République d'Haïti and Staff Calculations 191 [page 226] Haïti: Public Expenditure Management and Financial Accountability Review Table A4.5. Detailed Expenses by Budget Line (Fiscal year 2005-2006) (HTG thousand, unless otherwise indicated) [2005-2006 BUDGET BY AMOUNT SBENT LI 1 LI I Auoeatea D Spear 1) Rate | Share 1] 312 Fuel and lubricants 127349 9877.0 78% 29,0% in real terms 8822.7 7245.9 in real terms 4085.6 2805.8 in real terms 2831.2 1666.7 in real terms 15678 990.9 in real terms 1506.0 882.7 in real terms 1842.2 843.0 in real terms 22274.3 Source: MARNDR data Table A4.6. Detailed Expenses by Budget Line (Fiscal year 2002-2003) (HTG thousand, unless : otherwise indicated} 002.203 BUDGET BV AMOUNR SPENI LL LL 11) Anoeareg | || Spot | | Rate | | pau | 312. Fuel and lubricants 96903 … 7578.6 78% 20% ‘_! _inrealterms . 7: 131938 - 10318.5 304 Parts añd'accessories for vehicles 7 ‘80488 46246 57% 12% in real terms 10958.8 __6296.6 in real terms 6936.5 5886.8 in real terms 20790.7 5848.7 in real terms 4672.8 2619.3 in real terms 2755.4 2530.5 in real terms 3470.2 2088.8 in real terms 4084.6 1923.5 in real terms 1907.2 1682.6 in real terms 39195.3 Source: MARNDR data 192 [page 227] Haiti: Public Expenditure Management and Financial Accountability Review Table A4.7. Shares in Budget Execution (HTG million, unless otherwise indicated) nl ie de me ae ae nn | in real terms 246.6 203.5 178.4 218.5 196.0 209.5 207.2 % of total expenditure 55% 46% 55% 65% 69% 52% 67% in real terms 58.7 93.2 43.9 41.7 33.8 65.3 37.8 % of total expenditure 13% 21% 14% 12% 12% 16% 12% in real terms 141.2 145.4 100.2 78.5 56.2 128.9 67.4 % of total expenditure 32% 33% 31% 23% 20% 32% 22% in real terms 446.6 442.0 322.5 338.7 286.0 403.7 312.3 Sources : MARNDR data ; Le Moniteur, Journal Officiel de la République d'Haïti and Staff Calculations Table A4.8. Investment Budget (PIP), yearly allocations (HTG million, unless otherwise indicated) 3406.5 3 841.6 755.6 2437.6 | External (% 79% 92% __| 92% : . otal (%)" 100% 100% U e Source: MARNDR and MPCE data Table A4.9. Investment budget, Treasury funds (HTG million, unless otherwise indicated) A Authorized | 869 | 607 | #08 | Spent | 635 | 657 | | in real terms 57.7 52.2 ÎSpent / budget alloc. 32% 86% (*} up to January 31, 2007 Sources: MARNDR and MPCE data 193 [page 228] Haiti: Public Expenditure Management and Financial Accountability Review Table A4.10. Comparison of Budgets Requested and Allocated (HTG million, unless otherwise indicated) ENT UT PP P'NRequepted | 2Aloeaten || #01 1) |_inreatierms | 7907 7 | 2420 | 8 |inrealterms | 4186 | 607 | | à & | inrealterms | 12094 7 | 3027 | | |_inreatterms | 4544 7 | 2655 | 7 3 | inrealterms | 44501 | 1896 | ÿ S [inreatiemms | 39345 À 4551 | | Sources: MARNDR and MPCE data. Table A4.11. Generated Funds in Ministry of Agriculture (HTG million, unless otherwise indicated) Fisheries | 5108 | 15 | 0 | Etuis |" 588 [Us mms | 0 in real terms 962.3 3426.9 987.6 % of gen. funds 0,4% 13% 0,4% Source: MARNDR 194 [page 229] Haiti: Public Expenditure Management and Financial Accountability Review TableAd4.12. Allocations to the Ministry of Public Works, Transports and Communication (MTPTC) HTG million. unless otherwise indicated), FY2001/06 EN EU ANR ET Ex AT LU) Loos las | sta | aoû | zoo | ani | rvozs rvonnr | Total MTPTC Budget | 20015 | 1610,3 | 777,9 | 2805,5 | 13166 | 11859, | 14632 | 0277 | [ nominal US$ | 77 | 43 | 5,6 | 97 | 78 1 90 | 59 7j 89 | [USS/cap (real) [12,59 | 0,70 | 068 Ÿ 100 | 0,69 7 0,71 | 0,99 080 7 | (Excel. Interest Payments - nr o ‘ 423,5] 302,0 | 363,5 real terms 12270,6 12727,3 |, 14073,6 À 11792,5 10,61% sut US$/cap (real) 52,53 316 7] | | Budget (in % ‘ h ‘ pu recurrent budget total budget Sources: Le Moniteur, Journal Officiel de la République d'Haïti and Staff Calculations. 195 [page 230] Haiti: Public Exbenditure Manaaement and Financial Accountability Review TableA4.13. Infrastructure Sector. Budget Execution (HTG million, unless otherwise indicated), TTTEN _ AOL ET HR RUEIL 00 ave | sous | aoû | soios |aène | rvorns voue | | Execution rates (in %) | 34,3 | 86,7 | 1082 | 45,2 | 12 | 764 | 286 | [Execution rates (in %) | 27,2 [78,1 | 120,3 | 39,4 9,1 | 775,2 | 242 | Sources: Le Moniteur, Journal Officiel de la République d'Haïti and Staff Calculations. TableA4.14. Infrastructure Sector. Recurrent Budget Execution (HTG million, unless otherwise _ indicated), UE , . TT nl TENTE Averages | 72e | 0208 | ave | aootes | 100506 | rvorns roue | Total recurrent allocated 207.8 175.7 220.8 379.2 329 201.4 362.3 realterms 358.6 239.2 234.3. | 344.6 261.1 277.4 302.9 Ofwhich | | : Wages and salaries 122.9 122.8 130.8 |" 196.1 187.9 125.5 210.9 real terms 212.1 167.2 138.8 178.2 149.1 172.7 163.7 Goods and services 67.5 52.9 90 53.3 49.1 70.1 55.3 real terms 116.5 72.0 95.5 48.4 39.0 94.7 43.7 Others 17.4 0 0 129.7 91.9 5.8 96.1 real terms 30.0 0.0 0.0 117.9 72.9 0.4 2.4 Total recurrent executed 198.8 276 171.5 314.1 404.8 215.5 359.4 real terms 343.0 375.8 182.0 285.5 321.3 300.3 303.4 Of which Wages and salaries 1212 130 132.6 185.3 184.2 128 184.7 real terms 209.1 177.0 140.7 168.4 146.2 175.6 157.3 Goods and services 77.6 146 38.9 128.8 220.6 87.5 174.7 real terms 133.9 198.8 41.3 117.1 175.1 124.7 146.1 Others 0 0 0 0 0 0 0 Execution rates (in %) 95.7 157.1 77.7 82.8 123 110.2 102.9 Wages and salaries 98.6 105.9 101.4 94.5 98 102 96.3 Goods and services 91.5 275.8 43.2 70.3 156.4 136.8 113.4 Sources: Le Moniteur, Journal Officiel de la Rép blique d'Haïti and! ff Calculations. 196 [page 231] DE Dia zlû | : lu EE Tun Là Ë : || Hal L— ai EN La A [SL e & ( | ‘ T à ra à & + :. S SAR .. = EE = _. = “ HERBE dE & LIST SEE ; PAIE | Es ji L de pl SE . - 2ERle . É = RER RÉ ASIN DE L . ' £ Le + ë À PE . : AE EN 2 À AA Se E = SE S = : | LR Es CE .. ie | à 3 £ = | | 23 LA FÈRE ë LT œ g £ 0 CPE 2£ 5 'o | RQ n ER - ‘| à: li EE ERA als : | SlRiR RISIR | î 1. &ISIS a] 2 ESS : + ÉÉÊRÉ : 8 S © = RP PE o r 8 - ï < Ê= Le : 3 5 RER “| : 3 à 7 NES << Es ? £ “EP ie i ÈRE alglg gS EE + . | 5 2 ë Le. Ë, £c = 222 LT . É se SE E 2 5 ES n as LE br) AE $ G È Eu . “ARE SE | + £ AIS 258 Ë £| 23 Ti Ÿ © = . Fé $ £2 SE qu 2 ,: ARE 222 | 1 È êu LHÉRIE | ü Ps ASS AË | à SE asia Le ® 5 | | SES 22 v| © 2 ||e ‘ AIS 3 a 5 SI L à 22e Le) us no [A [S2IR 1 € 3 EE SAR Ÿ ë u La SRE 2e 2. Es Se ê — ‘5 ü “ = SAS . 2! = ARE JE ; ne] cl SE ae El D : al ARE Se & « UE “P ni a = ci E) - “ £ S sai . ë| À “ÈÈË ' È ARE 3 EF ÉÈL ce LÉ SÉCRÉÉ Se REE cé) . ME 5 ñ FIÈE £ HÈÉ ds = ZlalE ÉE APE AËE 518 J S É lé EME dÉE ÉÉÉPÉÉE APE EX ÉÉCIPÈEE HE < £ ÉÉÉÉEÉE + EEE ÉÉÉÉLE SRE CAE [page 232] Haiti: Public Expenditure Management and Financial Accountability Review ANNEX 5 Table A5.1. Allocations to Education Sector (HTG million, unless otherwise indicated), FY2002/07 T FR png EXT j EX ps J ENT D |avées | au | ons |antsoe | zoo | vois raser | [constant US$ per capita [2164 | 59 | #8 | 71 | 56 | 7 | à | | Total Investment Budget | 7522 | 3759 | 90 | 4741 | 7405 |2,056.00 | 406 | 1,090.20 | Total Investment in % of total 34 4.5 125 17.9 30.9 20 PNR PT) : Ô Ô 0 0 Q 0 0 In million of constant USS 856.0 AP CE M EM CO M LI 1 ES RES RE RIRE Budget (in % ct. ne : Sources: Le Moniteur, Journal Officiel de la République d'Haïti and Staff Calculations. Education sector comprises Ministry of Nationäf Education, Youth and Sports and University of Haiti. In FY2006/07, it includes Ministry of National Education and Professional Training, Ministry of Youth and Sports, and Civil Action, University of Haiti. We also include “interventions publiques” in favor of education sector. Table A5.2. Composition of Spending in Education, (HTG million, unless otherwise indicated), FY2002-07 EN EY Fi EV FEV EY ANGLES a ue ne mu mes nm mé vw Fvros | Wages and salaries 1,895.3 1,780.7 1,342.4 1,578.5 1,497.2 1,687.1 1,672.8 1,587.6 Goods and services 602.7 417.0 691.6 228.2 250.5 363.1 570.4 280.6 Others 26.5 NA NA 1,205.9 939.1 1,236.4 NA 1,127.1 Total 2,5245 2,197.7 2,033.9 3,012.7 26868 3,286.6 2,252.1 2,995.4 Share of wages and salaries in total (in 75.1 81.0 66.0 524 55.7 513 743 53.0 % ue of goods and services and others 249 19.0 34.0 47.6 44.3 48.7 25.7 47.0 in total (in % Sources: Le Moniteur, Journal Officiel de la République d’Haïti and Staff Calculations. 198 [page 233] Il & = Re LE + 2 als la |e [Sa lo ls la [à LL Ed = [où \o [al ai 00 a 2o La) a. > Le a A a SE e È œ So + L k — [© {nn [SR e | Et La Len) A — Ë 6 & e MURS | a |æ A malo a |A [Sim «+ lo | | A1 Le Fa SIT ee Lo al D a [ag] Lil E Shhéeis [© |e [ss | = | 5 Riads [EE | [8er 2 | | 2 ë D 2 j'le = reste) Le) Len em e qu FE géo [0 la |+l- 12 lo pa g 2in eo : h 1 + + LA s & M alo|Sin Ê Se (& là [re | [8 LL | à Sltlelsoinle vw EËla e {à [ol = JS là S WIRIS SR IRlS|s BIEN | Ni 8 [SSSR IASIÉlS € | a BEA a SE © # La em El 5 © sl [2 LL [air a Là la = allie Se he : æœiT =] wo _ s lfSIRlalsls = 7 Sie | | [li & | LE ie D elslals + Fe FAC 2 [TZ El unis |s|s|s S a Je [à |® m [= le S nal-laleislo bel EN — Li pe] S HASISISI SE & ni Be è = £ 2) De) + El Hi 5 À léllée Le _ + la £ ti a eee | Le lnl= £ e L le e s Sal | ! le | R à : S Else Te £ Free je là æs |s [2 | | 2 ODélelslæelzls 5 |TÉES à LR [ER | | KE À 5 [fé selSlIelSiISslS à Es lt EE T TO = Sie lmISItls 2 " 5 | RE | = D à ge o Usl.le 5 € ge fe LL ele à FE Le & 8 SN S à Ê&e à lo 51% = LE É KA ME ml læel= | = ES A co SI + Se | LE st a als E Se Gien [ei = — = E EE Re) ES C4 — = 5 e S|n|$iclæels os a LS . ; Ÿ . Il IR) È ns 5 : È Es T0 $| £ 5 © 3 3 & à ‘é 2 & % a à - [+ lle } | : : #| à | ass.) Ê 4 £ EE KE 88 El le Le > E UNE DIE F2 CE #lle ln .|& jslm S | JE + à | ses . £ AR SISIRISIRls LS 1e jen In Ella S 2 [F J TS : = = MBdESTES en 5 TT ss sie 5| 2 Il SSI] lg 82 - Fe) . £ = AR = "lee le a a . El © | Le le £ & lEl&e Là le els Le |S [2 le GI 8| = Mers € | 2x & |S &e | LÉ LE E 81 € AélcISIsiSs &S lai | je ls E = 5 3 AN ES © à pi T [sl < ep NN = É És 5 À L É & TS S à il É £ ue 2 = Solo |s a S| 5 $ 4Ële |: le |e- RL |R [2 E G ® ue 2 Ésle la lo [lo i [a |e = É En $ $ se sig [a Le [té NO Ie | É- = L-] ES LS a E SES |— — EE] Frul El È ÊlsE £ cË Él £ | à ë [ME Lilo Le la [la E [9 # S E3 ls RITES Si lic ei Ù a « s a À a P Ps Z L-] ps TT BUS ES | sis à # |œ ln 2 = € £,81818 8 EE # £a [2 La [ge | & | LE s | à HS ESS a # | 5 S| * Salsa © 3 & = als il kel s ga [HISISIS|E 8 Æ lues LR OK lola on |[e É 8 SSSR ISlS à RSR LR 13 lé [a [se [a o 5 <« ARBRES: mSeS [© | [ee [© |[& | © E a) En) ose & Se Sla D |® NE à nm = 2 T Le] d Aieigir | S | = À selon Ê & a © £ AREIBE = ul F Fa S CT] a LS] E | il Ê 5 sn e pl 3 + ES [=] È£ o Sign [un ? Lo Ë LÊR |< |e Fe Je S 3 je ei E 2] 00 Q S E ® © ESS | [+ 5 MR K& | 3 & 8 = $ — 2 x ê Ë 8 Et) . A 0 < | 8 JE = L'e — _ _ Q 8 < 8 |£ JE 8 |(s£°e & ui elE gl al£ alé 8 al “= - £L Sa SE SRE ls Da [852% = S 5 5 £18 219 | 818 512 wl2 818 ES wlà 5 al 9 + G pr ÉRIC EEPEE EE ÈE & o S s GILIÉ ALE Gs SIElE ds 516 $s SeSlGaE)s ZT ft & [page 234] Haiti: Public Expenditure Management and Financial Accountability Review Appendix A5.1. Strategy for the Health Sector in Haïti General Objectives of the 2003-2008 National Strateoy Plan for Health Sector Reform "A reduction of at least 50% in maternal mortality; " A reduction of at least 50% in the rates of infant and under-five mortality; “A reduction of 30% in the incidence of HIV/AIDS infection; "A reduction of 30% in mortality associated with HIV/AIDS; * A reduction of 10% in mother-to-child transmission of the infection; "A reduction of 30% in the incidence of Tuberculosis; “A rcduction of 50% in mortality associated with malaria; * A reduction of 50% in disorders due to lack of iodine; “Control of some diseases (lymphatic filariasis) and elimination (neonatal tetanus) or eradication of other diseases (poliomyelitis, measles). Intermediate Objectives 1) Decentralize the health system * Strategy I : Revision of the Legal and Institutional Framework for Decentralization > Action 1: Develop a legal framework assigning new functions to the local level > Action 2: Revise the organic law of the Ministry of Public Health > Action 3: Introduce structures to allow the population to participate in managing the system > Action 4: Develop an urban health policy > Action 5: Give the sector tools for regulating the introduction of CHUs > Action 6: Strengthen the management capabilities of the MPHP at all levels “Strategy 2 : Expansion of health care coverage through the introduction of functional and effective CHUs . oc > Action 1: Planning, support and follow-up of the expansion of CHUs Action 2: Strengthening of the management capabilities of CHU offices and health care institutions ‘(particularly the CRHs) : : > - Action 3: Preparation of the CHU development plans as the are eligible re : + “> Action 4: Introduction of tools for evaluating the-operational development of CHUs. : : | 2). ‘Improvethe supply of health care ce : Lo - . "__: Strategy l: Improvement of the quality of héalih care . - ‘ > Action I: Introduction of Basic Package of Services (BPS) in the health zones served by CHU health : … care facilities, giving priority to combating maternal mortality. > Action 2: Definition and implementation of a national policy ôn the subject of health care quality > Action 3: Development of the laboratory network “Strategy 2: Development of universal access to services in response to specific priority health concerns > Action 1: Evaluation of management cost > Action 2: Definition of financial mechanism > Action 3: Application and follow-up “Strategy 3: Gradual integration of programs designed to manage priority health problems, taking the millennium objectives into account > Action 1: Studies conducted on efficiency and effectiveness of integrating priority programs > Action 2: Introduction of a national children’s office to coordinate EPI, IMCI, nutritional deficiencies, etc. > Action 3: Introduction of a national women’s health committee > Action 4: Revision of sub-sectoral strategic plans from a perspective of integration in terms ofthe new directions in the sector. "Strategy 4: Consideration of traditional medicine as a key player in the health sector > Action l: National entity put in charge of relations between modern and traditional medicines > Action 2: Studies and research done on traditional medicine sector > Action 3: Mechanisms introduced for partnering with traditional practitioners * Strategy 5: Improve management of mental disorder > Action 1: Training of nursing staff in the first and second tiers of the CHU, in the management of simple cases and referral of complex cases, according to the BPS > Action 2: Strengthening of specialized services in the hospitals at the secondary and tertiary levels > Action 3: Promotion of changes in behavior for family and community integration of the mentally ill “Strategy 6: Health promotion and protection 200 [page 235] Haiti: Public Expenditure Management and Financial Accountability Review > Development of health promotion activities as defined in the BPS > Development of policies for the most vulnerable population groups (women, pregnant women, children, street children, orphans, adolescents, families in difficult situations) 3) Revitalize and expand the public hospital network in order to increase the supply of health care and improve its quality “Strategy l: Improvements in the management of public health > Action 1: Training in hospital management for staff responsible for medical care, nursing care and administration > Action 2: Development of standardized management tools, including establishment plans, for hospitals > Action 3: Installation of a central agency responsible for organizing the upkeep and maintenance infrastructures, equipment and logistical resources > Action 4: Securing at the national level of financing for the revitalization and expansion of public hospitals > Action 5: Legislation on administrative and financial autonomy of secondary and tertiary level hospitals > Action 6: Follow-up and evaluation of managerial performance “Strategy 2: Improved supply of services > Action 1: Gradual implementation of establishment plans > Action 2: Installation of quality transfusion capability in all hospitals > Action 3: Implementation of continuing training policy in the area of pathology management > Action 4: Strengthening of departmental and university hospitals’ maternity wards > Action 5: Promotion of service quality (through application of management standards, improved reception, supervision) > Action 6: Improved hygiene and cleanup in the hospital setting . > Action 7: Organization of a system for hospital accreditation and inspection ., > Action 8 : Installation of an integrated medical emergency system (IMES) > Action 9: Installation of a national cancer research center . : > Action 10: Installation of hospital coordination structures and mechanism : “Strategy 3: Development ofthe hospital-uriversity axis > Action 1: Modernization and autonomy of Haitian State University Hospital . > Action 2: Expansion of hospital-university axis, based on a process that incorporates transformation of - : existing facilities h > Action 3: Development of research and partnership agreements » Strategy 4: Expansion of the public hospital network > Action 1: Expansion of CRHs > Action 2: Networking of hospital facilities in the metropolitan area 4) Improve regulation of the sector by giving the MPHP tools for managing the entire sector, thus strengthening the leadership of the MPHP and its regulatory role = Strategy 1: Strengthening of legal and institutional framework for regulation > Action l: Preparation and utilization by the public sector of legal and administrative instruments necessary to fulfill its mission > Action 2: Updating ofthe country’s health legislation taking into account the national and international situation > Action 3: Installation of training facilities for the health professions (physicians, pharmacists) > Action 4: reactivation of the national ethics commission > Action 5: Installation of accreditation systems for health institutions and training institutions > Action 6: Preparation and/or completion and/or dissemination of rules and standards for the delivery of quality health care services > Action 7: Improved effectiveness and development of contractual approach > Action 8: Strengthening of central and departmental offices responsible for ensuring the application of laws, rules and standards > Action 9: Creation of a national public health laboratory > Action 10: Strengthening of health inspection = Strategy 2: Definition of a research policy > Action 1: Introduction of an institutional framework for research > Action 2: Development of an applied research program > Action 3: Implementation of a research training plan > Action 4: Development of research strategies in the hospital-university axis 201 [page 236] Haiti: Public Expenditure Management and Financial Accountability Review > Action 5: Human resources encouraged to conduct rescarch > Action 6: Mobilization of resources for conducting research projects "Strategy 3: Regular inspection and evaluation of health actions at all levels > Action 1: Strengthening of health inspection > Action 2: Observance of established standards and rules “Strategy 4: Strengthening of partnership > Action l: Preparation of a partnership charter > Action 2: Strengthening of intersectoral coordination (water, sanitation, communication facilities and routes, agriculture, environment, education, women’s affairs, social sector, law, etc.) > Action3: Strengthening of the ability of the MPHP to develop partnerships 5) Modernize the health information system = Strategy l: Revision of the information system for management > Action 1: Evaluation of existing health information system for management > Action 2: Strengthening of central team in charge of guiding the information system for management > Action 3: Strengthening of departmental offices for management and utilization of information for management > Action 4: Updating of objectives, procedures and tools of the information system for management at each level, taking into account the hospital’s information requirements > Action 5: Introduction of methods and means for gathering, collecting, processing and disseminating information {including feedback) to all levels in real time > Action 6: Training/raising awareness as to the use of new tools at all levels > Action 7: Training/raising awareness as to the utilization of data at all levels > Action 8: Monitoring the quality of information collected "Strategy 2: Strengthening ofthe epidemiological surveillance and warning system > Action Î: Strengthening the central team in charge of epidemiological surveillance > Action 2: Centralization of ali epidemiological data at level of a single central entity > Action 3: Strengthening'of departmental offices in charge of epidemiological surveillance . > Action 4: Updating of the.list of illness and syndromes requiring active surveillance > Action 5: Review and simplification of collection and reporting procedures, definition of illness and list of illness and syndromes to:be reported, based on specific surveillance objectives : "Strategy 3: Improvements in the availability and accessibility of information for development of the system: > Action 1: Creation of a documentation center > Action 2: Publication and dissemination of health sector data > Action 3: Studies, surveys and applied research projects carried out > Action 4: Installation of the health observatory > Action 5: Training for media and journalists in health intervention > Action 6: Introduction of health education programs 6) Develop human resources "Strategy 1: Introduction of the political and institutional framework for management of human resources appropriate to the needs of the sector > Action 1: Development/adaptation of institutional and political framework for HR management > Action 2: Strengthening of HR planning by category and by level in system > Action 3: Planning for integrating professionals in training in Cuba > Action 4: Integration of human resources in the system according to a career plan > Action 5: Registration of professionals > Action 6: Organization of a State examination for health professionals “Strategy 2: Bringing the qualification of operational personnel up to standard > Action 1: Introduction of a continued training system for the sector “Strategy 3: Production of human resources consistent with the sector's needs > Action 1: Development of a framework for partnerships between the MPHP and private and public training institutions > Action 2: Strengthening of initial training > Action 3: Conversion of Health Management Information and Training Center into National School of Public Health > Action 4: Planning of specialization needs > Action 5: Adaptation of social service taking public-private partnership into account “Strategy 4: Geographically equitable allocation of HR according to needs 202 [page 237] Haiti: Public Expenditure Management and Financial Accountability Review > Action 1: Deployment of human resources based on needs » Strategy 5: Improvement in the appeal of the sector > Action 1: Development of career management profiles and tools > Action 2: Improvement of working conditions > Action 3: Promotion of equitable compensation 7) Guarantee the population’s access to essential drugs "Strategy l: Preparation of an official document on the National Pharmaceutical Policy, including policy in essential drugs > Action 1: Completion and submission of National Pharmaceutical Policy document to the process of validation by ad hoc groups = Strategy 2: Introduction of an effective system for supply of essential drugs (INN) for state and Philanthropic health facilities > Action 1: Revision of existing supply (based on PROMES) and distribution system » Strategy 3: Strengthening of pharmaceutical inspection and control services > Action 1: Strengthening of the Pharmaceutical Controi Division in terms of human resources, training and equipment > Action 2: Development of a charter on donated medication > Action 3: Installation of national quality control laboratory "Strategy 4: Improved accessibility of essential drugs on the national list by level, at an affordable and standardized cost > Action 1: Review of existing system for setting prices for medications > Action 2: Rationalization of prescriptions > Action 3: Universal access to certain medications > Action 4: Improved access to essential drugs for certain vulnerable groups =" Strategy 5: Development of national capacity to manufacture medications . 8) Increase and rationalize financial resources in order to allow for improvements in the supply service in the - context of sector-based reform. “Strategy l: Secure the financial resources needed for proper operation of the health system 5 : : > Action 1: Securing regular availability of MPHP resources compared to system needs ; k > Action 2: Mobilization of funds > Action 3: Promotion of solidarity mechanisms > Action 4: Development of resources allocation mechanisms “Strategy 2: Regulate the financing subsystem of the health sector > Action 1: Introduction and monitoring of regulations adapted to financial system > Action 2: Introduction of a decentralized management system based on results Source: Ministry of Public Health and Population, Strategic Plan for Health Sector Reform, March 2004. 203 [page 238] Haiti: Public Expenditure Management and Financial Accountability Review Table A5.5. Allocations to Health Sector (In million of gourdes, unless otherwise indicated), Eu gr PV2001/06 ÿr Es pan RUN un ve nom ae mime au rot Moser | Total Health Budget 1,178.50 709.3 661.1 1,355.40 1,283.10 5,435.40 849.7 2,691.30 THB in real term 2,033.54 965.74 701.48 1,231.77 1,018.39 3,889.45 1233.6 2046.5 THB in nominal US$ 43.52 17.53 16.66 34.77 30.55 129.41 25.9 64.9 THB in USS$/capita 5.24 2.07 1.93 3.94 3.40 14.17 7.2 THB in % of GDP 1.38% 0.75% 0.55% 0.97% 0.76% 2.71% 0.89% 1.48% Total Recurrent Budget 685.9 587.7 587.9 871.2 962.7 1,150.90 620.5 994.9 TRB in real term 1,183.54 800.18 623.81 791.74 764.09 823.56 869.2 793.1 TRB in nominal USS 25.33 14.53 14.81 22.35 22.92 27.40 " 18.2 24.2 TRB in USS/capita 3.05 1.71 1.71 2.53 2.55 3.00 2.2 2.7 Totai Investment Budget 492.6 121.6 73.2 484.2 320.4 4,284.50 229.2 1,696.40 TIB in real term 850.00 165.56 77.67 440.04 254.30 3,065.89 364.4 12534 TIB in nominal US$ 18.19 3.01 1.84 12.42 7.63 102.01 7.7 40.7 TIB in US$/capita 2.19 0.35 0.21 141 0.85 1117 0.9 4.5 Total Recurrent in % of total budget 582 82.8 88.9 643 75 212 73 37 Total Investment in % of total budget 41.8 17.2 it. 35.7 25 78.8 27 63 Total Nation Budget 13,278.4 15,333.2 18,853.4 32,4045 37,816.5 64,436.8 15,821.7 44,885.9 TNB in real term 22,912.3 20,876.7 20,004.9 :29,448.8 -30,014.7 46,109.5 21264.6 35191.0 TNB in nominal US& 490.33 379.02 475.10: 831.23 900.39 1,534.21 448.2 1088.6 - : TNB in USS$/capita 59.05 44.71 54,93 : 94.22 100.29 167.98 52.9 120.8 Shares of Heaïth LL : - . sector in Nation 8.9 46 35%, " 42 . ‘34 8.4 54 6.0 . : Budget (in %) » : : Totai Nation Poe : . Recurrent Budget 6,908.10 9012.30 16,992.3* 7,808.50 19,597.0 17,786.1 109709 15,063.0 (Exci. Interest Lu Payment) - TNR in real term 11920.1 12270.6. 18030.2 7096.3 15554.0 127273 14073.6 117925 pe in nominal 440.2 303.3 454.4 182.0 370.3 303.0 399.3 285.1 THR in USS/capita 53.0 35.8 52.5 20.6 41.3 33.2 47.1 31.7 Percent of Total (Exci. Interest 9.9 6.5 3.5 112 49 6.5 5.7 6.6 Payments) Memo Item: Nominal GDP 85,700 94,028 119,758 140,387 168,034 200,456 85,700 94,028 Sources: Le Moniteur, Journal Officiel de la République d'Haïti and Staff Calculations. 204 [page 239] Haiti: Public Expenditure Management and Financial Accountability Review Table A5.6 Health Sector. Buds et Execution FG million, unless otherwise RSS 3 OA D ovine om anse zone anse voa Four Total Budget allocated 1,178.5 709.3 661.1 1,355.4 1,283.1 849.7 1,319.30 TBA in US$ 43.5 17.5 16.7 34.8 30.6 25.9 32.7 in real term 2033.5 965.7 701.5 1231.68 1018.4 1233.6 1125.1 Total Budget executed 771.8 930.3 655.3 890.4 700 785.8 795.2 TBE in USS 28.5 23.0 16.5 22.8 16.7 22.7 19.8 in real term 1331.8 1266.6 695.3 609.2 555.6 1097.9 682.4 Execution rates (in % 65.5 131.1 99.1 65.7 54.6 92.5 60.3 Total recurrent allocated 685.9 587.7 587.9 871.2 962.7 620.5 916.9 TRA in USS 25.3 14.5 14.8 22.3 22.9 18.2 22.6 in real term 11835 800.2 623.8 791.7 764.1 869.2 777.9 Total recurrent executed 686.8 790.3 568.2 798.8 689.9 681.8 744.4 TRE in constant USS$ 25.4 19.5 14.3 20.5 16.4 19.7 18.5 in real term 1185.1 1076.0 602.9 725.9 547.6 954.7 636.8 Execution rates (in % 100 134.5 96.7 947 71.7 109.9 81.2 Total investment allocated 492.6 121.6 73.2 484.2 320.4 229.2 402.3 TIA in US$ 18.2 3.0 L8 12.4 7.6 7.7 10.0 in real term 850.0 165.6 77.7 440.0 254.3 364.4 347.2 Total investment executed 84.9 139.9 87.1 91.5 10.2 104 50.8 TIE in US$ 3.1 3.5 22 23 0.2 2.9 13 in real term 146.5 190.5 92.4 83.2 8.1 143.1 45.6 Execution rates (in % 17.2 115 118.9 18.9 3.2 45.4 12.6 Sources: Le Moniteur, Journal Officiel de la République d'Haïti and Staff Calculations. Table A5.7 Health Sector. Recurrent Budget Execution (HTG million, unless otherwise indicated}, ‘ EAN DT FV2002/07 ENT qu ART : ° CN DER : 200102} 200208 | 20004 | 200406) | 2005/06! |IEMO2/C) | EMOS/07 | 203 264 CR PE AE A A A A [GS in US$ | 60 | 28 | 29 | 34 | 26 | 39 | 30 | (Others "27" ] 461 | 01 | 01 | 291 | 161 | 461 | 226 | [Oh in US$ | 17 | 00 | 00 | 07 | 04 06 | 06 | EC A EE A PE [Execution rates Gn %) 1 | L_ Goods and services ___[ 1473 | 2725 | 86 | 734 | 482 | 1657 | 621 ] Sources: Le Moniteur, Journal Officiel de la République d’Haïti and Staff Calculations. 205 [page 240] —— o ne 2 8)... £ is 8 Linterurre Si SE) oO o "0 K& © s ©? SE PET LES L nm À 8 à En 5 S++2snmsSsRLA EX +: a. JSRARSASÈZSR EF, = al a : Al MH IS£cueentte LP ERETEEEPE ES) LERASS 8 r&e- s5 & SSTesraes Be. Ë. » van? as El ed ne a CR FR. | N 0 . Bb Druse Te . : le ON Ye a Ÿ © Ÿ ES 880 © © n © Ê ë| sesissers.nge | LS RSR SC Las n = œ Dlimlieigle & à à à Fe = > a ll ES — — D = 3 £ 5 a) in £ 5 sl Gi) 5 sl ue = o D T7 £ SES S Ye So à = £ a el no QVvEr es — © © + An 8 qi En À m ST El Al IEEE ST = < = EUR 5 È GE — PRREES. 2 + [5 ÿ RESTE à 5 à s SALE ww | = Se le à NA + S BEA = [re us E e à feras © Gi TR | 5 HE RSR E A ÿ AE PEESESTS £ Ë = : FE T8"8S- LE de 5 = do | il Ë £ £ “ Ê Ê St £ 8 | = © © [in] 2 | = É 2 FA 28 288 s 83 là 8 æ BE D D PET É = > s 8 5 = 558 35 32" & < Hipeiin 8 8 E EA Ê 3 SE 5 = 8 S ê $ |EÉ< ste; + Mig jé s ESS EG EE sGEt [page 241] Haiti: Public Expenditure Management and Financial Accountability Review ANNEX 6 Table A6.1. Allocations to Justice and Security Sector (HTG million, unless otherwise indicated), FY2002/07 D 7 PP PO Pa PE | 2901/02 | 2002/03 es 04 | 2004/05 | 20035/06 À 2006/07 | FY02/04 FY05/07 | BE os D PR Security Budget gourdes [US dollar per capita [4.7 | 34 734 7 65 | 66 | 146 {38 j 92 | gourdes Share of HNP in Total NA NA NA 943 92.8 80.9 NA 86.7 Justice/Security Budget (in % Fo Bic Ro Li EE] Eu RG El Budget 70.8 FE D BE EE ER EG Budget ms ! 235.3 US$ of total budget i pre eee eee % of total budget US$ ge [TT Security in Nation Budget (in % Sources: Le Moniteur, Journal Officiel de 1 République d’Haïti and Staff Calculations. Table A6.2: Recurrent Budget Allocations to Justice/Securit Sector TG million FY2002/07 _ Lamine | aveus | 000 | aus | anèue | bu | evene évouer | Total Nation Recurrent 6,908.1 9,012.3 | 13,831.1 | 7,808.5 | 19,597.0 | 17,786.1 | 9,917.1 | 15,063.9 Budget (Excl. Interest Payments PE RER EU UE AN EU Interest Payments Sources: Le Moniteur, Journal Officiel de la République d’Haïti and Staff Calculations. 207 [page 242] Haiti: Public Expenditure Management and Financial Accountability Review Table 46.3: Evolution of the composition of expenditure (in Percent of total expenditures, excluding aid project), FY2001/06 D D D 1) aootz zones | zooÿes | zooas | zone | zoo | eva vase | 2091/0721 200708 | 200304 | 2004/0$ | 2005/06 | 2600/07 | FV02/04 FX0S/07 Goods and 20.0 36.2 24.0 274 31.6 26.7 26.7 28.6 services Capital 14.0 14.4 6.7 15.9 11.7 expenditures Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 expenditures FY2002-FY2007 in thousand current gourdes Excluding aid project 1 FE FX Ev fl RG | F4 [ AVEEZ de ut | ms | mobs | 2oëtns | roëèos | rod | rvuint Fm | VE EC ES RE EE | 8.806 5,504 10,334 6,687 4,757 7,919 Renting of building 3,303 1,354 13,625 6,625 6,625 2.329 10,125 Renting of vehicles 1,250 1,852 7,912 4,274 191 [| 1,551 6,093 Maintenance of office equipment 2,784 2,125 1,183 1,483 1481 1,119 Maintenance of vehicles 5,519 2,637 7,226 1,708 3,730 4,078 4,467 Maintenance of building 17,121 2,555 12,362 25,950 18,068 9,840 19.156 Office supplies 22,920 12,473 .23,615 19,977 27,954 13,393 21.796 42,634 48,621 | 63,434 101,380 119,713 45,628 82,407 Food | 56,441 37,321 200,680 | 402303 | 476,356 46,881 301,537 | Office material & equipment 26,013 59,333 37,423 18,401 35,499 42,673 27,912 Transport equipment 19,224 7,698 46,699 12.802 7,919 B._ Expenditures RS Ps A PE EE Traveling expenditures 1,293 1,027. 1323 | | 809 | 1,175 Renting of building 1,393 1,093 3,496 3,614 | | 748 | 3,555 Renting of vehicles [645 | 866 | 476 1 191 | | 756 | 334 7 | Maintenance of office equipment | 387 | 98 | 383 | 298 | | 243 | 391 | Maintenance of vehicles 2,262 1,587 5,020 | 832 | | 1,925 2,926 Maintenance of building 7,761 1,575 6,454 9,028 | | 4,668 7,741 Office supplies 16,784 9,830 16,285 12,621 | | 13,307 14,453 42,494 47,772 63,081 92,928 | | 45,133 78,005 55,773 37,084 200,177 392,351 | | 46,429 296,264 Office material & equipment 5,901 5,282 11,536 6,676 | {| 5,592 | 9,106 | 13,717 6,393 | 301} 876 | | 10.155 [__C._ Execution rates) | [ Traveling expenditures ____ } 147 | 458 | 187 } 128 | | 17 | 148 | Renting of building [422 | 80,7 Ÿ 257 | 546 | | 321 | 351 | Renting of vehicles [516 | 164 7 6 |" 45 |" | 487 | 55 | | Maintenance of office equipment | 139 |" 55 À 18 | 252 | | 164 | 349 Maintenance of vehicles [41 | 602} 69.5 [487 | | 472 | 655 | Maintenance of building [453 | 61.5 | 522 | 348 | | 474 | 404 | | Office supplies | 732 | 788 7} 69 | 632 | | 994 | 663 | {Fuel | 997 | 983 | 994 7 917 | | 989 | 947 7 [Food | 988 | 763 | 997 | 97.5 | | 99 | 983 | Office material & equipment [227 [7 89 | 308 | 363 | | 131 | 326 | 103.4 [59.8 | 114 [| 793 | 1447 | Sources: Government Data and Staff calculations. 208 [page 243] É Se = [ail N | Ë S “A ed » ; A 'FEFFEEE É= FÉNSSAaRE: E ÉRNÉER à = . E Ras Ce a | ES = | RENTE EE Ës RE E AÉSSSSSss | + ee | S = Ë ni 581 Al > A = "EPFFEE ë 5 2 TC 8 $ £ - LE SÉFÉER = L) . 5 É là 2 Sh ze mit CO 3% 5 PERTE TE e ÉESRSSÉSS [al | l ‘ | | | Lg % & SAS © = lo ERRTE = £ | ÉTÉ = " EÉREÉRIÉE : | ee + ; li a à ? a di = ne) 22 A ÈS Ê FÉFÉFERTE = ë : DLL . : | S & ©? ëi) +). EE F) SO + Ÿ > 8 EE = à = 8 à £ = ÉFÉREREEE è | 8 r 288% F4 Fe] 2 | Fe | 4 | | Sar £ ; Ë ia ge 5 A M BES à o et à à Ô S HER LE : Ô [S] a iAfiS-224 | < gl0 À SS$ e ; = rs 4 ll SÈas | S £ Il Fe : | d 8 sa NH | £ E SES à & £ È ESC À © Dei [res E FÉRÉREEFE : à a 2888 A - 8% £ : | + É 5 a o = |< ë Ë Elise ë È e SSrés FE $ Ë RARES a SESÉSR 3 (à à À ; |E F4 = © 2 | È 5 | SES co 5 & ! -RFÉEREEÉE É Ë =? Il FS ë ë Ë de 2 5 © ÉPRRE : x LE ESS © = + a : o 5 £ ÉFFEREÉE S © Ai °°? EL + SÈ+ a+ 3 = | : RTS £ 5 & 5 ce à. IE = dE .3B8ÈS8 ; X Se 8 ÉS ESS 58 É 5 o RÉSIÉRSÉ SE _ d'a ÉÉFESILT Es : 25 ! ÉSE42236 QE SE 5 HSESSESSE ia ë #l | Ë iii di : 13132533: F£ 5 8 2 SÈ3E RER TEE EOE FE £ sgsa an En [page 244] Haiti: Public Expenditure Management and Financial Accountability Review ANNEX 7 Summary List of Equations Production of Health Services and Effective Labor KGmlt) = AHC-[el(t)-KGi(t)]P#C-[OH(t)-KGu(t)]'P#C (A1) YGatt) = AH: [yen Lec(t)]P [KGi(t)T (A2) T{t) = AT-[Lep(t)IT HOT (A3) Production of Commodities . . | mt 16 . AJAT(IE [KA - - (A4) +. | Lo _ V(t) = LOPAL" …: (A5) | Y(t) = AY. TT (A6) Population, Labor Supply, and Schooling Technology NE) = [+ gn(t)T-N(t-1) (A7) gutt) = gn° + BulCo(t-1)/N(E-1)] - Bun[Cp(t-1)/N(t-1)7 (A8) La(t) = (1 - ap - as)-N(t) (A9) Left) = La(t) - Le(t) (A10) KG(t) = AEC-[O1(t)-KG(t)]PE[OE(t)-KGe(t)]' PES {A11) 210 [page 245] Haïti: Public Expenditure Management and Financial Accountability Review Z{) = AZ-{y6e" Lec(t)IP- [KGie(t)T PE (A12) SH(t) = AS-[STU(t)JFS-[H(t)]' #5 (A13) NES(t) = AE-Lysa°:SH(L)IPE-[Z(L)I"FE (A14) NE(t) = NES(t) + nnexpe-Cp(t) (A15) Le(t+1) = NE(t) + (1 - Ge)-Le(t) (A6) Leo(t) = (1 - ape - apu - ace)Le(t) (A7) Household Consumption and Wealth : P{t) = po-PLH(E)/KP(H)T ET WexesLec(t)+CGs(t)1/Kp(t)7F (A18) Ct+1)/C(t) = HC-m)re(t) + 1- P(t)}/T + pt (A19} | rr(t) = BY1-BV-(1-BJ}-Y(t)/Ko(t) (A20) Kpft+1) = lbft) + [1 - Opt)]Ko(t) (A21) dplt) = 1 - ep[CGmt-1)/Kp(t-1)]? (A22) Composition of Public Spending and Budget Constraint G(t) = CG(t) + IG{t) + ro-D(t-1) (A23) CG(t) = weLec(t} + CGuft) + CGs(t) + CGr(t) + CGolt) (A24) CGj(t) = 8; Y(t), j=S,0,T (A25) 211 [page 246] Haiti: Public Expenditure Management and Financial Accountability Review CGutt) = Bu-3hCGpn(t) = One Enden(t)-KGn(t-1) (426) IG(t) = @rY(t) (427) IGh(t) = x-1G(t), h=E,H,1,0 (A28) KGn(t) = @n:IGn(t-1) + [1 - Ocn(t)}-KGn(t-1) (A29) Scnlt) = 1 - Ecn[CGwlt-1)/KGn(t-1)745 (430) T(t) = (t-quhavY(t) + (T-qe)reCr(t) + (1-q)pr KGi(t-1) (A31) At) = Gt) - T(t} - Go-Y{t) (432) ee | QE) = aorY(t) + Gcrc-Cat) + apr KGt-1) (433) | | privote Cagital Formation | | : . | : 6) = (1+0487-)V(E) + WeLec(t) + eco = (+ roCo(t) - prKGt-1) (34) Stocks of Public Capital: Quality Indicators 8l(t) = Olo/{Ol + (1 - Olo)-exp[-(KG(t-1)/Ke(t-1))T3 (A35) EH(t) = 8Ho/£0Ho + (1 - 6Ho)-exp[-(KGu(t-1)/N(t-1))]} (36) SE(t) = 0E0/{0Eo + (1 - OEo)-exp[-(KGet-1)/xen5STU(-1)]} (A37) 212 [page 247] Haïti: Public Expenditure Management and Financial Accountability Review Table A.8.1. Baseline scenario, 2007-15 Years 2007 2008 2009 2010 2011 2012 2013 2014 2015 D Reai GDP per capita at market prices (% change) 0,7 0,7 0,6 2,6 0,6 0,5 0,5 0,4 0,3 Poverty rate-Ravallion's adjusted elasticity (Gini = 66.0) 55,5 55,3 55,2 56,1 65,0 54,8 54,8 54,7 54,6 Poverty rate-Growth elasticity of -1.0 55,0 54,6 54,3 53,9 53,6 53,4 53,1 52,9 52,8 Government Sector (% of GDP) Total resources (including grants) 13,5 43,8 143 14,7 14,7 147 14,7 14,7 44,7 Total revenues 8,6 8.6 8,5 9,5 9,4 sé 9,4 9,5 8,5 Direct taxes 3,9 39 3,9 3,9 3,9 3,8 3,9 3.9 3,9 Indirect taxes 4,9 48 4,7 47 4,6 4,6 4,6 46 46 User fees 0,8 08 0,6 0,8 0,9 0,6 0,9 0,9 0,9 Foreign aid (granis) 3,9 4,3 4,8 52 5,2 5,2 5,2 52 52 Total expenciture 11,8 12,2 126 12,8 12,9 12,9 12,8 13,0 43,0 Spending on goods and services (total) 6,6 6,6 6,5 5,5 8,5 6,5 6,5 6,6 6,6 Spending on maintenance 0,8 0,8 0,8 0,8 0,8 0,7 0,7 0,7 0,7 Wages and salaries 3,4 35 3,5 3,5 3,5 3,6 3,6 3.6 37 Socurity 14 44 44 14 14 1,4 14 14 14 Otner 0,8 LE 0,9 0,9 0,8 0,9 Le 0,9 LE Invesiment 4,5 49 5,3 57 5,7 5,7 5,7 5,7 67 Interest payments 0,7 0,7 0,7 0,7 C7 0,7 o,7 0,7 07 Overail fiscal balance including grants (cash basis) 17 17 17 17 17 17 17 17 +7 Memorandum items Private investment (% of GDP} 32,3 34,1 36,6 36,7 37.6 38,1 38,4 383 38,1 Public investment (% of total public expenditure) 321 34,0 35,8 37,5 37,5 37,5 37,5 37,5 37,4 Heaïth (% vf public investment) 5,4 8,4 74 8,4 9,4 9,4 9,4 94 8,4 Infrastructure (% of public investment) 36,4 36,9 37,4 37,9 38,9 399 39,9 39,9 39,9 Eoucation (% of public investment) 7.3 9,3 113 123 15,3 15,3 15,3 153 15,3 Other (% of public investment) 50,9 47,4 43,9 40,4 36,4 35,4 35,4 35,4 35,4 Aid (% of total revenue) 40,3 453 50,3 56,0 55,4 55,5 55,5 55,3 55,0 Total Aid (% of public investment) 85,3 87€ 89,3 60,5 20,8 8,0 91,1 91,0 20,9 Total debt (% of GDP) 29,0 28,8 28,7 28,6 28.5 28.5 28,5 28,6 287 Educated labour (in % of population} 37,6 378 383 38,8 383 39,8 404 409 41.5 Note: The “adjusted" elasticity formula proposed by Ravallion (2004) is -9,3*{1-Gini}"3 = -1.13 where Gini index is 50.5 for Haïti 213 [page 248] Haïti: Public Expenditure Management and Financial Accountability Review Table A.8.2. Higher Total Public Investment, 2007-15 (Deviation from the Baseline scenario) Years 2007 2008 2009 2010 2011 2012 2013 2014 2015 Real GDP per capita at market prices (% change) 0,0 0,0 0,3 0,3 03 0,4 0,3 0,3 02 Poverty rate-Ravallion's adjusted elasticity (Gini = 66.0) 0,0 0,0 0,1 0,1 -0,2 03 2,3 -0,4 -04 Poverty raie-Growth elasticity of -1.0 0,0 0,0 02 -0,3 -0,5 -0,7 -0,9 -1,0 1,1 Government Sector (% of GDP) Total resources (including grants) 0,0 5,0 5,9 5,0 5,0 4,0 3.0 2,0 10 Total revenues 0,9 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Direct taxes 0,0 0,0 0,9 0,0 00 0,0 0,0 0,0 0,0 indirect taxes 0,0 0,0 0,0 0,0 0,0 -0,1 0,1 0,1 0,41 User fees 0,0 0,0 0,0 0,0 0,0 0,0 0, 0,1 0,1 Foreign aid (grants) 0,0 5,0 5,0 5,0 5,0 4.0 3,0 2,0 1,0 Total expenditure 0,0 5,0 5,0 5,0 5,0 4,0 3,0 2,0 1,0 Spending on goods and services (total) 0,0 0,0 0,0 0,0 0,0 0.0 0,0 9,0 0,0 Spending on maintenance 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Wages and salaries 0,0 0.0 0,0 0,0 0,0 0,0 0, 0,1 0,1 Security 0,0 0,0 0,0 0,0 0,0 0,0 0,0 60 0,0 Other 0,0 0,0 0,0 0,0 0,0 0,0 0,0 00 0,0 investment 0,0 5.0 5,0 5,0 5,0 4,0 3,0 2,0 1,0 Interest payments 0,0 0,0 0,0 0,0 0,0 0,0 0,6 0,0 0,0 Overall fiscat balance including grants (cash basis) 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Memorandum items Private investment {% of GDP) 0,0 0,0 0,3 0,5 0,8 LA 14 4,6 17 Public investment (% of total public expenditure) 0,0 16,9 16,1 154 15,4 13,0 103 73 3,9 Health (% of public investment) 0,0 0,0 0,0 0,0 0,6 0,0 0.0 0,0 0,0 Infrastructure (% of public investment) 0,0 0.0 o0 0.0 0.0 00 00 0,0 0,0 Education (% of public investment) 0,0 0,0 0,0 0,0 0,0 0,0 0.0 0,0 6,0 Other (% of public investment) 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,6 Aid (% of total revenue) 0,0 52,3 52,8 53,1 53,2 42,7 31,9 21,2 10,5 Total Aid (% of public investment) 0,0 6,2 5,2 44 4,2 3,6 29 2,1 1,0 Total debt (% of GDP) 0,0 0,0 -0,1 -0,2 -0,3 -04 04 -0,5 -0,5 Educaled iabor {in % of population) 0,000 0,000 0,000 0,000 0,001 0,002 0,003 0.004 0,006 214 [page 249] Haïti: Public Expenditure Management and Financial Accountability Review Table A.8.3 Higher Totai Public Investment and Higher Efficiency of Public Investment, 2007-15 (Deviation from the Baseline scenario) Years 2007 2008 2009 2010 201t 2012 2013 2074 2015 ————_ oo? Real GDP per capita at market prices (% change) 00 00 05 o7 08 08 o7 07 06 Poverty rate-Ravailion's adjusted elasticity (Gini = 66.0) 00 00 04 03 -04 -06 07 08 0 Poverty rale-Growth elasticity of 1.0 60 00 23 -07 41 45 41 22 25 Government Sector (% of GDP) Total resources (inciuding grants) 00 50 50 50 49 39 29 1e os Total revenues 0,0 0,0 0,0 0,0 0,0 0,1 0,1 -0,1 -0,1 Direct taxes 0.0 00 00 00 00 00 00 60 00 Indirect taxes 00 00 00 04 0 04 2 -02 -02 User fees 00 00 00 00 00 01 0,1 c1 02 Foreign aid (grants) 00 50 50 50 50 40 30 20 09 Total expenditure 0,0 5,0 5,0 5,0 49 3,9 2,9 +9 09 Spending on goods and services (total) 0.0 00 00 0.0 00 61 0 01 04 Spending on maintenance 00 o0 00 00 00 00 01 ot 04 Wages and salaries 00 90 00 0.0 01 0,1 0 04 -02 Security 00 0,0 00 0.0 00 00 o0 00 00 Other 0,0 0,0 0,0 0,0 0,0 0,0 0.0 0,0 0,0 Investment 00 50 50 50 50 40 3,0 20 10 Interest payments 0.0 00 00 00 00 00 00 00 00 Overall fiscal balance including grants (cash basis) 00 00 00 00 00 00 00 00 00 Memorandum items Private investment (% of GDP) 0.0 0,0 0,5 11 17 2,3 2,9 34 38 Public investment (% of total public expenditure) 00 189 182 155 155 1341 104 74 41 Health (% of public investment) 0,0 0.0 0.0 0.0 00 00 co 00 00 Infrastructure (% of public investment) 0,0 0,0 00 00 00 00 00 00 00 Education (% of public investment) 0.0 00 00 00 00 00 00 00 00 Other (% of public investment) 0,0 0,0 0,0 0,0 0,0 6,0 0,0 0,0 0,0 Aid (% of total revenue) 0.0 523 53,0 534 535 429 32,1 212 103 Total Aid (% of public investment) 0,0 62 52 44 42 35 28 18 06 Total debt (% of GOP) 0,0 0,0 02 03 05 07 0 45 412 Educated labor (in % of population) 0000 0000 0060 0001 0002 0.004 0006 0910 oo14 215 [page 250] Haiti: Public Expenditure Management and Financial Accountability Review Table A.8.4 Realiocation of spending to health , 2007-15 (Deviation from the Baseline scenario) Years 2007 2008 2009 2010 2011 2012 2013 2014 2045 Real GDP per capita at market prices (% change) 0,0 0.0 0,0 0,0 0.0 a 0,1 o,1 CE Poverty rate-Ravallion's adjusted elasticity (Gin: = 66.0} 0,0 0,0 0,0 Le) 0,0 0,0 0,0 0,1 0,3 Poverty rate-Growh elasticity of -1.0 0,0 0,0 0,0 0,0 -0,1 0,1 0,1 “0,2 -0,2 Government Sector (% of GDP) Total resources (including grants) 00 00 0,0 0.0 0.0 0,0 0,0 00 0,0 Total revenues 0,0 0.0 0,0 0,0 0,6 0,0 0,0 0,0 0,9 Direct taxes 09 0,0 0,0 0,9 0,0 0,0 0,0 0,0 0.0 indirect taxes 0,0 0,0 0,0 0,0 0.0 0,0 0,0 0,0 0,0 User fees 0,0 0,0 0,0 0,0 0,0 0,0 0,9 0,6 0,0 Foreign aid (grants} 0,0 00 0,0 0,0 0,0 0,0 00 0,0 00 Total expenditure 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0.0 0,0 Spending on goods and services (total) 0,0 05 0,5 -0,5 0,5 -0,5 0,5 0,5 05 Spending on maintenance 0,0 0,0 0,0 0,0 0,0 0,0 00 0,0 0,0 Wages and salaries 0,9 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Security 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Other 0,0 0,5 0,5 2,5 -0,5 -0,5 0,5 -0,5 -0,5 Investment 0,0 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 Interest payments 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Overall fiscal balance including grants (cash basis) 0,0 0,0 0,0 00 0,0 0,0 0,0 0.0 0,0 Memorandum items Private investment (% of GDP) 0,0 0,0 0,0 0,1 0,1 0,2 02 02 03 Public investment (% of total public expenditure) 0,0 3,4 3,4 3,3 3,3 3,3 33 3,3 33 Health (% of public investment) 0,0 5,0 5,0 5,0 5.0 5,0 5,0 5,0 5,0 infrastructure (% of public investment) 0,0 0,9 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Education (% of public investment) 00 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Other (% of public investment) 0,0 -5,0 -6,0 -5,0 -5,0 -6,0 -5,0 -5,0 -5,0 Aid (% of total revenue) 0,0 0,0 0,0 0,0 0,0 0,1 0,1 0,3 0,1 Total Aid (% of public investment) 0,0 -8,0 7,6 7,2 7,2 -7,2 -72 72 -72 Total debt (% of GDP) 0,0 0,0 0,0 0,0 0,0 0,0 0,1 -0,1 “0,1 Educated labor {in % of population) 00 0,0 0,0 0,0 0,0 0,0 0,0 0,9 0c 216 [page 251] Haiti: Public Expenditure Management and Financial Accountability Review Table A.8.5 Lower collection cost, higher direct tax rate, 2007-15 (Deviation from the Baseline scenario) Years 2007 2008 2009 2010 2011 2012 2013 2014 2015 Real GDP per capita at market prices (% change) 0,0 0,0 0,1 -0,2 -02 -02 0,2 -0,2 0,1 Poverty rate-Ravallion's adjusted elasticity (Gini = 66.0) 0,0 0,0 0,0 0,0 0,1 0,1 0,2 0,2 0,2 Poverty rate-Growth elasticity of -1.0 0,0 0,0 0,0 0,1 02 0,3 0,4 0,5 0,6 Government Sector (% of GDP) Total resources (including grants) 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,1 Total ravenues 0,0 12 2,2 3,2 32 3,2 3,2 32 3,2 Direct taxes 0,0 11 2,1 3,0 3.0 3,0 3,0 3,0 3,0 Indirect taxes 0,0 0,1 0,1 0,1 0,1 0,1 0,4 0,1 0,1 User fees 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Foreign aid (granis} 0,0 -12 -2,2 3,1 -3,t -3,1 -3,1 3,1 -3,1 Total expenditure 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,1 Spending on goods and services (total) 0.0 00 00 00 00 00 0,0 6,0 0.0 Spending on maintenance 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Wages and salaries 0,0 0,0 0,0 0,0 0,0 0,0 0.0 0,0 0,0 Security 0,0 0,0 0,0 0,0 0,0 0.0 0,0 0,0 0,0 Other 0,0 0,0 6,0 0,0 0,0 0,0 0,0 0,0 0.0 Investment 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 interest payments 0,0 0,0 0,0 0.0 0,0 0,0 0,0 0,0 0,0 Overall fiscal balance including grants (cash basis) 9,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Memorandum items Private investment (% of GDP) 0,0 -10 -22 -33 -3,5 -3,7 -3,8 -3,9 4,0 Public investment (% of total public expenditure) 0.0 0,0 00 0,0 0, 0,1 01 01 01 Health (% of public mvestment) 0,0 0,0 0,0 0,0 0,0 0,9 0,0 0,0 0,0 Infrastructure (% of public investment) 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Education (% of public investment) 0,0 00 0,0 0,0 0,0 00 0,0 0,0 0,0 Other (% of public investment) 0,0 00 00 0,0 0,0 0,0 0,0 0,0 0,0 Aid (% of total revenue) 0,0 16,2 -28,0 -38,7 -38,9 -39,0 -38,9 -38,8 -38,6 Total Aid (% of public investment} 0,0 -24,2 -40,6 -54,7 -54,7 -54,7 -54,8 -54,7 -54,7 Total debt (% of GDP) 0,0 0,0 0,0 0,1 0,t 02 0,2 0,3 0,3 Educated labor (in % of population) 2,0 00 0,0 0,0 0,0 00 0,0 0,0 0,0 217 [page 252] Haiti: Public Expenditure Management and Financial Accountability Review Table A.8.6 Lower collection cost, higher direct tax rate, new revenue to investment in infrastructure, 2007-15 (Deviation from the Baseline scenario) Years 2007 2008 2009 2010 2011 2012 2013 2014 2015 Real GDP per capita at market prices (% change) 00 00 02 05 o7 o7 08 08 08 Poverty rate-Ravallion's adjusted elasticity (Gini = 66.0) 00 00 01 0,1 -03 04 06 -28 -09 Poverty rate-Growih elasticity of -1.0 00 00 04 -04 -08 12 16 -20 -24 Government Sector (% of GDP} Total resources (including grants) 00 12 21 3,1 a a1 30 30 30 Total revenues 0,0 12 2,2 3,1 3,1 31 3,0 3,0 30 Direct taxes 00 nl 24 3,0 30 30 30 30 30 indirect taxes 00 00 00 00 0.0 0.0 00 00 00 User fees 00 00 0.0 00 01 01 0,1 02 02 Foreign aid (grants) 00 00 0.0 00 0.0 00 00 00 00 Total expenditure 0,0 42 2.1 31 3,1 3,1 3.0 30 30 Spending on goods and services (total) 00 00 00 00 00 01 01 01 0,1 Spending on maintenance 0.0 00 0.0 00 00 00 00 00 0.1 Wages and salanes 00 00 00 0.0 0.0 -01 01 0.1 -02 Security 00 00 0.0 00 00 00 00 00 00 Other 0,0 6,0 0,0 00 0,0 0.0 0,0 0,0 0,0 Investment 0.0 12 22 3,1 3, 3.1 30 30 30 Interest payments 00 00 00 00 0.0 00 00 00 00 Overall fiscal balance including grants (cash basis) 00 00 00 0.0 00 0,0 00 00 00 Memorandum items: Private investment (% of GDP) 0,0 00 0,2 0,6 12 18 24 3,0 3,7 Public investment (% of total public expenditure) 0.0 5,0 81 10,7 107 108 10,8 109 10,9 Health (%6 of public investment} 0.0 00 00 00 0.0 00 0.0 00 00 Infrastructure (% of public investment) 0,0 00 00 00 0,0 0.0 0.0 00 00 Education (% of public investment) 0,0 0.0 00 00 0 00 00 00 00 Other (% of public investment) 0,0 0,0 0,0 0,0 0.0 0,0 0,0 0,0 0,0 Aid (% of total revenue} 0,0 -5.1 -9,3 ART 13,8 13,9 141 441 -14,2 Total Aid (% of public investment) 0.0 A7 25.8 -32,0 -82.2 24 328 -328 -33,0 Total debt {% of GDP) 00. . 00 01 -02 04 -06 -08 10 “12 Educated labor (in % of population) 00 00 0.0 00 0.0 00 00 00 00 218 [page 253] Haiti: Public Expenditure Management and Financial Accountability Review Table A.8.7 Higher security spending, 2007-15 (Deviation from the Baseline scenario) Years 2007 2608 2008 2019 2011 2012 2013 2014 2045 ER Real GDP per capita at market prices (% change) 0,000 -0.001 0,000 0,001 0,002 0,002 0,003 0,003 0,003 Poverty rate-Ravallion's adjusted elasticity (Gini = 66.0) 0,000 0,000 0,000 0,060 0,000 -0,001 0,001 -0,002 -0,003 Poverty rate-Growth slasticity of 1.0 0,000 0,004 0,000 0,600 0,001 -0,002 -0,004 -0,005 -0,007 Government Sector (% of GDP) Total resources (including grants) 0.0 3,0 3,0 3,0 3,0 2,5 2,0 1,6 16 Total revenues 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Direct taxes 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Indirect taxes 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 User fees 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Foreign aid (grants) 0,0 30 3,0 3,0 3,0 25 2,0 46 15 Totai expenditure 0,0 3,0 3,0 3,0 3,0 2,5 2,0 1,5 15 Spending on goods and services (total) 0,0 3,0 3,0 3,0 3,0 2,5 2,0 5 1,5 Spanding on maintenance 0,0 0,0 0,0 0,0 0,0 9,0 0.0 0.0 0,0 Wages and salaries 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Security 0,0 30 3,0 3,0 3,0 2,5 2,0 45 1,5 Other 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Investment 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Interest payments 0.0 0,0 0,0 0,0 0,9 0,0 0,0 0,0 0,0 Overall fiscal balance including grants (cash basis) 0.0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Memorandum items Private investment (% of GDP} 0,0 0,0 0,0 0,0 0,1 0,1 0,1 0,1 01 Public investment (% of total public expenditure) 0,0 -5,8 -6,0 -6,1 -6.2 -5,3 43 -3,3 -3,3 Health (% of public investment) 0,0 0,0 0,0 0,0 0,0 0.0 0,0 0,0 0,0 Infrastructure (% of public investment) 0.0 0,0 0,0 0,0 0,0 00 0,0 0,0 0,0 Education (% of public investment) 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Other (% of public investment) 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Aid (% of totat revenue) 0.0 31,4 31,6 31,8 31,9 26,6 21,3 15,8 15,9 Total Aid (% of public investment) 0,0 60,7 56,1 52,2 52,2 43,6 34,9 26,2 26,2 Total debi (% of GDP) 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 L Educated fabor (in % of population) 0,0- 0,0 0.0 0,0 0,0 0,0 0,0 0,0 0,0 219 [page 254] Haiti: Public Expenditure Management and Financial Accountability Review Table A.8.8 Higher security spending and Elasticity of Security Spending, 2007-15 (Deviation from the Baseline scenario) Years 2007 2008 2009 2010 2011 2012 2013 2014 2015 a Real GDP per capita at market prices (% change) 0,000 -0,013 0,603 0,016 0,026 0,037 0,048 0,054 9,059 Poverty rate-Ravallion's adjusted elasticity (Gini = 66.0} 0,000 0,003 0,002 -0,004 0,006 -0,014 -0,023 -0,034 -0,046 Poverty rate-Growth elasticiy of -1.0 0,000 0,007 0,006 -0,003 0,017 -0,037 -0,061 0,090 0,121 Government Sector (% of GDP) Total resources (including grants} 0,0 3,0 3,0 3,0 3.0 2,5 2,0 1,5 1,5 Total revenues 0,0 0,0 0,0 0,0 0,0 0,1 2,1 2,1 -0,1 Direct taxes 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 indirect taxes 0,0 0,0 0,0 0,0 0.0 0,1 0,1 0,1 -0,1 User fees 00 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Foreign aid {grants) 0,0 30 3,0 3,0 3,0 2,5 2 1,6 1,6 Total expenditure 0,0 3,0 3,0 3,0 3,0 2,5 2,0 1,5 15 Spending on goods and services (total) 00 3,0 3,0 3,0 30 25 2,0 15 15 Spending on maintenance 0,9 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Wages and salaries 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Security 0,0 3,0 3,0 3,0 3,0 2,5 2,0 4,5 15 Other 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 investment 0,9 0.0 0,0 0,0 00 0,0 0,0 0,0 0,0 interest payments 0,0 0,0 0,0 0,0 0,0 0.0 0,0 0,0 0,0 Overall fiscal balance including grants (cash basis) 0,0 0,0 0,0 0,0 0,9 0,0 0,0 0,0 0,9 Memorandum items Pnvate investment (% of GDP) 0,0 0,2 0,4 0,6 08 10 12 1,4 45 Public investment (% of totat public expenditure) 0,0 -5,8 -6,0 -6,1 6,1 -52 4,3 -3,3 -3,2 Health (% of public investment) 0,0 0,0 0,0 0,0 0,0 00 0,0 0,0 0,0 Infrastructure (% of public investment) 0,0 0,0 0,0 0,0 6,0 0.0 0,0 0,0 0,0 Education (% of public investment) 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 9,0 Other (% of public investment) 0,0 00 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Aid (% of total revenue) 0,0 31,2 31,5 31,7 31,8 26,7 21,5 16,4 16,3 Total Aid (% of public investment) 0,0 60,9 56,5 52,7 52,9 444 35,8 27,2 272 Total debt (% of GDP) 0,0 LA: 0,0 . 0,0 0,0 0.0 0,0 0,0 -0,1 Educated tabor (in % of population} 0,0 0.0 0,0 0,0 0,0 0,0 0,6 -0,t -0,1 220 [page 255] Haïti: Public Expenditure Management and Financial Accountability Review ——— 2 Table A.8.9 Combined shock with lower collection cost, higher direct tax and security spending, 2007-15 (Deviation from the Baseline scenario) Years ——————— "NE 2007 2008 2009 2010 26141 2012 2043 2014 2015 Reaï GDP per capita at market prices (% change) 0,0 0,1 0,5 2.6 0,6 0,7 0,7 0,6 0,5 Poverty rate-Ravallion's adjusted elasticity (Gini = 66.0) 00 9,0 0,1 -0,2 04 -0,5 0,6 -0,8 08 Poverty rate-Growth elasticity of -1.0 0,0 0,0 03 -0.6 0,9 13 417 -2,0 22 Government Sector (% of GDP} Total resources {including grants) 0,0 8,1 82 83 84 7,0 5,6 42 3,2 Total revenues 0,0 1,6 2,6 3,6 3,7 3,8 40 4,1 4,2 Direct taxes 00 1,1 2,3 3.0 3,0 3,0 3,0 3.0 3,0 Andirect taxes 0,0 0,3 0,3 0,3 0,2 0,2 02 0,1 0,1 User fees 0,90 0,1 0,2 0,3 0,5 C6 0,8 LE 1,0 Foreign aid (grants) 0,0 6,5 5,6 48 4,6 3,1 7,6 6,1 -0,8 Totai expenditure 0,0 8,1 8,2 83 8,4 7,0 5,6 42 3,2 Spending on goods and services (total) 0,0 28 2,7 2,8 2,9 2,5 2,1 17 1,8 Spending on maintenance 0,0 0,1 0,2 03 0,4 0,6 0,7 cs 9,9 Wages and salaries 0,9 0,0 0,0 0,0 -0,1 -0,1 6,1 -0,1 -0,2 Security 0,0 3,0 3,0 30 3,0 2,5 20 15 15 Other 0,0 -0,5 0,5 -0,5 -0,5 -0,5 0,5 -05 0,5 Investment 0,0 5,5 5,5 5,5 5,5 4,5 3,5 25 15 Interest payments 0,0 0,0 0,0 0,0 0,0 0,0 0,0 09 6,0 Overall fiscal balance including grants (cash basis) 0,0 0.0 0.0 0,0 0,0 0,0 00 0,0 0,0 Memorandum items Private investment (% of GDP) 0,0 -12 -1,8 -2,3 -1,8 -1,2 0,6 -0,1 0,4 Public investment (% of iotal public expenditure) Lx) 12,1 11,1 102 10,0 8,5 6,8 48 15 Health (% of public investment) 0,0 5,0 5,0 5,0 5,0 5,0 55 5,0 5,0 Infrastructure (% of public investment} 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Education (% of public investment) 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Other (% of public investment) 0,0 -5,0 -5,0 -5,0 -5,0 -5,0 -5,0 -50 -5,0 Aid {% of total revenue) 0,0 52,6 35,4 18,8 18,2 73 4,5 -16,0 -23,6 Total Aid (% of public investment) 0,0 16,5 6,2 -3,3 -3,5 -9,7 -17,2 -26.6 -31,6 Total debt (% of GDF) 0,0 0,0 0,1 -0,3 -0,5 -0,7 0,8 1,0 1,1 Educated {abor (in % of population) 0,000 0,000 0,000 0,002 0,004 0,007 6,010 6,013 0,016 ———— —— —_——__—_————— "°C 0 006 221 [page 256] Haiti: Public Expenditure Management and Financial Accountability Review Table A.8.10 Combined shock with higher security expenditure, direct taxes, and elasticity of security expenditure, 2007-15 (Deviation from the Baseline scenario) Years 2007 2008 2009 2010 2041 2012 2013 2014 2015 Real GDP per capita at market prices (% change) 00 où 05 06 06 o7 o7 o7 06 Poverty rate-Ravallion's adjusted elasticity (Gini = 66.0) 0,0 0,0 0,1 0,2 04 -0,5 0,5 -0,8 -0,9 Poverty rate-Growih elasticity of -1.0 00 00 03 -06 10 +8 A7 20 23 Government Sector (% of GDF) Total resources (including grants) 0.0 EX] 82 83 84 6e 5,5 41 32 Total revenues 0,0 16 26 3,6 37 3.8 3,9 4,0 4,1 Direct taxes 00 11 21 30 30 30 30 30 30 indirect taxes 00 03 03 02 02 02 0.1 0,1 00 User fees 00 01 02 03 05 05 08 0 11 Foreign aid (grants) 0.0 65 56 46 48 31 16 01 -08 Total expenditure 60 at 82 83 84 6 55 44 32 Spending on goods and services (total) 00 28 27 28 28 25 21 17 18 Spending on maintenance 00 01 02 03 04 06 07 08 0 Wages and salaries 00 00 00 0.0 -0,1 01 04 24 -02 Security 0.0 3,0 30 30 30 25 20 15 15 Other 0,0 -0,5 0,5 -0,5 0,5 -0,5 0,5 0,5 -0,5 Investment 00 55 5,5 55 55 45 35 25 15 Interest payments 00 00 60 0.0 00 00 0.0 0.0 00 Overall fiscal balance including grants {cash basis) 0.0 00 00 0,0 00 00 00 0.0 00 Memorandum items Private investment (% of GP) 00 1,1 44 17 1,0 -01 o7 14 21 Public investment (% of total public expenditure) 0.0 121 at 102 10,0 85 68 49 16 Health (% of public investment) 0,0 5,0 5,0 5,0 5,0 5,0 5,0 5,0 5,0 Infrastructure (% of public investment) 00 00 00 0.0 00 00 00 0.0 00 Education (% of public investment) 0.0 0,0 00 00 00 co 00 0.0 00 Other (% of public investment) 00 -50 50 50 60 50 50 -50 -5,0 Aid (% of total revenue} 0,0 52,3 35,6 20,6 29,2 8,7 -26 -13,6 -20,7 Total Aid (% of public investment) 9.0 177 78 18 15 78 15,0 244 287 Total debt (% of GDP) 0,0 00 D -03 05 -07 28 “1,0 11 Educated labor (in % of population) 0000 0000 0003 -0007 0013 002 -0031 -0043 0,057 222 [page 257] Haiti: Public Expenditure Management and Financial Accountability Review Table A.8.11 Combined shock with lower collection cost, higher security spending, and direct tax incresing later, 2007-15 (Deviation from the Baseline scenario) Years 2007 2008 2009 2010 2011 2012 2013 2014 2015 Real GDP per capita at market prices (% change) 0,0 0,0 06 08 08 08 07 06 06 Poverty rate-Ravallion's adjusted elasticity (Gini = 66.0} 0,0 0,0 0,1 -0,3 -0,4 -0,6 -0,8 0,8 -1,0 Poverty rate-Growth elasticity of -1.0 0,0 0,0 0,3 -07 1,2 -16 -2,0 -23 -2,6 Government Sector {% of GDP) Total resources (including grants) 0,0 8,1 8,2 8,2 8,3 6,9 5,5 4,1 32 Total revenues 0,0 06 0,6 42 1,8 24 2.8 3,1 3,2 Direct taxes 0,0 0,1 0,1 0,6 41 1,6 2, 2,1 2,1 indirect taxes 0,0 0,3 0,3 0,2 0,2 0,2 0,1 0,1 0,1 User fees 0,0 0,1 0,2 0,3 0,5 0,6 0.8 0,9 10 Foreign aid (grants) 0,0 7,5 7,5 7,0 6,6 46 2.6 11 0,0 Total expenditure 0,0 8,1 8,2 8,2 8,3 6.9 5,5 41 3,2 Spending on goods and services (total) 0,0 26 27 2.8 2.8 24 2.0 16 17 Spending on maintenance 0,0 0,1 02 03 0.4 0.5 07 08 0,9 Wages and salaries 0,0 0,0 0,0 0,0 -0,1 -0,1 0,1 -0,2 -0,2 Security 0,0 3,0 3,0 3,0 3,0 2,5 2,0 1,5 1,5 Other 0,0 -0,5 0,5 -0,5 -0,5 -0,5 0,5 -0,5 -0,5 Investment 0,0 5,5 5,5 5,5 55 45 35 2,5 1,5 Interest payments 0,0 0,0 0,0 0,0 0.0 0,0 0,0 0,0 0,0 Overall fiscal balance including grants {cash basis) 0.0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Memorandum items Private investment (% of GDP) 0,0 0,2 0,3 0,5 0,7 0,8 0,9 14 1.9 Public investment (% of totai public expenditure) 0,0 12,1 11,1 102 10,0 8,6 69 49 1,6 Health (% of public Investment) 0,0 5,0 5,0 5,0 5,0 5,0 5,0 5,0 5,0 Infrastructure (% of public investment) 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Education (% of public investment) 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Other (% of public investment) 0,0 -5,0 -5,0 -5,0 -6,0 -5,6 60 -5,0 -5,0 Aid (% of total revenue) 0,0 71,6 71,0 59,9 49,7 27,7 7,6 -5,0 -13,4 Total Aid (% of public investment) 0,0 25,8 24,1 18,4 13,9 4,6 6,6 14,7 18,2 3 Total debt (% of GDP) 0,0 0,0 02 -0,4 -0,6 0,8 4,0 1,1 -1,3 Educated labor (in % of population) 0,000 0,000 0,000 0,600 0,001 0,002 0,004 0,006 0,009 223 [page 258] Haiti: Public Expenditure Management and Financial Accountability Review Table A.8.12 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) Years 2007 2008 2009 2010 2011 2012 2043 2014 2015 ER Real GDP per capita at market prices (% change) 00 00 06 08 08 0 os o7 06 Poverty rate-Ravallion's adjusted elasticity (Gini = 66.0) 0,0 0.0 0,1 0,3 -0,4 -0.6 08 -0,9 1,0 Poverty rate-Growth elasticity of -1.0 0 00 03 -07 12 16 20 -24 27 Government Sector (% of GDP) Total resources (including grants) 0,0 si 82 82 83 89 55 41 32 Total revenues 0,0 0,6 0,6 12 17 2,3 29 3,0 3,1 Direct taxes 0.0 01 01 06 11 1.6 24 21 21 indirect taxes 0.0 03 03 02 o2 0.1 01 00 00 User fees 0.0 oi 02 03 05 06 08 09 10 Foreign aid (grants) 0.0 75 75 74 86 46 26 1 01 Total expenditure 0,0 8,1 82 8,2 8,3 6,9 5,5 4,1 3,2 Spending on goods and services (total) 0.0 26 27 28 28 24 20 16 17 Spending on maintenance 0.0 o1 02 03 04 05 07 08 09 Wages and salaries 0.0 00 00 0.0 01 -01 -01 -02 -02 Security 0.0 30 30 3.0 30 2,6 20 15 15 Other 0,0 -0,5 0,5 -0,5 -0,5 -0,5 0,5 0,5 -0,5 Investment 0.0 55 55 55 55 45 35 25 15 Interest payments 0.0 00 00 0.0 00 00 00 00 0.0 Overal fiscal balance including grants (cash basis) 0,0 00 00 0.0 00 00 0.0 00 00 Memorandum items Private investment (% of GDP) 0,0 00 0,7 11 1,6 19 22 30 3,7 Public investment (% of total public expenditure) 0.0 124 HE] 102 10,0 36 69 50 17 Health (% of public investment) 0.0 50 50 50 50 80 50 50 50 Infrastructure (% of public investment) 0.0 00 00 0.0 0.0 00 0.0 0,0 00 Education {% of public investment) 0.0 00 00 0.0 00 00 00 00 00 Other (% of public investment) 0,0 -5,0 -5,0 -5,0 -5,0 -5,0 5,0 -5,0 -5,0 Aid (% of iotal revenue) 0,0 70,9 704 59,5 49,8 28,4 9,0 -3,1 -11,0 Total Aid (% of public investment) 0.0 270 258 20,0 15,9 67 45 4126 4183 Total debt (% of GDP) 0.0 00 -02 04 -06 -08 40 12 13 Educated labor (in % of population) 0.000 0.000 -0,003 -0009 0,016 -0026 -0.037 -0049 -0,063 224