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TRANSCRIPT
February 18, 2010
Document of the World Bank
Report No. 51191-RO
RomaniaPublic Expenditure and Institutional Review
(In Two Volumes) Volume II: Background Papers
Poverty Reduction and Economic Management UnitEurope and Central Asia Region
Report N
o. 51191-RO
Rom
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eview
Vol. II
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Report No. 51191-RO
Romania Public Expenditure and Institutional Review (In Two Volumes) Volume II: Background Papers February 18, 2010 Poverty Reduction and Economic Management Unit Europe and Central Asia Region
Document of the World Bank
ROMANIA
CURRENCY EQUIVALENTS (February 1, 2010)
Currency Unit = New Romanian Leu (RON)
US$ = 2.9509 RON
FISCAL YEAR January 1 – December 31
ABBREVIATION AND ACRONYMS
APDRP Paying Agency for Rural Development and Fishery
MAFRD Ministry of Agriculture, Forests and Rural Development
APIA Agricultural Paying and Intervention Agency
MERI Ministry of Education, Research and Innovation
CAP Common Agricultural Policy MOH Ministry of Health
CFR Romanian Railways Company MoPF Ministry of Public Finance
CNDP
CoA
Complementary National Direct Payments
Court of Accounts
MOT
MTEF
Ministry of Transport
Medium-Term Expenditure Framework
DHIF District Health Insurance Fund NHIF National Health Insurance Fund
DPHA District Public Health Authority NMS New Member States
DRG Diagnosis-Related Group NRDP National Rural Development Plan
EAFRD European Agricultural Fund for OBI Open Budget Index
EAGF
Rural Development
European Agricultural Guarantee
OECD Organization for Economic Co-operation and Development
EC
Fund
European Commission
PBB
PCF
Performance-Based Budgeting
Per Capita Financing
ESA European Standard of Accounts PEIR Public Expenditure and Institutional
EU European Union Review
EUE European Union Euro PIRLS Progress in International Reading
EUROSTAT Statistical Office of the European Literacy Study
GDP
Communities
Gross Domestic Product
PISA Program for International Student Assessment
GP General Practitioner PSC Public Services Contract
GTMP General Transport Master Plan RHS Romania Health Survey
HBS Household Budget Survey RNCMNR Romanian National Company of
HiT Health in Transition Report Motorways and National Roads
HRD Human Resources Development RON New Romanian Lei
IACS Integrated Administration and ROP Regional Operational Program
IEC
Control System
Information-Education
SAPS
SFP
Single Area Payment Scheme
Single Farm Payment Scheme
IFI
Communication
International Financial Institutions
SME
SOP
Small and Medium Enterprise
Sectoral Operational Program
IMF International Monetary Fund UAA Utilized Agricultural Area
IPSAS International Public Sector UNESCO United Nations Educational, Scientific
ITC
Accounting Standards
Information Technology and
USD
and Cultural Organization
United States Dollar
LPIS
Communication
Land Parcel Identification System
VAT
WHO
Value-Added Tax
World Health Organization
Vice President : Philippe H. Le Houerou, ECAVP Country Director : Peter Harrold, ECCU5
Sector Director : Luca Barbone, ECSPE Sector Manager : Bernard Funck, ECSP2
Team Leader : Catalin Pauna, ECSP2
CONTENTS
1. THE FISCAL FRAMEWORK............................................................................................ 1
A. THE CURRENT FISCAL CONTEXT AND CHALLENGES ......................................................... 1 B. PATTERNS OF REVENUE AND EXPENDITURE ...................................................................... 4 C. THE 2009-2011 FISCAL FRAMEWORK .......................................................................... 10 ANNEX ..................................................................................................................................... 12
Public Finance Management Aspects ................................................................................... 12 A. Budgeting ..................................................................................................................... 12 B. Internal Control and Internal Audit ............................................................................. 13 C. Accounting and Reporting ........................................................................................... 14 D. Treasury and Cash Management ................................................................................. 14 E. External Audit and Parliamentary Oversight .............................................................. 15
2. PUBLIC SECTOR PAY AND EMPLOYMENT ............................................................ 19
A. PUBLIC EMPLOYMENT’S IMPACT ON THE BUDGET .......................................................... 19 B. THE NEED FOR A MEDIUM TERM STRATEGY ON PAY ISSUES .......................................... 22 C. A ROADMAP FOR IMPROVING EFFECTIVENESS OF THE PUBLIC PAY................................ 24
3. PENSIONS .......................................................................................................................... 27
A. FISCAL SUSTAINABILITY .................................................................................................. 28 B. EQUITY CONCERNS ........................................................................................................... 33 C. IMPACT ON THE ECONOMY ............................................................................................... 34 D. THE REFORM AGENDA ..................................................................................................... 35
4. EDUCATION ...................................................................................................................... 39
A. INTRODUCTION ................................................................................................................. 39 B. KEY CHALLENGES FACING PRIMARY AND SECONDARY EDUCATION ............................. 40 C. CONSTRAINTS FACING PRIMARY AND SECONDARY EDUCATION .................................... 42 D. POLICY OPTIONS FOR IMPROVING THE QUALITY AND RELEVANCE OF PRIMARY AND
SECONDARY EDUCATION .......................................................................................................... 48 STATISTICAL ANNEX ........................................................................................................... 56
5. HEALTH ............................................................................................................................. 65
A. INTRODUCTION ................................................................................................................. 65 B. INSTITUTIONAL SETUP AND CHALLENGES IN HEALTH CARE PROVISION ........................ 66 C. PUBLIC SPENDING ON HEALTH SERVICES ........................................................................ 68 D. EQUITY ISSUES ................................................................................................................. 72 E. CURRENT STRATEGIC FOCUS OF THE MINISTRY OF HEALTH ........................................... 77 F. SUMMARY AND RECOMMENDATIONS .............................................................................. 78 G. NEXT STEPS ...................................................................................................................... 79
6. AGRICULTURE AND RURAL DEVELOPMENT ....................................................... 81
A. PRIORITIES IN ROMANIAN AGRICULTURE AND RURAL DEVELOPMENT .......................... 81 B. DIRECT INCOME SUPPORT UNDER CAP PILLAR 1 ............................................................ 86 C. RURAL DEVELOPMENT SUPPORT UNDER CAP PILLAR 2 ................................................. 95 D. STATE AID ...................................................................................................................... 105 E. CONCLUSIONS AND RECOMMENDATIONS ....................................................................... 109
TABLES Table 1. The Distribution of Revenue and Spending by Main Budgets (% of GDP) ....................................3 Table 2. Absorption of EU Funds (% of the 2007-10 allocation) ............................................................... 10 Table 3. Government Revenue, 2008 (% of GDP, ESA 95) ....................................................................... 16 Table 4. Government Expenditure by Function in Europe, 2007 (% of GDP) ........................................... 17 Table 5. Government Expenditure by Economic Classification, 2008 (% of GDP) ................................... 18 Table 6. Personnel Expenditure Increases in Main Categories of Personnel, 2005-07 .............................. 20 Table 7. Public Sector Employment by Main Categories of Personnel, 2005-08 ....................................... 21 Table 8. Annual Base Salary Increases in Main Categories of Personnel .................................................. 22 Table 9. Contribution Rates for Social Security Programs, 2008 (%) ........................................................ 37 Table 10. Gross Enrollment Ratios by Level of Education and Urban/Rural Location for 2007/2008 .................................................................................................................................................... 42 Table 11. Structure of primary and secondary school system in Romania (2008/09) ................................. 44 Table 12. Functional and Economic Distribution of State Budget Expenditure for Education .................. 48 Table 13. Comparative functional spending on health in selected EU members, 2006 .............................. 68 Table 14. Romania: Evolution of spending in health functional classification ........................................... 69 Table 15. MTEF projections, budgets and actual spending, 2006-2009 (Bn Ron) .................................... 72 Table 16. Self-assessed health, 2008 ........................................................................................................... 73 Table 17. Share of individuals who did not seek health care when in need for checkups or treatments (by quintiles ............................................................................................................................... 74 Table 18. Share of individuals who did not seek care when in need for checkups or treatments, by area .............................................................................................................................................................. 74 Table 19. Information about health Services .............................................................................................. 74 Table 20. Percentage of individuals who paid for health care among those who were ill/had an accident in the reference month or suffer from a chronic illness/have a handicap ...................................... 76 Table 21. Percentage of individuals who paid for hospitalization from those who were hospitalized in the reference month ............................................................................................................. 76 Table 22. 2008 Agriculture budget executed............................................................................................... 82 Table 23. Phasing-In of EAGF Direct Payments (SAPS) ........................................................................... 87 Table 24. Phasing-In of Direct Payments in Romania ................................................................................ 90 Table 25. CNDP Support Programming, 2007/08 [million EUR] .............................................................. 92 Table 26. EAFRD allocation for Romania, 2007-13 [million EUR] ........................................................... 95 Table 27. National Rural Development Program – Financial Plan by Axes ............................................... 97 Table 28. Breakdown by Rural Development Measure, 2007-13 [million EUR] ....................................... 99 Table 29. Overview – Agricultural State Aid in Romania [million RON] ................................................ 107 FIGURES Figure 1. Government Revenue vs. Expenditure, 2001-2008 (% of GDP) ..................................................1 Figure 2. Budget Program vs. Actual Execution (% of GDP) ......................................................................2 Figure 3. Structural Budget Balance (% of GDP) ........................................................................................3 Figure 4. Personnel Expenditure, as Share of Government Revenue (2008, %) ..........................................5 Figure 5. Patterns of Revenue, 1995 - 2008 (% of GDP) .............................................................................6 Figure 6. Patterns of Expenditure, 1995-2008 (% of GDP) .........................................................................7 Figure 7. Actual versus Planned Expenditure by Sector (% change) ...........................................................7 Figure 8. Actual versus Planned Expenditure by Economic Classification .................................................8 Figure 9. Budget Expenditure: November – December Spike .....................................................................9
Figure 11. Evolution of Total Personnel Expenditure as % of GDP, 2005-07 ........................................... 20 Figure 12. Public Pension Fund Deficit 2008-2020 ................................................................................... 28 Figure 13. Projected Old-Age and System Dependency Ratios 2008-2050 ............................................... 29 Figure 14. Support Ratio: Number of Contributors Relative to Number of Pensioners in Public Pension Schemes ......................................................................................................................................... 30 Figure 15. Coverage Ratio-Participation to the First Pillar ........................................................................ 31 Figure 16. Net Replacement Rates for Male Full-Career Workers in Romania, Europe and Central Asia, and the World ........................................................................................................................ 32 Figure 17. Social Security Contributions, 2008 .......................................................................................... 34 Figure 18. Fiscal Impact of Pension Reform 2010-2020 ............................................................................ 36 Figure 19. Number of graduates and number of graduates achieving minimum level of quality, as a share of 19 year olds ................................................................................................................................. 41 Figure 21. Number of physicians and number of hospital beds per 100,000 ............................................. 75 Figure 28. Structure of the EU CAP (simplified) ........................................................................................ 81 Figure 29. CAP financial envelopes, 2007-13 (EUR billion) ...................................................................... 82 Figure 30. Farm population (upper panel) and farm land (lower panel): distribution by physical size (%, 2005) .............................................................................................................................................. 84 Figure 31. SAPS Payment Levels in First Year of Membership [EUR/ha] ................................................ 88 Figure 32. CNDP Levels in 1st Year of EU Membership (simplified) ......................................................... 91 Figure 33. Recommended Future CNDP ..................................................................................................... 93 Figure 35. Counterpart financing mechanisms under CAP Pillar 2 in Romania – simplified ..................... 95 Figure 34. General Structure of the European Union’s CAP Pillar 2 .......................................................... 96 Figure 35. Rural Development Allocations in New EU Member States; over 2007-13; Breakdown by Axes [%, EAFRD contribution] .......................................................................................... 98 BOXES Box 1: Introduction of per-capita financing can speed up the rationalization of the school system ........... 52 Box 2: Contribution system for non-wage earners ...................................................................................... 77 Box 4: From simple to multifaceted: CNDP schemes in Bulgaria, Slovakia and Hungary ........................ 91 Box 5: Addressing agricultural income disparities via Direct Payments – a good choice? ........................ 94 Box 6: How selective are new EU member states? ................................................................................... 101 Box 7: Types of State Aid acceptable to the European Commission ........................................................ 106
ACKNOWLEDGEMENTS This report is based on background papers and contributions prepared by a World Bank team led by Cătălin Păuna and composed of Bernard Myers, Lars Sondergaard, Mariana Moarcă�, Mohammed Dalil Essakali, Gerald Paul Ollivier, Agnes Couffinhal, Richard Florescu, Ufuk Guven, Holger Kray, Nadia Badea, Eugen Scânteie (consultant), Ana Otilia Nu�u (consultant), Lucian Luca (consultant). The team has benefited from comments and guidance from Bernard Funck, Benoît Blarel, Ted Ahlers, Ron Hood, Swati Ghosh, Penny Williams, Dina Umali-Deininger, Alberto Rodriguez, Ahmadou Moustapha Ndiaye, Mamta Murthi, Abdo Yazbeck, Henry Kerali, James Brumby, Charles Griffin, Fabienne Ilzkovitz (EC), Stefaan Pauwels (EC), Lorena Ioni�ă (EC), Carlos Fernandez (IMF). The team is grateful to Bernard Funck, Penny Williams, and Benoît Blarel for their support and advice. The team wishes to thank the Romanian Government for the cooperation of its senior officials and staff in the Ministry of Public Finance, the Ministry of Education, Research, Youth and Sports, the Ministry of Agriculture and Rural Development, the Ministry of Health, the Ministry of Labor, Family and Social Protection, the Ministry of Transport and Infrastructure, the General Secretariat of the Government, the National Health Insurance House, and the National House of Pensions. We are particularly grateful for the support provided by Angela Caraba� and Georgia Babici of the Ministry of Public Finance. The team has received generous assistance from Raluca Banioti and Cecilia Nieva.
1
1. THE FISCAL FRAMEWORK
A. The Current Fiscal Context and Challenges 1.1 Public spending increased substantially in recent years, from 31 percent of GDP in 2004 to 37 percent of GDP in 2008. Around 80 percent of the increase was, however, in current spending, up by 4.8 percent of GDP, and this was reflected mainly in wages and pensions hikes. The public sector wage bill almost doubled, as percentage of GDP, during this period. Thus, public sector wages have become, on average, the second highest in the country after those in the financial sector. Concomitantly, a significant hike occurred in public employment, which expanded by over 15 percent between 2005 and 2008 (see Volume 1). Two consecutive increases in public pensions brought the pension fund from surplus into deficit, undermining its long term financial sustainability (see the Pensions chapter). The situation was exacerbated by further expenditure hikes in the run up to the elections in the final months of 2008.
Source: MoPF.
1.2 The increase in public spending was not matched by improved revenue collection. During the period 2004-2008, budget revenue collection modestly increased from 29.7 percent to 32 percent of GDP, in spite of the robust economic growth, averaging 5-6 percent per year. Tax revenue, in particular, actually marginally declined, as percentage of GDP, in 2008, relative to 2007, to 31 percent. The mild tax relaxation caused by the introduction of the flat 16 percent income and profit tax in January 2005
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Figure 1. Government Revenue vs. Expenditure, 2001-2008 (% of GDP)
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Revenue Expenditure Deficit
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and the gradual reduction of the social contributions did not bring in considerable extra resources, a sign that tax compliance remains a prime challenge. Both revenues and expenditures were substantially overestimated (Figure 2) in 2007 and 2008
Source: MoPF.
1.3 As a result of the excessive public spending, Romania entered the global crisis with the largest structural budget deficit in the EU, of 7.9 percent of GDP in 20081 (up from 4.4 percent in 2007). The effect of the highly pro-cyclical fiscal policy was a widening of the budget deficit beyond sustainable levels, to 5.5 percent2 of GDP in 2008, in the context of an over 7 percent economic growth. Coupled with a high private consumption and investment, which fuelled imports of goods, and a low savings ratio, this led to a considerable widening of the current account deficit to over 12 percent of GDP. Faced with a deteriorating macroeconomic situation, a rapidly slowing economy and a potentially large fiscal and financial gap, Romania had little choice but to turn to the IFIs for support. The IMF, the EC, the World Bank and other IFIs agreed to support the reforms committed to by the Romanian government with a package totaling euro 19.95 bn over the period 2009-2011.
1 According to the EC Spring Forecast, 2009. 2 ESA-95.
Figure 2. Budget Program vs. Actual Execution (% of GDP)
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Program Achieved
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Figure 3. Structural Budget Balance (% of GDP)
Source: EC Spring Forecast 2009.
1.4 The deterioration of the fiscal stance came primarily from the worsening of the state budget balance. Table 1 presents the distribution of revenue and expenditure by main component of the general consolidated budget. The figures suggest that the worsening of the overall fiscal balance in the last two years was driven primarily by the state budget, and not the local governments, as is sometimes thought. In 2008, for example, over 80 percent of the 4.8 percent budget deficit (5.5% per ESA 95) was generated by the state budget, while the local budgets contributed with around 15 percent. The social assistance budget exhibited a surplus in 2007 and a balanced budget in 2008, but the two consecutive hikes in pensions already pushed it into a considerable deficit (see the Pensions chapter).
Table 1. The Distribution of Revenue and Spending by Main Budgets (% of GDP)
State Budget Local Budgets Social Assistance
Budget
Budget of Institutions
Totally/Partially Financed from Own Resources
2007 2008 2007 2008 2007 2008 2007 2008
Revenue 11.87 11.89 9.44 8.90 5.97 6.56 4.81 4.50
Expenditure 15.60 15.76 9.77 9.63 5.60 6.56 4.45 4.17
Deficit -3.72 -3.87 -0.33 -0.72 0.37 -0.005 0.35 0.32Source: MoPF
1.5 Faced with an unsustainable situation, the government begun to take steps to reverse the considerable fiscal imbalances. Left unchanged, the fiscal policies of 2008
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would have produced a deficit of over 10 percent of GDP in 2009, but measures approved in the first 2009 budget rectification produced a correction of about 3 percent of GDP. These budget measures included an increase of 3.3 percent in social contributions; adjusted property taxes due to an increase in appraisals; cuts in the public wage bill through reductions of bonuses and other benefits, and the elimination of 137,000 vacancies, previously used to grant higher salaries to existing staff; and reductions in goods and services spending, as well as in subsidies.
1.6 Following the larger-than-expected economic contraction in 2009, further fiscal tightening measures were required to attain a consolidated budget deficit target of 7.3 percent of GDP. Thus, the Government introduced a 8-days unpaid leave for public servants in November-December and reduced the number of public agencies.
1.7 The government has committed to gradually bring its deficit down to below 3 percent of GDP by 2012, in line with the Maastricht deficit criteria. Substantial uncertainty nevertheless persists. This is associated primarily with the magnitude and longevity of the output contraction, which affects revenue collection performance. Giving the strong pressures and vulnerabilities coming from the rigid patterns of current spending, mainly on pensions and wages, substantial additional medium term fiscal adjustment is needed to restore the viability of public finances.
1.8 For the next few years, the government will face the difficult task of reconciling the fiscal needs with ensuring the long term sustainability of public finances. In response to the crisis, the government has taken steps to support the rapidly falling aggregate demand. The support comes in different forms, including enhanced safety nets for the poor, support for the industrial sector as guarantees, grants and credits to enterprises, the recapitalization of state-controlled banks or guarantees for first time house buyers. The pension fund will continue to run important deficits, to be covered from subsidies from the state budget, while public debt, low at this stage, increases fast. Covering these costs could strip away resources from areas where these are much needed, such as health and education (see the Health and Education chapters). With this in mind, gradually bringing the budget deficit to 3 percent of GDP by 2012 will not be an easy task. In its Autumn 2009 Forecast, the EC projected a further widening of the consolidated budget deficit to 6.8 percent3 of GDP in 2010, beyond the 5.9 percent target agreed with the IFIs.
B. Patterns of Revenue and Expenditure 1.9 Overall public spending remains considerably below the EU average in spite of the recent important increases… Table 8 in the annex depicts expenditure by function in the EU at the level of the consolidated general government budget4. Several features stand out. First, overall public spending in Romania was, in 2007, almost 10 percent below the EU average, with only five European countries exhibiting a lower public expenditure, as percentage of GDP, than Romania. Public spending in the social
3 ESA 95. 4 ESA 95.
5
sectors appears to be particularly low relative to the EU averages. Public spending on education, at 4.2 percent of GDP, is the lowest in all but four countries in the sample. Spending on health, at 4.3 percent of GDP, is around two percentage points under the EU average, while spending on social protection and on general public services is roughly only half of the EU mean. Similarly, spending on environment is half of the EU average. On the other side, public expenditure in economic affairs is, at 6.8 percent of GDP, almost double than in the EU. Overall, the figures tend to suggest a low focus on public investment in human development.
1.10 Government revenues are even comparatively lower, if benchmarked against the EU average. As table 7 in the annex suggests, revenue collection was 33.1 percent of GDP in 2008, relative to an EU-27 average of 44.5 percent of GDP. Romania collects less revenue from all taxes compared to the mean of the EU. Taxes on income and wealth bring particularly modest revenues, 6.9 percent of GDP, compared with an EU average of 13.1 percent. Social contributions represent 10.3 percent of GDP, against an EU mean of 13.7 percent. Revenues from taxes on production and imports and on property are more in line with the EU figures.
1.11 Following the substantial salary hikes of the recent years, the public wage bill has become one of the largest in Europe, measured as a share of government revenue. Table 9 in the annex compares the distribution of government spending by economic classification. The table shows that compensation of public employees has reached the EU average in 2008, at around 10.2 percent of GDP. While this is not among the highest by EU standards, measured as percentage of GDP, it is actually high measured as a share of government revenue, given its low share in GDP. As the chart below suggests, only five other European countries (all small) have a higher personnel expenditure share in government revenue. Affected by the crisis, some of these countries (Latvia and Lithuania) have already taken bold measures aimed at adjusting wages and staffing in public administration downwards.
Figure 4. Personnel Expenditure, as Share of Government Revenue (2008, %)
1.12 The composition of revenue did exhibit significant variation in recent years... VAT collection appeared to be on a steady upward trend (barring the crisis), reflecting
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Ger
man
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Source: EUROSTAT
*2007 data for EU-15
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the strong private consumption growth over the last eight years and, probably, modest improvements in compliance. Collection from wages and income tax steadily picked up after 2005, driven by the rapid wage increases, and, possibly, by the introduction of the flat income and profit tax in January 2005. No major visible effect of the flat tax appears to be on profit tax collection, which appears rather stationary. Collection from property taxes was flat during recent years, in spite of the boom, now gone, in real estate prices.
Source: MoPF.
1.13 But the relaxation of the fiscal policy after 2005 is visible in the changes of the composition of expenditure. In 2008, all components of current spending shot up, while capital spending declined. Spending on personnel expanded by over 70 percent in the last five years, reaching around 8.4 percent of GDP5 in 2008, in line with the EU average. The increase in public pensions pushed up transfers by three percentage points of GDP between 2006 and 2008. The gradual but significant downward adjustment of interest payments by over four percentage points of GDP between 1999 and 2008 and a small decline in spending on goods and services, allowed the government to gradually raise capital spending after 2005.
5 Later estimates put the figure at slightly over 9% of GDP.
Profit tax
Wage and income tax
Property tax
V.A.T.
Excise duties
Social insurance contributions
Non-fiscal revenue
0.0
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Figure 5. Patterns of Revenue, 1995 - 2008 (% of GDP)
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Figure 6. Patterns of Expenditure, 1995-2008 (% of GDP)
Source: MoPF.
1.14 There are systematic and large gaps between planned and actual expenditure at the level of the individual sectors. The figure below compares the differences between actual expenditure and the initial budget allocations, as approved annually through the budget law, in the main spending sectors in the last three years. The chart suggests that the resource allocations to some of the most important sectors were constantly overstated, although some of these appear to suffer from endemic underfunding. The executed budget for education was in 2008, for example, around 25 percent lower than planned, while health received in practice approximately 15 percent less. Similarly, the actual budget for agriculture was 50 percent lower, while for defense the reduction relative to the plan was around 23 percent.
Figure 7. Actual versus Planned Expenditure by Sector (% change)
Source: MoPF.
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1.15 The erratic patterns of expenditure and large departures in execution from initial planning are also visible in spending by economic nature. The chart below compares the actual spending relative to the initial budget plans by main economic category. It shows, in particular, a systematic and large understating of the public wage bill of between 28 percent in 2007 and over 45 percent in 2006. In fact, wage increases were, in general, not budgeted through the annual budget law, and gap filling was done through reallocations from other categories, including from investment, through budget rectifications during the year. Goods and services and interest payments appear to have been consistently overestimated, while capital spending showed an erratic movement, underestimated by around 30 percent in 2006, but overestimated by a similar figure in 2008.
Figure 8. Actual versus Planned Expenditure by Economic Classification (% change)
Source: MoPF.
1.16 The substantial changes in resource allocations both within and between budget years make it difficult for spending departments to prepare strategic plans and formulate and implement coherent policies. The disconnect between policy and resources led to situations where appropriations were unpredictably amputated to respond, for example, to a deterioration in the macroeconomic framework, or to accommodate unforeseen alternative claims on budget resources. Frequent budget rectifications, up to four or five each year, reallocating important resources within the year also affected the quality of the budget execution process by undermining the predictability and transparency of funds appropriation. There are no standardized, harmonized and transparent guidelines for budget rectifications, which are instead addressed in a discretionary manner, on a case by case basis. Multi-year expenditure targets are only indicative and budget execution differs substantially from previous year’s programming, especially for capital spending.
1.17 Important reallocations occur in the last months of the budget calendar. This is known as the “November-December” effect, when invoices come in and public spending accelerates and the traditional budget surplus of the first ten months of the year
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turns into a deficit. This follows a budget rectification, and resources are often redirected from capital to current spending. Impressive amounts of “capital” spending on cars, furniture and other durables take place during this period, including at local level. The swing in the fiscal balance in November -December amounts sometimes to over two percent of GDP and causes important liquidity injections in the economy, which the central bank struggles to smooth out.
Figure 9. Budget Expenditure: November – December Spike
Source: Romanian Academic Society
1.18 Administrative weaknesses plague the absorption of EU funds, although the situation appears to be slowly improving. As of end-January 2010 (Table 2), only around 7.2 percent of the euro 8.7 bn allocation from the 2007-10 programming exercise has been drawn from the EU structural and cohesion funds. If pre-financing from the EU is excluded, reimbursements amount to around 2 percent of the total allocation. The Competitiveness OP is the only program where more significant amounts (8 %) of the funds have already been drawn. On the positive side, as of end-January, about two thirds of the funds have been contracted (or a decision has been taken). The Transport OP stands out, however, as the only program where projects amounting to less than 20 percent of the funds have been approved. The slow progress recorded so far in the absorption of the EU funds points to the weak administrative capacity of the potential beneficiaries. At the same time, the simplification of the procedures for accessing the EU resources, both by the government and the EC under the European Economic Restructuring Plan, should have a positive impact on speeding up absorption. There is already a marked improvement in the number of approved projects, relative to January 2009, for example.
Budget Expenditure: November- December Spike
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Jul-0
7
Sep-
07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep-
08
Nov
-08
Jan-
09
Mar
-09
Dec
199
1 le
i mill
ion
10
Table 2. Absorption of EU Funds (% of the 2007-10 allocation)
Operational Program
Allocation (mn Euro)
Approved projects
(%)
Contracted/Decisions (% of )
Paid (%)
Reimbursed (% )
Regional 1,699 70.21 60.3 12.28 1.72Environment 1,972 45.79 45.25 9.25 0.51Transport 2,037 18.71 18.71 1.58 1.58Competitiveness 1,216 48.16 37.97 10.13 7.95Human Resources 1,534 174.49 37.39 4.72 0.63Administrative Capacity 131 32.4 27.09 1.13 0.19Technical Assistance 81 31.23 27.99 0.88 0.88TOTAL 8,670 66.98 39.12 7.16 2.06
Source: MoPF.
C. The 2009-2011 Fiscal Framework
1.19 The only viable option for the government over the next few years is to follow prudent fiscal policies aimed at correcting the present imbalances and keeping under control the deficit, supported by a medium term program of reform. This can be achieved through a combination of higher revenues and downward expenditure adjustments, which would allow a gradual correction of the deficit towards 3 percent of GDP in the medium run. In the short run, higher revenues can mostly come from higher taxes, as compliance cannot be improved without a tax administration reform. This is, however, not guaranteed as the crisis is likely to push companies, already paying high labor taxes, into the informal sector. At the same time, there clear scope for reducing current spending, which spiraled upwards in recent years.
Figure 10. Revenue and Expenditure Projections, 2009-2011 (% of GDP)
Sources: IMF, MoPF
0
10
20
30
40
50
2009 2010 2011
Revenue and Expenditure Projections, 2009-2011 (% of GDP)
Revenue Expenditure
11
1.20 The government is committed to reducing the budget deficit to 5.9 percent of GDP in 2010 and 4.3 percent in 2011. These targets are achievable, but require political determination, as they cannot be met without frontally addressing the two important sources of imbalances: the oversized public sector wage bill and the financial stability of the pension fund. In the context of the ongoing multilateral support program, the government aims to bring public spending down to around 37.1 percent of GDP in 2010 and 34.9 percent in 2011, while revenues remain virtually flat (Figure 10).
1.21 Bridging the gap between current spending and revenue can be achieved by undertaking policy corrections on both sides of the government’s balance-sheet. Volume 1 proposes a menu of options for raising additional revenue and pursuing expenditure cuts.
1.22 The report makes the case that, in the current crisis environment and consistent with experience worldwide, the gap between expenditure and revenue should be done primarily by reducing the level of current spending (see Volume 1).
12
ANNEX
Public Finance Management Aspects
A. Budgeting
1.23 As a result of the weak linkages between planning and budgeting, the quality of service delivery has not matched the increased public spending. Romania has largely failed so far to take advantage of good economic times and EU membership in order to translate increased spending into visible outcomes. Important resources continue to go to unproductive ends, inhibiting sustainable growth and increasing vulnerabilities. Examples of discrepancies between spending and results are presented in the individual chapters. Large increases in public spending in education or health, for example, have not fostered major improvements in outcomes. Similarly, unit costs in roads building and maintenance are substantially higher than in most EU countries, yet the quality of infrastructure is still below par, constraining growth.
1.24 The government is cognizant of the limited linkages between performance and resources and is taking steps towards establishing an MTEF. The MTEF would enhance the strategic content of the budgeting process, make budgets more policy oriented, enhance funding reliability and effectiveness, and improve the integrity of budgeting figures, such that the amounts budgeted reflect national priorities and are actually implemented. A first step in this direction is the commitment of the government to pass a fiscal responsibility law. The key features of the law will include a framework for improved multi-year budgeting; limits on the number of budget rectifications within year; fiscal rules on expenditures, public debt, and the primary deficit; and the establishment of an independent fiscal council. While this is a noteworthy development, it only represents the beginning of a long term reform process for improving linkages between planning, policy and resources (see the individual chapters for the proposed reform agendas in specific sectors).
1.25 Strengthening the capacity of the line ministries to design, implement and evaluate policy proposals should be part of the MTEF implementation agenda. At this stage line ministries appear severely constrained in terms of capacity to develop implementable plans and policies. The government should consider launching a review of the functions, organizational structures and available skills of public agencies, with the view to preparing a program to eliminate duplications, simplify organization and work flows and enhance the professionalism of the personnel. Stronger monitoring and evaluation (M&E) arrangements are necessary to help the government to assess the extent to which resources allocated achieve the intended outcomes and feed-back into the policy framework for corrections and reallocations.
1.26 There are risks associated with the decision of the government to speed up decentralization of public services. The government embarked upon a rapid process of decentralization which would result in important responsibilities and resources transferred to the sub-national governments. The changes pursued seek to improve the
13
efficiency of service delivery at local level and enhance sub-national investments quality. This is a noteworthy decision, as efforts to decentralize have been so far partial and have not resolved the key issues affecting sub-national public administration. A strategy for health decentralization was drafted and presented to the government and the approach to decentralization of education is also in an advanced design phase. However, a key challenge is for the government to advance the process of decentralization at a pace which commensurates with the establishment of an appropriate accountability framework for the local governments to warrant the transparent and effective use of the public resources at sub-national level.
1.27 This said, Romania has made some progress in government budget transparency as measured by the 2008 Open Budget Index assessment. Romania has been promoted from the OBI category “provide some information” to the next category, “provide substantial information”. According to OBI, the remaining budget issues are the absence of pre-budget statements, of a citizens’ budget and of a mid-year review; whereas only partial information is available for areas such as Executive’s budget proposal, in-year reports and audit reports.
1.28 However, several important budgeting challenges remain. While the introduction of program budgeting has enhanced budget management, budgets lack realism. As noted above, a Medium Term Expenditure Framework is not yet fully developed. There are still several budget adjustments done during the year, as needed, with no formal mid-year review. While usually timely budget approvals have been recorded over the past few years, the recent delays in the approval of the 2010 budget, due to the post-elections environment, show that this remains an area for improvement. In addition, timely reports on changes in budget allocations remain hard to come by.
B. Internal Control and Internal Audit 1.29 While internal control and internal audit have recorded substantial improvements, there are several points on the unfinished reform agenda. An extensive decentralization of the ex-ante control functions has been rolled out over the recent years to most line ministries. However, this has not yet happened for several line ministries, which include some major budget spenders, which account for about half of the total budget funds. Among these line ministries are the Ministry of Agriculture and Rural Development, Ministry of Environment and Sustainable Development, Ministry of Public Health, Ministry of Transport and Infrastructure, Ministry of Justice, and others. For these ministries, the delegated MOPF ex-ante controller still has to review and to provide the ex-ante visa for all budget commitments, and for all budget payments, that are above the predefined limits. This mechanism work in principle, but it is sub-optimal to have such a differentiated approach, as the line ministries for which the ex-ante control functions have not been decentralized do not have an incentive to further develop their own structures to ensure a timely transition towards full decentralization. MOPF has still to agree with the concerned line ministries the detailed agenda for the remaining actions to achieve full decentralization of ex-ante functions.
14
1.30 While overall the internal audit function has increased and most of the internal audit procedures have been developed, professional capacity, development and training requirements to apply those remain problematic. Several line ministries, including some main budget spenders, have low internal audit capacity, including severe shortages of internal audit staff for some line ministries. Also, despite the use of internal audit planning tools, a large part of the assignments is done on an ad-hoc basis. In some cases, the ad-hoc assignments represent more than half of the total internal audit work, at the expense of other assignments included in the initial annual work program. MOPF closely monitors the remaining changes to be pursued by the concerned line ministries. It is unclear, however, when these areas will be addressed, giving the current context of reduced public personnel expenditures and diminished headcount.
C. Accounting and Reporting 1.31 Progress has been made in accounting and reporting, but challenges remain. While accruals accounting has been rolled out, the new chart of accounts introduced in 2006 and a major assets revaluation exercise carried out, reporting is still done both on accruals and cash accounting methods. Good progress has been recorded towards gradually introducing IPSAS. However, the budgets are developed using the cash basis only, with additional information on commitments. While such additional information on commitments is useful, complex projects and contracts extending over several years are affected by the limited multi-year budgeting capability.
1.32 In addition, there is still significant reliance on manual accounting and bookkeeping processes. This aspect, coupled with sometimes limited accounting staff capacity increases the risk of errors. Moreover, a substantial unfinished agenda is left for the local public finances area. At the lowest local level, the communal accounts are now kept using the double entry accounting concept, as opposed to single entry in the past. However, the accounting and reporting capacity is weak. The systems used at the local level are predominantly manual and, despite the standardized charts of accounts and reporting formats, there is no uniformity in systems.
D. Treasury and Cash Management 1.33 The treasury and cash management functions have improved, but there is still not a fully integrated financial management information system in place. The existing treasury system has further developed, with significant improvements in the payments processing, but there are still no direct links with the line ministries. A web based integrated system, with centralized databases and servers, is being envisaged, with the technical specifications being defined. This will address several current issues, including the ability of the treasury to ensure the contracts monitoring, optimized prognosis of cash needs, foreign currency payments, letters of credit and online banking functions.
15
E. External Audit and Parliamentary Oversight
1.34 Some progress has been achieved on external audit. The Court of Accounts (CoA) has developed and updated its procedures manuals on compliance, financial and performance audits. The CoA has been accredited as the Audit Authority for the EU funds. Still, the main CoA activities are to a great extent focused on the budget holder’s compliance for individual transactions. The actual use of performance audits is still limited and financial audits are not used to provide an audit opinion on the financial statements, but rather for compliance purposes.
1.35 The external audit Parliamentary oversight committees appear to have a limited use of the CoA reports and thus the subsequent impact of the CoA reports is rather limited.
1.36 The public financial management reform efforts will continue in the immediate future, and it is expected that the planned changes of the Law of Public Finance and the Law of Local Public Finance, as well as other legislative changes, would further enhance the Public Financial Management System.
16
Table 3. Government Revenue, 2008 (% of GDP, ESA 95)
Country Go
ver
nm
ent
rev
enu
e
So
cia
l co
ntr
ibu
tio
ns
Ca
pit
al
tax
es
Cu
rren
t ta
xes
on
in
com
e, w
ealt
h,
etc.
Pro
per
ty i
nco
me
Ta
xes
on
pro
du
ctio
n
an
d i
mp
ort
s
Austria 48.2 16 0.1 14 1.2 14.1
Belgium 48.6 16.2 0.7 16.5 0.7 12.5
Bulgaria 39 8.1 0.5 6.5 1.4 18
Cyprus 44.9 8.3 0 13.1 1.3 18.7
Czech Republic 40.9 16.2 0 8.7 0.8 11.1
Germany 43.8 16.4 0.2 11.3 0.7 12.5
Denmark 55.4 1.8 0.3 29.6 2 17.4
Estonia 37.9 12.1 - 8.1 1.7 12.3
Spain 36.6 13 0.4 10.7 1 9.8
Finland 52.5 12.1 0.3 17.4 4.5 12.8
France 49.3 17.9 0.4 11.4 0.9 14.8
Greece 39.9 14 0.3 7.7 0.9 12.3
Hungary 46.5 13.9 0.1 10.6 1.2 15.7
Ireland 33.8 6.7 0.2 11.1 1.3 11.9
Italy 46 13.7 0 15.4 0.6 13.7
Lithuania 34 9.3 0 9.3 0.6 11.5
Latvia 35.5 8.8 0 9.7 1.1 10.8
Malta 40.6 7.6 0.3 13.1 1.3 14.7
Netherlands 46.4 15.2 0.3 11.6 3.4 12.2
Norway 58.9 8.9 0.1 22 13.9 11.3
Poland 39.2 11.4 0 8.6 1.4 14.2
Portugal 43.2 13 0 9.9 0.9 14.6
Romania 33.1 10.3 0 6.9 0.9 12.3
Sweden 55.7 11.9 0 17.5 2.6 18.2
Slovenia 42.7 14.3 0 9.3 0.7 14
Slovakia 32.7 12.1 0 6.4 1.1 10.7
United Kingdom 42.3 8.5 1.2 16.6 0.7 11.9
EU - 15* 45.3 13.6 0.3 13.8 1 13.5
EU - 27 44.5 13.7 0.4 13.1 1.1 13 Source: EUROSTAT * 2007 data for EU-15
17
Table 4. Government Expenditure by Function in Europe, 2007 (% of GDP)
Country To
tal
Gen
era
l p
ub
lic
serv
ices
Def
ense
Pu
bli
c o
rder
an
d s
afe
ty
Eco
no
mic
aff
air
s
En
vir
on
men
t p
rote
ctio
n
Ho
usi
ng
an
d c
om
mu
nit
y a
men
itie
s
Hea
lth
Rec
rea
tio
n,
cult
ure
an
d r
elig
ion
Ed
uca
tio
n
So
cia
l P
rote
ctio
n
Austria 48.4 6.9 0.9 1.4 4.6 0.5 0.6 7.5 1 5.2 19.9Belgium 48.4 8.5 1.0 1.6 5.1 0.6 0.4 7.0 1.2 5.8 17.1 Bulgaria 41.5 8.2 1.6 3.1 5 1.4 1.4 3.1 0.8 3.9 13.1Cyprus 42.9 10.2 1.8 2.1 4.3 0.3 2.5 2.9 1.3 7.4 9.9Czech Republic 42.6 4.4 1.2 2.1 6.9 1 1.1 7.1 1.3 4.7 12.9Germany 44.2 5.5 1 1.6 3.5 0.6 0.8 6.3 0.7 3.9 20.4Denmark 51 6 1.6 1 3.4 0.6 0.6 7.3 1.6 7.4 21.7Estonia 35.5 3.3 1.3 2.3 4.5 0.9 0.7 4.5 2.1 6.2 9.8 Spain 38.8 4.5 1.0 1.9 4.9 0.9 0.9 5.7 1.6 4.4 13Finland 47.3 6.2 1.4 1.2 4.4 0.3 0.4 6.6 1.1 5.8 19.9France 52.4 7 1.8 1.3 2.8 0.9 1.9 7.2 1.5 5.9 22.2Greece 43.7 8 2.3 1.2 4.4 0.5 0.4 4.9 0.4 3 18.6Hungary 49.8 9.4 1.3 2 6.6 0.7 1 4.9 1.5 5.3 17.3Ireland 35.4 3.7 0.5 1.5 4.8 0.7 2 7 0.7 4.5 10Italy 47.9 8.6 1.3 1.9 4 0.8 0.7 6.8 0.8 4.7 18.2Lithuania 35.2 4 1.9 1.7 4.4 0.9 0.3 4.6 1 5.2 11.1Latvia 35.5 3.8 1.5 2.7 4.9 0.6 1.3 4.6 1.9 5.8 8.4Malta 42 p 6.3 0.7 1.5 5.9 1.5 0.7 5.8 0.6 5.4 13.7 Netherlands 45.3 7.3 1.4 1.8 4.7 0.8 0.9 5.7 1.3 5.1 16.3Norway 40.9 4.2 1.6 0.9 3.7 0.6 0.6 7.1 1.1 5.4 15.7Poland 42 5.5 1.4 1.8 4.5 0.6 1.1 4.6 1.1 5.7 15.7Portugal 45.8 7.1 1.1 1.6 3.8 0.5 0.5 6.8 1.1 5.8 17.5
Romania 36.6 3.6 2.5 2.4 6.8 0.4 1.5 4.3 1 4.2 9.9Sweden 52.5 7.5 1.6 1.3 4.7 0.4 0.7 6.8 1.1 6.9 21.6Slovenia 42.4 6.2 1.3 1.6 4.0 0.4 0.5 5.9 1.1 5.8 15.5 Slovakia 34.6 3.7 1.5 2 4.3 0.6 0.8 6.5 0.7 4 10.6United Kingdom 44.4 4.4 2.4 2.5 2.9 1 1.1 7.5 1.1 6.2 15.3EU - 15 46.1 6.2 1.5 1.7 3.7 0.8 1 6.7 1.1 5.1 18.3EU - 27 45.8 6.1 1.5 1.8 3.8 0.8 1 6.6 1.1 5.1 18
Source: Eurostat.
18
Table 5. Government Expenditure by Economic Classification, 2008 (% of GDP)
Country To
tal
Go
ver
nm
ent
Ex
pen
dit
ure
Co
mp
ensa
tio
n o
f em
plo
yee
s
Su
bsi
die
s,
Gro
ss f
ixed
ca
pit
al
form
ati
on
Inte
rest
So
cia
l b
enef
its
oth
er
tha
n s
oci
al
tra
nsf
ers
in k
ind
So
cia
l tr
an
sfer
s in
k
ind
Inte
rmed
iate
co
nsu
mp
tio
n
Austria 48.7 9.1 3.5 1 2.6 18.1 5.5 4.5Belgium 49.9 12 2.1 1.6 3.8 15.9 7.4 3.7Bulgaria 37.4 9 0.7 5.6 0.8 10.5 1.6 7.5Cyprus 44 14.3 0.4 3 2.9 12.5 0.1 5.3Czech Republic 42.4 7.6 1.7 4.8 1.1 12.7 5.4 6.1Germany 43.9 6.9 1.1 1.5 2.8 16.9 7.5 4.3Denmark 51.7 17.1 2.2 1.8 1.4 14.9 1.5 9.1Estonia 40.9 11.5 1 5.6 0.2 10.8 1.5 7.2Spain 40.5 10.7 1.1 3.8 1.6 12.3 2.6 5.4Finland 48.4 13.2 1.3 2.5 1.5 15.2 2.3 6.4France 52.7 12.7 1.4 3.2 2.8 17.6 5.7 6.4Greece 44.9 11.2 0.1 2.9 4.4 18.4 0 9.4Hungary 49.8 11.6 1.1 2.8 4.2 15.9 2.8 5Ireland 41 10.3 0.5 5.4 1.1 11.5 2 4.6Italy 48.7 10.9 0.9 2.2 5.1 17.7 2.7 7Lithuania 37.2 10.8 0.7 4.9 0.6 11 1.7 5.8Latvia 39.5 12 0.7 4.9 0.9 8.3 0.5 5.4Malta 45.3 13.9 2.2 2.7 3.3 13.5 0.5 5.7Netherlands 45.5 9.2 1.3 3.3 2.2 10.3 9.6 7.2Norway 40.1 12 1.8 3.1 1.4 11.7 1.9 6.8Poland 43.1 9.8 0.7 4.6 2.2 14.1 2.2 7.2Portugal 45.9 12.9 1.2 2.1 3 15.6 4.3 6Romania 38.5 10.2 1.4 5.4 0.8 10.6 0.6 6.2Sweden 53.1 14.9 1.4 3.3 1.7 15.1 3.2 4.4Slovenia 43.6 10.8 1.6 4.2 1.2 14.7 1.9 6.5Slovakia 34.9 6.6 1.9 1.8 1.2 11.3 4.3 9.7United Kingdom 47.7 11.1 0.7 2.3 2.3 13.2 0 6.1EU - 15 * 46.1 10.5 1.1 2.4 2.8 15.3 4.1 3.8EU - 27 46.8 10.5 1.2 2.7 2.7 15.4 4.2 4.0
Source: EUROSTAT.
19
2. PUBLIC SECTOR PAY AND EMPLOYMENT
2.1 Reform of the pay system is a critical component of improving the quality of public administration in Romania. Higher levels of budget resources allocated in recent years have not resolved the challenges faced by the public administration. Spending on public sector pay has risen dramatically since 2004, but the overall system of remuneration and career advancement for public servants has not changed much. Annual pay increases are still negotiated ad hoc with individual trade unions and reflected in across-the-board increases in base salaries. Careers scales still place heavy emphasis on time-in-grade and the accumulation of allowances. The incentives needed to attract skilled workers and motivate performance remain weak. Consequently, the government should consider an overall reform of the pay system that will bring the structure and principles closer in line with common European practices. A medium term pay strategy should be developed that addresses problems of internal equity and that improves external competitiveness for the key skills that are the most difficult to recruit and retain in the public sector. A. Public Employment’s Impact on the Budget 2.2 Personnel costs have represented a large and rapidly growing portion of the Romanian budget having risen at a faster pace than GDP and faster than public spending overall. Aggregate spending on personnel cost increased by 73 percent from 2005 to 2007, while GDP only grew by 40 percent during the same period and total spending rose 59 percent. As of end-2007, the total salary related costs of public servants in the budget totaled 26.2 billion lei or 19.2 percent of total public spending. Yet even this figure significantly under-estimates the full cost of public sector personnel because expenditures for some occupations are categorized under other headings of the budget. For example, health workers are currently paid through transfers to public health units from the national health insurance fund (NHIF) and pensions of military/security personnel are funded directly as a budget line item. 2.3 The rate of growth in personnel costs varies by occupational group, with the special sector6 having grown fastest. Overall personnel costs rose from 5.3 percent of GDP in 2005 to 6.5 percent in 20077 (a 23 % total increase). Out of this figure, the special sector rose from 1.3 percent to 2.4 percent of GDP -- surpassing pre-university education, which remained almost constant (1.7 %). (See Figure 11) In nominal terms, the personnel costs for central government rose slightly faster than for local government (102 % versus 77 %), but this is likely due to the contribution of the special sector. (See
6 Defense and public order. 7 Figures do not include public institutions financed from their own revenues. If these were included, personnel costs would expand to 8.2% of GDP in 2007 and 8.4% in 2008.
20
Table 6.) The expenditures for central government civil servants and contract employees rose by 53 percent, while the impact on the budget of pre-university education was only about 35 percent.
Source: MoPF.
Table 6. Personnel Expenditure Increases in Main Categories of Personnel, 2005-07 2007/ 2006 2007/ 2005 Central government 30% 102%
Civil servants and contract employees 30% 53% Military 17% 78% Police, gendarmerie, fire fighters, judiciary, intelligence 34% 215%
Local government - civil servants and contract employees 30% 77% Pre-university education 2% 35% Total public sector personnel expenditure8 21% 73% GDP 18% 40% Total public sector spending 21% 59%
Source: MoPF
2.4 Increases in the size of public sector employment have also burdened the budget. Between 2005 and 2008 the number of authorized positions grew from 1.318 million to 1.496 million – an increase of 13 percent overall. The number of positions at central government rose at about the same pace as those at local government (25 % versus 24 %). However, much of the increase at central government was driven by
8 Data on health personnel expenditure and university education not available.
Figure 11. Evolution of Total Personnel Expenditure as % of GDP, 2005-07
0.1%
1.0%
10.0%
state budget - civilian (civil servants and contract employees)
0.8% 0.8% 0.9%
state budget - military 0.5% 0.6% 0.6%state budget - police, gendarmerie, fire fighters,judiciary, intelligence
0.8% 1.6% 1.8%
local budgets - civilian (civil servants and contract employees)
0.9% 1.0% 1.1%
preuniversity education 1.7% 1.9% 1.7%total public sector 5.3% 6.4% 6.5%
2005 2006 2007
21
increases in the special sector from 199,117 to 263,324 or 32 percent. Civil servant positions in central government rose by 20 percent but from a much smaller base (65,314 to 78,153). But it is civil servant posts in local government that expanded the most rapidly – rising from 41 percent overall (from 55,417 to 78,002) most likely reflecting the rapid growth in local revenues. In contrast, positions in pre-university education remained unchanged. See table 7.
Table 7. Public Sector Employment by Main Categories of Personnel, 2005-08
Category/ Employer 2005
(authorized) 2006
(authorized) 2007
(authorized) 2008
(authorized) 2008
(occupied)
% Occupied
2008
Increase 2008-2005
Central government 304,512 335,352 359,218 381,188 336,783 88% 25%
Special sector (military, police, gendarmerie, fire fighters, justice, intelligence) 199,117 221,425 244,154 263,325 N/A N/A 32%
Civil servants 65,314 70,232 N/A 78,153 N/A N/A 20%
Contract employees 37,981 41,595 N/A 37,535 N/A N/A -1%
Local government 257,679 301,956 314,895 318,291 272,687 86% 24%
Civil servants 55,417 58,282 N/A 78,002 N/A N/A 41%
Contract employees 202,262 227,784 N/A 240,289 N/A N/A 19%
Pre-university education 339,688 339,688 339,688 339,688 336,688 99% 0%
Central agencies subsidized 36,539 46,873 47,003 46,697 40,850 87% 28%
Local agencies subsidized 39,600 49,470 47,798 54,198 44,356 82% 37%
Health 193,933 202,090 215,875 224,458 202,154 90% 16%
University education 79,941 68,203 68,203 68,203 66,321 97% -15%
Central agencies own revenues 21,737 29,824 29,819 31,050 26,862 87% 43%
Local agencies own revenues 31,334 20,399 19,404 19,907 15,220 76% -36%
Pension fund management 5,792 4,181 4,181 4,737 4,423 93% -18%
Labor fund management 3,464 3,545 3,505 3,152 3,057 97% -9%
Health fund management 3,697 4,028 4,028 4,028 3,779 94% 9%
Total public employment 1,317,916 1,405,609 1,453,617 1,495,597 1,353,180 90% 13%
% of total workforce 28.90% 30.10% 30.50% - - - -
Source: MoPF
2.5 Generous increases in the average pay for public sector employees have been the biggest factor in adding to the budgetary impact. Salary increases authorized for different occupational categories between December 2004 and December 2008 have exceeded the rate of inflation by two to three times. Inflation was estimated at 29 percent during the four year period, but the cumulative increase in pay was 86 percent for teachers, 84 percent for health workers, and 86 percent for police. The biggest single hike in pay would have been between December 2006 and 2007 when teacher pay was raised 29 percent, even though inflation was running at 6.8 percent. Other groups had relatively high increases that year as well, though slightly lower than in education. See Table 8.
22
Table 8. Annual Base Salary Increases in Main Categories of Personnel
Annual Rate of Increase Cumulative Increase
Personnel Category dec.05/ dec.04
dec.06/ dec.05
dec.07/ dec.06
dec.089/ dec.07
dec.07/ dec.04
dec.0810/ dec.04
Civil servants 17% 11% 19% 12% 55% 73%
Contract employees 20% 11% 19% 12% 59% 78%
Judiciary 8% 9% 20% 5% 42% 48%
Military 8% 10% 25% 5% 48% 55%
Police 30% 10% 25% 5% 78% 86%
Pre-university teachers 14% 12% 29% 12% 64% 84%
Health 20% 11% 22% 12% 63% 83%
Annual inflation 8.6% 4.9% 6.8% 5.9%11 22% 29%
Source: MoPF
B. The Need for a Medium Term Strategy on Pay Issues 2.6 Although average pay for public sector workers improved, previous governments may have missed a window of opportunity to address more profound weaknesses in the overall approach to public sector pay. Salary increases were broadly given across-the-board for an occupational category, but without fundamentally changing the composition of pay. Government pay-setting has reflected an ad hoc process of negotiation rather than any strategic policy setting based on the long-term needs and goals of the public administration. As a result, whatever inequities that may have existed – for example, mismatching between pay and responsibility – were merely perpetuated. Furthermore, some key positions or critical skill areas that lag farther behind their private sector comparators could justify a more targeted approach – and even bigger pay increases. Likewise, no new measures have been put in place to enhance accountability or motivate performance in exchange for higher real pay.
2.7 The lack of a coherent overall pay strategy has led to unequal pay for similar work. A 2006 study completed for NACS identified significant equity problems within the civil service, with some positions making up to 14 times more than others with similar responsibility. Similar conclusions were reached in the report prepared by the World Bank in 2008 for the Ministry of Labor. For example, local government contract positions that require university qualification had an 8.4 ratio between the highest and lowest paid clerks. Some librarians with high school qualification earn 4 times more than others. Differences in responsibility alone cannot account for such wide variances in pay, but they are perpetuated through the annual across-the-board increases. In the long-run such practices undermine motivation and contribute to the lack of competitiveness in public sector pay.
9 Estimate, based on the legislation passed by the government in 2007 and early 2008. 10 Estimate, based on the legislation passed by the government in 2007 and early 2008. 11 National Bank of Romania estimate.
23
2.8 This lack of a compensation strategy contributes to distortions in the labor market and diverts resources from key needs. While the public sector lags behind the private sector in pay for some positions, there is a risk that it overpays for others. Without better information on salaries, the government is unable to achieve a consistent level of competitiveness vis-à-vis the private sector. There is a wide-spread perception that public sector pay has lagged behind the private sector. A survey conducted by the Hay Group in 2006 confirmed that the average total compensation for civil servants was substantially lower than in the private sector. That was especially the case for professional, technical, and managerial positions.
2.9 On the other hand, recently released government statistics imply that the average public sector pay is about 20 percent higher than the private sector average. This underlines the fact that public sector pay varies significantly across different occupational families and levels of responsibility. For example, average per capita expenditure for the special sector is about 50 percent higher than for the civil servants and contract employees of the central government. International experience also shows that the gap between public and private sector pay tends to be smaller for the low skilled positions.
2.10 There are several ways in which Romanian pay practices diverge from more developed countries in Europe:
• Non-wage compensation represents a disproportionate share of total compensation, well above EU practice, varying anywhere from 68 percent for teachers to 42 percent for military and 45 percent for public safety employees (this excludes the amounts that are paid by the employer for social contributions). In most European countries base salary is at least 80 percent of total pay.
• Allowances undermine transparency and lead to discretionary practices. Diverse allowances are described in employment statutes, with some given to almost all employees to top-up base salaries and others reserved for certain categories (e.g., police officers who use codes). Yet other elements of remuneration are in the form of in-kind benefits, and not explicitly authorized in the law.
• The basic principle of ‘equal pay for equal work’ is not respected. As noted earlier, some people are paid several times more than others who perform a similar function. Genuine differences in performance and responsibilities can explain some variance in pay, but not of the magnitude found in the Romanian data.
• Incentives for performance are undermined by the compressed salary scale. The differences in base pay that result from promotions to positions of higher responsibility are relatively small. Therefore, performance incentives that come through the prospect of career advancement are weak.
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• Seniority is rewarded at the expense of performance. Seniority is rewarded in other countries through movement within a salary range for a specific position – as a partial recognition of performance in that particular job. But in Romania it is an automatic payment irrespective of actual performance or responsibility. Moreover, because of its size – up to 25 percent of base salary – it can overshadow the rewards that come from career advancement. For younger staff entering the public service for the first time, the opportunities for salary enhancement are quite limited in the short to medium term, and this may explain in part the high turnover rates.
• Compensation decisions are not based on reliable information on private sector comparators. In most EU countries public sector salary levels are below those in the private sector. This reflects non-monetary benefits such as enhanced job security and other factors. Specialized salary survey data is used periodically to assure that salaries for various types of positions remain within a desired range.
C. A Roadmap for Improving Effectiveness of the Public Pay 2.11 Since early 2009 the government has taken steps towards reforming public pay. The government approved a salary ordinance to reduce non-wage compensation. A framework unitary pay law has also been approved, which aims to integrate under one statute the pay ranges for all public sector workers. The unitary pay law envisions changes to the pay system that would eliminate pay discrepancies for similarly qualified workers and enhance capacity to attract and retain skills in the public administration. The specific characteristics of the pay reform are to be worked out in the implementation regulations following the framework law. The National Agency for the Civil Service is also proposing new rules that would increase their influence in recruitment decisions, and therefore enhance their ability to assure merit is used.
2.12 A multi-annual plan for implementing a unitary pay system should be drafted and pursued. While the preparation and adoption of a unitary pay law is a step forward in addressing the fragmentation of the current remuneration system, its implementation can only be done gradually, over several years. It is therefore important that a multi-year plan for the phasing out of the law is drafted. Specifically, the plan should ensure that:
• A limit of 30 percent on non wage personnel expenditures and caps on individual bonuses for non-military personnel is phased in.
• The salary grading structure would be based on job responsibility and qualification.
• The salary grades established would more closely align pay for selected benchmark jobs to actual labor market conditions (through a salary survey). A comprehensive grading framework, including a serious effort to validate the relative “job weight” of common public sector occupations would also help to
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improve simultaneously the internal equity and external competitiveness of positions. One aim should also be to improve the attractiveness of the public sector to university graduates and to reduce artificial constraints on advancement.
• The disparities in pay between similar performing positions would be reduced and the pay reform would provide enhanced career advancement for high-performing public servants in various occupational categories.
• The implementation plan is fully costed and is consistent with the medium term budget projections.
2.13 In the medium term, there is a need to strengthen the human resource management function, including the enforcement of merit-based recruitment and career development. Measurable goals and objectives for improving the quality of human resources should be adopted. Indicators would measure the impact of new policies on recruitment, retention rates, training and overall employee satisfaction.
2.14 This should improve the incentives for public institutions to focus on performance, including their efficiency and effectiveness of public resource use. Performance measurement for senior managers and directors of departments will be much easier when the institutions themselves have well-established objectives and measurable indicators of performance.
2.15 Over the longer-term the public administration should improve its capacity to monitor and evaluate institutional performance, including the value-for-money of individual policies and programs. In parallel, the government may wish to consider functional reviews of major ministries and the overall structure of the public administration to identify options for streamlining important functions. Reducing the number of authorized positions would be one way for the government to liberate more resources for improving the public pay system. Government can initiate steps now to create both a capacity for and a culture of performance evaluation that would help create incentives for more effective human resource management in the long term.
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3. PENSIONS 3.1 Romania’s public pension system is under considerable stress and its prospects are bleak unless far-reaching reforms are initiated soon. The first pillar system is financially unsustainable and requires sizeable and increasing budget support; it is affected by important inequities; and it taxes employers excessively, curtailing competitiveness and swelling the informal economy. Many of the standard indicators used to determine the health of the pension system place Romania at the bottom of the EU. The economic crisis has painfully exposed these problems, as the government is being forced to extend massive financial support at a time when it can hardly afford it. Without reform, the pension system will continue the present downward spiral which will require ever-increasing diversion of state budget resources from their normal uses, undermine economic convergence, and affect the very livelihood of future generations of retirees.
3.2 The Government has approved a draft pension reform law with the view to address both the equity and fiscal sustainability problems of the current system. The draft includes provisions to accelerate the increase in the retirement age; to amend the indexation rule of the pension; to tighten conditions for disability pensions; and to integrate the special pensions into mainstream. While this is an important step in the right direction, the approval by Parliament of a pension law consistent with its stated objectives is critical.
3.3 The pension system is beset by serious structural problems. Some - primarily ageing of the population – are shared by most EU members, but most are due to ill-considered decisions driven by short-term political considerations, and to the development gap between Romania and the more advanced EU members. They include the generous retirement age and pension indexation rules, the special conditions granted to some privileged groups of retirees, and the inevitable drain of young workers attracted by employment opportunities abroad. The attempt to meet the increasing financial gap of the system by raising social security taxes has penalized economic competitiveness and driven an increasing proportion of labor to the informal economy, fostering a vicious circle of a declining support ratio and increasing taxes. Romania has one of the highest taxation of social security and one of the lowest ratios of contributors to beneficiaries in the EU.
3.4 The reform of the pension system is admittedly among the most difficult tasks, as it must reverse what a politically-influential large segment of the population sees as acquired rights, and as it must struggle with the huge inertia stemming from the very nature of the long-term horizon of the system. This is not the kind of reform which could be dealt with by quick administrative fiat: successful change will require sustained political will and vigilant adherence to reform measures over a very long period, perhaps decades. Such a reform will not succeed unless backed by broad popular awareness and support. The government must strive to build a true partnership with stakeholders and maintain the course under stress.
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A. Fiscal Sustainability
3.5 The pension system faces a series of key challenges, which severely undermine its long term sustainability:
3.6 The system is experiencing growing deficits. The public pension system is putting an increasing burden on the state budget as pension contributions can no longer meet obligations. Without further reforms, the deficit of the public pension fund (first pillar) is conservatively projected to increase from 0.6 percent of GDP in 2008 to 1.3 percent in 2009, 2.7 percent in 2015, and 3.4 percent by 2020 (see figure 12 below).12 The deficit follows fragile improvements in 2006-2007 owing to comprehensive reforms since 2001, combined with better revenue collection and supported by steady economic and employment growth. The improvements were reversed by decisions in 2007-2008 to increase the pension point value and grant additional increases to certain categories of retirees.
Figure 12. Public Pension Fund Deficit 2008-2020
Source: World Bank projections 2009.
3.7 This deficit stems from a number of cyclical and structural causes which will be discussed below, including: (i) the economic slowdown; (ii) ageing of the population; (iii) a retirement age below that in other countries; (iv) the low ratio of contributors to
12 The projected deficit is underestimated. It does not take into account the decrease in formal employment (and the corresponding decline in social security contributions) due to the economic crisis and the impact of the increased rate of employers’ contribution since February 2009. The projections factor in the March 2009 decision to set pensions to a minimum of RON 300, increased to 350 RON/month as of October 2009, which will cost the budget an estimated RON 745 million (about EUR 175 million) in 2010. Farmers’ pensions will add another RON 3 billion (EUR 700 million) at the rates of October 2008.
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beneficiaries; (v) generous replacement rates and indexation rules; (vi) the financing of the second pillar; and (vii) the fact that the pension system is driven by exogenous political considerations with an important populist element, rather than by internal consistency and sustainability objectives.
3.8 The economic slowdown. The initially projected economic growth has been replaced by a contraction of the economy of at least 7.0 percent for the entire 2009. Unemployment is rising rapidly, and is expected to peak at 8.7 percent in 2010 before starting to decline slowly. The inevitable decline in the revenues of the pension fund may be also affected by the reversal in the reduction of contribution rates, which could encourage increased recourse by employers to informal labor. Contributions rates were increased in February 2009 by 3.3 percent, to 31.3 percent, up from 28 percent in 2008.
3.9 Ageing of the population. The old-age dependency ratio is projected to increase from 23.6 percent in 2008 to 55.3 percent by 2050 (see figure 13 below reproduced from Holzmann & Guven, op.cit., figure 7.6). The ageing of the population will raise the system dependency ratio (pension recipients divided by pension contributors) from 56.9 percent in 2008 to a projected 95.9 percent by 2050.13 Figure 13. Projected Old-Age and System Dependency Ratios 2008-2050
3.10 Retirement age. The retirement ages are gradually being increased from 60 to 65 for men, and from 55 to 60 for women, but these increases will be fully implemented only in 2015, and will still keep Romania among the EU countries with the lowest retirement age. Earlier retirement and longer life expectancy for women implies that by 2050 they would collect benefits for 50 percent longer than men.14
13 Holzmann, Robert & Guven, Ufuk, Adequacy of Retirement Income after Pension Reforms in Central, Eastern and Southern Europe, The World Bank, Washington 2009 (p.231). 14 Op. cit. p.216.
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3.11 The low ratio of contributors to beneficiaries. The ratio of contributors to beneficiaries depends to a large extent on the target ratio between benefits and contributions. There are no firm rules on the optimum ratio, but Romania appears to fare considerably worse than the rest of the EU. As of end-2008 there were 6.04 million contributors and 4.55 million beneficiaries (old age, disability and survivor pensions), yielding a ratio of contributors to beneficiaries of 1.33. As in practice the distinction between the pension fund and the state budget has been traditionally blurred in Romania (flows between the two going both ways when required by circumstances), one should also add the 0.85 million non-contributing farmers who receive pensions paid from the state budget, which would further lower the ratio contributors/beneficiaries to 1.12. This ratio was 1.7 in EU-25 in 2004, and 3.2 in Canada and respectively 3.7 in the United States in 2000 (see Figure 14 below).15
Figure 14. Support Ratio: Number of Contributors Relative to Number of Pensioners in Public Pension Schemes
Source: EC Special Report 1/2006, The impact of ageing on public expenditure; and Bongaarts, J., Population Ageing and the Rising Cost of Public Pensions, Population Council 2004. No. 185.
3.12 Romania has a low coverage ratio (contributors to working population). In 2005-2006, only 39 percent of the working-age population of Romania contributed to the first-pillar pension scheme, less than other Central and Eastern countries reviewed by the World Bank, whose coverage ratio ranges from 48 percent in Bulgaria to 66 percent in the Czech Republic.16 A similar indicator, the proportion of contributors to the labor force, is only 57.6 percent in Romania, compared with 82-93 percent in these other Central and Eastern European countries (see Figure 14 below).
15 European Commission, Special Report no. 1/2006, The impact of ageing on public expenditure, table 3.23) and Bongaarts, John, Population Ageing and the Rising Cost of Public Pensions, Population Council 2004 No. 185, table 1. 16 Holzmann and Guven, op.cit.
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3.13 Replacement rates and benefit adequacy. Gross replacement rates (ratio of benefits to pretax pre-retirement earnings) are estimated at 72.9 percent, of which 45 percent provided by the first pillar and 27.9 percent by the second pillar, irrespective of income, indicating that the pension system provides a strong link between contributions and benefits as a result of the reforms. Net replacement rates (net benefits ratio to post-tax pre-retirement earnings) are very similar, though they may vary somewhat by income.17
3.14 The replacement rates for full career workers are considerably higher than in most countries in Eastern and Central Europe or the world averages. They also appear to favor beneficiaries with higher pre-retirement earnings (see Figure 15 below, reproduced from Holzmann & Guven, op.cit. p.228, figure 7.3).18 The analysis of the rates for partial-career workers19 indicate that although they provide benefits generally above the poverty line, they seriously penalize workers entering the workforce later (after 25), retiring early, or working intermittently.
Figure 15. Coverage Ratio-Participation to the First Pillar
Source: Holzmann and Guven, op.cit., pp.71, 98, 125, 159, 220, 249 and 275.
3.15 Indexation rule. The present system is generous compared with most OECD countries that index pensions to inflation. It provides for the accumulation of points based on the ratio of individual wages to the average wage, multiplied by the point value, which is a percentage of the gross average wage. This formula is applied throughout the retirement period, which means that pensions rise in tandem with average wages and may further increase if the point value is adjusted upwards, as happened in December 2008,
17 Net replacement rates vary by income as a result of the taxes. The variation is not related to the rules of the pension system as shown by equal gross replacement rates across all income levels. 18 Simulated replacement rates for an unmarried male working in a hypothetical career path starting at age 20 and with retirement at the statutory age, under the assumption that real wage growth is 2 percent, inflation is 2.5 percent and the rate of return in invested assets is 3.5 percent. 19 Op. cit. pp.229-230.
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when it went to 45 percent, up from 31 percent in 2007, an almost 50 percent increase. This explains the relatively high replacement rates.
3.16 Non-transparent system. The point system makes pension indexation less transparent than the inflation-based indexation system, more vulnerable to political pressure, and less predictable. An example is provided by the use of three different point values in 2009, one for the first quarter, a second one for the next two quarters, and a third one for the last quarter of the year. Such practices make fiscal management less predictable, and lead to uncertainty for beneficiaries.
Figure 16. Net Replacement Rates for Male Full-Career Workers in Romania, Europe and Central Asia, and the World
3.17 Financing transition to the second pillar. The revenues of the first pillar are projected to decline steadily, from 6.2 percent of GDP in 2008 to 4.3 percent in 2020 and 2.4 percent by 2050 as a result of the introduction of the second pillar, and because the overall number of contributors will decline due to the ageing of population and the overall decline in population.20 The second pillar was introduced in 2006; 4.64 million contributors participate, of which 3.45 million workers executed payments as of end-2008. Its full impact will be felt when the contribution rate reaches the projected maximum.
3.18 The contribution rate for the second pillar was set initially at 2 percent and was scheduled to increase annually by 0.5 percent until it reached 6 percent. In response to the fiscal difficulties due to the crisis the government has put on hold the first scheduled increase from 2 percent to 2.5 percent. It would be important to resume as soon as possible the schedule of increased contributions to the second pillar, in order to maintain the viability of the scheme and avoid jeopardizing the government’s long-term objective
20 Holzmann & Guven, op. cit., pp. 230-231.
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of reducing the risks of the public pension system and easing the pressure on the state budget. A prolonged suspension of planned increases in contributions to the second pillar may drive out from the market private pension funds that are already operating on tight margins and long pay-back periods due to the low level of management fees permitted under the law. This could reduce competition and drive up fees for contributors.
3.19 Pension policy has been driven by political rather than financial considerations. Over the past twenty years all major decisions governing the pension system, e.g., the early mass retirement of public sector staff in the 1990s, the eligibility criteria, the level of pensions and the method of their indexation, have been taken on political grounds, and often under the pressure of populist expectations at election times. The consideration of the internal consistency and sustainability of the pension system has been secondary, at best uneven. As mentioned before, decisions have been driven by the implicit assumption of open communication between the pension fund and the state budget, pensions being treated as an entitlement rather than as a return on accumulated contributions. B. Equity Concerns 3.20 The use of general revenues that are raised from all taxpayers to provide adequate benefits to the covered population is debatable on equity grounds. Budget subsidies to the first pillar pension fund benefit only 39 percent of the working population that contributes to the pension fund, which means that a majority of the future elderly are subsidizing the current beneficiaries of the public pension fund. The inequity inherent in the system is magnified by the high level of compulsory contributions to the pension fund, which encourage informal employment and leave a growing number of Romanians susceptible to slipping into poverty in old-age.
3.21 Gender inequities. As mentioned above, the retirement age for women is lower. Life expectancy at retirement for women is 20.9 compared to 13.5 for men, and the difference will persist even as the retirement age increases. By 2014, when the retirement age for women is scheduled to reach 60, their life expectancy would be 20.6 years. The already short life expectancy at retirement for men makes difficult further increases in retirement age beyond the currently legislated increase to 65. Additional savings may come only by narrowing the gap in retirement ages for men and women. Most OECD countries have equalized these ages.
3.22 Special pension funds. Some 150-160,000 retirees from the military, the police, the judiciary, the legislature, the foreign affairs, and civil aviation receive special benefits from special pension funds. The workers’ contributions to these funds are between 5 percent and 10.5 percent, and the respective employers pay no contribution. The funds are financed partly by the social insurance budget, and partly from the state budget. The benefits are out of proportion with the contributions. They are higher than those paid to the retirees covered by the general system, representing 60-80 percent of the gross earnings (salary and additional payments) from the last 1-6 months of employment, and they are paid in full after 25-30 years of service. For several categories only one month is used to compute the pension, and this can lead to artificially inflated pensions. The
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consolidation of these funds with the central public pension fund is currently under discussion.
3.23 Farmers’ pensions. Farmers’ pensions are paid from the state budget under the social assistance programs. As of October 2008 there were 846.4 thousand old farmers receiving on the average 290 RON/month net benefits, very close to the minimum guaranteed pension introduced on April 1, 2009, of 300 RON/month. C. Impact on the Economy
3.24 Financing the deficit of the pension system puts an increasingly onerous burden on the state budget. Romania will be hard pressed to meet the Maastricht target for macroeconomic stability of a maximum 3 percent budget deficit and the criteria for joining the Eurozone in 2014-15, as currently proposed, unless aggressive steps are taken by the government to contain and reverse the chronic deficit of the pension system. As discussed above, the pension system as currently operating will run deficits around 3 percent of GDP by the middle of the next decade.
3.25 The financing of the current pension system affects negatively the competitiveness of Romania and the sustainability of the system. Total social security charges paid by Romanian employers in 2008 for old age, disability and survivors, health, maternity, work injury, unemployment and family allowances were reported by the US Social Security Administration21 to be the highest in Europe (see Figure 17). The charges for old age, disability and survivor benefits were also the highest – especially when factoring in the February 2009 increase. Romania is also among the top ten European countries concerning contributions paid by insured people (see Table 6).
Figure 17. Social Security Contributions, 2008
Source: United States Social Security Administration, Social Security Programs Throughout the World: Europe, 2008
21 United States Social Security Administration, Social Security Programs Throughout the World: Europe, 2008, Washington, September 2008, Table 4.
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3.26 The high level of social security taxes affects the competitiveness of Romanian business and encourages the growth of the informal economy. As labor either migrates in response to business opportunities elsewhere, or moves to the informal economy, contributions to the pension system are curtailed and the growing deficit forces higher charges. This is a vicious circle which is not sustainable and which must be broken by strong reforms. D. The Reform Agenda
3.27 A renewed reform agenda must address both the sudden deterioration of the system brought by the economic crisis, and the longer term sustainability and equity concerns outlined above. Some of the key reforms include:
• The acceleration of the proposed increase in the retirement age, and equalization of this age for men and women.
• Consideration of a non-contributory benefit for the elderly, including a basic pension (zero pillar).
• The review of labor taxes with a view to enhancing competitiveness.
• The restoration of second pillar financing according to the law.
• The upgrading of the pension system administration and monitoring, and increased transparency.
3.28 In the short-term, the suggestion is to de-link retirement benefits from gross average wages; replacing the current indexation system with inflation-based indexation; equalizing the retirement age for women with that for men; restoring the schedule for gradually increasing the financing of the second pillar by 0.5 percent a year until reaching the 6 percent target; and designing and implementing a zero pillar system addressing social protection of non-contributing elderly poor.
3.29 In the medium-term, in addition to the continued implementation of decisions taken in the near future which need to be applied over a longer period, the government could consider consolidating the various public pension systems; reviewing labor taxes and charges for employers with a view to gradually bringing them down; implementing a capacity building program aimed at strengthening pension administration and monitoring, including the integration of ITC systems in the National House of Pensions, the National Agency for Employment, the National Agency for Social Assistance Benefits Payment, and the Ministry of Labor, Family and Social Protection; replacing the compliance-based supervision of the pension fund market with risk-based supervision; and implementing an information-education-communication (IEC) program to improve the financial awareness of contributors, and help them understand the impact of their decisions on future benefits.
3.30 The potential impact of the gradual replacement of the point system as currently designed with indexation of benefits to inflation and the equalization of the retirement age for men and women by 2020 is illustrated in Figure 18. These reforms alone could
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cut in half the projected deficit of the pension system by 2020, from 3.4 percent of GDP to 1.7 percent.
Figure 18. Fiscal Impact of Pension Reform 2010-2020
. Source: World Bank projections 2009.
3.31 Far-reaching reforms will require strong political will and leadership, and will take a long time to implement. Yet they must be carried out if Romania wants to put the pension system on a sound basis. The reform of the pension system is admittedly among the most politically difficult, and the magnitude of the problem in Romania is particularly daunting. Restoring the pension system to financial sustainability and addressing equity issues, while at the same time reducing contributions to enhance competitiveness and create a more favorable climate for the return of workers to the formal economy, are by no means easy tasks.
3.32 As a first step toward building the necessary support for systemic reform, the government may consider an information and communication program aimed at sensitizing all stakeholders to the problems faced by the pension system and the cost of inaction. This could prepare the ground for partnership with the stakeholders in designing and implementing a reform strategy which could gradually address the structural issues with tolerable social costs.
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Table 9. Contribution Rates for Social Security Programs, 2008 (%) Country Old age, disability, and survivors All social security programs a
Insured person
Employer Total Insured person
Employer Total
Austriab 10.25 12.55 22.8 17.05 25.15 42.2 Belgiumb 7.50 8.86 16.36 13.07 24.77 37.84 Bulgariab 8.8 13.2 22 13 19.9 32.9 c Czech Republicb 6.5 21.5 28 12.5 35 d 47.5 cd Estoniab 2 20 22 2.6 33.3 35.9 c Finland 4.1 17.6 21.7 6.01 20.67 26.68 c Franceb 6.65 e 9.9 e 16.55 e 9.8 32.68 d 42.48 d Germanyb 9.95 9.95 19.9 19.5 19.92 39.42 c Greeceb 6.67 13.33 20 11.55 22.1 33.65 Hungaryb 9.5 f 24 f 33.5 f 17 32 49 cg Iceland 4 13.34 f 17.34 f 4 13.34 17.34 c Ireland 4 f 8.5 f 12.5 f 4 8.5 12.5 h Italyb 8.89 23.81 32.7 8.89 31.97 40.86 Latviab 9 f 24.09 f 33.09 f 9 24.09 33.09 c Lithuania 2.5 23.7 26.2 3 31.5 34.5 c Maltab 10 f 10 f 20 f 10 10 20 Netherlandsb 19 5.65 24.65 22.5 10.4 32.9 c Polandb 11.26 16.26 27.52 22.46 19.61 42.07 c Portugal 11 f 23.75 f 34.75 f 11 23.75 34.75 Romaniab 9.5 29 38.5 16.5 36.75 53.25 c Slovak Republicb 4 14 18 10.4 27.2 37.6 c Slovenia 15.5 f 8.85 f 24.35 f 22.1 16.1 38.2 c Spainb 4.7 f 23.6 f 28.3 f 6.25 31.08 37.33 c Sweden 7 e 11.91 18.91 7 23.43 i 30.43 ci Switzerlandb 11.9 11.9 23.8 13.05 13.15 d 26.2 d United Kingdomb 11 f 12.8 f 23.8 f 11 12.8 23.8 c Source: United States Social Security Administration, Social Security Programs Throughout the World: Europe, 2008, Washington, September 2008. a Includes Old Age, Disability, and Survivors; Sickness and Maternity; Work Injury; Unemployment; and Family Allowances. In some countries, the rate may not cover all of these programs. In some cases, only certain groups, such as wage earners, are represented. When the contribution rate varies, either the average or the lowest rate in the range is used. b Contributions are subject to a ceiling on some benefits. c Government pays the total cost of family allowances. d Employers pay the total or most of the cost of work injury benefits. e Contributions finance old-age benefits only. Additional contributions are required for survivor and disability benefits. f Also includes the contribution rates for other programs. g Plus flat-rate contributions for medical benefits. h Government pays the total cost of unemployment benefits. i Employers pay the total cost of mandatory unemployment insurance.
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4. EDUCATION A. Introduction
4.1 The education sector is the second largest beneficiary of budget resources. Actual expenditure amounted to 4.5 percent of GDP in 2008 against an announced target of 6 percent of GDP, and a final budget of 5.2 percent of GDP. This reflects the importance attached by the Government and the Romanian society as a whole to education, as well as the recognition of the declining standards and outcomes since 1990.
4.2 Since 1990 education has experienced major changes with respect to its administrative and governance structure, the teaching workforce and the curriculum, and more changes are planned. Numerous reforms were initiated in the educational sector to modernize the operations of the educational sector through decentralization of the management and financing of schools, improved transparency and efficiency in education sector outcomes, and improved inter-governmental coordination. Reforms were also initiated to modernize the delivery of educational services through better teacher training systems and adjusting school curricula to the challenges of an European, market-oriented economy. The need for sector reform is widely accepted across the political spectrum, as proven by the adoption in March 2008 of the National Pact on Education endorsed by all political parties as well as by other stakeholders, including all major trade unions active in the sector. The next major steps contemplated by the Authorities are decentralization of education financing, administration and management of human resources, and the related introduction of per capita financing.
4.3 Changes notwithstanding, Romania’s education system must make important strides to reach convergence with more advanced EU members as Romania ranks lowest in the EU across a number of performance measures. Simply allocating additional resources for education per se will not do the job. What matters more is how these additional resources are used to improve the quality of teaching.
4.4 The Pact on Education recognized this but did not spell out a mechanism for linking further increases in spending to results. If increased spending in general and increased teacher compensation in particular predate implementation of reforms and are not related to outcomes, this may actually undermine reform. While increased salaries may attract a better quality of new staff, they would render more difficult the attrition of under-qualified staff, strengthen vested interests opposing staff rationalization, and make more difficult the introduction of performance-based incentives.
4.5 In the current economic environment, the discussion is no longer about how to best use additional resources for education but, rather, how to ensure that scarce resources are spent more wisely. This chapter aims to provide ideas for the government on how to go about this difficult task. An underlying message of the report is that an economic crisis presents the opportunity to undertake some of the more difficult
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structural reforms which are preventing the education sector for realizing its full potential. Moreover, looking further ahead, failure to act decisively now – crisis or no crisis – to improve education standards and achievements may jeopardize medium- to longer-term sustainable growth and convergence objectives.
4.6 This chapter focuses on primary and secondary education for a number of reasons. First, it receives the bulk of public education expenditure (close to 2/3 of the budget). Second, two previous World Bank studies covered tertiary education (2009) and, among other things, life-long learning (2007). Third, the magnitude of the challenges facing primary and secondary education in terms of the quality and relevance is particularly pressing.
4.7 The chapter has three main messages: first, the primary and secondary education sector faces significant challenges, primarily related to the quality and the relevance of the education provided. Second, the main constraint impeding the sector in delivering better results is related to how the education resources are spent as opposed to how much the education sector spends: low class sizes in large urban schools divert resources from the rural schools where it is most needed. Third, using resources more effectively will involve creating better incentives at the local and school level to create larger classes – within maximum class size norms – and more strategic, medium-term planning at the Ministry of Education, Research and Innovation (MERI).
4.8 The chapter begins by highlighting the main challenges facing the sector in terms of access to primary and secondary education as well as in terms of improving quality and relevance of education. Second, the chapter argues that these challenges can be directly linked to a number of constraints facing the sector and highlights what these constraints are. Third, the chapter presents policy options for addressing these constraints. B. Key Challenges Facing Primary and Secondary Education 4.9 Romania’s main challenge in education is related to weaknesses in quality. Romania’s youth – for the most part – attend school and graduate, but international assessment data suggest that many of them may be graduating from school without acquiring the necessary skills to succeed in life and in the labor market. In particular, OECD’s Programme for International Student Assessment (PISA) reveal that a large proportion of Romanian students – 53.5 percent of the 15-year olds – scored at a level (“below level 2”) indicating “serious deficiencies in students’ ability to use reading literacy as a tool for the acquisition of knowledge and skills in other areas.”22 Although PISA only tests 15 year olds, (as opposed to graduates of secondary education), most likely the weaknesses highlighted by PISA are symptomatic of quality problems which persist throughout the last years of upper secondary. If so, the challenge of heightening
22 Similar findings apply for scoring in science and mathematics, and they are confirmed by similar surveys: MSS 2003 for 8th graders, PIRLS 2001 and 2006 for 4th graders. Also TIMSS 4th and 8th graders 2007 (TIMSS & PIRLS International Study Center, Boston College, 2008).
41
the quality of learning is much more important than the challenge of closing the attainment gap (see Figure 19).
4.10 The international test results not only reveal problems with the overall quality of education, they also show a high polarization of students’ results. In particular, students in rural areas score significantly lower. For example, results from the international PIRLS 4th grade reading assessments show that scores were 5 and 11 percent higher in urban areas in 2001 and 2006, respectively, compared to rural areas. PISA 2006 findings were similar, with students from large cities scoring 10 percent higher in mathematics, 13 percent higher in science, and 22 percent higher for reading.23 The results of students’ national testing after the 4th grade and national exams after the 8th grade confirm these findings.24
Figure 19. Number of graduates and number of graduates achieving minimum level of quality, as a share of 19 year olds25
Source: Eurostat, OECD (PISA results 2006) and World Bank staff calculations and assumptions as specified in footnote
4.11 Just as the overall picture on quality is polarized, so is the situation regarding the enrollment rates. In particular, the number of 19 year olds that graduate with an upper secondary degree is still below that of other new EU member states (see figure above). This lower rate can be largely traced to the limited access of poor and rural youth to such education, and to the lower quality of primary and lower-secondary education in rural areas. High schools are concentrated in urban areas, which, given the poor state of road infrastructure and inadequate provisions for student transportation, makes the access to secondary education for rural youth more difficult. In 2008, only 13 percent of high schools were located in rural areas. And yet there are indications that rural families
23 MERI Annual Report 2008, pp. 62-64. 24 Ibid. pp. 96-102. 25 “Minimum quality” is defined as scoring above level 1 on PISA 2006 exam. To draw this graph a key assumption is needed, namely, that the distribution across different quality levels of 15-students (as measured by PISA) is indicative of the distribution across different quality levels of upper secondary graduates.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Old EU members New Member States, excl. Romania Romania
(pro
po
rtio
n o
f 1
9 y
ear
old
s)
Total number of secondary graduates (% of 19 year olds)
Number of secondary graduates who achieves minimum quality (% of 19 year olds)
42
understand the importance of education and are prepared to make sacrifices to educate their children. With a significant number of rural parents working abroad, the demand for better education for their children is bound to increase.
4.12 Inequities in the access to and quality of education jeopardize EU convergence objectives on upper secondary and tertiary education. The rural, poor and Roma youth are left behind. There is a significant gap between urban and rural areas in the enrollment in both compulsory and upper secondary education (Table 10). The 2005/2006 Household Survey indicated that 66 percent of urban youth 19-20 years old had at least high school education, compared with only 39 percent of the rural youth. In part, this is due to the lower quality of compulsory education in rural areas, as illustrated by the results of the exams at the end of the secondary cycle in 2006/07. The exams were failed by 27.2 percent of the students from rural areas, and by only 13.6 percent of the students from urban areas.26 The same survey showed that only 28 percent of the 19-20 years old poorest quintile had upper secondary education, compared with 80 percent in the highest quintile of income distribution. Similarly, enrollment of Roma youth is significantly lower than the national average, with only 20 percent enrolled in preschools and 64 percent in primary schools, against national averages of 78 percent and 98 percent, respectively. Only 5 percent of the Roma youth reported having high school education, compared with 57 percent of ethnic Romanian youth. 4.13 These inequities at the upper secondary level have implications for enrollment patterns at the tertiary level and beyond. For instance, the 2005/2006 Household Survey shows that only 4 percent of the rural youth 25-29 years old report having higher education, compared with 27 percent of the urban youth. Similarly, only 2 percent of the youth in the poorest income distribution quintile and 5 percent of the second lowest quintile have university education, compared with 43 percent in the richest quintile.
C. Constraints Facing Primary and Secondary Education
4.14 This section argues that the main constraint impeding the sector for delivering better results is related to how the education spends its resources as opposed to how much the education sector spends. In particular, the section argues that, for a number of reasons, the efficiency of spending in education is low. That is, the same amount of resources could likely result in better outcomes, if spent differently. Moreover, the section makes the case that the root cause of this inefficiency can be traced to (i) the way schools are currently financed, i.e. with money following teachers, not students; (ii) weak 26 MERI Annual Report 2008, p.98.
Table 10. Gross Enrollment Ratios by Level of Education and Urban/Rural Location for 2007/2008
School Level Total Urban Rural Preschool 77.6 81.8 73.7 Primary 97.8 102.2 94.1 Lower Secondary 100.5 109.1 92.5 Compulsory Education 99.2 105.7 93.3 Upper Secondary 66.4 80.3 49.0 Source: MERI Annual Report 2008.
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structures to ensure accountability for results; and (iii) the lack of strategic policy planning within a medium-term expenditure framework.
4.15 The most important piece of evidence that efficiency of spending is subpar is that the average class size in Romanian schools is low and has been declining over time. A low average class size implies higher costs because employing more teachers than necessary means more spending per enrolled student. From an efficiency perspective, the low average classes (and more spending per enrolled student) may be desirable if it translated into higher quality teaching. With regards to low class sizes, in 2008/09 there were 19.7 students on average per class. More specifically, each “stream” or “parallel class” of students in a school consisted of 19.7 students in 2008/09 (see Table 11 below)27. The declining class sizes is also reflected in the fact that the number of students has been declining faster than the number of teachers (see figure 20 below).
Figure 20: Pre-university enrollments and teaching staff, excl. pre-school (1992/93=100)
27 This implies that in the higher grades in upper secondary where some subjects are electives, students might end up studying in ever smaller learning environments for these subjects.
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
1990/912000/012001/022002/03 2003/042004/052005/062006/072007/082008/09
school years
2002/02=100%
Enrollment (number of students)Teaching StaffNumber of classes
44
Source: MERI
4.16 There is no magic number for an ideal class size in terms of separating efficient schools from non- efficiency schools but, likely, the current level in Romania is lower than it would need to be from a quality perspective. In fact, most educators (and researchers on the topic) would agree that having one more student sitting in a classroom makes virtually no differences in terms of the quality of the education provided. The question, therefore, is “can Romanian schools safely increase their class sizes by one, two, three or maybe even five additional students without hurting the quality of education?” This chapter does not have the answer to that because, to our knowledge, no rigorous experimentation has been conducted in Romania on the impact on quality of increasing class sizes. That is, what, if any, is the impact on learning for Romanian students being grouped in classes of 20 students versus sizes of, say, 28? At a minimum, this is a policy option worth exploring for efficiency gains that might help fund substantive quality improvements.
4.17 It is also worth adding that the same picture of inefficient allocation of resources emerges when looking at the number of students relative to the number of non-teaching staff: the plummeting student numbers have not translated into fewer non-teaching staff. In fact, non-teaching staff increased by 34 percent from 2005/06 to 2008/09 alone.
Table 11. Structure of primary and secondary school system in Romania (2008/09)
Source: World Bank calculations based on Education Management Information System 2008/09.
707580859095
100105110115
1992
/93
1993
/94
1994
/95
1995
/96
1996
/97
1997
/98
1998
/99
1999
/00
2000
/01
2001
/02
2002
/03
2003
/04
2004
/05
2005
/06
2006
/07
2007
/08
2008
/09
1992
/93=
100
Enrollments
Teaching staff
School Size
Total
Students
Total
Classes
Total
Teachers
Total
Schools
Average
Class Size
Standard
Error
Class Size
g
Student-
Teacher
Ratio
(STR)
School
(Number
of
Students
Teacher-
class
Ratio
<100 Students 191,745 14,928 24,611 7,251 12.8 0.1 7.8 26.4 1.6
100-199 340,826 20,402 38,607 2,401 16.7 0.1 8.8 142.0 1.9
200-299 261,020 14,628 26,194 1,077 17.8 0.1 10.0 242.4 1.8
300-399 198,629 10,233 18,649 576 19.4 0.1 10.7 344.8 1.8
400-499 178,878 8,706 16,101 399 20.5 0.1 11.1 448.3 1.8
500-599 183,117 8,823 16,280 334 20.8 0.1 11.2 548.3 1.8
600-699 177,776 8,364 15,280 274 21.3 0.2 11.6 648.8 1.8
700-799 205,109 9,241 16,764 274 22.2 0.1 12.2 748.6 1.8
800-899 199,105 8,939 15,577 235 22.3 0.1 12.8 847.3 1.7
>=900 765,394 33,397 57,115 641 22.9 0.1 13.4 1194.1 1.7Total 2,701,599 137,660 245,178 13,462 19.7 0.0 11.0 519.1 1.8
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4.18 Given that average class size is the key determinant of efficiency of spending, policy makers should seize the opportunity of the crisis to put in place policies to increase the size. A first immediate step should be to put in place policies to prevent the class sizes from continuing to shrink. With student numbers projected to continue to decline in the coming years, there is every reason to suspect that average class sizes will also decline. As a consequence, spending per student will also continue to increase unless action is taken. Given the economic crisis, the education sector will likely be required to take swift action and set bold targets for increasing class sizes. However, even bold actions should be accompanied by the establishment of a rigorous monitoring and impact evaluation to allow policy makers to quantify what, if any, the impact is on learning.
4.19 Increasing the number of students in each class first requires understanding why class sizes – and related to it student-teacher ratios – have been plummeting over the years.
4.20 The main reason for the current low class size is the lack of incentives at both the school and municipal level to try to increase class sizes (and, consequently, dismiss teachers). In particular, at present, budget resources are shared with local governments on the basis of staff norms, rather than on the basis of demand for education services (i.e. number of students enrolled). Thus, local authorities have little if any incentive to consolidate schools, increase class sizes, rationalize the use of teaching staff, and reduce the number of non-teaching staff. Doing so involves the unpleasant task of laying off a teacher and/or closing a school with absolutely no financial reward for doing so. With teacher unions as powerful as they are, it is understandable that local politics favors the status-quo. Nor does the current financing system offers any mechanism to ensure that resources saved through consolidation and better personnel management can be redeployed within the respective school districts.
4.21 This lack of incentives to address smaller class sizes has been particularly problematic in Romania’s environment with declining student numbers, a situation which makes it all the more important to downsize the school system. Romania’s school-age population has declined since the early 1990s, and this trend has accelerated since 2000. The number of children ages 7-14 declined between 1990 and 2007 by 34 percent, from 2.7 million to 1.8 million. Even though this decline is projected to level off in the next decade, the impact will soon be felt in upper secondary and higher education. Although the aggregate declines across this period are very large, they are felt more gradually at the school level. Each incoming cohorts shrinks by one or two students from the previous year, slowly affecting the total enrollment in the schools. From the school’s principal’s perspective, though, without strong incentives to do otherwise, he or she will try to accommodate the declines within existing regulations governing minimum and maximum class sizes: currently 15-25 for primary schools and 20-30 for secondary schools.
4.22 The preparation and execution of the education sector budget suffers from serious deficiencies, inefficiencies and inequities. This also explains the poor efficiency of spending, beyond the lack of incentives to increase class sizes. Several previous
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reports document these issues in greater detail. 28 Problems include the budgeting vacuum stemming from the divide between central allocation of resources and implementation by decentralized administrations; the fragmentation of education finance; weaknesses in strategic planning and absence of a multi-year budgeting framework; lack of transparency and accountability in public spending; and related institutional weaknesses. These problems translate into significant misallocation and waste of public resources, and inequities in access to public funds. Each of these problems will be discussed below. 4.23 The budgeting vacuum conveys the disconnect between the nominal responsibility of the Ministry of Education, Research and Innovation (MERI) for the overall management and development of the sector, and the delegation of the budgeting and spending of the bulk of resources to decentralized authorities. In 2008 almost two-thirds of the budget for education was executed by decentralized administrations, including virtually all the expenditure for pre-university education, except for investments managed by MERI. Since 2001 teachers’ salaries are paid through the decentralized administrations, but the allocations for each school and budget item are decided by the Ministry of Public Finance (MoPF) based on the number of employees. MERI does not control the use of funds, and does not report on budget execution. In an attempt to compensate for the lack of financial control, MERI relies on administrative mechanisms which are expected to control employment in each school, appoint teachers and school directors, set up classes and allocate teaching staff, and apply national norms and curriculum requirements. 4.24 The cost of the budgeting vacuum is considerable. As mentioned, local authorities have little incentive to consolidate schools even at a time of declining student cohorts; MERI is not equipped to defend the budgets for the education sector or to guide the allocation of scarce resources, and has difficulty articulating and costing sector reforms, e.g. length of compulsory education, increased enrollment in secondary education, affirmative action for Roma youth or youth with special needs, etc. With most financial decisions taken by MoPF, the budgeting process evolved into an accounting exercise with limited relevance to needs and outcomes, and MERI is not in a sufficiently strong position to adequately monitor the use of funds and guide future decisions.
4.25 Similarly, the budget fragmentation at the local level – with spending narrowly earmarked for particularly activities – prevents local authorities from weighing trade-offs between maintenance and salaries, and is another disincentive for the rationalization of the school system. Local authorities cannot transfer potential savings from eventual school consolidation to, for example, transportation of students. Similarly, modernization of, say, school heating may reduce spending on wages but require higher spending for maintenance. The present rigid system of central allocation and earmarking of resources prevents managers from taking needed measures and forces them to forego potential savings.
28 Report on the Quality of the Budget Process in MER (Jan Herczynski, 2006); Education Policy and Budget Allocation: Effective Use of Limited Resources in Romanian Education (Jan Herczynski, 2006); PEIR 2006.
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4.26 The lack of strategic planning and of a medium-term expenditure framework further aggravates the impact of the distorted financing system. The preparation of the budget by MERI focuses only on the relatively small part of sector spending which is under its direct control, and is guided exclusively by short-term objectives. MERI has yet to become a forward-looking, policy innovator champion of improved education. Excessive reliance on legal and administrative regulation of sector finances sidetracks attention from the basic issues and challenges discussed above.
4.27 In the absence of a policy framework, budget negotiations within MERI, as well as with MoPF and the Parliament, degenerate into confrontational discussions on norms and procedures, rather than on strategic objectives and policy decisions. Moreover, lack of policy capacity and medium-term planning hinders Romania’s access to EU structural funding under the Sectoral Operational Program for Human Resource Development (SOP HRD) and the Regional Operational Program (ROP). By 2013 these funds could cover up to 15 percent of Romania’s public spending for education.
4.28 Information, analysis and policy formulation capacity is limited. There is no national capacity capable of collecting all the information on the education sector, including financial information and international data; reconcile conflicting data, and interpret and analyze them; inform and consult other stakeholders in and outside the government; and formulate policy recommendations.
4.29 In part, this weakness is due to the fact that information on education expenditure allocation and use is limited and not user-friendly. Financial information is produced essentially for accounting purposes rather than to underpin decision-making for better allocation and use of resources, and there is very little information on the outcomes of expenditures. Moreover, two-thirds of the state budget for education is executed by decentralized administrations, and the data available on the use of these resources are less than adequate. This report uses outlays on a cash basis in an attempt to reconcile the data provided by MoPF and MERI on the execution of the state budget for, respectively, decentralized administrations and MERI.
4.30 The use of cash outlays and the inability to analyze expenditure financed by own resources lead to under-estimation of actual expenditures. Outlays on a commitment basis are higher, given the practice of bunching expenditures towards the end of the fiscal year, and the delayed settlement of government obligations due to lengthy bureaucratic procedures and the temptation to postpone payments to the next fiscal year in an attempt to contain fiscal deficits. Expenditures financed by own resources may add up to 10 percent to those financed by the state budget. The discussion also uses data provided by international institutions (EUROSTAT, UNESCO, OECD), keeping in mind that such data becomes available usually with a 2-3 years delay.
4.31 Analyzing public expenditure on education for the past couple of years provides several examples of how the weaknesses highlighted above manifest themselves. For instance, although the target for public spending on education has been 6 percent of GDP for the past two years, in reality, the final budget and actual expenditures have fallen short of that target. For instance, in 2008, the final revised budget amounted to 5.2
48
percent of GDP (RON 26.41 billion) while actual expenditures (including off-budget spending financed by own resources of various administrations and institutions) only reached 4.5 percent of GDP. The under-execution of the budget was due mainly to the overestimation of budget revenues which forced cuts in planned expenditure across board. This pattern will probably be repeated in 2009 when, even after rectifications that reduced the Parliament-approved initial budget, expenditures for education are projected at about 6.3 percent of GDP. This level seems impossible to attain in light of the contracting budget resources and competing claims from other sectors.
4.32 Another example of the weaknesses highlighted above is that the faster increase in upper secondary and higher education enrollment in recent years does not seem to have been accompanied by a proportional increase of their budget share. These levels of education use 37-38 percent of state resources (see Table 12 below). However, additional resources were mobilized in public higher education from user fees and from universities’ own revenues generated primarily by research activities, to a large extent financed by the state budget for research. In 2008/09, 53.3 percent of the students enrolled in public universities were paying fees.
Table 12. Functional and Economic Distribution of State Budget Expenditure for Education
D. Policy Options for Improving the Quality and Relevance of Primary and
Secondary Education
(W/out off-budget expenditure, percentage distribution)
Distribution 2004 2005 2006 2007 2008
Functional Distribution 100.0 100.0 100.0 100.0 100.0
Administration 1.7 1.6 3.1 11.9 6.0
Preschool 9.5 9.5 10.0 8.7 9.8
Compulsory education 39.4 39.3 37.6 34.8 36.0
Primary 0.0 0.0 19.8 18.1 17.8
Lower secondary 0.3 0.2 17.8 16.7 18.2
Secondary 24.0 24.4 21.3 18.0 19.9
High schools 21.4 21.9 15.5 14.2 15.1
Vocational 2.6 2.5 2.9 2.3 2.4
Technical schools 0.0 0.0 2.9 1.5 2.3
Tertiary 14.4 14.4 17.0 17.2 16.8
Other (including special education) 9.7 9.5 9.4 7.4 9.7
Other public administrations /3 1.3 1.3 1.6 1.9 1.8
Economic Distribution 100.0 100.0 100.0 100.0 100.0
Current Expenditure 95.4 95.5 81.9 78.9 78.2
Personnel 59.5 61.2 53.9 43.4 49.4
Non-wage current expenditure 35.9 34.2 28.0 35.5 28.8
Capital Expenditure 4.2 4.2 16.6 19.7 19.0
Debt Service & Other 0.4 0.3 1.6 1.5 2.8
Source: Annex tables 1 and 3.
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4.33 Improving the way resources are spent, by itself, does not create better learning or more relevant education; these require high quality teaching and a curriculum suited for modern labor markets. However, for limited public resources to be supportive, they need to be well spent. And, as highlighted in the previous section, that is not the case in Romania today. This section provides ideas for how to go about addressing the constraints highlighted in the previous section.
4.34 The intermediate goal to strive towards is create larger classes. To teach more efficiently, Romanian students could easily be grouped together in groups of close to 30 students as opposed to the current average of 20 students. Achieving goals requires setting and articulating those goals in terms of measurable indicators. In Romania’s case, the main path to better use the resources in education is to create larger classes. They are currently low and could be raised without hurting the quality of education. Policy makers should therefore set a target, within a range where quality can reasonably expected not to be impaired, and evaluate their policy options in terms of likely effectiveness in raising average class sizes.
4.35 The final goal is to improve learning outcomes as measured by standardized tests, and the relevance of education as measured by the success of students in being able to continue their studies onwards to tertiary education and/or find employment beyond graduation. To achieve this, policy makers must ensure that the resources that are freed up by increasing class sizes and reducing the number of teachers (who will no longer be teaching those classes), are kept within the education sector and re-invested where they will have a bigger impact on learning. For instance, as it will be discussed below, large savings can be generated by increasing class sizes in large (mostly urban schools). As discussed in the section on challenges, students in these schools are currently outperforming rural students by a wide margin. Therefore, the resources freed up in large urban schools might sensibly be re-directed to raise the quality of learning in rural schools to urban standards. What the most effective way to heighten that quality – and spend the freed up resources – is beyond the scope of this chapter. What is certain is that the answer will, inevitably, involve experimenting with different policies to discover the most cost effective intervention. For instance, policy makers may discover that, in order to attract the most effective teachers to rural schools, school salaries in these regions must be raised above current levels. Or, they may discover that the number of instructional hours for rural students have to be substantially expanded.
4.36 Increasing class sizes in large urban schools is relatively easier than in other schools. The reason is that larger schools (say, schools with more than 600 students) have the opportunity to merge classes: they can decide to have, say, 3 parallel classes of 7th graders rather than 4. This opportunity is not available to small, rural schools. Therefore, in the short-term, it makes sense to focus on large schools first, and consider the much more difficult task of creating larger class sizes in rural schools – which would have to be merged to larger schools for this to be possible – as a medium-term agenda.
4.37 The education sector could mobilize substantial savings by simply focusing on creating larger classes in large urban schools. Analyses undertaken as part of this report – using data supplied by Romania’s Education Management Information System (EMIS) –
50
suggest that as many as 9 percent of all teaching positions could be made eliminated by such a move. And, arguably, the increases in class sizes entertained in this analysis could likely be done without affecting the quality of education. In particular, the analysis focused on larger schools with more than 600 students and simulated the impact on teachers needed by increase the average class size to 28 students (compared with around 23 now). The analysis shows that almost 18,000 full-time and 2,000 part-time teaching positions (or around 9 percent of all teachers employed in Romania) could be eliminated.
4.38 How does one increase class sizes? Increasing class sizes using the currently available policy instruments – i.e. mainly through tweaking the minimum and maximum allowable norms – has shown its ineffectiveness as illustrated by the continued decline of average class sizes.29 As mentioned in the section on constraints, the main problem is that local authorities and school principals do not have any financial incentives to create classes towards the maximum norm.
4.39 The way to create better incentives to increase class sizes is to change the way local authorities and schools receive their funding for education: instead of financing inputs (ie number of teachers employed), funding should be tied to the number of students enrolled – or, theoretically more appealing, to the number of students graduating with a desired level of competencies. Moreover, the resources should come in the form of a block grant that local authorities and schools can move across budget lines, from personnel to non-personnel costs. Commonly, this type of financing is referred to as “per capita finance” (PCF) and it is implicitly assumed that this is financing being linked to the number of students enrolled.
4.40 The Government has decided to introduce PCF starting with September 2010, following the adoption of legislation to this effect. The local authorities will receive the recurrent budget for education from the central government based on a per student standard costs.
4.41 In terms of the incentives it provides, per capita financing (PCF) can be seen as both a “carrot” and a “stick”. It is a carrot in the sense that, under per capita financing, local providers have a financial incentive to achieve larger class sizes. With money being tied to the number of students (ideally graduating with a desired level of proficiency), local providers do not lose resources when letting go of a teacher or a school; in fact, they reap the savings which they can reinvest in the remaining schools, classes and teachers. However, per capita financing is also a stick: when student numbers decline, funding declines, forcing local providers to take the painful decisions.
29 A word of clarification is in order here: as Table 2 shows, the issue is not that school principals circumvent norms regarding class sizes: class sizes – perhaps with the exception of some very small schools – are within the minimum and maximum norms. Rather, because of the lack of incentives to do otherwise, the issue is that they have gradually moved towards the lower bound of these norms and this implies higher costs – on a per student basis – but not, necessarily, higher learning outcomes. In other words, if school principals faced better incentives they might choose larger classes and decide to spend their resources on other things (e.g. higher salaries to remaining teachers, more non-wage inputs etc).
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4.42 To avoid a potential misunderstanding about per capita financing, it is important to note that per capita financing does not imply that the number of students enrolled is the only factor which determines the amount of money transferred from the center to the local provider. In fact, most countries allow the per student amount to vary, according to a formula. Such formulas usually recognize differences in the cost of providing education in different parts of the country (e.g. in mountainous regions versus densely populated urban areas), or to different students (e.g. primary versus secondary students, vocational versus general education, or tertiary versus non-tertiary students, or native speaking students versus non-native speaking students). Box 2 provides an example of a formula (from Bulgaria) that differentiates between underlying costs of providing education under different circumstances.
4.43 The introduction of PCF is admittedly politically difficult and requires careful technical preparation to address Romania’s specific conditions. A formula where operational expenditures are allocated to schools on the basis of the number of students –with parametric adjustments to account for varying costs of providing education services depending on the type of school, geographic location, access, etc. - must be simple, relevant to sector policies articulated by MERI, valid across the entire country without exceptions, transparent, use only objective factors that cannot be manipulated by local interests, and stable over time.
4.44 There are important risks associated with introducing per student financing. First, experience from other countries suggests that simply changing the financing flows does not change the mindset of local actors (e.g. school principals) unless the restrictive norms governing class sizes, teacher workloads and other staff norms are relaxed. The risk is that if local actors still think that norms determine the number of teachers and staff they can employ – and not the available resources under the per student financing – they may not actively try to reduce their staff numbers. It is important also to think actively to more autonomy at school level. The most important norm to relax is the norm governing class sizes. A first-best option would be to completely abolish the norm (similar to what Latvia did in 2007 and Denmark did several years ago). A second-best would be to take out the class size norms from the education law and have a ministerial regulation to determine the law. This will make it easier to make adjustments, as needed. A third best is to keep the class size norms in the education law but significantly increase the ceilings.
4.45 The second risk is that dropout rates of the most vulnerable students – poor, minorities, etc – is likely to increase as a result of more school closures. There is therefore a need for the Ministry to develop an “action plan” – well before the summer break when school closures are expected – to mitigate these risks. An important part of this plan will be to think creatively about how to use the “buffer fund” set aside by the Ministry of Education and MPF. In addition, the Ministry should quickly develop a registry of all students so that each student can be tracked during the school system (by a unique ID number). Such IT system is also critically important to ensure a correct correlation between financing and student numbers.
4.46 Romania can review the experience of other countries which have successfully implemented such formulas (e.g., Bulgaria (see Box 1 below)), and could run detailed simulations once a formula is developed.
52
Box 1: Introduction of per-capita financing can speed up the rationalization of the school system Bulgaria’s experience could be relevant. Since January 1, 2007, Bulgaria has replaced input-based financing of primary education with PCF. Many municipalities decided they could do with fewer schools. The ministry of education has the final say in school closings and monitors compliance with the fairly elaborate procedures municipalities must undertake before doing so. For instance, a school closure proposal has to include a discussion of how the transportation needs of affected students will be addressed and demonstrate that nearby schools have sufficient capacity to accommodate the additional students. Municipalities can apply for school buses, for additional payments to laid-off teachers, and for resources to refurbish “central” or new “merged” schools. The ministry has put together a list of “protected schools” that cannot be closed down (mainly in mountainous areas) and it provides additional resources to finance them. Initial results are encouraging (see box figure 1 below).
Box figure 1: Public school closures in Bulgaria 1991/02-2008/09
Source: World Bank calculations based on Bulgaria National Statistical Institute website and estimates for 2008/09.
4.47 The introduction of PCF is consistent with the proposed decentralization of financing, administration and human resource management for pre-university education, and it provides the proper incentives to ensure that local administrations feel responsible for the outcomes in education. Decentralization cannot be simply a delegation of financing to local administrations. To be successful, it must: (i) ensure the accountability of local administrations and providers; (ii) balance increased local managerial and control responsibilities with the role of MERI; (iii) link financing to verifiable results; (iv) balance innovation and flexible response by local administrations to new demands with enforcement of national objectives and standards (e.g., equity concerns, teachers’ standards, teaching material, measurement of academic achievements, relevance of education to job market expectations, etc.).
4.48 Some of the new responsibilities which could be enjoyed by decentralized administrations include the freedom to view the state budget resources allocated to education as a block grant, rather than as funds earmarked for wages and other specific uses; responsibility for deciding optimum class size, school distribution and school staffing, including hiring, remuneration and firing of teachers; ability to carry on savings from one year to next; responsibility for management of the entire investment budget and authorize construction of new schools; freedom to subcontract maintenance and operation of school facilities; freedom to rent facilities no longer needed, and use proceeds to finance education; a greater say with regard to offering of facultative courses; and freedom to select and change managers.
050
100150200250300350
1991
/92
1992
/93
1993
/94
1994
/95
1995
/96
1996
/97
1997
/98
1998
/99
1999
/00
2000
/01
2001
/02
2002
/03
2003
/04
2004
/05
2005
/06
2006
/07
2007
/08
2008
/09e
53
4.49 Accountability is essential. Many stakeholders appear to be concerned with the capacity of the government to ensure the needed accountability for financial and managerial decentralization of education, and the risk of local political decisions undermining the objectives of decentralization. These concerns are justified, and they are borne by international experience with decentralization. Actions in essentially three areas could best address them: first, establishing clear financial and management accountability rules for local administrations, with adequate monitoring and enforcing mechanisms; second, re-thinking the role of MERI with a view to safeguarding national objectives and standards; and third, providing stakeholders with timely and sufficient information on decisions made by local authorities.
4.50 It is beyond the scope of this report to identify the specific measures that will work in Romania’s context to strengthen accountability, but for illustrative purposes a few examples may be useful. There should be clear binding criteria governing the consolidation of classes and schools, closure of schools, sub-contracting school services to private firms, withholding funds or carrying them over from one year to next, reporting the execution of the education budget, making public information on financial and managerial decisions, hiring and firing staff, appointing or dismissing managers, etc. Similarly, there should be nationally-applicable standards for the administration of student assessments at key stages of education (e.g., after the 4th, 8th and 12th grade), for core school curricula, for “school score cards” which would allow rating results across schools and regions, including performance of students from minority groups, from low-income households, and with special education needs, etc. Beneficiaries and other stakeholders must also be involved in taking and implementing decisions, through permanent institutions (e.g., parent-teachers associations or/and school boards), regular consultative mechanisms (e.g., annual reporting to taxpayers by local administrations), or ad hoc consultations with stakeholders.
4.51 In this context, the government will also need to reconsider the role of MERI. This would take into account two key objectives: the distribution of responsibilities with local administrations following decentralization; and the capacity for national policy formulation, programming, monitoring and evaluation.
4.52 Some of the MERI functions which need to be enhanced or created were discussed above. Among them is the creation of the capacity to collect, analyze and disseminate the information needed to underpin policy decisions, define outcomes, and monitor their implementation. Equally critical is the role of MERI in coordinating policy formulation and programming for the education sector. While the role of other institutions such as the Parliament or the Presidency can be important, and notwithstanding the important contribution of academia, non-governmental organizations, think tanks or the trade unions in this area, the government ought to consider reconfirming the legal mandate of MERI as sector coordinator. A decision in this sense would need to be supported by capacity building actions.
4.53 There will also be a need to change the culture of budgeting, and implementing the Medium-Term Expenditure Framework (MTEF). Since the mid-1990s to the mid-2000s Romania benefitted from extensive technical assistance and
54
analytical advice on budgeting and public financial management, from the World Bank and other international institutions. However, Romania’s budget culture has yet to change: twenty years after the fall of communism the budget process remains non-transparent and even secretive; budget documents are difficult to read and understand even for people with an economic and financial background; the budget is based on historical claims on resources rather than on the priorities stemming from EU convergence objectives and the need to compete in a global economy.
4.54 MERI has limited say in the budgeting process and final allocation of resources. In general MoPF arbitrates and decides, and proper consultations are hindered by the perennial lateness of the budget approval process. The Parliament may lack the technical capacity needed to digest and analyze budget documentation, and the information needed to assess progress towards specific outcomes. The aggregate level of spending for education tries to reconcile political goals with resource availability and implementation constraints, and is hostage to the pressures of interest groups. External resources, in general, and EU Structural Funds in particular are not mobilized to their full potential, mainly because political interests undermine the continuity and objectivity required.
4.55 The government has decided to strengthen the MTEF process so that it guides the strategic planning processes of line ministries, which includes MERI. The medium term expenditure projections currently prepared by MoPF do not succeed in linking planning and budgeting. Issues include frequent budget revisions, large differences between the approved budget and actual spending, ad hoc reductions in spending, poor multi-annual programming of capital spending.
4.56 As a first step towards addressing these issues, the MTEF reform will entail specification of the broad composition of expenditure and the policy choices they represent, e.g., the trade-off between personnel costs and capital expenditure. Further reforms will be based on the introduction of a Fiscal Responsibility Law, which would mandate compliance with overall revenue and expenditure limits of the annual budget, and ensure that new measures must respect aggregate limits on total expenditure or personnel costs.
4.57 These reforms will set the stage for the implementation of MTEF budgeting starting with the fiscal year 2010, which would determine aggregate revenue and expenditure targets for 2010-2011, and distribute expenditure by functional and economic classification. The MTEF would also include analysis of fiscal risks and scenarios for responding to them. A three-year MTEF for 2011-2013 would set ceilings for major line ministries that collectively account for at least 70 percent of spending, and would define the allocation of the capital expenditure across existing projects in order to ensure their timely completion.
4.58 Finally, given that the most important input in terms of learning is teachers, special attention is needed to steer policies regarding their salaries and their performance. The question of teacher wages is a thorny one, and it is being debated under the proposed introduction of a unified pay system for the public sector. First, expectations are high, and they were hyped by the adoption last October of a law
55
increasing teachers’ salaries by 50 percent across board. Even though this law has been de facto shelved by the new government, trade unions still claim for its implementation. Second, following several wage increases (including three such increases in 2008), average teacher wages were brought in line with other central administrations30, even though the range of salaries is quite broad. In particular, salaries at entry level in the pre-university system appear to be low, while differences between university and pre-university salary levels are large. And third, if and when the government decides to increase teachers’ wages, it should be possible to identify savings stemming from the rationalization of staff and schools, and these increases should be linked to explicit and quantifiable performance criteria related to the quality of education.
4.59 None of the proposed policy options above will be easy to implement, so a sustained Information-Education Communication (IEC) effort is essential. There are strong vested interests opposing the move from input-based allocation of budget resources for education to per capita finance and the rationalization of staff and facilities, especially some trade unions; local authorities may resist increased accountability; some institutions may oppose the proposed greater role of MERI in managing information and making policy recommendations; there may be resistance to greater private financing and provision of services; etc. Moreover, one should not underestimate the inertia of the system and the conservatism of perhaps a large number of the otherwise well intended practitioners of education: people who dedicated their lives and careers to serving an established education model may face have difficulty understanding and accepting reforms. They will not oppose reform because they do not want a better education system, but because they do not have the information needed to document problems and outline possible solutions. In a similar vein, politicians, especially parliamentarians, must also be informed and educated. A stronger technical capacity in the Parliament could facilitate the dialogue with the Executive and other stakeholders.
30 The average salary in central administration exceeds the average salary in the economy.
56
STATISTICAL ANNEX
Source: MERI May 2009, MOPF April-May 2009.
Table 1Education expenditure - Functional Classification w/out Off-budget Expenditure(million RON current prices)
Actual Actual Actual Actual Actual BudgetAdministrations and education levels 2004 2005 2006 2007 2008 2009
State Budget 6,978.7 8,598.8 12,868.2 16,681.7 20,014.4 25,149.8 Administration 115.7 135.8 395.3 1,990.0 1,206.7 Preschool 661.3 814.2 1,285.2 1,454.2 1,958.5 Compulsory education 2,750.8 3,379.4 4,843.4 5,811.9 7,211.1 Primary 0.0 0.0 2,546.7 3,022.4 3,563.8 Lower secondary 20.9 18.6 2,296.7 2,789.4 3,647.3 Secondary 1,676.7 2,101.6 2,742.5 3,004.5 3,974.8 High schools 1,496.5 1,882.7 2,000.0 2,367.0 3,020.9 Vocational 179.6 218.6 368.8 383.4 485.6 Technical schools 0.6 0.3 373.7 254.0 468.3 Tertiary 1,006.2 1,241.3 2,183.3 2,875.4 3,363.1 Other (including special education) 680.4 818.6 1,212.9 1,226.3 1,939.9 Other public administrations /3 87.6 108.0 205.6 319.5 360.3 451.8MERI 1,696.4 2,089.6 3,978.8 6,151.0 7,007.6 5,218.9 Administration 12.8 11.8 15.7 22.3 30.0 Decentralized administration 102.9 124.0 379.6 1,967.8 1,176.7 Preschool 0.0 0.0 0.0 0.0 100.0 Compulsory education 20.9 18.6 184.8 259.9 545.2 Primary 0.0 0.0 0.0 0.0 51.4 Lower secondary 20.9 18.6 184.8 259.9 493.8 Secondary 77.2 134.6 411.3 288.8 519.0 High schools 77.2 134.6 0.0 0.0 0.0 Vocational 0.0 0.0 40.5 38.3 62.9 Technical schools 0.0 0.0 370.8 250.5 456.1 Tertiary 1,006.2 1,241.3 2,183.3 2,875.4 3,363.1 Other 476.4 559.3 804.1 736.9 1,273.6Decentralized administration 1/ 5,194.7 6,401.3 8,683.8 10,211.2 12,646.5 19,479.1 Preschool 661.3 814.2 1,285.2 1,454.2 1,858.5 Compulsory education 2,729.9 3,360.8 4,658.6 5,551.9 6,665.9 Primary 2,546.7 3,022.4 3,512.4 Lower secondary 2,111.9 2,529.5 3,153.5 Secondary 1,599.5 1,967.0 2,331.2 2,715.7 3,455.8 High schools 1,419.3 1,748.1 2,000.0 2,367.0 3,020.9 Vocational and technical 179.6 218.6 328.3 345.1 422.7 Other post-high school 0.6 0.3 2.9 3.5 12.2 Tertiary 0.0 0.0 0.0 0.0 0.0 Other (mostly special education) 204.0 259.3 408.8 489.4 666.3Other central administrations 2/ 87.6 108.0 205.6 319.5 360.3 451.8Off-budget expenditure and transfers 3/ 744.5 865.1 374.0 281.5 1,865.1 8,113.7Total Expenditure 7,723.2 9,463.9 13,242.2 16,963.1 21,879.5 33,263.5Consolidated general budget 7,153.3 0.0 13,764.7 17,308.0 22,506.4Discrepancy -569.9 -9,463.9 522.5 344.9 626.9
1/ Data for 2005 extrapolated from the total reported for preuniversity education based on distribution for 20042/ 2004-2006 figures were extrapolated as proportion to MERI based on 2007-2008 expenditures.3/ Concerning mostly MERI.
57
Source: Table 1
Table 2Education expenditure - Functional Classification - State Budget w/out Off-budget Expenditure(percentage distribution)
Actual Actual Actual Actual Actual BudgetAdministrations and education levels 2004 2005 2006 2007 2008 2009
State Budget 100.0 100.0 100.0 100.0 100.0 100.0 Administration 1.7 1.6 3.1 11.9 6.0 Preschool 9.5 9.5 10.0 8.7 9.8 Compulsory education 39.4 39.3 37.6 34.8 36.0 Primary 0.0 0.0 19.8 18.1 17.8 Lower secondary 0.3 0.2 17.8 16.7 18.2 Secondary 24.0 24.4 21.3 18.0 19.9 High schools 21.4 21.9 15.5 14.2 15.1 Vocational 2.6 2.5 2.9 2.3 2.4 Technical schools 0.0 0.0 2.9 1.5 2.3 Tertiary 14.4 14.4 17.0 17.2 16.8 Other (including special education) 9.7 9.5 9.4 7.4 9.7 Other public administrations /3 1.3 1.3 1.6 1.9 1.8 1.8MERI 24.3 24.3 30.9 36.9 35.0 20.8 Administration 0.2 0.1 0.1 0.1 0.1 Decentralized administration 1.5 1.4 3.0 11.8 5.9 Preschool 0.0 0.0 0.0 0.0 0.5 Compulsory education 0.3 0.2 1.4 1.6 2.7 Primary 0.0 0.0 0.0 0.0 0.3 Lower secondary 0.3 0.2 1.4 1.6 2.5 Secondary 1.1 1.6 3.2 1.7 2.6 High schools 1.1 1.6 0.0 0.0 0.0 Vocational 0.0 0.0 0.3 0.2 0.3 Technical schools 0.0 0.0 2.9 1.5 2.3 Tertiary 14.4 14.4 17.0 17.2 16.8 Other 6.8 6.5 6.2 4.4 6.4Decentralized administration 1/ 74.4 74.4 67.5 61.2 63.2 77.5 Preschool 9.5 9.5 10.0 8.7 9.3 Compulsory education 39.1 39.1 36.2 33.3 33.3 Primary 0.0 0.0 19.8 18.1 17.5 Lower secondary 0.0 0.0 16.4 15.2 15.8 Secondary 22.9 22.9 18.1 16.3 17.3 High schools 20.3 20.3 15.5 14.2 15.1 Vocational and technical 2.6 2.5 2.6 2.1 2.1 Other post-high school 0.0 0.0 0.0 0.0 0.1 Tertiary 0.0 0.0 0.0 0.0 0.0 Other (mostly special education) 2.9 3.0 3.2 2.9 3.3
58
Source: MERI May 2009, MOPF April-May 2009.
Table 3Economic Classification - State Budget w/out Off-budget Expenditure(Million RON current prices)Aggregates 2004 2005 2006 2007 2008
TOTAL 6,978.6 8,598.9 12,868.1 16,627.1 19,951.9 Current Expenditure 6,659.6 8,209.4 10,536.6 13,111.7 15,601.6 Wages 4,155.2 5,265.7 6,933.9 7,216.6 9,848.5 Other non-wage current expenditure 2,504.4 2,943.8 3,602.7 5,895.1 5,753.1 Capital Expenditure 289.7 361.4 2,131.2 3,273.5 3,789.7 Debt Service & Other 29.4 28.0 200.3 242.0 560.6
MERI 1,696.3 2,089.6 3,978.7 6,150.9 7,007.7 Current Expenditure 1,540.4 1,880.5 2,473.1 4,696.3 4,373.6 Wages 191.6 220.9 275.4 314.2 418.0 Other non-wage current expenditure 1,348.8 1,659.6 2,197.7 4,382.1 3,955.6 Capital Expenditure 126.5 181.1 1,477.0 1,421.7 2,602.8 Debt Service & Other 29.4 28.0 28.6 32.9 31.3
Decentralized Administrations 5,194.7 6,401.3 8,683.8 10,211.1 12,646.3 Current Expenditure 5,034.1 6,224.2 7,864.1 8,157.4 10,942.6 Wages 3,906.6 4,974.6 6,524.9 6,691.6 9,196.9 Other non-wage current expenditure 1,127.5 1,249.6 1,339.2 1,465.8 1,745.7 Capital Expenditure 160.5 177.1 648.0 1,844.7 1,174.1 Debt Service & Other 0.0 0.0 171.7 209.1 529.6
Other Public Administrations 87.6 108.0 205.6 265.1 297.9 Current Expenditure 85.0 104.7 199.4 258.0 285.4 Wages 57.0 70.2 133.6 210.8 233.6 Other non-wage current expenditure 28.1 34.6 65.8 47.2 51.8 Capital Expenditure 2.6 3.2 6.2 7.1 12.8 Debt Service & Other 0.0 0.0 0.0 0.0 -0.3
Note: Total resulting from disaggregated information differs from total of Table 1.
59
Table 4Economic Classification - State Budget w/out Off-budget Expenditure(Percentage Distribution)
Aggregates 2004 2005 2006 2007 2008TOTAL 100.0 100.0 100.0 100.0 100.0 Current Expenditure 95.4 95.5 81.9 78.9 78.2 Personnel 59.5 61.2 53.9 43.4 49.4 Non-wage current expenditure 35.9 34.2 28.0 35.5 28.8 Capital Expenditure 4.2 4.2 16.6 19.7 19.0 Debt Service & Other 0.4 0.3 1.6 1.5 2.8
MERI 100.0 100.0 100.0 100.0 100.0 Current Expenditure 90.8 90.0 62.2 76.4 62.4 Personnel 11.3 10.6 6.9 5.1 6.0 Non-wage current expenditure 79.5 79.4 55.2 71.2 56.4 Capital Expenditure 7.5 8.7 37.1 23.1 37.1 Debt Service & Other 1.7 1.3 0.7 0.5 0.4
Decentralized Administrations 100.0 100.0 100.0 100.0 100.0 Current Expenditure 96.9 97.2 90.6 79.9 86.5 Personnel 75.2 77.7 75.1 65.5 72.7 Non-wage current expenditure 21.7 19.5 15.4 14.4 13.8 Capital Expenditure 3.1 2.8 7.5 18.1 9.3 Debt Service & Other 0.0 0.0 2.0 2.0 4.2
Other Public Administrations 100.0 100.0 100.0 100.0 100.0 Current Expenditure 97.0 97.0 97.0 97.3 95.8 Personnel 65.0 65.0 65.0 79.5 78.4 Non-wage current expenditure 32.0 32.0 32.0 17.8 17.4 Capital Expenditure 3.0 3.0 3.0 2.7 4.3 Debt Service & Other 0.0 0.0 0.0 0.0 -0.1
Source: Table 3.
60
Table
5En
rollm
ent in
Pub
lic E
duca
tion 1
990/9
1-20
08/09
(sele
cted y
ears
)
1990
/9120
00/01
2001
/0220
02/03
2003
/0420
04/05
2005
/0620
06/07
2007
/0820
08/09
Total
enro
llmen
t in pu
blic e
duca
tion
5,818
,172
5,044
,006
5,292
,692
5,237
,651
5,130
,382
4,351
,295
4,377
,411
4,667
,123
4,580
,075
4,458
,425
Urb
an2,7
07,45
92,8
58,77
82,8
42,64
22,7
99,20
32,9
81,61
72,8
69,89
33,0
25,90
12,9
64,50
42,8
66,08
8 R
ural
2,336
,547
2,433
,914
2,395
,009
2,331
,179
1,369
,678
1,507
,518
1,641
,222
1,615
,571
1,592
,337
Pre
-uni
vers
ity ed
ucati
on4,8
73,22
14,0
28,34
23,7
18,49
93,6
80,86
33,5
90,40
83,4
35,54
03,3
20,36
83,5
20,21
43,4
35,01
73,3
59,20
7 U
rban
2,336
,547
2,433
,914
2,395
,009
2,331
,179
2,236
,447
2,088
,098
2,199
,847
2,137
,397
2,082
,247
Rur
al1,6
91,79
51,2
84,58
51,2
85,85
41,2
59,22
91,1
99,09
31,2
32,27
01,3
20,36
71,2
97,62
01,2
76,96
0 P
resc
hool
752,1
4161
0,817
398,9
1343
2,612
432,9
0642
9,336
543,3
6562
6,646
628,4
0863
5,650
Urb
an29
2,182
240,8
2726
1,342
258,6
6125
8,751
268,1
1730
5,791
310,4
5732
0,273
Rur
al31
8,635
158,0
8617
1,270
174,2
4517
0,585
275,2
4832
0,855
317,9
5131
5,377
Com
pulso
ry ed
ucati
on2,7
30,30
62,4
11,50
52,3
39,92
22,2
07,33
52,1
13,72
11,9
78,24
41,7
93,43
81,8
31,28
71,7
81,84
11,7
45,02
7 U
rban
1,320
,111
1,294
,898
1,184
,093
1,120
,370
1,038
,548
917,6
7492
0,902
888,5
9586
6,832
Rur
al1,0
91,39
41,0
45,02
41,0
23,24
299
3,351
939,6
9687
5,764
910,3
8589
3,246
878,1
95
Prim
ary
1,090
,172
1,062
,474
1,011
,820
993,5
6894
9,489
895,6
1791
4,667
864,0
4785
6,115
ur
ban
550,0
3853
8,316
493,5
6347
8,612
458,6
5543
2,592
435,7
8541
2,012
410,3
55
rura
l54
0,134
524,1
5851
8,257
514,9
5649
0,834
463,0
2547
8,882
452,0
3544
5,760
Lo
wer s
econ
dary
1,321
,333
1,277
,448
1,195
,515
1,120
,153
1,028
,755
897,8
2191
6,620
917,7
9488
8,912
ur
ban
770,0
7375
6,582
690,5
3064
1,758
579,8
9348
5,082
485,1
1747
6,583
456,4
77
rura
l55
1,260
520,8
6650
4,985
478,3
9544
8,862
412,7
3943
1,503
441,2
1143
2,435
Sec
onda
ry E
duca
tion
1,390
,774
1,006
,020
979,6
641,0
40,91
61,0
43,78
11,0
27,96
098
3,565
1,062
,281
1,024
,768
978,5
30 U
rban
724,2
5489
8,189
949,5
7495
2,148
939,1
4890
2,307
973,1
5493
8,345
895,1
42 R
ural
281,7
6681
,475
91,34
291
,633
88,81
281
,258
89,12
786
,423
83,38
8
High
scho
ols99
5,689
684,4
6169
3,247
736,8
2075
0,973
734,7
9871
4,221
795,3
5578
3,688
760,2
47
urb
an52
2,387
651,8
3869
1,018
704,4
4469
4,720
679,7
4675
0,493
735,7
3071
0,582
r
ural
162,0
7441
,409
45,80
246
,529
40,07
834
,475
44,86
247
,958
49,66
5
Voc
ation
al tra
ining
365,8
6023
9,532
239,9
1226
9,808
264,6
5027
2,372
254,0
6924
7,176
217,6
2218
7,939
u
rban
138,1
1120
2,120
225,6
6322
0,555
224,3
1820
7,764
203,6
3817
9,879
155,2
94
rur
al10
1,421
37,79
244
,145
44,09
548
,054
46,30
543
,538
37,74
332
,645
P
ost-h
igh sc
hool
seco
ndar
y edu
catio
n29
,225
82,02
746
,505
34,28
828
,158
20,79
015
,275
19,75
023
,458
30,34
4
urb
an63
,756
44,23
132
,893
27,14
920
,110
14,79
719
,023
22,73
629
,266
r
ural
18,27
12,2
741,3
951,0
0968
047
872
772
21,0
78 U
nive
rsity
Edu
catio
n19
2,810
370,9
1242
4,864
447,6
3346
8,024
486,4
1951
3,678
520,2
6351
6,650
463,5
68
Sour
ce: M
ERI r
epor
ts Ma
y-Jun
e 200
9, ex
cept
for 19
90/91
using
INS
data,
and d
ata on
unive
rsity
educ
ation
2000
/01-2
007/0
8 fro
m ME
RI A
nnua
l Rep
ort 2
008.
61
Table
6Te
achi
ng S
taff
in Pu
blic E
duca
tion 1
990/9
1-200
8/09 (
selec
ted ye
ars)
Teac
hing
Sta
ff19
90/91
2000
/0120
01/02
2002
/0320
03/04
2004
/0520
05/06
2006
/0720
07/08
2008
/09
Teac
hing
Sta
ff Pu
blic
Educ
ation
271,7
1929
4,938
265,3
7027
5,357
287,7
2328
5,861
281,0
3427
7,318
276,8
4931
7,628
urba
n19
2,639
180,2
5918
3,751
189,6
0920
0,614
190,4
6420
8,574
207,2
8220
1,515
rura
l10
2,299
85,11
191
,606
98,11
410
5,121
97,39
711
6,070
115,4
5411
6,113
Pre
-univ
ersit
y Edu
catio
n25
7,792
266,9
7923
6,606
245,7
3825
7,586
242,6
3422
6,879
256,9
1725
3,353
252,1
17 U
rban
164,6
8015
1,495
154,1
3215
9,472
151,5
5114
1,936
156,9
0215
4,382
152,5
30 R
ural
102,2
9985
,111
91,60
698
,114
91,08
384
,943
100,0
1598
,971
99,58
7 P
resc
hool
37
,007
34,02
328
,542
32,17
331
,373
32,24
429
,439
37,14
437
,419
38,18
6 U
rban
18,73
416
,082
17,84
217
,471
18,20
616
,985
21,08
920
,936
21,66
0 R
ural
15,28
912
,460
14,33
113
,902
14,03
812
,454
16,05
516
,483
16,52
6 C
ompu
lsory
Edu
catio
n16
3,865
162,6
0614
0,242
143,7
9715
2,280
140,0
9513
2,381
147,3
7914
5,454
145,0
11 U
rban
80,73
272
,602
71,56
173
,738
68,48
064
,664
69,18
568
,380
67,23
6 R
ural
81,87
467
,640
72,23
678
,542
71,61
567
,717
78,19
477
,074
77,77
5 P
rimar
y60
,312
48,22
052
,452
55,58
251
,836
50,19
954
,938
54,07
653
,976
ur
ban
27,60
321
,699
22,85
223
,855
22,76
222
,932
24,15
123
,921
23,89
7
rura
l32
,709
26,52
129
,600
31,72
729
,074
27,26
730
,787
30,15
530
,079
Low
er se
cond
ary
102,2
9492
,022
91,34
596
,698
88,25
982
,182
92,44
191
,378
91,03
5
urba
n53
,129
50,90
348
,709
49,88
345
,718
41,73
245
,034
44,45
943
,339
ru
ral
49,16
541
,119
42,63
646
,815
42,54
140
,450
47,40
746
,919
47,69
6 S
econ
dary
Edu
catio
n56
,920
70,35
067
,822
69,76
873
,933
70,29
565
,059
72,39
470
,480
68,92
0 U
rban
65,21
462
,811
64,72
968
,263
64,86
560
,287
66,62
865
,066
63,63
4 R
ural
5,136
5,011
5,039
5,670
5,430
4,772
5,766
5,414
5,286
Hig
h sch
ools
51,73
164
,018
60,31
660
,055
64,53
760
,017
49,66
555
,072
55,63
554
,819
u
rban
59,86
356
,886
56,79
660
,904
56,71
447
,370
52,25
552
,817
51,79
4
rur
al4,1
553,4
303,2
593,6
333,3
032,2
952,8
172,8
183,0
25 V
ocati
onal
traini
ng4,2
094,8
946,3
868,6
448,2
489,5
4614
,654
16,02
813
,481
12,40
8
urb
an3,9
434,8
656,8
896,2
597,4
3212
,188
13,10
610
,903
10,18
8
rur
al95
11,5
211,7
551,9
892,1
142,4
662,9
222,5
782,2
20 P
ost-h
igh sc
hool
seco
ndar
y edu
catio
n98
01,4
381,1
201,0
691,1
4873
274
01,2
941,3
641,6
93
urb
an1,4
081,0
601,0
441,1
0071
972
91,2
671,3
461,6
52
rur
al30
6025
4813
1127
1841
Uni
vers
ity E
duca
tion
13,92
727
,959
28,76
429
,619
30,13
730
,857
31,54
330
,583
31,96
427
,325
Sour
ce: M
ERI r
epor
ts Ma
y-Jun
e 200
9, ex
cept
for 19
90/91
using
INS
data,
and d
ata on
unive
rsity
educ
ation
2000
/01-2
007/0
8 fro
m ME
RI A
nnua
l Rep
ort 2
008.
62
Tabl
e 7Ra
tio S
tude
nts/T
each
ers 1
990/9
1-20
08/09
(sele
cted
year
s)
Ratio
s19
90/91
2000
/0120
01/02
2002
/0320
03/04
2004
/0520
05/06
2006
/0720
07/08
2008
/09
Tota
l Pub
lic E
duca
tion
21.4
17.1
19.9
19.0
17.8
15.2
15.6
16.8
16.5
14.0
urba
n14
.115
.915
.514
.814
.915
.114
.514
.314
.2 ru
ral
22.8
28.6
26.1
23.8
13.0
15.5
14.1
14.0
13.7
Pre
-uni
vers
ity E
duca
tion
18.9
15.1
15.7
15.0
13.9
14.2
14.6
13.7
13.6
13.3
Urb
an14
.216
.115
.514
.614
.814
.714
.013
.813
.7 R
ural
16.5
15.1
14.0
12.8
13.2
14.5
13.2
13.1
12.8
Pre
scho
ol
20.3
18.0
14.0
13.4
13.8
13.3
18.5
16.9
16.8
16.6
Urb
an15
.615
.014
.614
.814
.215
.814
.514
.814
.8 R
ural
20.8
12.7
12.0
12.5
12.2
22.1
20.0
19.3
19.1
Com
pulso
ry E
duca
tion
16.7
14.8
16.7
15.4
13.9
14.1
13.5
12.4
12.3
12.0
Urb
an16
.417
.816
.515
.215
.214
.213
.313
.012
.9 R
ural
13.3
15.4
14.2
12.6
13.1
12.9
11.6
11.6
11.3
Prim
ary
18.1
22.0
19.3
17.9
18.3
17.8
16.6
16.0
15.9
ur
ban
19.9
24.8
21.6
20.1
20.2
18.9
18.0
17.2
17.2
ru
ral
16.5
19.8
17.5
16.2
16.9
17.0
15.6
15.0
14.8
Low
er se
cond
ary
12.9
13.9
13.1
11.6
11.7
10.9
9.910
.09.8
ur
ban
14.5
14.9
14.2
12.9
12.7
11.6
10.8
10.7
10.5
ru
ral
11.2
12.7
11.8
10.2
10.6
10.2
9.19.4
9.1 S
econ
dary
Edu
catio
n24
.414
.314
.414
.914
.114
.615
.114
.714
.514
.2 U
rban
11.1
14.3
14.7
13.9
14.5
15.0
14.6
14.4
14.1
Rur
al54
.916
.318
.116
.216
.417
.015
.516
.015
.8 H
igh
scho
ols
19.2
10.7
11.5
12.3
11.6
12.2
14.4
14.4
14.1
13.9
u
rban
8.711
.512
.211
.612
.214
.314
.413
.913
.7
rur
al39
.012
.114
.112
.812
.115
.015
.917
.016
.4 V
ocat
iona
l tra
inin
g86
.948
.937
.631
.232
.128
.517
.315
.416
.115
.1
urb
an35
.041
.532
.835
.230
.217
.015
.516
.515
.2
rur
al10
6.624
.825
.222
.222
.718
.814
.914
.614
.7 P
ost-h
igh
scho
ol se
cond
ary e
duca
tion
29.8
57.0
41.5
32.1
24.5
28.4
20.6
15.3
17.2
17.9
u
rban
45.3
41.7
31.5
24.7
28.0
20.3
15.0
16.9
17.7
r
ural
609.0
37.9
55.8
21.0
52.3
43.5
26.9
40.1
26.3
Uni
vers
ity E
duca
tion
13.8
13.3
14.8
15.1
15.5
15.8
16.3
17.0
16.2
17.0
Sour
ce: T
ables
5 an
d 6
63
Tabl
e 8
Num
ber o
f cla
sses
in p
re-u
nive
rsity
edu
catio
n, 2
001/
02-2
008/
09
Num
ber o
f cla
sses
2001
/02
2002
/03
2003
/04
2004
/05
2005
/06
2006
/07
2007
/08
2008
/09
Pre-
univ
ersi
ty E
duca
tion
171,
159
168,
027
162,
983
157,
682
155,
423
166,
720
165,
588
161,
658
Ur
ban
101,
593
99,3
3595
,752
92,3
3687
,209
93,6
8492
,677
89,8
59
Rura
l69
,566
68,6
9267
,231
65,3
4668
,214
73,0
3672
,911
71,7
99 P
resc
hool
17
,938
18,8
6118
,684
18,5
8725
,088
29,0
6429
,541
30,0
50
Urba
n10
,658
11,0
8710
,873
10,8
5111
,619
13,2
7013
,273
13,6
83
Rura
l7,
280
7,77
47,
811
7,73
613
,469
15,7
9416
,268
16,3
67 C
ompu
lsor
y Ed
ucat
ion
112,
867
108,
031
104,
041
99,8
0393
,227
96,6
3295
,066
93,0
22
Urba
n54
,147
50,8
8748
,318
45,8
5941
,853
43,1
1642
,072
41,0
57
Rura
l58
,720
57,1
4455
,723
53,9
4451
,374
53,5
1652
,994
51,9
65
Prim
ary
55,1
7053
,071
52,0
7050
,769
48,8
1650
,469
48,7
2647
,887
u
rban
24,1
8522
,606
21,8
7521
,359
20,5
4521
,044
20,2
8420
,012
r
ural
30,9
8530
,465
30,1
9529
,410
28,2
7129
,425
28,4
4227
,875
Lo
wer
sec
onda
ry
57,6
9754
,960
51,9
7149
,034
44,4
1146
,163
46,3
4045
,135
u
rban
29,9
6228
,281
26,4
4324
,500
21,3
0822
,072
21,7
8821
,045
r
ural
27,7
3526
,679
25,5
2824
,534
23,1
0324
,091
24,5
5224
,090
Sec
onda
ry E
duca
tion
40,3
5441
,135
40,2
5839
,292
37,1
0841
,024
40,9
8138
,586
Ur
ban
36,7
8837
,361
36,5
6135
,626
33,7
3737
,298
37,3
3235
,119
Ru
ral
3,56
63,
774
3,69
73,
666
3,37
13,
726
3,64
93,
467
Hi
gh s
choo
ls27
,805
28,2
8528
,011
27,0
1125
,913
29,5
4030
,435
28,6
87
u
rban
26,0
2326
,417
26,1
8625
,446
24,5
9027
,809
28,5
6126
,828
rura
l1,
782
1,86
81,
825
1,56
51,
323
1,73
11,
874
1,85
9
Voca
tiona
l tra
inin
g10
,694
11,4
5711
,094
11,4
4710
,542
10,6
369,
565
8,60
7
u
rban
8,99
69,
608
9,26
89,
378
8,51
58,
673
7,81
97,
042
rura
l1,
698
1,84
91,
826
2,06
92,
027
1,96
31,
746
1,56
5
Post
-hig
h sc
hool
sec
onda
ry e
duca
tion
1,85
51,
393
1,15
383
465
384
898
11,
292
urb
an1,
769
1,33
61,
107
802
632
816
952
1,24
9
ru
ral
8657
4632
2132
2943
Sour
ce: M
ERI r
epor
ts M
ay-J
une
2009
.
64
Table
9Nu
mber
of st
uden
ts pe
r clas
s 200
1/02-2
008/0
9
Stud
ents
per c
lass
2001
/0220
02/03
2003
/0420
04/05
2005
/0620
06/07
2007
/0820
08/09
Pre-u
niver
sity E
duca
tion
21.7
21.9
22.0
21.8
21.4
21.1
20.7
20.8
Urb
an24
.024
.124
.324
.223
.923
.523
.123
.2 R
ural
18.5
18.7
18.7
18.3
18.1
18.1
17.8
17.8
Pre
scho
ol 22
.222
.923
.223
.121
.721
.621
.321
.2 U
rban
22.6
23.6
23.8
23.8
23.1
23.0
23.4
23.4
Rur
al21
.722
.022
.322
.120
.420
.319
.519
.3 C
ompu
lsory
Edu
catio
n20
.720
.420
.319
.819
.219
.018
.718
.8 U
rban
23.9
23.3
23.2
22.6
21.9
21.4
21.1
21.1
Rur
al17
.817
.917
.817
.417
.017
.016
.916
.9 P
rimar
y19
.319
.119
.118
.718
.318
.117
.717
.9
urba
n22
.321
.821
.921
.521
.120
.720
.320
.5
rura
l16
.917
.017
.116
.716
.416
.315
.916
.0 L
ower
seco
ndar
y 22
.121
.821
.621
.020
.219
.919
.819
.7
urba
n25
.324
.424
.323
.722
.822
.021
.921
.7
rura
l18
.818
.918
.718
.317
.917
.918
.018
.0 S
econ
dary
Edu
catio
n24
.325
.325
.926
.226
.525
.925
.025
.4 U
rban
24.4
25.4
26.0
26.4
26.7
26.1
25.1
25.5
Rur
al22
.824
.224
.824
.224
.123
.923
.724
.1 H
igh sc
hools
24.9
26.0
26.8
27.2
27.6
26.9
25.7
26.5
u
rban
25.0
26.2
26.9
27.3
27.6
27.0
25.8
26.5
r
ural
23.2
24.5
25.5
25.6
26.1
25.9
25.6
26.7
Voc
ation
al tra
ining
22.4
23.5
23.9
23.8
24.1
23.2
22.8
21.8
u
rban
22.5
23.5
23.8
23.9
24.4
23.5
23.0
22.1
r
ural
22.3
23.9
24.1
23.2
22.8
22.2
21.6
20.9
Pos
t-high
scho
ol se
cond
ary e
duca
tion
25.1
24.6
24.4
24.9
23.4
23.3
23.9
23.5
u
rban
25.0
24.6
24.5
25.1
23.4
23.3
23.9
23.4
r
ural
26.4
24.5
21.9
21.3
22.8
22.7
24.9
25.1
Sour
ce: T
ables
5 an
d 8.
65
5. HEALTH
A. Introduction
5.1 This chapter highlights the recent developments in the health sector, in terms of institutional aspects and financing, updating the findings of the 2006 PEIR report. The chapter assesses the extent to which the reforms and measures undertaken by the government in the past three years are conducive to improving cost efficiency in service delivery. Aspects concerning the institutional setup and affecting the success of reforms are also highlighted, together with a brief update on health equity issues. As health profiles and indicators change slowly, the report does not analyze in detail recent changes in health outcomes, but rather highlights the gaps in the institutional setup that could impair the efforts to improve services and stimulate cost-efficiency.
5.2 The reforms undertaken in the past two decades have been substantial and are still on-going, but the agenda remains unfinished. A reform package introduced in 2006 consolidated and built upon a number of existing laws focusing mainly on decentralization, prevention and the development of primary health care, private sector involvement in health financing, and the clarification of the relationships between the health and social care systems. Decentralization is on-going and a new strategy for advancing this process has been recently approved (May 2009).
5.3 While public health expenditure may not be high compared with similar European countries, there is ample room to improve technical and allocative efficiency of current spending, which remains biased towards hospital care. Overall, despite their substantial fiscal impact, health reforms and investment plans are poorly articulated in the MTEF, as illustrated by the analysis of previous years’ plans versus execution. In fact, the 2010 budget is not consistent with the MTEF. Further, experts in the sector tend to agree that current revenues might not be sufficient to sustain expenditures for the on-going programs, some of which may have to be stopped to ensure the payment of salaries.
5.4 Despite a stated commitment to reduce inequities, disparities in access to medical services persist between rural and urban areas and among income groups. They reflect both supply-side constraints, as investments in services and infrastructure are biased towards richer and urban areas, as well as demand side barriers, including informal payments. A common perception is also that the financing of the sector remains inequitable. Indeed, although the reliance on contributions has decreased over time, following the introduction of earmarked sin taxes, the number of people who contribute to the funding of the quasi-universal system is low, which undermines solidarity in the system.
66
B. Institutional Setup and Challenges in Health Care Provision
5.5 Initial reforms. Until the late nineties, Romania had a Semashko health system which faced a number of typical challenges: a small percentage of GDP allocated to healthcare; poor responsiveness to local health needs; growing inequities in resource allocation (the “under the table” payments being affordable to only a privileged few); poor quality primary care caused by underfunding and a bias towards more expensive hospital care; inefficiencies in spending caused by inappropriate incentives (such as input-based funding).
5.6 As a response to these problems, successive governments after 1996 promoted reforms to ensure the provision of service and allocation of resources in a manner consistent with local market demand. Like in many countries of the region, reforms in the late nineties attempted to “transform the centralized, tax-based system into a decentralized and pluralistic social health insurance system with contractual relationships between purchasers, the health insurance funds and health care providers” (Health in Transition - HiT, 2008). Such a system aims to separate the financing of health services from provision (GPs, hospitals etc.) and from regulation, which is the responsibility of the Ministry of Health (MoH). The purpose is to increase competition for funding among providers, who in turn would have incentives to improve the quality of services.
5.7 A mandatory universal health insurance was introduced in 1998, and the roles of the key institutions were redefined to move towards a social insurance scheme. MoH is responsible for the national health policy and regulates the sector. It legally lost control over the largest part of the financing. The Ministry has 42 branches in each county (DPHAs), which develop and implement health programs, control healthcare provision, monitor the health status of the population, and provide public health services. Funding for health care is primarily channeled through the National Health Insurance Fund (NHIF) – a quasi-autonomous organization – which purchases health services through its 42 district branches (DHIF).
5.8 Services to which the insured are entitled are defined in a framework contract, elaborated by the NHIF, agreed by MoH and approved by the Government, and in its implementing norms. Primary care is provided by family doctors, ambulatory secondary care by hospital outpatient services, diagnosis centers, and office-based specialists. Inpatient care (up to tertiary level) is provided in public hospitals as well as social care units. Other providers include home care providers, ambulance companies, prosthesis providers and outpatient pharmacies.
5.9 Unfinished agenda. After successive reforms that put in place the legislative framework, major challenges remain and many existing organizations have yet to embrace their new roles and responsibilities. Part of the cause is that while legislative changes can be made relatively easily by administrative decision, well-functioning institutions require longer term to mature. In addition, there is a strong resilience to real change from key players in the system. The following are some of the key challenges:
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• While legally separated, the regulator, purchaser and provider functions are not fully split de facto into autonomous organizations. The sector thus preserves some of the features of the previous centralized Semashko system. In particular, the NHIF and its regional branches, and providers of services, continue to remain overly dependent on MoH. The budget of the NHIF is proposed by the government and approved in Parliament, and the difference between revenues and expenditures (surplus in 1999 and 2002, or deficit since 2003) is transferred to or subsidized by the state budget, respectively. While initially NHIF should have had an elected board, since 2002, the president of the NHIF has been nominated by the Prime Minister, ranked as Secretary of State. Indeed, a new government ordinance in 2005 requiring that the board be elected was never implemented. On the provider side, while hospitals could in theory compete for provision, rules are such that the bulk of managerial decisions require prior approval from the MoH, e.g. for hiring/firing staff and salary levels, as well as for reorganization issues, making hospitals dependent on the regulator.
• The hospital reform agenda has yet to be seriously tackled. Although the number of hospital beds has continued to decrease in the past three years (from a total of 141,225 beds in 2006 to 126,375 in 2008), the rationalization of the system is an unfinished agenda. The autonomy and accountability of hospitals is very limited. Resistance to change is in part explained by the fact that the majority of decision-makers in the system comes from the hospital sector and has limited interest in changing the status quo (HIT 2008). A slightly different but not contradictory perception is that most decisions about hospitals are politicized and not motivated by technical reasons. This is unlikely to change until a clear strategy is in place, its objectives publicly debated, and its implementation underpinned by a solid monitoring and evaluation framework.
• Many quality assurance mechanisms are either missing or not enforced. Authorization and licensing procedures are complicated and compliance with standards is low. Accreditation of providers other than hospitals was terminated; accreditation of hospitals although required by law is stalled. Most clinical guidelines and protocols are not available.
• The system fails to deliver on its promise to provide a broad package of services to the population. Medical benefits to the insured are detailed in a framework contract between NHIF and providers and endorsed by the MoH. The benefits package is defined in broad terms31, and the services offered are not based on priorities. As funds are generally insufficient, the contract mentions that services will be provided “to the extent permitted by the available financing”. This generates
31 The benefits package includes health services, pharmaceuticals (with and without co-payment) and medical devices: preventive services; ambulatory healthcare; hospital care; limited dental services; medical emergency services; rehabilitation; pre-, intra- and post-birth medical assistance; home care nursing; drugs; health care materials; and orthopedic devices. Services explicitly excluded are professional risks, diseases and work accidents, some high-technology procedures, some dental services, cosmetic surgery, in vitro fertilization, curative health care assistance in the workplace, luxury accommodation services in hospital. See also HiT report Romania, 2008.
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uncertainties as to the priorities which will be financed, as there are no clear rules about which services should be covered first. Because the demand (and expectations) exceeds what the system is able to deliver, patients are left to compete for resources. They solve this problem though a combination of interpersonal connections, improvisation, and informal payments to providers which create a parallel system of incentives. This contributes to the perception that the health sector is one of the most corrupt parts of Romanian society (Transparency International 2006) and probably compounds socio-economic inequalities in access to health services.
C. Public Spending on Health Services
5.10 While public spending has gradually increased in recent years towards levels that are comparable to those observed in countries with similar levels of income (from 3.4% of GDP in 2000 to 3.9% of GDP in 2007), the system remains biased towards hospital-based services. The in-patient care admissions indicator per 100 is 24 in Romania, compared to just 17 in EU-15 and 20.7 in NMS-8 (2007). Consequently, 46.4 percent of NHIF spending (2007) was for hospital care, compared to just 40 percent in OECD countries, while NHIF expenditure on primary health care remained low at 5.8 percent in 2007. Out of the total current expenditure on health care, Romania spends significantly more than other EU member states for in-patient curative and rehabilitative care.
Table 13. Comparative functional spending on health in selected EU members, 2006 DE EE ES LT HU PL RO SK FI
Services of curative and rehabilitative care, o/w 53.9 54.98 56.12 51.86 47.81 53.68 48.99 44.69 58.18 Services of curative care 50.6 52.42 56.12 47.92 45.7 50.65 48.36 44.06 55.1 Services of rehabilitative care 3.29 2.56 0 3.95 2.11 3.02 0.62 0.63 3.08Services of in-patient curative and rehabilitative care 28.43 30.7 22.55 31.18 26.18 30.6 40.94 21.42 28.46 Services of long-term nursing care 12.49 3.53 8.46 4.04 2.8 6.91 0.88 0.43 12.67Ancillary services to health care 4.61 8.8 5.05 5.1 4.06 3.92 3.81 7.25 3Medical goods dispensed to out-patients, o/w 19.89 27.44 24.63 35.9 36.26 31.57 32.38 39.07 18.17 Pharmaceuticals and other medical non-durables 15.39 23.81 22.44 31.31 32.02 28.82 31.69 31.13 15.28 Therapeutic appliances and other medical durables 4.5 3.63 2.2 4.59 4.24 2.75 0.68 7.94 2.89Prevention and public health services 3.46 2.53 2.39 1.27 7.07 2.45 5.9 4.49 5.37Health administration and health insurance 5.65 2.71 3.35 1.83 1.18 1.47 7.6 4.07 2.61
Not specified by kind : 0 0 0 0.83 : 0.44 0 :Administration and provision of social services in kind to assist living with disease and impairment 6.56 0 0.6 3.35 : 0.44 0 2.94 15.12
Current health care expenditure (CHE) 100 100 100 100 100 100 100 100 100Source: Eurostat
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5.11 Moreover, in 2006, nine out of the 20 most frequent DRGs (representing 15 percent of cases treated in acute care hospitals) could have been treated in outpatient facilities. Also, because primary care remains underdeveloped, patients tend to seek care from emergency rooms in hospitals. Only a quarter of the patients who visit emergency departments are assessed to be in need of urgent care (HiT, 2008). Table 14. Romania: Evolution of spending in health functional classification 2003 2004 2005 2006 Services of curative and rehabilitative care 53.81 48.58 45.78 48.99
Services of curative care 53.08 47.95 45.15 48.36
Services of rehabilitative care 0.73 0.63 0.64 0.62 Services of in-patient curative and rehabilitative care 44.7 38.64 38.65 40.94
Services of long-term nursing care 0.2 0.39 0.34 0.88
Ancillary services to health care 3.63 4 3.79 3.81
Medical goods dispensed to out-patients 22.27 30.3 30.75 32.38 Pharmaceuticals and other medical non-durables 21.76 29.43 30.12 31.69 Therapeutic appliances and other medical durables 0.5 0.88 0.63 0.68
Prevention and public health services 5.28 6.92 6.63 5.9 Health administration and health insurance 6.52 5.18 4.04 7.6
Not specified by kind 8.3 4.63 8.67 0.44 Administration and provision of social services in kind to assist living with disease and impairment 0 0 0 0
Current health care expenditure (CHE) 100 100 100 100
Source: Eurostat
5.12 In addition, the amount spent by NHIF on medicines is high (29 percent of expenditures in 2008), which represents the second highest expenditure item after hospital services. A recent analysis of the pharmaceutical sector32 in Romania highlighted a series of issues, in particular the lack of cost-benefit analysis in the decisions made to introduce new expensive drugs in the reimbursement list; the lack of prescription guidelines and monitoring of prescriptions practices; and the existing rationing mechanism through pharmacy budget ceilings.
5.13 A reference pricing mechanism is in place and, seeking to control costs, a ministerial order (February 2009) redefined the price setting mechanism for drugs to be reimbursed by the NHIF. Legislation was also passed in March 2009 to promote generic drugs prescription in the framework contracts with service providers. Many of the required reforms would take time but, in the short term, a thorough and transparent reassessment of the existing list of reimbursed drugs, the clarification of the criteria for
32 Romania: Pharmaceutical sector analysis, 2007, Andreas Seiter, World Bank
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future inclusions and the review of copayment rates and exemptions could control cost and improve the equity of the system.
5.14 Provider payments. Some of the issues highlighted above are direct consequences of the incentives embedded in the structure of payments to providers. Currently, the payment systems are (HiT, 2008):
• Primary care: a mix of capitation (85%) and fee for service (15%)
• Ambulatory specialized care, including dental: fee for service base on a point scale.
• Hospitals receive prospective payments consisting of a mix of:
o Acute care: case payment, either DRGs (case payment by diagnosis, currently in 278 acute care hospitals) or flat rate per case (around 230 inpatient care units);
o Long-term or rehabilitation: a budget based on the number of estimated cases, the optimal length of stay and negotiated tariff per day;
o National public health programs: A sum for pharmaceuticals and medical supplies, where the DRG proves to be insufficient (see below)
o Other: tariffs for services, fee-for-service.
5.15 Reforms in the payment mechanisms are on-going. For example, the DRG system has been gradually introduced and extended since 2005 to all acute care hospitals.
5.16 Nevertheless, further reforms are required, in particular to reduce the hospital bias:
5.17 First, primary healthcare is reportedly under-funded, and family doctors cannot / do not have incentives to upgrade their equipment or attend training programs. As a result, hospitals remain the main providers of some basic treatments and diagnostics. Because hospitals are more remote from the patients, they sometimes require to be hospitalized simply for accommodation.
5.18 Second, the current DRG system (case payment by diagnosis) has not yet been evaluated, but a number of observations can already be made:
• The initial DRG rates were transposed from the Australian system and need to be better adapted to the Romanian context. A practical option to initiate the process would be to concentrate on the high cost/high volume areas of activities and take data from a sample of hospitals known to have more developed internal costing processes.
• Some DRGs appear significantly underfunded and resources from the national public health programs, which should have covered preventive services, have increasingly been used to top-up hospital funding. For instance, oncology
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treatment is funded both through DRGs and the national program for non-communicable diseases, which has de facto become a vertical treatment program managed by NHIF. Although no evaluation of the impact of public health programs has taken place, this situation is likely to have undermined their capacity to meet their intended purpose. In addition, the induced fragmentation of funding generates complex incentives at the hospital level.
• By shifting financing from an input base to a service base, the system potentially create incentives to reduce the excessive number of hospital beds and improve the efficiency of hospital production. In reality, hospitals have very limited flexibility in using the revenues generated from the DRGs (they still operate under line-item budgets) and their authority to adapt the way they produce services is bound by norms, regulations and administrative controls. The average length of stay in hospitals has slightly dropped from 6.9 days in 2006 to 6.7 days in 2008.
5.19 Budgetary processes and MTEF. Another shortcoming in the management of public expenditure in the health sector is the fact that investments and reforms are poorly anchored in the MTEF. As the following tables illustrates, estimates for future years’ expenditure are frequently and significantly revised. These revisions can be only partially traced back to the introduction of new programs – such as the introduction of the prevention and control of diseases programs in 2007.
5.20 In general, the impact of reforms or investments is not adequately forecasted (if it is at all). Among recent examples, across the board salary increases granted last year were not built into the payments to hospitals, which since have been struggling to pay them. There is also no evidence - beyond stated intentions - that the ambitious hospital construction program planned before the economic crisis was actually embedded in a clear rationalization strategy and/ or master plan and that all the (financial and other) implications in terms of closing or reconversion of existing facilities, human resources, etc – had been accounted for. In the current context, this plan appears to have been at least partially put on hold, but it would make sense to reassess it thoroughly before undertaking major investments.
5.21 The new policies announced after the 2009 change in government have yet to be explicitly reflected in the MTEF. For instance, in the first half of 2009, a decentralization strategy was prepared. In effect this is a shift from deconcentration to decentralization. The most important measures consist in the transfer of the responsibilities over hospitals of local interest from DPHAs to local administrations. The responsibilities to be transferred include: ensuring quality management and good governance over public funds in these hospitals; payments of utilities; financing of preventive and curative programs in school medical cabinets; and financing of the Roma health mediators. While the government has already approved the strategy, the fiscal impact has not been included in the MTEF. The question of the resources which will be available to local governments to meet this new mandate does not appear to have been resolved.
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Table 15. MTEF projections, budgets and actual spending, 2006-2009 (Bn Ron) Total health budget
2006 2007 2008 2009 2010 2011 2012 MTEF 2006 1.34 1.35 1.34 1.24 MTEF 2007 1.57 3.5 3.6 3.84 4.11 MTEF 2008 3.81 4.65 7.42 7.35 7.07 MTEF 2009 3.6 4.14 5.1 5.54 5.36
Prevention and control of diseases program (introduced in 2007)
2006 2007 2008 2009 2010 2011 2012 MTEF 2006 n/a n/a n/a n/a MTEF 2007 n/a 1.57 1.43 1.56 1.69 MTEF 2008 2.25 2.63 5.58 5.68 5.38 MTEF 2009 2.5 1.36 2.19 2.28 2.37
Source: MoPF. Figures in grey are actual.
5.22 The lack of credibility of the MTEF and its limited ability to reflect policies and investments undermines the capacity of the MoH to make a case for increased funding. In a sense, this is also a symptom of a more deeply entrenched shortcoming of the policy process in the health sector: reforms in Romania are generally elaborated by the MoH and public or parliamentarian debates and efforts to build consensus around priorities are limited (HiT 2008). In addition, there are no systematic efforts to monitor and evaluate the impact of policies and to ascertain whether they are reaching the stated objectives. In these conditions, and although by and large there is a technical consensus about what needs to be done, that is reducing inequalities and strengthening outpatient care, policies tend to be driven by conviction rather than evidence generated in the context of Romania.
D. Equity Issues
5.23 Since 2002, when the National Anti-Poverty and Social Inclusion Plan was approved, successive governments have implemented measures for poverty reduction. Some of these reforms sought to improve access to public social services (health, education). The 2008 HiT report highlights some sector-specific measures which seek to reduce inequalities: incentives for family doctors to locate in isolated or disadvantaged area and hiring Roma health mediators to ensure the access of Roma population to medical services. Since 1999, the uninsured have been entitled to free emergency care and a few basic services. However, the impact of these measures has not been evaluated. While not directly pertaining to the health sector, the development of a social work system - agencies for people with disabilities, protection of children and against domestic violence- also has the potential to reduce the social burden on the health sector (e.g., hospitalization for social reasons). Such agencies have started to appear but they still need to be developed.
5.24 The previous PEIR report highlighted that poverty was a major cause of inequalities in health outcomes, the distribution of services and resources and access to
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services. In addition, some features of the way revenues are raised for the health sector, suggest that the burden is not fairly shared, which undermines the potential for mobilizing additional resources and contributes to the overall impression that the system is inequitable.
5.25 Outcomes. Surprisingly little information is available about socio-economic differences in health outcomes in Romania, although differences in health outcomes across counties are most certainly a reasonable proxy. For example, in 2003, infant mortality rates per 1000 live births varied from 9 (in Bucharest) to 25 (Ialomiţa). Also, in 2007 the number of TB deaths per 100,000 varied significantly among counties, from 2 (Buzău) to 20 (Giurgiu) (INS data). Some evidence is also available about the poor health status of the Roma population, whose life expectancy is 10 years lower than the general population and infant mortality 40 percent higher.
5.26 Table 13 from the HBS 2008 presents some recent data about self-assessed health, which indicates that the poor report slightly more handicaps but significantly fewer chronic diseases and episodes of illness than the rich. This data should however be interpreted with caution: since health outcomes (and, as we will see below, coverage rates) for the poor are lower than for the rich, the lower perceived need for care may probably reflect a combination of poor access to care and therefore knowledge about diagnostics and lack of information about health.
Table 16. Self-assessed health, 2008 Individuals who… Q1 Q2 Q3 Q4 Q5 Totalhave a handicap (%) 2.3 2.2 1.9 1.8 1.4 1.9 suffer from a chronic illness (%) 7.7 11.6 14.2 16 15.7 13 were ill or had an accident in the reference month (%) 8.5 12.7 15.3 17.3 16.4 14 were ill or had an accident in the reference month/suffer from a chronic illness/have a handicap (%)
10.6 15.4 17.9 20.3 20 16.9
Source: HBS 2008. Q1 is the lowest income quintile, Q5 the highest.
5.27 Access to services. According to data from household surveys, access to healthcare in Romania has improved in the last years, but remains uneven. While in 1996, about 40 percent of the population did not seek medical care when in need (due to sickness/accidents/disabilities), the proportion has decreased to less than 30 percent in 2008. However, the increase in access has not benefited all income quintiles equally: only about half of the population in the poorest quintile has access to medical services, almost the same percentage as in 1996, whereas the access of the richest income group has increased from 65 percent to over 80 percent (Table 17).
5.28 Similar differences in access can be noted between people living in rural and urban areas (Table 18). Basically, the poor seek medical assistance 2.3-2.5 times less frequently than the people in the richest income group. The 2004 reproductive health survey of Romania provides additional evidence of significant inequalities in access to services: only 25 percent of women with a low socio-economic status received post-natal care (56% of high income status); and only 30 percent of rural women vs 49 percent in urban areas did so. The average for Romania is 38 percent, low relative to the rest of
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Europe. In Romania, in 2004, 80 percent of women had never been screened for cervical cancer33. The rate was 89 percent in rural areas, 93 percent among women of low-socio-economic status and low-income women, 97 percent among the Roma. Table 17. Share of individuals who did not seek health care when in need for checkups or treatments (by quintiles)
Q1 Q2 Q3 Q4 Q5 Total 1996 48.1 43.7 41.1 33.3 34.5 39.1 2000 42.6 39.7 35 34 28.5 35 2004 48.2 38.7 31.7 28.6 25.8 33.1 2008 47.9 36.6 27.9 25.9 19.5 29.5
Source: World Bank using RHS data, 2008
Table 18. Share of individuals who did not seek care when in need for checkups or treatments, by area
Rural Urban 1996 42.1 37.2 2000 34.6 35.2 2004 38.1 29.7 2008 34.4 26.3
Source: World Bank using RHS data, 2008
5.29 A number of reasons can explain these differences. First, it appears that lower/income and rural populations are poorly informed about how to access the system. While more recent data is not available, the Romania Poverty Assessment in 2003 showed that the rich and the urban population were more likely than the poor/rural to indicate that they know someone who could help them solve their health problems. Only 47 percent of rural population knew someone who could help solve a medical problem, whereas for urban the percentage was 61 percent and the difference between the lowest and highest income group was significantly larger (Table 19).
Table 19. Information about health Services
Q1 Q2 Q3 Q4 Q5 Know someone who could help solve health problem
34.9 51.5 53.2 61.2 75
Source: Romania Poverty Assessment, 2003
5.30 Another factor is the inequality in the distribution of services and resources. Excluding counties with national centers, the number of hospital beds per 100,000 inhabitants varies between 300 (Ialomiţa) to 900 (Covasna) for counties of comparable size. The number of beds is much larger in Bucharest (1041) and Cluj (1039). The distribution of physicians across the country is also uneven: varying from 100 (Vaslui) to 200 (Arad), and 560 in Bucharest. The following two graphs plot health resources available (bed, physicians) against the average earnings of the population in each county. The positive correlation shows that richer counties also benefit from better medical care.
33 WHO recommends a test every 3 year.
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Figure 21. Number of physicians and number of hospital beds per 100,000
5.31 Out-of-pocket payments also contribute to limiting access to health care. The 2008 HBS shows that 80 percent of those who sought care in the past month had to pay some amount out-of pocket and the proportion has been increasing (in 2001 the proportion was 68 percent). In 2001, 42 percent of hospital patients declared having paid to access care; the proportion in 2008 is 70 percent. The average household monthly payment per month is 57 Ron ($19) and $44 for households with one ill member. The frequency and amount of payments are lower among the low income groups (63% of households in the lowest quintile pay and 88 percent in the highest, the average amounts are respectively $15 and $83). A more detailed analysis would, however, be required to precisely assess the burden on the poor and understand its determinants.
5.32 Interestingly, the HBS survey distinguishes between payments “with” and “without” receipt. Assuming the latter primarily reflects informal (“under-the-table”)
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payments, the data shows that when patients sought care around 3 percent paid “without receipt” (and among those the majority also paid some amount “with receipt” (Table 20). In hospitals, however, more than 60 percent of patients declared having paid some informal amount (among those 3.5 percent also pay a formal charge for the hospital treatment). Table 21 also shows that informal payments in hospitals are much more frequent in 2008 (60%) than 2004 (40%) and 2001 (31%).
Table 20. Percentage of individuals who paid for health care among those who were ill/had an accident in the reference month or suffer from a chronic illness/have a handicap 2001 2004 2008 Nothing 32.2 29.7 20 By receipt only 64.4 66.7 77 without receipt only 0.9 0.7 0.5 both by receipt and without receipt 2.4 3 2.4 Total 100 100 100
Source: HBS 2008
Table 21. Percentage of individuals who paid for hospitalization from those who were hospitalized in the reference month 2001 2004 2008Nothing 57.8 53 29.8By receipt only 10.6 6.9 9.4without receipt only 30.5 36.3 57.4both by receipt and without receipt 1.1 3.7 3.5Total 100 100 100
Source: HBS 2008
5.33 The financing of the health system, and in particular the exemptions from contributions and, to a degree, from copayments also generate inequity in the system. Regarding the exemptions from contributions, most [seems unlikely. Can we be specific?] categories were exempted during 2002-2004. This way, by 2005, there were only about 5 million contributors, while the total population of 21.5 million was practically entitled to benefits. As 2004 was an elections year, the government decreased significantly the co-payments for drugs and increased the number of the fully reimbursed medicines. The measure was not specifically targeted at the poor or at a specific category, and did not reduce the inequities in the system, as regardless of income, people consuming the drugs benefited from the cost reduction. This contributed to the accumulation of debts in NHIF, which were paid in 2005.
5.34 The reforms of 2006 removed some exemptions, but many still do not contribute: most non-wage-earners, including children and youth during education, persons with disabilities, war veterans, anti-communist dissidents, housewives, patients covered by the national health programs and pregnant women under a certain level of earnings. Also exempted are jail inmates and judges on behalf of whom the ministries of Interior and
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Justice respectively pay a contribution34. Currently, there are only 5.8 million insured persons, out of which 98.5 percent are employed (employees and self-employed) and 1.5 percent are unemployed. Out of the total number of employed persons, 11,000 are self-employed (freelancers, lawyers, managers, public notaries etc.), which is much below their actual proportion in population (see Box 2 for details).
Box 2: Contribution system for non-wage earners
Law 95/2006 specifies that all persons earning income (wages, capital investments, agriculture, intellectual property etc.) should pay contributions in order to be insured. In practice, enforcement is possible only in the case of employed persons and formally unemployed, for whom tax is withheld by a third party (employer; unemployment fund). Any uninsured person can join the system by retroactively contributing to the health insurance fund. To compute the retroactive contribution, Law 95/2006 distinguishes individuals how have declared income and those who have not. The retroactive payments for those who had not declared income had to cover a contribution based on 5 years of minimum gross wage, but since end-2007 the period is only 6 months of minimum gross wage (Order 617/2007 of the NHIF, Law 264/2007). Order 617 also specifies that individuals whose income was taxed have to retroactively contribute in proportion to the declared income for the period during which they did not contribute. In practice, individuals who work in the informal economy do not declare taxable income and pay the lower amount. Overall, individuals who earn income other than wages (for which tax is withheld by the employer) have no incentive to pay unless they become ill, and unless the treatment is more expensive than the insurance. Last, non-wage earners whose spouse is insured, automatically benefit from their coverage. When it comes to the contribution of people who earn wage and non-wage income the law is somewhat ambiguous as individuals who contribute on their wages are considered fully insured. Although in many countries, social insurance has traditionally been financed from wages, many countries have sought over time to broaden the base to include other income (eg France). This can eliminate distortions between types of workers but also increase equity (richer households tend to have more diversified sources of income). A thorough assessment of the fairness of the overall tax system and in particular of contributions to the health systems is required. It should seek to assess – taking into account household size - the extent to which (i) households with a given income (whatever the source is) have comparable contributions (horizontal equity) and the extent to which richer households contribute more to the system.
E. Current Strategic Focus of the Ministry of Health
5.35 Following the 2009 change in government, the MoH has set to implement a series of reforms stretching over the next two years. As a first step, the ministry intends to adjust the benefits package. The redefinition is likely to entail a combination of: (i) revisiting the list of services covered; and (ii) introducing formal copayments while ensuring the poor receive adequate financial protection through exemption mechanisms. Explicitly excluding services from the benefits package is difficult, although some adjustments can be made (e.g., the list of drugs).
34 An important question would be the extent to which the contributions paid on behalf of exempted populations actually covers (average) incurred costs.
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5.36 A critical element of this policy should be to ensure that evidence-based and transparent mechanisms for the inclusion of new technologies and drugs in the benefits package are in place. As copayments are introduced and the list of services not included in the benefit package widens, the scope for private insurance to develop should increase. The government has also announced its intention to set up an integrity directorate and, through tightened controls, reduce or eliminate informal payments. Over the mid-term, the intention is to implement the hospital rationalization strategy and revise provide payment methods to reward performance.
F. Summary and Recommendations
5.37 While important reforms are under way and some improvements in the health indicators have taken place in the past 15 years, more remains to be done.
5.38 The reforms proposed by the MoH -decentralization, revision of the benefits package, measures against informal payments- are most welcome, but will probably meet some resistance. Key stakeholders in the sector (medical staff, management) have strong incentives to maintain the status-quo: health staff because they supplement their income with informal payments, management because the current mechanisms limit the possibilities for effective performance monitoring (e.g., the mix of DRG and national programs to cover treatments). Part of this resistance could be overcome by setting clear and prioritized targets which the reforms will need to achieve; by generating public debate to build consensus around the choice of policies to achieve them; and by measuring and documenting whether the intended result are indeed achieved for the benefit of patients and citizens.
5.39 Shifting the system towards providing more and better access to outpatient care requires:
• Reduce hospital overcapacity, but also increase the autonomy of the hospital system to respond to incentives, monitor and reward performance. Future hospital investments should be guided by a master plan and selected according to equity criteria with the objective to reduce inequalities in access to care;
• As part of quality assurance, health technology assessment needs to be introduced and used as a basic tool for equipment investment and establishing the pharmaceutical reimbursement list (cost-benefit, cost-effectiveness assessments)
• Develop and strengthen preventive, primary, and outpatient care particularly in rural areas and improve referral systems.
5.40 These reforms should be supported by:
• Revisions in the provider payment system to encourage the expansion of outpatient care, limit fragmentation in funding so as to increase accountability
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for resources, harmonize funding across all facilities of the same type and reward performance;
• Quality assurance mechanisms. The recent development of guidelines for ten
frequently treated conditions is a step in the right direction, but they need to be institutionalized and their implementation monitored. One option would be to create a Quality Assurance Agency in charge with coordination of clinical guidelines development, accreditation of health care providers, investigation of medical incidents/accidents, and elaboration of quality of care policies, education and training for quality assurance in health care. The performance of all health care services providers should be systematically assessed and monitored. As part of quality assurance but also in relation to the revision of the benefits package, health technology assessment needs to be introduced and used as a basic tool for equipment investment and establishing the pharmaceutical reimbursement list (cost-benefit, cost-effectiveness assessments);
• A clear strategy on medical and social care. The relationships between MoPH,
NHIF, Ministry of Labor, Family and Social Protection need to be clarified to improve chronic, long term and home care and set up a strategy for integrated medical and social care.
5.41 At the sector level, a thorough analysis of the fairness in financing would probably reveal a limited horizontal and vertical equity in the system due to the way contributions are computed and given exemption criteria. This undermines the solidarity principle and will have to be addressed particularly if more resources are to be mobilized for health.
5.42 Although it may not be perceived as an immediate priority, to ensure that the system received increased and adequate funding, it will also be important to:
• Establish a functional National Health Accounts system to support policy making, monitor the impact of the crisis on health expenditures and of reforms.
• Strengthen the capacity of the sector to generate, analyze and use economic information and data for decision-making (including the preparation of the MTEF).
G. Next Steps
5.43 Romania needs to invest better in its citizens health, but also to do it in a more equitable and transparent way. Over the past 10 years, a social insurance system which separates funding from provision and seeks to steer away from funding inputs towards purchasing services has been under development, but the transition is incomplete. A major hurdle has been the lack of reform in the hospital sector which traditionally dominates service provision.
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5.44 The health system needs sustained policies which systematically promote and develop preventive and primary care and increase hospital efficiency by focusing its activity on services which cannot be delivered in an outpatient setting. Such reforms take time and are unlikely to yield immediate savings.
5.45 A welcome first step is the hospital rationalization strategy that the government is committed to preparing in the next few months, which should seek to redress geographic inequalities in access to care and explicitly set criteria for future investments which contribute to reducing them. Increasing hospital efficiency also requires revisions in the payment systems and changes in the hospitals governance structure to ensure that they are accountable for results (to the authority and the public) and that they can manage resources (financial and human) to better respond to their mandate.
5.46 In parallel, a strategy is required to strengthen primary and outpatient care, particularly in rural areas (also supported by payment reforms).
5.47 In the pharmaceutical sector, the new pricing system and generic policy can hope to bring savings. In addition, it would be important to set explicit criteria to include drugs in the reimbursement list based on the evidence of therapeutic value and cost-effectiveness and perhaps revisit the list of currently reimbursed drugs using these criteria.
5.48 Patients are generally frustrated by a system in which priorities and entitlements are not always clear and where they often end-up informally paying for services. Introducing formal and explicit copayments can also contribute to resolving this problem, as well as to improving pathways into the system, but patients need to be convinced that they will see a benefit from it, which can only happen if accountability increases at all level, reforms are explained, and their results monitored.
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6. AGRICULTURE AND RURAL DEVELOPMENT
A. Priorities in Romanian Agriculture and Rural Development 6.1 As an EU member state, Romania no longer operates an autonomous agricultural and rural development policy, but nationally implements and manages the European Union's Common Agricultural Policy (CAP)35. Though a common policy, there is no uniform application of CAP policy instruments across the NMS. Apart from a set of general mandatory rules, the CAP offers many implementation options from which member states may choose. As a result, EU countries continue to have powerful tools to “tailor” support programs to the conditions and needs of their agriculture and rural sectors. The actual implementation of the CAP takes very different shapes from one country to another36.
6.2 The CAP supports agricultural and rural development through measures grouped into two so-called “Pillars”, i.e. two principal areas of intervention. Pillar 1 provides agricultural market and income support, with direct (area) payments representing the prevalent form of income support to the EU farmers. Pillar 2 addresses both the agricultural sector and the wider rural population through a comprehensive set of rural development programs.
6.3 For the CAP programming period 2007-2013, and in accordance with CAP funding and financial management principles37, Romania
35 Giving up autonomous country-specific agricultural policies in most new EU Member States entailed significant changes to agricultural sector support: most nationally administered output, input, or credit support programs and various other intervention tools had to be discontinued or could only be carried on during a negotiated transition (see discussion on State Aid in Section 2). 36 Rural development (i.e. Pillar 2) support is provided through a menu of about 40 measures, grouped into four categories, the so-called “axes”. From these, members can almost autonomously select the most suitable mix. For Bulgaria, the rural development menu is further enriched with a set of country-specific measures. Agricultural market and income support (i.e. Pillar 1) also allows for some flexibility albeit more limited. Several options accompany the way in which direct payments are calculated and made. Direct payments in Bulgaria are subject to simplified arrangements and are not immediately granted at full EU15 levels. Diversity is further increased through an option to employ national budgetary resources to complement (or "top-up") EU-funded direct payments during the transition period (see Section 2). 37 See particularly Council Regulation (EC) No. 1290/2005 of June 21, 2005, on the financing of the Common Agricultural Policy
Figure 28. Structure of the EU CAP (simplified)
Pillar 1
AGRICULTURAL MARKET AND INCOME
SUPPORT
European Agricultural Guarantee Fund
Common Agricultural Policy
Pillar 2
RURAL DEVELOPMENT
European Agricultural Fund for Rural Development
In
com
e su
ppor
t (D
irect
pay
men
ts)
M
arke
t sup
port
C
ompe
titiv
enes
s
E
nviro
nmen
t
D
iver
sific
atio
n
LEADER
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finances its agricultural and rural development policy out of three38 main funding sources:
• European Agricultural Guarantee Fund (EAGF), fully financing direct income and market support measures under the first pillar of the CAP. For its core activities, EAGF provides finance in the context of shared management between Romania and the European Commission (EC). For a limited number of accessory activities (e.g., specific veterinary measures for disease eradication, promotion of agricultural products, agricultural accounting systems, and agricultural surveys) EAGF expenditure is done in a centralized manner.
• European Agricultural Fund for Rural Development (EAFRD), financing, in a context of shared management between Romania and the EC, the EC's contribution to the rural development program implemented in Romania. Public counterpart financing to EAFRD allocation is provided through allocation in the Ministry of Agriculture, Forests and Rural Development (MAFRD) budget.
• Budget of the Ministry of Agriculture, Forests and Rural Development (MAFRD), the Agricultural Paying and Intervention Agency (APIA) as the designated Paying Agency for EAGF, and the Paying Agency for Rural Development and Fishery (APDRP) as the accredited Paying Agency for EAFRD and European Fishery Fund. Financing from national budgetary sources applies to (i) the public counterpart-financing for expenditure incurred under the EAFRD; (ii)
38 A fourth principal source of budget funds is the European Fisheries Fund. Support measures under this fund, however, have not been subject of the mission’s assessment.
Figure 29. CAP financial envelopes, 2007-13 (EUR billion)
2.5
4.2
0.5
6.2
0.7 1.
8
14.0
5.5
1.8
0.7
2.6
2.8
0.7
3.8
1.0 1.
7
13.2
8.0
2.0
0.9
BG CZ EE HU LV LT PL RO SK SI
Pillar 1 direct payments Pillar 2 rural development
Table 22. 2008 Agriculture budget executed
EUR million %
EU resources 711.9 29.1
-rural development (EAFRD) 99.8 4.1
-rural development (Sapard) 194.6 7.9
-pillar 1 payments (EAGF) 417.4 17.0
National CAP related transfers: 469.4 19.2
-pre-financing of EAGF payments 26.5 1.1
-counterpart financing of EAFRD 30.1 1.2
-counterpart financing of Sapard 85.5 3.5
-CNDP's 327.3 13.4
Other national resources 1,269.2 51.8
-wages 190.1 7.8
-state aid (farmers support) 671.6 27.4
-capital and goods 56.4 2.3
Total 2,450.4
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Complementary National Direct Payments (CNDP); (iii) pre-existing State Aid to agriculture and rural development and “de minimis” program and (iv) the national administration of the above where subject either to national management or shared management between Romania and the EC. Significant resources need to be appropriated from the state budget to meet the spending needs in agriculture and rural development. In 2008, their planned share in the total state budget was approximately 7.5 percent. If adding the funds projected to be disbursed from EU and other external sources, the amount available to the sector would more than double.
6.4 CAP budget allocations for Romania differ from those in other new EU member states in both aid volume and aid intensity (Figure 29). Pillar 1 allocations were negotiated on the basis of areas sown with various crops, the size of animal herds, and “historical” yields (output per hectare or per animal during a reference period). Pillar 2 allocations were negotiated with country-specific structural adjustment and rural development needs in view.
6.5 For Romania, for other new EU member states, and ultimately for the European Union it is a challenge to address the substantial diversity of agricultural and rural sectors with the CAP as a single common sector policy. Across the new EU member states, average sector performance is ultimately driven by the diversity in the distribution of agricultural land between “large” and “small” farmers (Figure 30). Three different land distribution patterns stand out: (i) large-scale-farming dominated structures (e.g., Estonia, the Czech and Slovak Republics) in which large-scale farms cultivate most agricultural land; (ii) mixed farming structures (e.g. Poland, Bulgaria and Latvia), in which the distribution of land is fairly balanced across all farm clusters; and the (iii) dualistic farming structures, specific to Romania, where almost all agricultural land is equally divided between small and large holdings. Figure 30 below shows that in Romania about 90 percent of the farm population is employed on plots of less than 5 ha in size, but plots of this size constitute less than 40 percent of all farm land.
6.6 Highly dualistic farm distribution and excessive fragmentation of land use are among the major challenges facing Romania’s rural sector. In 2005, there were 4,256,152 holdings, out of which 4,121,247 were farming an agricultural area of 13.9 million hectares (out of 14.7 million hectares of total agricultural land). The average Romanian farm is of 3.37 hectares and made up of 3.73 parcels, which places it well below the European average farm size. This low average, however, masks a wide disparity in farm size characterized by a dualistic distribution pattern. Close to 80 percent of the utilized agricultural area (UAA) is shared almost equally by two groups: a very populous group (80% of all holdings) of small farm units below 5 hectares, and a very small number of farms over 50 hectares (13,830 farms operating 40% of the UAA). The remaining 20 percent of UAA is farmed by an intermediate segment of 5 to 50 hectares farms, which is low compared to other EU countries and needs to be strengthened. Small farms are found primarily among individual holdings. There are 4,121,247 individual holdings farming 65.45 percent of the utilized agricultural land (or 9,102,018.22 hectares), as opposed to only 18,263 legal holdings who operate the remaining land 34.55 percent, (or 4,804,683.06 hectares). Individual holdings average 2.15 hectares divided in
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3.7 parcels, while holdings with a legal personality average 269 hectares split in about 9 parcels.
Figure 30. Farm population (upper panel) and farm land (lower panel): distribution by physical size (%, 2005) [figures in square brackets indicate average farm size]
6.7 Ownership remains the dominant form of acquiring farm land. In 2005, three quarters of the UAA was farmed by its owners39 , while only 14 percent was leased. Though developing, the land lease market remains limited and mostly benefits larger farms. The incidence of leased land in total farm land becomes relatively important only in farm holdings larger than 50 hectares where leased land accounts for about one third of their farm size. This situation is mainly triggered by the uncompleted land reform agenda. The restitution and redistribution of land and forestry land started in 1991 and was carried out in several successive stages. As a result, 95.6 percent of the agricultural land and about 33 percent of the forestry land has been given back to former owners or their legal successors by 2005. However, the property titles were issued without a proper cadastre check of corresponding land and without registering them in the land book system. The location and the boundaries of the restituted parcels oftentimes failed to be clearly identified and are therefore subject to many litigations and disputes.
6.8 The excessive fragmentation of land use and lack of association among farmers have a negative impact on the agricultural competitiveness. The percentage of the agricultural land which is operated by subsistence farms (45 %) keeps the aggregate agricultural performance low by offsetting the achievements of otherwise high performing large farms, and preventing the consolidation of semi-subsistence farms into viable and more competitive farm units. The level of the sector competitiveness is
39 Farm Structural Survey, 2005
0
20
40
60
80
100
Romania Bulgaria Hungary Poland Slovenia Lithuania Latvia Slovakia Estonia CzechRepublic
0
20
40
60
80
100
[3.4 ha] [4.4 ha] [6.0 ha] [6.0 ha] [6.3 ha] [11.0 ha] [13.2 ha] [27.4 ha] [29.9 ha] [84.2 ha]
0-5 ha 5-10 ha 10-20 ha 20-50 ha >50 ha
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illustrated by low yields levels, low growth, and a worsening of the agri-food trade balances, as agriculture and the food industry cannot keep up with increases in food demand driven by rapid overall economic growth, in the face of foreign competitiveness, particularly EU competition. Agriculture is declining as a share in the national economy. During the first years of transition, the GVA in agriculture declined less than of the industry. But since 2000, the industrial sector has enjoyed continuous growth, while the agricultural sector has experienced significant fluctuations due to its sensitivity to droughts. Agriculture contributed 13.6 percent to the total GVA in 2004 (down from a 20 percent contribution in 1990), while the primary sector (agriculture, forestry and fishery) contributed 14.1 percent, down from 16.2 percent in 1998. Moreover, in the recent years, agricultural performance appears to be increasingly unstable. This is due to more frequent and more severe natural calamities (drought, floods) and animal disease events (avian influenza, swine fever). The former reflects the impact of the climate change on Romanian agriculture and inadequate infrastructure to mitigate related risks.
6.9 The Romanian farming sector also faces a severe generational problem, particularly in the semi-subsistence farm segment. . Much of the land is tied up with elder farmers and used for subsistence purposes. 31 percent of the total UAA is farmed by persons beyond retirement age, as opposed to only 10 percent of the total UAA which is farmed by young farmers. Increased agricultural competitiveness requires that more land be managed by younger farmers. To facilitate such a transfer of land resources, the land market needs to be activated through actions both on the supply as well as the demand, and by reducing transaction costs.
6.10 Agriculture has a high importance in ensuring an income through self-employment, while rural diversification in Romania still remains a challenge. Most people engaged in agriculture are self-employed, and agriculture accounts for only 3.2 percent in the total number of the employees in the economy. The rural non-farm economy employs only 24.5 percent of the rural active population. Rural non-farm employment declined over 1998-2005. Explanations for this decline include the downsizing or restructuring of nonfarm rural industries, increased external migration among the active population, and low average rural income levels that generate fewer employment and diversification opportunities.
6.11 Another challenge facing the rural development in Romania is represented by the provision of financial services in rural areas. Despite many and significant improvements in the rural financial system, the access to credit in rural areas still remains a problem. The financial system has been largely restructured, privatized and modernized and no longer suffers from liquidity problems. After severe contraction until the late 90s and early 2000s, the provision of financial services in rural areas and agricultural sector increased, but the outreach remains limited and based towards the large corporate farms, larger enterprises, and consumer lending. Access by the intermediate farm segment as well as Small & Medium Enterprises (SMEs) in rural areas remains difficult because of the risks and high transaction costs perceived by commercial banks, a weak collateral base, and embryonic micro-finance institutions. This limited access to credit by the most populous segments of the farming and rural population reduces their capacity to invest,
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and also makes it particularly difficult for them to absorb EU funds, which require pre-financing from the beneficiaries. B. Direct Income Support under CAP Pillar 1
I. EU-funded Direct Payments – Single Area Payment Scheme (SAPS)
6.12 Like 10 of the 12 EU New Member States (NMS), Romania has opted to use the simplified implementation system for EU-funded direct payments, the Single Area Payment Scheme (SAPS). Fully financed by the European Agricultural Guarantee Fund (EAGF) it provides for flat area-based payments40 to users, not owners, of agricultural land. Payments are decoupled from production activity (no obligation to produce). While Romania was initially scheduled to move from this simplified to the EU mainstream Single Farm Payment Scheme (SFP) in 2011 at the latest41, the EC recently approved an extension of the applicability of SAPS to 2013. This decision has been taken in the light of several advantages such as reduced costs of implementation, administrative simplicity, and smaller distortive effects on the farm sector as to be potentially expected from commodity-specific payments.
6.13 By setting a relatively high minimum size threshold for farms to receive income support under SAPS, Romania has reduced administrative costs, and more importantly created incentives for consolidation of small, uneconomical plots. The minimum size for an agricultural holding to be eligible for support under SAPS is 0.3 hectares, but Romania has decided to set it at the maximum permissible level of 1.0 hectares. In practice, all new member states applying SAPS except Cyprus have chosen to set one hectare as the minimum holding size (Hungary and Bulgaria are applying a system with two minimum sizes). Under SAPS, this criterion is complemented with a 0.3 ha minimum parcel size eligible for the area payment. The application of a minimum holding threshold of one hectare in Romania effectively excludes about three-quarters of Romania’s agricultural population from SAPS receipts. However, it significantly reduces the budgetary and administrative costs associated with providing direct payments to small-scale production units, and provides incentives for structural change towards a less fragmented farm and land use structure in Romania.
6.14 Over the first ten years of EU membership (2007-16) farmers in Romania will receive only a fraction of the direct payments received by farmers in the EU15.
40 Under this simplified support schemes, payments are granted for agricultural land only; no specific payments are being provided for livestock. 41 As an outcome of the 2003 CAP reform, a Single Farm Payment Scheme (SFP) was introduced in the EU starting 2005. SFP is based on direct payments that EU15 farmers had been receiving under certain support programs during a reference period (2000 to 2002). As Romania (like most new member states) did not operate CAP-conforming direct payments during the reference period, and due to the high administrative requirements for implementing direct payments on an SFP basis, Romania, like all new EU member states, has been given the option to choose the Single Area Payment Scheme (SAPS) instead . However, using the SAPS rather than the new SFP approach was initially limited to the first three years of membership, with the possibility of two one-year extensions.
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In accordance with EC provisions on the phasing-in of direct income support in new member states (Table 31), direct payments for Romania in 2007 started at 25 percent of the EU15 level, increase yearly by five percentage points until 2009, and then increase by ten percentage points per year to reach 100 percent of the then applicable EU level in 2016.
6.15 The determination of income support payment levels for EU NMS is conducted based on country-specific EAGF annual support envelopes that follow the above phasing in schedule. In essence, SAPS payment level determination is based on two elements fixed at national level:
• a national financial envelope which is to be established by the Commission and is the sum of all the direct payments the Member State concerned would receive under 'normal' direct payment arrangements; and
• a national agricultural area (reference area), to be established as the part of the agricultural area that was in 'good agricultural condition' in June 2003 and to be adjusted according to objective criteria to be approved by the Commission (e.g. reduction to take into account the fact that Romania decided not to grant direct payments to farms smaller than 1 ha).
6.16 For the year 2009, Romania's EAGF support envelope ceiling amounts to EUR 632.4 million out of which EUR 623.4 million for SAPS payments42. The latter compares to EUR 529.5 million in 2008 and EUR 440.6 million in 2007. Following a division of the EAGF support envelope by the applicable reference area (8.7 million hectares in 2007; 9.3 million hectares in 2008), this translates into 2009 SAPS payments levels of approximately 67 EUR/ha (284 RON/ha) following the scheduled increase over payment levels in 2007 (50.55 EUR/ha; 167 RON/ha) and 2008 (57 EUR/ha; 210 RON/ha). It is estimated that, by the time Romania has fully phased in CAP Pillar 1 income support payments by 2016, payment levels will amount to approximately 191 EUR/ha.
42 In addition to the SAPS envelope of EUR 623.4 million, Romania is eligible for EAGF-funded specific payments to sugar beets (EUR 3.5 million), tomatoes (EUR 0.8 million), and energy crops (EUR 4.7 million).
Table 23. Phasing-In of EAGF Direct Payments (SAPS)
Year
Percent of EU direct
payment level
10 new member states
Romania (and Bulgaria)
2004 25 — 2005 30 — 2006 35 — 2007 40 25 2008 50 30 2009 60 35 2010 70 40 2011 80 50 2012 90 60 2013 100 70 2014 100 80 2015 100 90
2016+ 100 100
Source: World Bank, EU8+2 Regular Economic Report, May 2007
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6.17 Direct payment levels across the new EU member states are subject to great variation, with Romania ranging among the new EU members with relatively higher nominal SAPS payment levels (see Figure 31). While SAPS per-hectare payments are, in principle, uniform for all eligible land within the individual new member states (i.e., irrespective of natural yield potential) these payments differ substantially between the new EU members. These variations occur because levels of per hectare payments are computed by dividing the available EU financial “envelope” for each country by the eligible agricultural area. Given the EU rules for CAP Pillar 1 financial allocations, higher land productivity results in higher
hectare payments, as historical yield levels (2000-2002) were factored into the determination of the financial envelope for Pillar 1. Furthermore, candidate countries with a relatively higher production of CAP-supported agricultural products (e.g., arable crops, beef and veal, milk and dairy products) were allocated relatively larger financial envelopes.
6.18 SAPS payments do not require any designated national budget allocation, but they do have cash flow implications for the Treasury. SAPS as well as the specific payments to sugar beets, tomatoes and energy crops are being financed, in full, by the EAGF. The EAGF disburses, through the MAFRD, to the Agricultural Paying and Intervention Agency (APIA) as the designated agricultural paying agency. From a cash-flow perspective, however, SAPS payments are pre-financed by the APIA while the actual transfer from the EAGF to APIA, covering the financial resources spent in the form of direct payments in year (n), will be made in year (n+1). In the year 2008, the direct payments related to the year 2007 were funded from a temporary loan with no interest rate put at MAFRD disposal by the Ministry of Public Finance. The amounts came from the incomes obtained from privatization. The same pre-financing scheme of direct payments was also used in 2009, according to Government’s Decision HG 461/15 of April 2009, which put an amount of 1.87 billion RON at MAFRD disposal. As a result, the MAFRD budget was reduced by the same amount at the budgetary rectification of April 2009. This solution was an attempt to guarantee the effectuation of direct payments in the period imposed by EC (until June 30, with no penalties), in the conditions in which ensuring the funds from the current receipts could lead to delayed payments. Moreover, it is a management responsibility of the APIA to ensure that the highest possible share of its domestic SAPS payment approvals meets the EAGF control standards. From a funds absorption perspective, it is the management responsibility of the MAFRD, to determine, ex ante, as good as possible the area for which actual payments can be made.
6.19 Following a relatively careful, conservative determination of its SAPS reference area, Romania absorbs its EAGF allocation almost in full, whereas other
Figure 31. SAPS Payment Levels in First Year of Membership [EUR/ha]
Source: European Commission, The World Bank
70.2
57.253.1
50.544.5 43.8
35.9
26.820.7
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new EU member states, such as Poland and Bulgaria, forego a full EAGF absorption following an overestimation of the area eligible for EAGF payments43. Romania had initially chosen to register 8.7 million hectares for 2007 SAPS payments with the EC, and this turned out to accurately project the area for which actual applications were received for the 2007 campaign, and which resulted in SAPS payments equivalent to initial projections (the level of per hectare payments is computed by dividing the available EAGF financial envelope by the eligible agricultural area for which application have been received). When the area for which applications were received increased to about 9.3 million hectares in 2008, Romania had to adjust the per-hectare payment from the initially projected 60.75 EUR/ha to about 59.83 EUR/ha. The current reference area of 9.3 million hectares is expected to represent a relatively stable level for future projections. The conservative determination of reference area has prevented Romania from sub-optimal absorption of EAGF funds, as a higher than applied-for registration of areas would have led to i) a reduction in per-hectare payments to farmers (income loss for farmers), and ii) a non-absorption of EAGF funds for the excess registered area.
6.20 Unaddressed investment needs in the administration of Direct Payments have led to delays in payment execution and, if not addressed immediately, will lead to a massive penalization of Romania by the EC in the order 10 percent of the payments (over EUR 50 million) per year. Mainly due to continuing deficiencies in the IT-systems of APIA, SAPS payments have been effected with substantial delays. This has not only led to liquidity constraints in the sector and consequently to discontent among farmers, but it also has caused a penalization of Romania for payment delays. Only about 70 percent of the 2007 payments were effected by June 30, 2008, the remaining 30 percent were effected during July to September 2008 (for payments effected after June 30, 2008, a gradual penalty, to be paid out of the national budget, is applied). With a view to the high number of application submitted for the current year, Romania has requested a reduction of the applicable penalty coefficient, but the EC communicated that such reduction cannot be taken into account as long as APIA’s control error rate amounts to 10 percent in comparison to 1.6 percent on EU average. The technical main reason for this potential massive penalization is that APIA’s Land Parcel Identification System (LPIS), constituting an integral element of the EC-mandated Integrated Administration and Control System (IACS), is not working properly and, as a consequence, does not allow the stopping of errors and continues to identify land areas of non-worked land each year. In order to address these deficiencies, Romania would have to take one of two options: First, it either had to carry out a 100 percent control (in comparison to the required 5%), but this would be logistically and administratively impossible. Second, and more realistically, Romania will have to solve the remaining LPIS programs through a designated assessment of programming adjustment needs and a following re-programming of the LPIS software.
6.21 A comprehensive assessment of the key public administration bodies involved agricultural and rural development, forthcoming, will complement the
43 The determination of a national reference area is among the two support level determination elements fixed at national level.
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scope and findings of the current Public Expenditure Review. The Government of Romania has recognized the importance and timeliness of a strategic reform of the public administration. Fully supporting this process, the World Bank will provide an independent functional review of key sectors and associated public institutions, including agriculture and rural development. The assessment of the latter will cover sector development effectiveness, public management efficiency, and how the acquis communautaire is translated into domestic implementation.
II. Nationally-funded Direct Payments - Complementary National Direct Payments
6.22 Of all types of policy support, the Complementary National Direct Payments (CNDPs) provide the most significant potential for budgetary savings, which can be achieved without jeopardizing – but rather fostering – sectoral restructuring and competitive gains.
6.23 Within limits, Romania (partially) employs national budgetary resources to "top-up" EU direct income support via Complementary National Direct Payments (CNDP). These CNDPs are granted in addition to EAGF-funded SAPS and are currently funded from both the national budget and through reallocation of EAFRD funds. Topping-up represents a transitional option and is subject to an EU-agreed phasing out schedule (Table 32). Starting 2014 at the latest, top-ups are being gradually replaced by the phasing-in SAPS payments, and must be discontinued in 2016 when the single area payments eventually reach 100 percent of the EU-15 level. However, following December 2008 decision of the European Agricultural Council, Romania currently may apply for an increase of CNDPs to a maximum permissible level of 50 percent of EU15 average.
6.24 Romania implements a moderately complex set of CNDP, thus necessitating higher administrative efforts than many other new EU member states. Since EU accession, Romania grants seven CNDP schemes to crop and livestock producers, with higher complexity than new EU members like e.g. Bulgaria or Slovakia, but not as complex as e.g. Hungary (compare Box 4). CNDP to crop producers are granted in the forms of partially decoupled area payments to producers of arable crops, flax and hemp, hops and sugar beet –therewith topping-up direct payments to farmers taking advantage of the existing SAPS administrative system- and as output subsidies to tobacco. CNDP to livestock producers are granted in the form of decoupled (per holding) payments for bovines and as partially decoupled (per head) payments for sheep and goats.
Table 24. Phasing-In of Direct Payments in Romania
Year
Percent of EU15 direct
payment level
SAPS CNDP (max.)
Total (max.)
2007 25 30 55 2008 30 30 60 2009 35 30 65 2010 40 30 (50)* 70 (90)* 2011 50 30 (50)* 80 (100)* 2012 60 30 (40)* 90 (100)* 2013 70 30 100 2014 80 20 100 2015 90 10 100
2016+ 100 0 100 * Potential option following December 2008 Decision of the European Agricultural Council Sources: MAFRD, World Bank
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6.25 Direct income support via CNDP in Romania is higher than in most other new EU member states (see Figure 32). In a simplified assessment, Romania’s CNDP support envelopes translated into per hectare payments of 37.7 EUR/ha in 2007 and 38.5 EUR/ha in 2008, whereas the 2009 payment levels will only be determined after the complete receipt of applications for the 2009 support season (after the time of this assessment).
6.26 Romania’s CNDP support envelope amounts to approximately EUR 518 million. Until the end of 2009, a significant share of these can be secured from European Funds allocations44 with only the remaining difference to be financed by the national budget (Table 33). Whereas CNDP to livestock are entirely financed from the national budget, financing of the CNDP to crops still takes advantage of this ”reverse modulation” of EAFRD funds. As part of the EU accession agreement, Romania was allowed to shift an amount of its CAP Pillar 2 allocations under the EAFRD and use it for supplementing the CAP direct income support provided through CNDPs. This opportunity is limited to the first three years of membership, as over these years, the SAPS levels would have already substantially increased. From 2010, however, Romania will have to fund any CNDPs entirely from the national budget, thus increasing the potential domestic funding needs by up to about EUR 200 million, and creating the need for adequate budgetary planning in the 2009 budget cycle.
44 Under the ‘reverse modulation’ provision for EAFRD financing, Romania can re-allocate up to EUR 166.3 million (2008; EUR 122.1 million in 2007; EUR 211.7 million in 2009) from those financial allocations originally foreseen for rural development (CAP Pillar II).
Figure 32. CNDP Levels in 1st Year of EU Membership (simplified)
Note: CNDP converted into area payment equivalents (simplified) Source: OECD, Ministry of Agriculture and Food
0
15
30
45
Box 4: From simple to multifaceted: CNDP schemes in Bulgaria, Slovakia and Hungary
Bulgaria (2008*) Arable crops 47.53 €/ha [CNDP for sheep and dairy cows
added in 2008]
Slovakia (2005*) Arable crops 68.81 €/ha Tobacco 2,553.15 €/ha
(Burley 1948.62 €/ha, Virginia 3164.94 €/ha)
Hops 233.87 €/ha Suckler cows 111.34 €/head Sheep and goats 16.62 €/head
Hungary (2005*) Beef slaughter 154.4 €/head Cows 136.11 €/head Cattle (extensification) 51.67 €/head Milk 31.34 €/ton Ewes € 5.81/head Sheep (de minimis) 2.50 €/head Sheep complementary 4.55 €/head Goat (female) 4.80 €/head Tobacco: Burley 2997.2 €/ha, Virginia 3791.9 €/ha
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6.27 No dedicated assessment of the justification of the current CNDP schemes and support levels could be carried out in the context of this study. Prior Bank analyses, however, suggest that from a sector income perspective, top-ups at current levels would have been more justified during the initial years of membership than they would be nowadays that SAPS support levels have already substantially increased during the 2007-2009 term. Based on lessons learned from Romania’s and other new EU member states implementation of CNDP regime, we believe it is possible to meet the challenges imposed by tightening budgetary pressures because:
a) effective future income support can be provided within reduced overall CNDP support ceilings (i.e. accommodating an early reduction in the overall amount of CNDPs provided to the sector) alongside with the scheduled phasing-in of SAPS;
b) enhancements in addressing prevailing income disparities and/or support asymmetries would be more effectively addressed through an improved targeting rather than through increases in support rates; and
c) potentials for medium-term fiscal rationalization exist without jeopardizing agreed income support objectives if the following recommended elements of a future CNDP support agenda are being observed.
6.28 Attempts should be resisted to increase CNDPs any further because a further overall increase in CNDPs is fiscally prohibitive and not required to avoid a decline in average farm incomes. If not diligently and immediately addressed, the combined effect of the following three parallel programming challenges might increase the need for annual state budget funding by more than half a billion euro! First, for the remainder of 2009, priority should be given to the identification of budgetary resources
Table 25. CNDP Support Programming, 2007/08 [million EUR] programming year
NDP category Financing source 2007 2008
Crop production 333.1 298.8
Arable crops blend national budget and EAFRD 323.8 288.3
of which EAFRD 122.1 143.1
national cofin. of EAFRD 30.5 35.8
national budget 171.2 109.4
Specific crops 9.3 10.5
Livestock production 185.3 129.4*
Bovines national budget 141.6 120.5*
Sheep and Goats national budget 43.7 8.9*
TOTAL 518.4 428.2* Note: Table indicates support as per annual programs, not actual disbursements. Out of the 2007 livestock support program, EUR 98.8 were effected in 2007, the remainder in 2008. * incomplete, only containing the livestock payments effected in 2008
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needed to compensate for the discontinuation of the reverse modulation of EARFD funds to CNDP, which, even without an increase in overall CNDP support levels, implies an additional state budget need of up to EUR 70 million. Second, Romania should refrain from taking advantage of the Decision of the European Agricultural Council (December 2008) which allowing Romania to increase CNDPs to 50 percent of EU15. If requested and eventually approved by the EC, this would correspond to approximately a doubling (in nominal terms) of the current CNDP support to Romanian farmers to support levels of more than EUR 700 million. Finally, the mandatory termination of transitory State Aid schemes (“sunset clause”) at the end of 2009 will further increase the lobbying pressure on policy makers to provide new CNDP support as an offset. Pressure will be greater for those subsectors in which the provision of State Aid will be discontinued (such as e.g., the livestock sector).
6.29 To optimize future CNDP programming, focus should be given to an improved targeting of support within reduced CNDP support ceilings, on a regional and/or sub-sectoral level. For selected agricultural production activities, it is understood that –while not strictly needed to preserve average producer income levels over time– the analytically well-founded establishment or increase of regional/subsectoral CNDP levels might contribute to a targeted reduction of prevailing income disparities and support asymmetries (such as e.g., between crop and livestock production), and thus contribute to the rural development rather than the general income support agenda.
6.30 Improved targeting of CNDP support must be based on thorough assessment of underlying objectives and analysis of the income situation among target beneficiaries, i.e. in line with the programming rules already applied to sector support under CAP Pillar 2, and consequently the domestic implementation of the National Rural Development Program. Such analysis would particularly serve to better delineate the eligibility criteria that help to prevent CNDPs from unfolding potentially distortive impacts or give rise to support asymmetries (such as e.g. the national application of livestock support payments originally intended to reduce income disparities of livestock producers in less favored areas of the country).
6.31 To continue support for farm incomes in an environment of declining fiscal space, a gradual phasing out of CNDPs could be initiated starting in 2010. Such phasing out could still be designed so to ensure increasing support transfers to farmers. Figure 33 displays the recommended future CNDP regime with a phasing-out of CNDPs by an average of 5 percent of EU-15 annually starting in 2010. Such reduction in CNDP would still be positively overcompensated by the scheduled phasing-in of EU direct income support payments by 10 percent of EU-15 average. This would induce a 2.5 percent increase in direct income
Figure 33. Recommended Future CNDP
Source: World Bank
0
20
40
60
80
100
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
CNDP recommended
SAPS
max Dir. Payments currentmax Dir. Payments (Council option)
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support payments per year, but would free up about EUR 85 million annually. In addition to substantial fiscal rationalization, this would furthermore facilitate an early adjustment of producers with the mainstream CAP support provisions that will apply once State Aid and CNDP will have eventually been phased out.
Box 5: Addressing agricultural income disparities via Direct Payments – a good choice?
There is a tendency to consider the CAP as a mechanism for providing a secure source of income to the low-income agricultural or rural population. The “agricultural” policy would thus be expected to substantially contribute to the resolution of socio-economic development challenges in rural regions. The increased importance of direct payments and rural development measures, as well as the accession of new member states with large numbers of subsistence and semi-subsistence producers, has brought this issue to the fore. In Bulgaria, a large –even dominating- number of producers can be classified as (semi-)subsistence farmers. However, many of these producers own less than one hectare which disqualifies them from most CAP payments. Even those producers who own between 1 and 2 hectares have difficulty accessing direct payments because the cost of complying with the various directives (on environmental quality, food safety, animal welfare) governing payment eligibility is prohibitively high. Even the “semi-subsistence” measure introduced as a rural development instrument to assist new member country transition is designed to help producers become more oriented to the market.
Commodity-specific CNDPs may appear to mitigate potential adverse income effects for some categories of farmers. However, evidence indicates that applying a flat, decoupled CNDP (i.e. not linked to the amount produced) scheme is preferable to using specific, coupled CNDPs (i.e. linked to the amount produced). Like in Romania, concerns had been raised in many new EU member states that dairy farmers would experience substantial income losses, since direct payments would be allocated only to agricultural land. But the evidence points in the other direction: with the implementation of CAP–type policies, dairy farmers in new member states experienced an estimated income increase of up to 23 percent in the first year of accession. Commodity-specific CNDPs come at high implementation costs, administrative complexity, and a long-term distorting impact on production patterns. It is therefore preferable to use CNDPs on the most equalized and simplified basis possible. Support schemes targeting specific sectoral adjustment needs or regional income disparities are better addressed under CAP Pillar 2 (see below).
Another risk attached to treating direct payments as a means of guaranteeing farmer incomes is that they might discourage farmers from restructuring, consolidating or modernizing their holdings. For example, if inefficient farmers have a guaranteed income they may be less inclined to sell or lease their land to more productive farmers. Direct payments may also serve to distort land prices and land rental rates. This is so, as payments are granted on a per hectare basis, which increases the price of buying or leasing agricultural land, discouraging people from renting land and slowing down the consolidation of farms into more viable units. Ultimately, this means that support is going to landowners, rather than farmers, and that large landowners receive more support than smallholders who would normally have lower incomes.
These tradeoffs between protecting incomes and promoting competitiveness point to the need to separate social assistance measures from payments designed to ensure a viable agricultural sector. Thus, the Government would have to consider introducing social policies and services tailored to the needs of poor farm households. One possibility is to support socio-economic guidance services for the farm population. Such services would provide information and advice to farm households that would help them adapt to the new agricultural policy regime. Also, the Government may decide to introduce innovative social assistance programs that would enable poor or subsistence farmers to stay on the land. An example of this is the rural social scheme in Ireland, which provides supplementary income to farmers in exchange for undertaking work that will benefit the local community.
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C. Rural Development Support under CAP Pillar 2
6.32 The EU has a common rural development policy, institutionalized as the CAP’s rural development pillar (Pillar 2) and therefore implemented through the agricultural administration. It is aimed at meeting the investment support and restructuring needs of rural regions through a coherent set of sectoral and territorial support measures. Within the CAP framework, it accompanies and complements the market and income support policy implemented under CAP Pillar 1. During the recent evolutions of the CAP, this rural development pillar has been gaining increasing importance. As is the case in other new EU member states, assistance under CAP Pillar 2 accounts for about 60 percent of total CAP financial support to Romania.
6.33 Over the current programming period 2007-13, Romania’s National Rural Development Program qualifies for EUR 8.02 billion potential financial assistance from the European Agricultural Fund for Rural Development, EAFRD.
6.34 EAFRD assistance for most support measures is subject to a two-stage counterpart financing by the national budget and project beneficiaries (Figure 35). Together with EUR 1.95 billion in national public resources and EUR 3.41 billion beneficiary counterpart financing, this allocation is expected to generate rural investment projects in amount of EUR 13.38 billion.
6.35 Rural development aid is managed and delivered by the EU on a decentralized basis, unlike market and income support under CAP Pillar 1. The EU provides a common framework for CAP Pillar 2, similar to a ‘tool box’ out of which member states can select those measures deemed appropriately addressing country-specific rural development challenges. It is therefore left to Romanian Government to define specificities of rural development strategies, programming, and implementation. For that purpose, member states choose from a common, extensive “menu” of support measures, grouped into four so-called “axes” (Figure 34): Axis 1 supports competitiveness enhancement in agriculture and the food-
Figure 35. Counterpart financing mechanisms under CAP Pillar 2 in Romania – simplified
Total cost of a non-revenue generating (i.e. “public”) rural development project
Public contribution 100%
EAFRD 75% or 80%
National budget 25% or 20%
Total cost of a revenue generating (i.e. “private”) rural development project
Public contribution 50%
Private contribution 50%
EAFRD 75% or 80%
National budget
25% or 20%
Source: World Bank
Table 26. EAFRD allocation for Romania, 2007-13 [million EUR]
Year EAFRD
2007 0.00
2008 1,146.68
2009 1,442.87
2010 1,359.77
2011 1,357.86
2012 1,359.15
2013 1,356.17
Total 8,022.50
Source: NRDP RO
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industry through sectoral (investment) grants. Axis 2 (environment/land management) and Axis 3 (diversification/quality of life) support, to different degrees, the wider territorial (social and environmental) implications of farming. Axis 4, LEADER, supports implementation of the other three axes through community-based, local development strategies.
6.36 The actual absorption of EAFRD support under all four axes will pose major challenges to Romania. EAFRD support is exclusively being granted on a reimbursement basis, and any annual EAFRD allocations are subject to the so-called ‘n+2 rule’ under which the EC shall automatically decommit any part of an annual commitment which has not been settled45 by the end of the second year following the year of commitment. Though the recent start of the Romanian Rural Development Program does not yet allow for an evaluation of its effectiveness and its funds use structures, lessons learned in other EU member states demonstrate the need for well-integrated and synergistic programs in order to effectively leverage, mobilize, and eventually absorb available support funds. Selectivity and coherence in measure definition/delineation increase the effectiveness of support programs in addressing country-/region-specific development challenges. Timeliness in programming the specific provisions of Pillar 2 support measures and communicating these to beneficiaries and the concerned administration ensures adequate timing of investment planning/ processing. Simplicity of application and approval processes and procedures reduces transaction costs during the preparation, submission, and processing of support applications and reimbursement claims.
45 This implies that qualifying applications have to be received from beneficiaries, grant agreements have to be signed (contracted), and physical implementation progress has to be made against which reimbursement of investment costs can occur.
Figure 34. General Structure of the European Union’s CAP Pillar 2
CAP Pillar 2 RURAL DEVELOPMENT
Axis 1 COMPETITIVENESS
Axis 2 ENVIRONMENT
Axis 3 DIVERSIFICATION
Modernization of farms Setting up of young farmers Early retirement Adding value to agricultural
and forestry products Setting-up producer groups Restructuring semi-
subsistence holdings
…
Farming in less-favored areas Agri-environment Afforestation Non-productive
investments Animal welfare …
Micro-enterprises Tourism Basic services in the
rural areas Village renewal and
development Preservation of rural
heritage …
Axis 4 LEADER
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I. Structure of the National Rural Development Program
6.37 Romania’s National Rural Development Plan (NRDP) provides a coherent programming framework. As mandated and guided by applicable EC regulations, the NRDP builds and expands on the 2007-13 National Strategy Plan for Rural Development (NSP) which defines three overall objectives: i) to increase the economic dynamics of Romanian rural areas including the development of a sustainable agriculture and forestry sector; ii) to preserve, protect and consolidate nature, environment and natural resources; and iii) enhance the social dynamics and the quality of life in rural areas. Based on a detailed analysis of the situation in rural areas and an ex-ante evaluation, the NRDP then lays the programming basis for the prioritization among Axes and the selection of applicable measures within Axes, alongside with financing plans, functional designations and definition of an applicable monitoring and evaluation framework.
Table 27. National Rural Development Program – Financial Plan by Axes
Public Contributions to NRDP
EAFRD contribution National budget
contribution
Total public contribution
Share in total public contribution rate
[Million
EUR] [%] [Million
EUR] [Million
EUR] [%]
Axis 1: Competitiveness 3,173.85 80.0 793.46 3,967.31 39.79
Axis 2: Environment 1,880.60 82.0 412.81 2,293.41 23.00
Axis 3: Diversification 1,979.00 80.0 494.75 2,473.75 24.81
Axis 4: LEADER 188.06 80.0 47.02 235.08 2.36
Technical Assistance 300.89 80.0 75.22 376.11 3.77
CNDP rev. modulation 500.10 80.0 125.03 625.13 6.27
Total 8,022.50 80.5 1,948.29 9,970.79 100.00% Source: NRDP, 2007-13
6.38 Consistent with the main structural challenges identified46 in the analytical section of its NRDP, Romania has chosen to attach highest priority to Axis 1 and 3, i.e. to supporting, through sectoral (investment) grants, the restructuring and competitiveness enhancement in agriculture and the food-industry, and the need for economic diversification. The National Rural Development Program 2007-2013 foresees allocation of 39.79 percent of the available public contribution (39.56 percent of the available EAFRD allocation) on Axis 1 measures, 23 percent (23.44 percent of EAFRD) on Axis 2, 24.81 percent (24.67 percent of EAFRD) on Axis 3, and 2.36 percent (2.34
46 Main challenges identified are: (i) polarized farming structure with a very large share of subsistence and semi-subsistence farms; (ii) fragmented land and forest ownership; (iii) low educational level and inadequate qualification of the labor force in the sector; (iv) low level and quality of farm equipment on smaller farms; (v) low level of productivity in agriculture and food industry; (vi) limited outreach of banking system in rural areas, particularly to smaller farms and SMEs; (vii) aging labor force in the sector; (viii) high dependence on agriculture and poor job opportunities in non-agricultural sectors; (ix) limited access and low quality of basic services to the population in rural areas; (x) weak rural infrastructure (roads, water/waste treatment, energy and gas networks).
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percent of EAFRD) on Axis 4, and 3.77 percent (3.75 percent of EAFRD) on Technical Assistance (Table 35). The distribution of EAFRD funds among the four axes is compliant with the minimum axis allocations for the NMS as mandated by the EC47.
6.39 Romania’s prioritization among Axes follows patterns commonly observed among new EU member states (see Figure 35): Countries with relatively lower labor productivity in agriculture are more inclined to emphasize the “competitiveness”-oriented measures (Axis 1)48. On the other hand, countries with a higher per-capita-GDP have a stronger preference for measures falling under the “environment” axis.49 There is no such obvious pattern for the 'diversification' axis.
6.40 Romania’s choice of NRDP measures under all three main Axes is insufficiently selective and overly ambitious. Although it is coherent, Romania’s NRDP attempts to address a wide range of structural improvement needs through a high number of individual support measures. Out of 36 measures available under the EC’s EAFRD regulation, Romania selected 29, 23 of which are programmed for implementation in the entire 2007-13 programming period (see Table 33)50. 14 of these 23 measures were launched between March 2008 and April 2009; the others are foreseen to be introduced by the end of 2009. Those six measures that were selected, but not yet budgeted, are foreseen to be introduced at a later stage, thus necessitating a revision and EC-re-accreditation of the NRDP.
47 Council Regulation No. 1698/2005 which requires that: (i) a minimum of 10% of EAFRD contribution has to be spent on Axis 1; (2) a minimum of 25% of EAFRD contribution has to be spent on Axis 2; (iii) a minimum of 10% of EAFRD contribution has to be spent on Axis 3; (iv) a minimum of 2.5% of EAFRD contribution has to be spent on Axis 4. 48 The correlation index between the preference for “competitiveness” measures (proposed shares of axis 1 in the total rural development allocation) and the productivity of labor in agriculture equals -0.8825 and is significant at the 0.01 level. 49 The correlation index between the preference for “environment” measures (proposed shares of axis 2 in the total rural development allocation) and the level of development equals 0.8358 and is significant at the 0.01 level. 50 With the exception of measures 431 (sub-measure 1) and 611, which will be implemented until the end of 2009 only.
Figure 35. Rural Development Allocations in New EU Member States; over 2007-13; Breakdown by Axes [%, EAFRD contribution]
Source: Country NRDPs, World Bank
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
LV
HU
LT
RO
PL
BG
EE
SI
SK
CZ
Competitiveness Environment Diversification LEADER & Technical assistance
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Table 28. Breakdown by Rural Development Measure, 2007-13 [million EUR] Axis / Measure Public Expenditure
Axis 1 – Improving the competitiveness of the agricultural and forestry sector 3,967.31
111 Vocational training, information actions and diffusion of knowledge 119.02
112 Setting up of young farmers 337.22
121 Modernization of agricultural holdings 991.83
122 Improving the economic value of the forests 198.37
123 Adding value to agricultural and forestry products 1,071.18
125 Improving and developing infrastructure related to the development and adaptation of agriculture and forestry 476.08
141 Supporting semi-subsistence agricultural holdings 476.08
142 Setting up of producer groups 138.86
143 Providing farm advisory and extension services 158.69
Axis 2 – Improving the environment and the countryside 2,293.40
211 Support for mountain areas 607.75
212 Support for Less Favored Areas – other than mountain areas 493.08
214 Agri-environment payments 963.23
221 First afforestation of agricultural land 229.34
Axis 3 – Quality of life in rural areas and diversification of the rural economy 2,473.74
312 Support for the creation and development of micro-enterprises 383.43
313 Encouragement of tourism activities 544.22
322
Village renewal and development, improvement of basic services for the economy and rural population, conservation and upgrading the rural heritage 1,546.09
Axis 4 – Leader 235.07
41 Implementation of the local development strategies: 171.60
411 Improving the competitiveness of the agricultural and forestry sector 57.59
412 Improvement of the environment and rural area 22.33
413 The quality of life in rural areas and the diversification of the rural economy 91.68
421 Implementing cooperation projects 4.70
431 Running the Local Action Groups, acquiring skills and animating the territory 58.77
431-1 Pubic-private partnership building 11.76
431-2 Running costs, acquisition of skills and animation 47.01
Total Axes 1, 2, 3, 4 8,969.52
511 Technical assistance 376.12
Of which expenditures for the national rural network 30.09
- (a) running costs 7.52
- (b) action plan 22.57
611 Complements to direct payments 625.13
TOTAL 9,970.77
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Foreseen for later implementation (Starting from 2010) Indicative budget 113 Early retirement of farmers and farm workers 71.41 114 Use of advisory services 95.21 213 Natura 2000 payments, on agricultural land 100.00 223 First afforestation of non-agricultural land 75.68 224 Natura 2000 payments, on forestry land 16.05 341 Skills acquisition and animation with a view to preparing and
implementing a local development strategy (2010-13) 12.37 Source: NRDP
6.41 The selection of a relatively high number of support measures seriously challenges both the administrative capacity and thus the national absorption capacity. It dilutes the NRDP’s potential effectiveness in addressing key rural development challenges. The administration of every separate measure binds administrative resources and requires potential beneficiaries to get accustomed with measure-specific application and implementation provisions. Though the rationale for the selection of a high number of measures might have been the political desire to satisfy the investment funding needs of most sub-sectors, it would have been advisable to focus measure selection and accreditation on a smaller sub-set of measures addressing key development challenges. Experience from other new EU member states shows that well-prioritized and selective rural development programs are more effective in leveraging, mobilizing and eventually absorbing the available support funds. The selectivity and coherence in measure definition increase the effectiveness of support programs in addressing country specific development challenges. In addition, timeliness in programming the specific Pillar 2 measures and communicating these to potential beneficiaries and the concerned administration ensures adequate timing of investment planning and processing.
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Box 6: How selective are new EU member states? Flexible selection of support measures within the axes allows member states to choose almost any number and combination of support schemes. A Bank review of rural development programs in new EU member states shows that within the axes almost all EU8+2 countries prefer similar types of measures: Within Axis 1, investment support for agricultural holdings is a prime choice. But there are exceptions: Poland, for instance, allocates most funds to early retirement support in agriculture, a measure getting much less support in most other countries. Within Axis 2, agri-environmental support as well as payments for less-favored areas are the most frequently chosen measures. Hungary is an exception and attaches much higher importance to promoting the afforestation of agricultural land. Within Axis 3, orientation is much less obvious. Countries channel significant funds towards the development of micro-enterprises in rural areas (e.g., Hungary, Slovenia, Latvia), basic services for the rural economies (e.g., Hungary, Poland), the renewal and development of villages (e.g., Latvia, Estonia) or support for agri-tourism (e.g., Lithuania).
The concentration of funds on individual measures varies greatly. The following serve as examples within Axis 2 (environment): o highly concentrated: Slovenia divides the axis funds almost equally between only two
measures; o diversified: The Czech Republic and Slovakia chose eight different support schemes. In
Hungary the draft rural development plan outlines as many as twelve distinct schemes.
Slovakia serves as example for particularly a well prioritized and administered NRDP. Approximately 65 percent of the total public expenditure is concentrated in four measures. This is one of the highest concentration ratios of the rural development resources across the EU-12. Important administrative cost savings are generated. In particular, the sizable less-favored area (LFA) scheme creates a significant leverage effect. The measure, which stands for 25 percent of the total public support, is simple and effective from an administrative perspective. Payments are made on an area-basis, similarly with and via the same institutional channels as the Pillar 1 direct payments. There scope, however, is different from that of the regular single area payments. They are designed as compensations payments for pursuing farming in mountainous areas or areas affected by various disadvantages (soil erosion etc.).
II. Implementation of the National Rural Development Program
6.42 Romania’s administrative arrangements for the programming and implementation of the NRDP satisfy the provisions as set forth in the applicable EAFRD regulations. The administrative responsibility for the programming and the management of the NRDP rests with the Ministry of Agriculture, Forests and Rural Development (MAFRD). It is the responsible body for the preparation of the aforementioned Rural Development Policy Documents for the period 2007-13. The administrative responsibility for program implementation rests with the General Directorate for Rural Development within the
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Ministry of Agriculture, Forests and Rural Development, which was designated as the Managing Authority (MA), and the Paying Agency for Rural Development and Fishery (APDRP) as the accredited Paying Agency for EAFRD and European Fishery Fund.
6.43 The data made available as of the date of this assessment shows that the Romania’s NRDP is being met by high sector demand and uptake, given the significant number of funding applications received. Following the calls for proposals launched under the 14 measures already accredited, a number of 7,773 applications were selected for funding. This trend, in principle, points at a potentially satisfactory funds absorption in forthcoming periods.
6.44 Despite the prioritization of the calls for applications under accredited measures, the launch of 14 measures in one year from the NRDP approval has seriously challenged the administrative capacities of the MAFRD and of the Paying Agency. This has led to a substantial backlog of applications not yet processed, illustrated by the number of grant agreements signed (1,304 out of the 7,773 approved applications).
6.45 No major challenges were identified from a fiscal point of view. NRDP implementation does not pose major national budgeting challenges per se as 80 percent of public support for RDP implementation is secured from the European Agricultural Fund for Rural Development (EAFRD), and only 20 percent - EUR 632 million for 2007-2013 period - is to be covered from national budgetary sources (the public counterpart-financing for expenditure incurred under the EAFRD). The support for rural development is directly administered by the MAFRD, both the EC’ s contributions to the rural development program and the public counterpart financing to EAFRD allocation being reflected in the budget of the MAFRD. The EAFRD funding mechanism allows an advance transfer from the EC of an amount up to 7 percent from the total 2007-2013 financial allocation (in two tranches of 3.5 percent each). The new rural development rules allow certain advance payments (initially proposed at 20 percent, recently increase at up to 50 percent) to the beneficiaries of projects funded through NRDP. This advance payment is conditioned by obtaining a bank guarantee letter (covering 110 percent of the received amount) and it is made on the basis of an initial payment application (that is not accompanied by invoice). With the following tranches, the payment applications will be accompanied by invoices, and the advance payment that has been initially received will be used for funding the next project stage, having a working capital role. The statements of expenses, based on which the funds are transferred from EC to the MAFRD accounts, are sent to EC on a quarterly basis. Statements reflecting the NRDP allocation for the CNDP are sent to EC on an annual basis.
6.46 Sufficient fiscal space has been created to comply with EAFRD counterpart financing obligations. Though program implementation is at an early stage, initial projections as well as past experiences under the SAPARD program suggest that all the matching funds to the in-coming EU rural development resources are made available as needed. Consistent and timely budgetary monitoring and management has allowed for adequate reactions to under- and over-budgeting.
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6.47 Although, through its financing plan, the NRDP provides a coherent framework for multi-annual budget planning, the annual budget formulation process could be enhanced by putting in place more realistic disbursement projections and considering the program performance in the previous years. The budget execution for 2008 shows that the amounts budgeted for the NRDP implementation were highly overestimated. Despite the late approval of the NRDP (February 2008), the amount budgeted for rural development support in 2008 was of EUR 2,307, while the payments actually executed covering only 11.4 percent of the budgeted amount. For the future, a more realistic budget forecast is recommended, based on the existing signed contracts and on a realistic estimation of the new contracts to be signed under different support measures.
6.48 CAP administration costs in Romania are relatively high. The rural development funds are transferred to beneficiaries through the two paying agencies: the Paying Agency for Rural Development and Fishery - APDRP (for the largest part of EAFRD funds), and the Paying and Intervention Agency for – APIA (for area payments funded under Axis 2, and the CNDP). The operational costs of the two agencies amounted to about 11 percent of the funds operated in the year 2008. In the case of APDRP, strictly related to the EU funds received in 2008, the administration costs account for about 10 percent (yet taking into account the legal payment commitments, twice as high compared to those effectively paid, the costs would be reduced to 3 percent). In the case of APIA, strictly related to the EU funds, the administration costs represented about 27 percent in 2008; however, related to total operated funds (CNDP and state aids) the costs are reduced to about 12 percent. The main cause of the high administration costs of the direct payments is the extremely high number of beneficiaries (compared to the other Member States), many of these receiving relatively low amounts. In addition, comparisons across the NMS has shown that countries having established separate paying agencies for the two European agricultural funds report higher administrative costs than countries with single intervention and paying agency.
6.49 Relative costs of CAP administration in Romania are projected to decline in the coming years. A main reason for the reduction in administrative cost per transferred support budget is the projected increase in transfers from the European agricultural funds as payment rates increase along the phasing-in schedule.
III. Further Challenges to the Definition of the Rural Development Agenda
6.50 As is discussed above, Romania’s NRDP provides a relatively coherent but not necessarily well prioritized framework to rural development. The current NRDP implicitly foresees a mid-term revision which should not only represent a process to integrate, as discussed above, six additional measures. It should also carefully revisit and address current weaknesses with regard to measure selectivity and take early corrective measures. Such corrective measures should, at the very latest, be taken in preparation of the NRDP for the 2013-20 programming periods.
6.51 Closely related is the need to make more systemic efforts, within and beyond the agricultural administration, to maximize the synergies between the use of European
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Agricultural and Structural Fund. Romania should ensure complementarity and coherence between actions to be financed by the EAFRD, the Cohesion Fund, and the European Social Fund on a given territory and in a given field of activity. Although the demarcation line and the coordination mechanisms between actions supported by the various Funds are defined in the national strategy plan and in the NRDP, the implementation of those provisions is still lagging behind. If not addressed properly, this might lead to overlaps between investments funded from different sources.
6.52 Preparation of the NRDP for the 2013-20 programming period should start in 2010 at the latest. Experience has shown that NRDP preparation and accreditation is a time-consuming process. A finalization of preparations for the forthcoming NRDP in 2012 at the latest would allow for adequate transparency and investment planning among potential beneficiaries and for adequate capacity adjustments in the agricultural administration.
6.53 In the light of the ongoing evolution of the CAP, preparation of the 2013-20 NRDP requires reflection of the outcomes of the 2008 “Health Check of the Common Agricultural Policy”. Among the most important outcomes from a rural development perspective are the forthcoming shift of financial resources from direct aid to rural development mainly for purposes of addressing "key challenges" pertaining to (1) climate change, (2) bioenergy, (3) water management, (4) biodiversity, (5) innovation linked to the previous four points and (6) for accompanying measures in the dairy sector. This transferred money will be co-financed by the EU at a rate of 75 percent and 90 percent in convergence regions.
6.54 With a view to the medium-term challenge of supporting competitiveness and efficiency enhancement in its rural sector, Romania should clearly prioritize CAP Pillar 2 implementation over CAP Pillar 1 interventions. Though many of the new EU member states require effective support to sector restructuring, the need is even more pronounced in Romania, where about 70 percent of all agricultural holding are below one hectare in size. The use of direct payments and short-term subsidies might be more justified to provide short-term mitigation of potential income losses during the first years of EU accession (i.e., raising incomes, contributing to income stability, correct price distortions), they clearly do not raise competitiveness, reduce incentives to restructure, and carry a risk of irreversibility and entitlement. An enhanced focus on investment and risk-mitigation programs in the CAP Pillar 2 context, on the other hand, provides incentives for competitiveness enhancement and economic diversification, and thus contributes to raising farm and non-farm incomes in a medium- to long-term and reduce income (cross-regional and cross-sectoral) income disparities.
6.55 Unless the Romanian government introduces appropriate measures, beneficiaries’ lack of access to rural/agricultural credit will impede implementation of the NRDP and the absorption of EU funds. One of way of addressing this issue is to support establishment of venture capital funds, loan funds and credit funds within an existing financial institution to invest or provide guarantees to enterprises on their establishment during their early stages or expansion, but only in activities that fund managers consider potentially viable. Precautions however shall be taken by the Managing Authority and the
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funds to minimize the distortion of competition in the venture capital or lending market. The contribution to the funds from public sources and investments made by the funds in or guarantees provided to individual undertakings are subject to the rules on State Aid. (Regulation 1974/ 2006). D. State Aid
6.56 With the EU member states implementing a common sector policy via the two European agricultural funds, any additional nationally funded support to domestic agriculture is subject to substantial EU legislative regulation and EC approval requirements. In this context, the so-called State Aid programs are primarily granted for the production, processing and marketing of agricultural products and must be communicated to the EC before their implementation51 (most need authorization from the EC). In the case of Romania, all current State Aid programs will have to be terminated in their current form at the end of 2009.
6.57 The European Union definition of State Aid applies to any measure providing national businesses with an “advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities”. The EU has therefore pronounced a general prohibition of State Aid under Article 87(1) of the Treaty. However, it also recognizes that “in some circumstances, government interventions are necessary for a well-functioning and equitable economy” and therefore allows for “a number of policy objectives for which State aid can be considered compatible” under Articles 87(2) and 87(3), the so-called “exemptions”. However, these State Aid measures are tightly regulated, monitored and assessed by the European Commission through a system of rules and regulatory acts52. They fall under three categories:
• Existing State Aid: State Aid measures in place before accession and approved by the EC to be extended until the end of 2009 (“sunset clause”);
• New State Aid: State Aid measures put in place after accession which require EC approval (on a no-objection basis) and registration and which can be extended beyond 2009;
51 There are a few exceptions to the notification requirement, such as aid covered under Regulation (EC) No 994/98. 52 State aid for agriculture is regulated by the European Commission, primary under (i) “Commission Regulation (EC) No 1857/2006 of 15 December 2006 on the application of Articles 87 and 88 of the EC Treaty to State aid to small and medium-sized enterprises active in the production of agricultural products and amending Regulation (EC) No 70/2001 (OJ L 358 of 16.12.2006)”, (ii) “Community guidelines for state aid in the agriculture and forestry sector 2007-2013 (OJ C 319 of 27.12.2006)” which cover most sorts of State aids such as investment, environmental or disasters aids” and the Commission Regulation (EC) No 1535/2007 of 20 December 2007 on the application of Articles 87 and 88 of the EC Treaty to De Minimis aid in the sector of agricultural production (OJ L 3337 of 21.12.2007).
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• De Minimis: State Aid measures which, for simplification, can be put in place without prior registration and approval by the EC within a maximum authorized envelope and a limit per beneficiary.
6.58 State Aid rules in the agricultural sector are based on three different perspectives. Firstly, the agricultural State Aid rules follow the general principles of the European Union’s competition policy. Secondly, State Aid rules in the agriculture sector have to be coherent with the provisions of the CAP. Finally, the rules have to be compatible with the Community's international obligations, in particular the WTO Agreement on Agriculture.
Box 7: Types of State Aid acceptable to the European Commission
EC guidelines describe the main types of aid, which the EC can accept, and the conditions attaching to the granting of the aid. These can be summarized as follows: • aids for investments on farms can normally be permitted at up to 40 percent of eligible
expenses, or 50 percent in the less favored areas; higher rates of aid may be allowed for investments linked to the conservation of traditional landscapes, the relocation of farm buildings in the public interest, or to the improvement of the environment, animal welfare or hygiene;
• aids for investments in the processing and marketing of agricultural products are governed by the provisions applicable to State aid in the industrial sector. The aid intensity, however, will be, in general, higher than for the industrial sector
• aids granted in return for agri-environmental undertakings given by farmers and other environmental aids;
• aids to compensate for handicaps in less favored areas; • aids to help the setting-up of young farmers; • aids for early retirement, the cessation of farming activities, or the closure of production,
processing and marketing capacity; • aids for the establishment of producer groups; • aids to compensate for damage caused to agricultural production or the means of production
caused by natural disasters or exceptional occurrences, adverse weather conditions or outbreaks of animal or plant disease, and aids granted to encourage insurance against such risks;
• aids to encourage the production and marketing of quality agricultural products, the provision of technical support for producers and the improvement of the genetic quality of livestock;
• aids to grant specific support for the outermost regions and the Aegean islands. • Natura 2000 payments and payments linked to Directive 2000/60/EC; • aid for meeting standards; • aid for advertising of agricultural products; • aid relating to exemption from excise duties as provided for in Directive 2003/96/EC
(taxation of energy and electricity); • aid for the forestry sector.
Source: SCADPlus information services of the European Commission
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I. Existing State Aid
6.59 Romania’s existing State Aid measures addressed to farmers53 currently account for about EUR 540 million annually, are relatively fragmented and build on a limited objectives and results framework. Romania has opted for 25 different State Aid measures for agriculture, clustered into a five categories (Table 37). Such a complex structure typically leads to increased administration costs and diluted impact. These State aid schemes are established on an annual basis, within maxima previously agreed to with the European Commission, but do, unlike those rural development measures based on the NRDP, not appear to have been defined by clear medium or longer term priorities.
53 State aid for agriculture include also some national programs as hail prevention, flood prevention, soil amendment, land reclamation, plant protection, research and development totalizing about EUR 135 million.
Table 29. Overview – Agricultural State Aid in Romania [million RON] 2007 payments 2008 payments 2009 payments for ’06 for ‘07 for ‘07 for ‘08 for ‘08 for ‘09i
TOTAL 2389.6 2030 860.3
Vouchers & cash 971.1 694.8 116.9 65.3
Mountain pastures 17.8 Cash support 8.1 Vouchers for inputs 39.4 913.8r 461.3r De minimis support 2008 233.5 dm 116.9 dm
Livestock support 711.7 778.4 367.6
268.5 443.2 146.0 632.4 230.9 136.7 Investments in milk farms 13.5 National programs for livestock sector 252.0 404.1 143.9 570.9 220.1 124.1 -pork 35.0 137.5 48.6 155.7 74.3 45.4 -poultry 44.0 168.4 40.2 190.3 69.7 61.5 -milk 56.3 83.6 45.7 165.4 49.1 Breeding stock 1.9 2.1 1.9 0.7 Genetic resources 3.0 4.0 0.2 3.9 0.3 Animal waste management 19.5 38.1 6.3 11.0 Compensation for disease 15.6 17.4 2.3 0.9
Crops support 62.4 129.2 77.5
9.5 52.9 10.1 119.1 54.8 22.7 National programs for crop sector 9.5 52.9 10.1 56.2 15.3 22.7 -vegetables 2.1 17.9 1.5 19.9 2.0 10.2 -veg/fruits for processing 7.4 6.0 6.1 5.7 3.5 8.8 -sector viticol 22.3 0.4 21.2 2.5 1.4 Sugar beet 31.4 18.9 Soybean 31.5 20.6
Other support 636.4 428.4 298.3
12.7 623.7 69.1 359.3 124.5 173.8 Land reclamation (paid to water users) 16.6 45.2 17.4 98.1 Diesel subsidy 0.9 48.8 106.4 24.6 4.6 Seeds subsidy 12.9 15.8 4.0 Credit subsidy 44.7 91.6 47.6 67.1 Investment subsidies 100.0 Insurance subsidies 18.1 0.3 Calamity compensation (drought’ 07/floods ’08) 499.2 20.7 11.6
Early Retirement (renta viagera) 11.8 31.8 23.3
Superscripts: r registered State Aid; dm de minimis State Aid; i including payments until May ’09 only
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6.60 The Romanian government needs to soon take a policy decision on how to replace the existing State Aid, but some critical inputs into the decision are not available to MAFRD. Existing State Aid measures are in most part subsidies that are non-compliant with the EU CAP but have been given some time past accession date to be phased out or transformed into support that is compliant. The government’s options going forward are to either (a) eliminate existing state aide starting January 2010, hence considerably reducing agricultural spending, or (b) transfer part/all the budget from these measures to new measures that are compliant with EC regulations. For example, to replace the investment and short-term credit lines, there may be a rationale to deal with farmers’ difficulty in accessing long-term financing and in particular the necessary pre- and co-financing of Pillar II measures. Articles 49-52 of EC Regulation 1974/2006 under EAFRD on interest rate subsidies and financial engineering actions open the door for Governments to provide this type of aid, but it is also likely that the government would need to implement other related measures such as strengthening of non-banking institutions, contract enforcement or collateral-related issues.
6.61 A guiding principle for the future re-programming of Existing State Aid is to carefully target potential future resource allocations to only public goods. Many of the current state aid measures apply to goods that can be considered private in nature, hence distorting competitiveness and silencing market incentives (e.g. use of irrigation water, credit subsidies, etc.). Those public in nature (e.g. maintaining genetic resources under the Livestock Breeding Program; see below) qualify for continued government support. Based on information made available for this assessment, it appears, the MAFRD representatives had discussions with the European Commission and with the representatives of the farmers’ associations in the month of June, trying to identify new state aid forms compatible with the EU legislation, focusing upon the aids for investments (40 percent support of total investment), for diversification (procurement of sustainable equipment, building up or modernization of stables, silos, processing premises, processing and marketing of agricultural products) as well as for environment protection (900 EUR/ha support for the multi-annual crops, 600 EUR/ha for the annual crops and 450 EUR/ha for pastures). The Ministry intends to prepare the new legislation by the end of 2009, so that these forms of support can be notified at the European Commission.
II. New State Aid
6.62 Since accession, the Government of Romania has only registered with the EC one single New State Aid measures, namely the provision of input vouchers for the 2007 season. It is to be assumed that current State Aid programs such as the provision of calamity compensation, land reclamation, et al, might qualify for future registration as New State Aid, whereas others (e.g., early retirement) might be integrated into the overall NRDP programming framework, but no information on programming process was obtained for this study.
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III. State Aid under the De Minimis Rule
6.63 In its attempt to simplify State Aid procedures and monitoring, the European Council enabled the EC in 199854 to adopt “Block Exemptions for State Aid” and allowed the EC to declare specific categories of State Aid compatible with the Treaty, hence avoiding the requirement that member states notify the EC and request its approval each time. The total allowance for the De Minimis is set for every three-year period. For agriculture in Romania, this allowance is set at 7,500 EUR per beneficiary. National ceiling for Romania for three fiscal years is about EUR 98 million (cf. Reg. EC 1535/2007, in force for six years period 2008-2013). Money disbursed in autumn 2008 (a small part was reserved for spring 2009, dedicated to vegetable growers) covers the large part of the national ceiling with consequence that for remaining 2009 and 2010 this kind of support would not be allowed.
6.64 In the first year of EU membership, the De Minimis contribution was only applied in 2008. The support was granted in a similar way that voucher scheme in 2007, with stated aim “establishment of autumn crops”. The cash was granted at a rate of 200 RON/ha, for 1 to 120 ha, to all farmers (natural or legal person) registered at APIA. Main crops benefited from this measure were wheat, rapeseed and barley.
E. Conclusions and recommendations
6.65 Overview. Although Romania now implements the EU’s “common” agricultural policy (CAP), national policymakers still maintain responsibility to tailor CAP implementation to meet the specific development needs of the country. The National Rural Development Program (NRDP) appropriately lays out the challenges that Bulgarian agriculture and rural development face, but the actual allocation of resources to the sector is not fully consistent with the strategic challenges laid out in the document. With CAP resources projected to increase substantially over the coming years under Pillar 2, Romanian authorities must take appropriate policy measures now so that the opportunity to impact long-term sector growth is not missed. Important decisions need to be made regarding existing State Aid programs (which are to be phased out under EU rules) and the Complementary National Direct Payments (CNDPs) for which EU financing will phase out. Going forward, Pillar 2 activities that promote competitiveness need to be prioritized over Pillar 1 income support payments. MAFRD could also play a more strategic role by articulating measurable goals for the sector and by critically evaluating the effectiveness and efficiency of the National Programs financed currently through their budget. With expectations of higher EU counter-part funding required in the future, careful prioritization of resources within the current domestic resource envelope will be ever more important.
6.66 Direct income support under CAP Pillar 1: SAPS. Largely thanks to a conservative determination of the reference area, the SAPS absorption rates have been exemplary in Romania, also from a regional perspective. Nevertheless, unaddressed
54 European Council Regulation No. 994/1998
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investment needs in the administration of these direct payments have led to delays in payment execution. These not only have negative cash flows implications on the Treasury, but also may lead to a massive financial penalization by the EC in the order of 10 percent of the payments (over EUR 50 million) per year. Timely action is therefore needed, to address these barriers and normalize the disbursements.
6.67 Direct income support under CAP Pillar 1: CNDPs. Direct income support via CNDP in Romania is higher than in most other new EU member states, if translated into its area-payment equivalent. Unlike SAPS, these payments are primarily sourced with the national budget, and will be entirely domestic once the “reverse modulation” (i.e. divert NRDP funds to Pillar 1) phases out. This may put severe strains on the domestic budget, particularly in the light of the recently EC approved option of raising the CNDP levels up to 50 percent of the EU-15 levels (as opposed to the original 30 percent). Attempts should be resisted to any further overall increase in CNDPs, as this is fiscally prohibitive and not required to avoid a reduction in average farm incomes.
6.68 Rural development support under CAP Pillar 2. Romania has created sufficient fiscal space for the counterpart financing of the EUR 8.02 billion of financial assistance delivered via the EAFRD, and no major challenges are expected from a fiscal point of view. However, the actual absorption of the rural development funds is likely to pose major challenges to Romania. The explanation lies greatly with the selection of a relatively high number of support measures that are seriously challenging the administrative capacity, and thus the national absorption capacity. Furthermore, this insufficient selectivity in rural development programming dilutes the NRDP’s potential effectiveness in addressing key rural development challenges. Romania should therefore carefully revisit and address current weaknesses with regard to measure selectivity and take early corrective measures. Closely related, there is a need to make more systemic efforts, within and beyond agricultural administration, to maximize synergies between the use of the European agricultural and structural funds. Finally, in a medium-term perspective, Romania should clearly prioritize CAP Pillar 2 implementation over CAP Pillar 1 interventions, particularly given the challenges of its dual farm structure.
6.69 State aid. Romania’s existing state aid measures addressed to farmers accounting for about EUR 540 million annually are relatively fragmented and build on a limited objectives and results framework. Such a complex structure typically leads to increased administration costs and diluted sectoral impact. Also in view of the state aid sunset clause that Romania, as a new entrant into the EU, is subject to, the Romanian Government needs to soon take a policy decision on how to replace the existing state aid. The options forward are to either: (a) eliminate existing state aid starting January 2010, hence considerably reducing agricultural spending, or (b) transfer part/all the budget from these measures to new measures that are compliant with the EC regulations. A guiding principle for future programming of existing state aid is to carefully target potential future allocations only to public goods (e.g. maintaining genetic resources under the Livestock Breeding Program), as these are least market distortive.