Report No. 49273-SC Seychelles Public Expenditure Review June 25, 2009 Poverty Reduction and Economic Management 2 Africa Region Document of the World Bank SEYCHELLES PUBLIC EXPENDITURE REVIEW Table of Contents ACKNOWLEDGEMENTS .................................................................................................................................. i EXECUTIVESUMMARY .................................................................................................................................. 11 I MACROECONOMICSTABILIZATIONANDFISCALPOLICY . ...................................................... 1 Background and Objectives o fthe Report 1 Recent Economic Developments ........................................................................................................................ .......................................................................................................... 2 Impact o fMacroeconomic Reforms on Product and Labor Markets 6 Fiscal Policy and Recent Developments ........................................................................................................... .................................................................. 11 Medium-Term Expenditure Outlook 13 Conclusion ........................................................................................................................................................ ................................................................................................................ 15 I1 . PUBLICEXPENDITURESAND EXPENDITUREMANAGEMENT ............................................... 18 Trends inPublic Expenditures .......................................................................................................................... 18 Public Finances and Economic Growth ............................................................................................................ 23 Lessons or a Successful Fiscal Consolidation ................................................................................................. 25 Budget Preparation 28 Budget Execution .............................................................................................................................................. ........................................................................................................................................... 30 Recommendations ............................................................................................................................................. 30 I11 . PUBLICADMINISTRATION AND PUBLICSERVICEREFORM ................................................. 34 Context .............................................................................................................................................................. 34 Reforms Initiated in2008 ................................................................................................................................. 36 Towards a More Strategic Approach: Organizational and Structural Reforms 37 Public Sector Wage Structure Reform .............................................................................................................. ................................................ 48 Conclusions and Implementation Steps ............................................................................................................ 54 IV. HEALTHCARE ........................................................................................................................................ 56 Health System Context 56 Health Status ..................................................................................................................................................... ..................................................................................................................................... 57 Health Spending ................................................................................................................................................ 58 Availability o f Health Care Facilities ............................................................................................................... 62 Availability and Productivity o f the HealthWorkforce. 64 Utilization o f Health Care ................................................................................................................................. ................................................................................... 67 Out-of-Pocket Payments inForm o f Co-Payments and Private Insurance 69 Social Security Benefits .................................................................................................................................... ....................................................... 71 The Case for Social HealthInsurance ............................................................................................................... 72 Concluding Remarks 77 Recommendations ............................................................................................................................................. ........................................................................................................................................ 77 V. EDUCATION ............................................................................................................................................ 81 Education Sector Context ................................................................................................................................ -81 Education Outcomes 83 Education Spending .......................................................................................................................................... ......................................................................................................................................... 84 Co-Payments and Cost Sharing 90 Enrollment Trends ............................................................................................................................................ ........................................................................................................................ 90 Productivity o fEducation Staff 95 School Autonomy ............................................................................................................................................. ........................................................................................................................ 98 Addressing Quality o fEducation Concerns 98 Private Education .............................................................................................................................................. ...................................................................................................... 99 University (Degree-Level) Education ............................................................................................................. 100 Summary ofKey Recommendations .............................................................................................................. 101 Annex 1: Summary Table ofthe Empirical Researchon Public Finance and Growth .................................. 103 Annex 2: Description ofthe Legal and Institutional Framework for Public Financial Management(PFM) 104 Annex 3: CategorizingFunctional Reviews ................................................................................................... 107 Annex 4: Ministryof Community Development, Youth, Sports, Culture and the Arts Institutional Review 109 Annex 5: Ministry ofEmployment andthe National HumanResource DevelopmentCouncil Institutional Review ............................................................................................................................................................ .. 113 Annex 6: MinistryofFinanceInstitutional Review ....................................................................................... 115 Annex 7: Ministry ofNational DevelopmentInstitutional Review ............................................................... 116 Annex 8: DepartmentofPublic Administration Institutional Review 118 Annex 9: DepartmentofEnvironment Institutional Review ......................................................................... ........................................................... 120 Annex 10: Department ofthe Police 122 Annex 11: Department ofDefense ................................................................................................................ .............................................................................................................. 124 Annex 12: Summaryof Government-WidePotential Staff Reductions ........................................................ 125 Annex 13: Ministry ofEducationOrganagram ............................................................................................................. .............................................................................................. 127 Annex 14: MOE Expenditures, 2007 128 Annex 15: Map of Seychelles ........................................................................................................................ 130 REFERENCES .................................................................................................................................................. 131 APPENDIX ........................................................................................................................................................ 138 GOVERNMENTRESPONSETO THE REVIEW ........................................................................................ 138 Public Administration and Public ServiceReform: ........................................................................................ 138 ListofBoxes Box 1: Price Liberalization. SubsidyReforms and Global Price Changes 8 Box 2: The BudgetProcess .................................................................................................................................. ............................................................. 27 Box 3: International BestPracticeinWage SystemReform ................................................................................ 48 Box 4: NolanRecommendationsfor Restructuringthe Secondary School System ............................................. 91 ListofFigures Figure 1: Commercial FuelPrice Increases. 1998-2008 .......................................................................................... 9 Figure 2: Government Revenues. Spendingand Budget Deficits. 1988-2007 18 Figure 3: External Debt and Extent of Concessionality. 1980-2006 ..................................................................... ...................................................... 19 Figure 4: Primary Expendituresas Percent of GDP, Seychelles and Comparators, average2000-2005 ...............20 Figure 5: Expenditureby Economic Classification, Percent of GDP 21 Figure 6: Expenditureby Functional Classification, Percentof ........................................................................... ................................................................... 21 Figure 7: Flows to and Fromthe Central Budget to Parastatals,2004-07 ............................................................. 23 Figure 8: ComparisonofProductive and Unproductive Expenditures 25 Figure 9: Overall and Primary Balance, ................................................................................................................ .................................................................. 26 Figure 10: Composition ofFiscal Adjustment, 1999-2007 ................................................................................... 26 Figure 11: Budget Credibility: Budget and Outcomes2005-2008 28 Figure 12: Hospitalsper 100,000 .......................................................................................................................... ....................................................................... 63 Figure 13: PHC Unitsper 100,000 ....................................................................................................................... 63 Figure 14: Hospital Beds per 1,000 ...................................................................................................................... 63 Figure 15: Acute Hospital OccupancyRate ......................................................................................................... 63 Figure 16 :PhysiciansandNurses, Per 1000Population, 2006/7 66 Figure 17: Sick-Leave by Day ofthe Week, 2008 ................................................................................................ ......................................................................... 71 Figure 18: Seychelles Tax Wedge Comparedto OECD, Europeand CentralAsia .............................................. 74 Figure 19: Sponsored Students Studying Abroad (N=407) as of October 2008 82 Figure 20: Some IGCSE Results, 2007 ................................................................................................................. .................................................... 84 Figure 21: MOE Spendingon Education, 2004-2007 .......................................................................................... 85 Figure 22: Public Spendingon Education in Small Island Countries(latest available year) 85 Figure 23: EducationExpenditureper Student, 2007 ........................................................................................... ................................ 86 Figure 24: UnitFiscal Costs as PercentageofUnitFiscal Cost of Primary Education 2007 87 Figure 25: UnitFiscal Costs Selected Countries(latest availableper year) ......................................................... ............................... Figure 26: SchoolEnrollments by Cycle (Sub-Level) ofEducation, 2004-2008................................................. 87 93 Figure27: ProjectedGrowthof School-AgePopulationCohorts. 2007-2012 ...................................................... 93 Figure28: ProjectedGrowthin0-4 Year Age Cohortby District, 2007-2012 ..................................................... 94 Figure29: Student-TeacherRatiosinSmallIslandCountries(latest year available) ............................................. ............................................ 96 Figure30: EnrollmentsinPublic andPrivate Schoolsby LevelandGrade, 2008 100 Listof Tables Table 1:Key EconomicIndicators. 2005-2011 ........................................................................................................... ....................................................................................................... 5 Table 2: Structure ofGDP, PercentofTotal 7 Table 3: Direct andIndirectSubsidiesto be RemovedinMEFP 7 Table 4: SubsidizedCoreCommoditiesSR, 2008 .................................................................................................. ........................................................................... 8 Table 5: CommercialElectricityTariff Changes, 2008 ........................................................................................... 9 Table 6: MediumTermBudgetFramework,2008-2013 ....................................................................................... 12 Table 7: RevenueRaisingMeasures Agreed inthe MEFP, 2008 13 Table 8: PotentialExpenditure Savings,2008-2011 ............................................................................................. ......................................................................... 16 Table 9: ExternalDebt Composition,2002-2006,(US$ million) .......................................................................... 19 Table 10 :SeychellesandComparatorsPublic Spending,average2000-2005 20 Table 11:The 2007 Top 6 ParastatalsReceivingCentralBudget Transfers ........................................................ ..................................................... -22 Table 12: FunctionalCompositionofCentral GovernmentSpending,2002-7 ..................................................... 22 Table 13: ExpenditureAdjustment Composition,2003-2007 27 Table 14 Summaryof Public FinancialManagementNext Steps . ............................................................................... .......................................................................... ....................................................................... 33 Table 15: ComparativeWage Bills of SmallStates, 2000-2005 34 Table 16: Estimatesofthe Wage BillSavingsMeasures, ..................................................................................... 37 Table 17:Wage BillandPrimaryExpendituresby Function, 2007 ...................................................................... 39 Table 18: PotentialWage Grid Structure under RestructuredPublic Service Model ............................................ 53 Table 19 :Health Outcomes Indicatorsfor SeychellesandComparators,LatestYear Available 57 Table 20: TotalHealthSpending,2007 ................................................................................................................. ......................... 58 Table 21: TrendinGovernmentHealthExpenditures,2005-2007 ........................................................................ 58 Table 22: SeychellesandComparators,Health Expenditures,Average2002-2004 59 Table 23: Government RecurrentHealthExpendituresby Division, 2005-2008 .................................................. ............................................. 60 Table 24: GovernmentHealthExpendituresby Economic Classification, SRMillions 61 Table 25: Arrears andDebt Stock, October2008 ................................................................................................. ...................................... 62 Table 26: Public SectorHealthWorkforce, 2005-2007 ............................................................................................ ......................................................................................... 65 Table 27: Nurses per OccupiedHospitalBed2006/7 66 Table 28: Health Sector Wages and SalariesSavings,2008-09, SR millions ....................................................... 67 Table 29: Overseas Treatment, ExpendituresandPatients, 2005-2007 ................................................................. 68 Table 30: PreventableDiseases with High-CostTreatment, Number of Cases 69 Table 31:PotentialAnnual Revenuefiom Co-Payments ..................................................................................... .................................................... -70 Table 32: Social SecurityDirectBenefitsExpenditures, SR ................................................................................. 71 Table 33: EstimatedReductioninExpendituresfor Sick LeaveandFuneralBenefits, SR 72 Table 34: Comparingthe Financingof SocialHealthInsurance Funds ................................................................ .................................. 72 Table 35: Scenarios for ContributionRatesandRevenuesfor SocialHealthInsurance 73 Table 36: PayrollTaxes andTax Wedge across Sectors, InSR, 2008 .................................................................. ...................................... 74 Table 37: HealthInsurance ScenariosandImpactOnLabor Costs andTax Wedge, SR 75 Table 38 Summary ofHealth SectorImplementationNext Steps . ....................................................................... ...................................... 80 Table 39: ComparisonofEducationIndicators, Latest Year Available 83 Table 40: TotalEducationSpending,2007 .......................................................................................................... ............................................................... 85 Table41: Recommendationsfor EducationSubsidies ......................................................................................... 89 Table42: SchoolEnrollments (includingPrivateSchoolEnrollments) by LevelandGrade, 2004-2008 .............90 Table43: Enrollmentsby LevelandInstitution,2004-2008 92 Table 44: MOE Staffing, 2008 ............................................................................................................................. ................................................................................ 96 Table 45: Student-TeacherRatios, 2008 .............................................................................................................. 97 Table 46: ProposedReductionsinOffice andSupport Staff ................................................................................. 97 Table 47: RecommendationsandEstimatedImpactonthe Budget .................................................................... 102 Table A14 . 1: MOEExpenditureBreakdownby Division ................................................................................. 128 Table A14.2: MOEExpenditureby LevelofEducation2007 129 Table A14 .3: ........................................................................... TotalEducationExpenditureper Studentby LevelofEducation,2007 ....................................... 129 ACKNOWLEDGEMENTS This report was prepared by a World Bank team led by Tracey Lane (senior country economist) based on the team's work with the Government of Seychelles between 10* and 30th October, 2008. The Macroeconomic Stabilization and Fiscal Adjustment chapter was produced by Tracey Lane, Tony Verheijen (senior public sector specialist) wrote the Public Sector Employment and Wages chapter, Peter Moock (senior education consultant) wrote the Education chapter and Pia Schneider (senior health economist) wrote the Healthcare chapter. Andrea Purdekova provided research support to the whole team. Support was provided by Anne Khatimba and DoraHarris inediting the final report. The Government of Seychelles provided excellent assistance to the team throughout. The initial analysis was shared with government counterparts, presentedand discussed at the end of the mission. In particular we are grateful to the following individuals and their staff for their assistance: Mr.Afif, Principal Secretary ofFinance; Ms.Esparon, Principal Secretary at the Department of Public Administration; Ms. Simeon, Principal Secretary of Education; and Ms.Berlouis the Chief Executive of the Health Services Authority. Finance Minister Faure was the government's client and interlocutor for the Bankteam. Since this report was first sharedwith the Government, a number of far reaching reforms have already taken place. As of June 2009 prior to formal publication of this report the Government continues to show a strong commitment to the macroeconomic stabilization program anchored in fiscal consolidation. To this end the Government has taken on many o f the recommendations contained herein and summarized inan Appendix to the mainreport. The team benefited from the insights and guidance of Kathie Krumm, Sector Manager; Cevdet Denizer, Lead Economist; Michel Wormser, Acting Country Director and Harold Bedoya, Senior Economist inthe Country Management Unit; and Paul Matthieumission chief at the International Monetary Fund. The team i s especially grateful to the guidance provided by the peer reviewers: Sanjay Kathuria, Lead Economist, Felipe Barrera, Senior Education Economist, and Stephanie Medina-Cas, Desk Economist at the International Monetary Fund. 1 EXECUTIVESUMMARY 1. Overall context. In 2008, afier many years of unsustainable fiscal policy and a distorted and overvalued foreign exchange regime, the Government o f Seychelles embarked upon a bold economic reform program. This program aims to put the economy on a path toward macroeconomic stability, liberalize the economy and to allow the private sector to take over from the State as the driving force in the economy. Seychelles, a small open, middle- income island state with relatively low incidence of poverty and near full employment, faced acute economic difficulties in2008 as a result of past economic management exacerbatedby the rising global oil and food prices and the downturn inthe global economy. This resulted in missed debt-service payments and the subsequent downgrading of its credit rating by Standard andPoors. Facedwith current debt service difficulties and a historically poor credit track record, the authorities responded quickly by adopting a comprehensive reform program supportedby a 2 year StandBy Arrangement withthe International Monetary Fund(IMF) and commencing negotiations with Paris Club and other private and official creditors for debt restructuring. The government has embarked upon a comprehensive reform strategy aimed at restoring internal and external balances with the assistance of the international financial institutions and development partners. The reform program includes: (i)the complete liberalization of the exchange rate regime and float of the currency (which was introduced in November 2008), (ii)tightened fiscal policy, including improved targeting of the comprehensive social safety net and a privatization program to deal with the many state- owned enterprises. 2. PublicExpenditureReforms.This Public Expenditure Review (PER) is the first ina series of planned World Bank economic reports and analytical work in response to the government's request for assistance to implement structural reforms. The PER'S focus reflects the government's request to focus on the overall size and functions of the public sector and in particular health and education sectors. We find that revising the role of the public sector to focus on core government functions in order to address fiscal sustainability concerns, lies at the heart o f the policy reform efforts. This first phase therefore focuses on reforms inthe civil service and efficiency improvements inthe health and education sectors as basedlargelyon a rapid assessment undertakeninthe last quarter o f 2008 designedto provide timely inputs to the government's policy agenda and intime for the 2009 budgetpreparation. Italso provides the Bankwith ananalytical basisto informits financial support in2009. 3. Fiscal Background. The preference for high government spending is linked to the country's history o f welfarist policies (the public sector provides services from the cradle to the grave-including free pre-primary schooling and funeral benefits) as well as a well- established state role incommercial activities). This development model has not beenwithout success: Seychelles has good health and education outcomes compared to other small island states and i s placed 50' on the 2004 UN Human Development Index. However, weak financial managementof the public sector has ledto inefficiencies and unproductive spending anda bloatedpublic sector. The report cites many examples of the government taking on too 11 many functions while not carrying out core functions efficiently, persistent budget overruns and budget practices inconsistent with fiscal targets, and lack of incentives for efficiency improvements. 4. The debt crisis has meant the government has moved decisively and swiftly to redress the economic mis-managementof the past. Many of the reforms recommended here have already been initiated by the government following the discussions the team had as the analysis was commenced and the initial drafts sharedwith policy-makers in October 2008. The government has demonstrated exceptional commitment to the economic reform program underway, and has embarked on a communications campaign which has rallied support from the political opposition as well as business community and civil society groups. Already these steps have resulted in a more stable macroeconomic environment, reduced external and internal imbalances and improved the sustainability of fiscal policy. Discussions with Paris Club creditors are due to take place inthe first quarter 2009. 5. The adverse externalenvironment,a result of the credit crisis in Europe and the UnitedStates has started to impactthe Seychelles tourism sector. Tourism receipts were estimated to have fallen by 25 to 30 percent at the end of 2008. So far this has strengthened the resolve of the authorities to get through the transition. We encourage the authorities to continue the steps not only necessary for the fiscal consolidation (the main focus o f this report) but also to take the complementary steps to put in place a safety-net (currently underway and the focus of a next phase of the PER) as well as reform of the business environment (see World Bank's Investment Climate Assessment 2008) to enable the private sector to quickly respond to the improved macroeconomic environment. We recognize that the latest economic growthprojections show a much deeper recessionwill take place in2009 than originally envisaged, which may if prolonged make the transition-and the necessary reforms-more difficult and painful. It is therefore important for the government to not lose sight o f these complementary reforms so that the economic bounce-back projected for 2010 (of positive2.5 percent growth, followed by 5.0 percent growth by 2012) can be achieved. 6. As a high priority we urge the Ministry of Finance to address issues of budget credibility by (i)consolidating the budget consistent with the definitions in the IMF's Government Finance Statistics Manual and (ii)strengthening capacity for developing macroeconomic forecasts and ensuring that there is consistency with the fiscal framework at the beginning of the budget process. Given the vulnerability of the economy to external shocks and the recent global downturn, additional work to develop alternative scenarios will be undertakenas part of the subsequentphase of the PER in order to address concerns with respectto the volatility o f expendituresand revenuesand adequate contingency planning. We also find that there i s a need to strengthen central government functions such as building capacity in the Ministry of Finance's budget department, and improving finance and human resource skills in government ministries. We also note that considerable progress has been made in terms o f public financial management, and commend the Ministry of Finance's successful efforts in 2008 to maintain fiscal discipline, as well as establishing improved public financial management practices which lead in the past to budget overruns without Parliamentary approval. 7. Public Administration and Civil Service. While a number of public administration reforms focused on reduction of postswere undertaken in2008, their impliedfiscal savings of iii approximately 7.5 percent of the wage billby 2010 will not be sufficient to meet fiscal targets in the medium term nor to address the underlying concern of improving public sector performance Considering the macro-fiscal context of the Seychelles, and the contours of the adjustment program on which the Government has engaged, a two pronged approachto public administration and civil service reform is needed: one, a transition from emergency across the board staff cuts to a more strategic approach on the functions undertakenby the state and the way in which these functions are provided, and, two, initiating a wage system reform to ensure that the civil service attracts and retains qualified personnel within the sustainable fiscal targets. This should safeguard the impressive human development outcomes that the Seychelles has already achieved. 8. Furthermeasures are encouraged over the course of the next two years, principally to privatize non core functions, particularly those where the State plays a role in providing private goods and commercial activities in competitive markets, and also to halt the practice of the public sector being the employer of last resort. In doing so there should be active engagement by senior government leaders to encourage community responsibility for important aspects of policies currently delivered solely by the state. Undertaking functional reviews of each Ministry should be undertaken to rationalize the government's role and identify core responsibilities, align posts and determine areas of overstaffing. An initial review of several ministries, including in detail in the health and education sectors, found examples of unproductive service provision as a result of too many people employed to provide services. Low national unemployment rates (currently estimated at 2.5 percent) and a reliance on expatriates (estimatedto be some 9,000 nationally) to filljobs inthe private sector (including unskilled and semi-skilled positions) provide a favorable context for successful management of this reform including limiting negative household welfare impacts. That said, the global economic downturn that gathered momentum at the end of 2008 will provide additional challenges in 2009 for implementing this program. The subsequent phase of the PER will examine the effectiveness of the reforms, already underway, of the social welfare system and active labor market policies to enable the reform transition without detriment to the poverty profile. Clearly, the impact on expatriate labor (particularly low-skilled workers coming fiom countries such as Mauritius, India and Thailand), currently employed in the private sector inSeychelles is also likely to be detrimental during the transition and even more so since the global recessionhas started to adversely impact the Seychelles tourism industry. We simply note here this concern, which lies beyond the scope ofthe SeychellesPER. 9. The composition of the public administration is heavily skewedtowards the provision of support services: low-skilled workers make up around one third o f total civil service employment. This reflects inpart an implicit strategy o f the government inthe past to be the `employer of last resort', absorbing large numbers (including directly from unemployment schemes) into functions and positions that, based on international practice, should not be part of the core public service. We find several functions which should be considered for contracting out to the private sector through either individual contracts that would generally be based on hours worked, or through contracting with private sector providers where a competitive service sector is in place. In many cases the individuals currently employed by the public sector could re-organize themselves as a private sector contractor, with a government contract that would be subject to competition after an initial period. While contracting out might have a minimal aggregate fiscal effect inthe near term-as expenditure shifts from the wages and salaries budget to the goods and services budget-over time with a iv competitive private sector and robust procurement practices this is likely to both improve public sector service delivery and lower costs. Internationalpractice indicates that contracting out is likely to lead to efficiency improvements and fiscal savings under these conditions. An initial estimate of the potential civil service employment impact i s up to almost 3,000 individuals or 28 percent of staff. Some o f the fiscal savings would needto be re-investedin other areas-such as social security and/or active labor market programs-which would have to beworked out inthe course of2009. 10. Fundamental reforms o f the civil service wage grid are also recommended to ensure that the remaining posts inthe public sector can attract and retainqualified staff. We also find considerable lack of transparency surrounding wage-setting in Seychelles, through the use of multiple allowance schemes which are used to effectively raise take-home pay for specified groups of employees and/or individuals and recommend that these practices should be discontinued. Inshort these features arise from: (a) including a large a number of categories o f staff; (b) setting artificially low base wage levels for senior staff, usually to give the impression of egalitarianism; and (c) fragmenting pay composition. Such wage systems not only lack transparency, but are also costly to administer (as payroll needs to take into account of ten or more pay components), open to abuse, and make pay levels unpredictable for staff. As a result the current wage system is neither efficient nor transparent, nor necessarily provides for a competitive wage system to attract and retain qualified senior staff. The compression ratio for current real salary levels (lowest paid staff to the average Principal Secretary) is approximately 1:6, which i s at the lower end of what would constitute an acceptable compression ratio ininternational comparative terms. Establishing a durable wage grid may therefore require setting a higher compression ratio target, e.g. 1:7 or above. It is proposed to have 6 grades for professional staff, while each grade should have at least 10 steps. Introducing a new wage grid should follow the reorganization of the public sector and beprecededby a full fiscal impact assessment (aligning eachpost to their new position on the grid) to ensure that this is fiscally feasible in the near future. Making a wage grid durable requires setting differentials andpercentagesrather than absolute numbers. 11. Another critical issue will be reforms of Public Enterprises. While these will be looked at inmore detail inthe subsequent phase o f the PER, an initial review finds a complex group of 44 enterprises with varying degrees of government involvement, exposure and oversight. The sector has had increasing transfers from the budget inrecent years (around 4 percent of GDP) while dividends back to the government have decreased over the same period. We recommend adopting a standardized approach to governance and accountability relations. This would meanone for agency type institutions (regulatory and inspection functions), one for non-commercial state enterprises, one for commercial state enterprises with over 50 percent government ownership and one for commercial state enterprises where government has a minority shareholding, until such time as the government shares inthese enterprises are divested. This would significantly reduce government exposure to risks and contingent liabilities and facilitate a more systematic approach to reforming the sector. We also recommend buildingcapacity inthe public enterprise monitoringunit and consider merging it withthe privatizationunit. As apriority, systematic financial reporting by, andmonitoringof, the existing parastatals should be institutionalized, and over the medium term policies developed to guide government's involvement innew commercial ventures. V 12. Health Care. Without jeopardizing progress on health outcomes, the Government could substantially reduce the health sector budget by identifying services where supply significantly exceeds demand and releasing staff in areas of low productivity. Half of government health spending i s for wages and salaries, which i s especially high given that expensivetertiary levelcare (withhighly-paidmedical staff) is not providedinthe Seychelles, but rather patients are sent overseas for treatment. The number employed inthe health sector has been increasing in recent years and so too has the share of ancillary staff (which is also highcompared to other countries). Furthermore, averagemonthly incomes for public workers inthe health sector are highcomparedto the rest ofthe public sector. Most telling, we found several examples o f medical staff and facilities which do not operate at full capacity. For example physicians in public hospitals see on average 4 hospitalized patients per week. In addition to areas for contracting out-such as hospital meals, the government should also fully examine these unproductive service areas and release staff in unproductive positions. Preliminary analysis conducted for the PER suggests such staff reductions could reduce the health sector wage bill by almost SR 13 million per annum or 6.4 percent of 2007 government health spending. 13. While tertiary care is largely not provided in Seychelles the rest of the nationally providedhealth sector is characterized by low utilizationrates comparable to European levels. Infact we find, Seychelleshas anoversupply of health care facilities andmore hospitals and bedsper capitathan other middle-income countries. There are extremely low occupancy rates in hospitals off-Mahe Island, as well as in wards within the main hospital in Victoria. To increase the average acute care occupancy rate in hospitals to 80 percent, the government i s advised to close around 50 beds initially. While the health sector has been dominated by public provision, a new private sector hospital is scheduled to open in 2009 which should provide an opportunity for the government to contract specialized secondary and tertiary care in-country including open-heart surgery, renal transplantation, haemodialysis and cosmetic surgery, and this should dramatically improve access to such care and reduce spending on the overseastreatment. 14. As a result of the overseas treatment program and the need to import all medical supplies, the health sector has become highly indebted particularly in foreign exchange denominated debt. Arrears have accumulated over the past six years and the stock of arrears combined with outstanding debts as of October 2008-in other words prior to the devaluation-amounting to 45 percent of 2007 government health spending. Now that the Seychelles rupee has depreciated, health sector debts are also exposed to exchange rate risk since the majority o f outstanding invoices are denominated in foreign currency. The government is advised to clear the debts, and improve debt and arrears management in the health sector in order to improve the sector's financial sustainability and relations with creditors thus opening-up opportunities with suppliers. There are potential cost savings from improving pharmaceutical procurement by larger bulk purchasing once the financial management of the sector is improved including the management o f foreign exchange. Furthermore, recent endeavors to use telemedicine technology to import health services from overseas are far more cost effective than sending patients overseas and should be further explored inthe future. 15. Currently, all domestically-provided public health services are provided free o f charge, leading to excess demand in some cases. Patients co-pay for the use of private sector vi care and treatment abroad. The government is encouraged to initiate a review to consider introducing small co-payments with exemptions to exclude vulnerable groups, initially for additional procedures such as physiotherapy, dental care and non-emergency visits at the emergency department. Introducing co-payments in many other countries has reduced unnecessary use o f care. Any co-payment policy, however, should be explicit andexemptions should be transparent and cost-effective to administer and/or enforce e.g. for specific groups such as children and adolescents under 18 years o f age or for specific services such as emergency services. 16. While a full review o f the social security system will be undertaken as part o f a subsequent phase o f the PER, an initial review o f the system found generous state-provided sick leave and evidence o f abuse o f the sick leave provision. The PER recommends therefore that sick benefits should be revised with the first thirty days paid by the employer rather than the state, with a maximum o f 100 days state-paid sick leave per person per year. We also recommend eliminating the funeral benefit-which i s a small non-targeted transfer. 17. Education. Like health care, the provision o f education in the Seychelles is predominantly by the public sector, and centralized with both financing and provision largely in the hands of central government. Degree-level tertiary education is not provided in Seychelles, and at some cost to the government those that are eligible are fully funded to study overseas. Recent reviews o f the education sector, have raised concerns about quality and examinations results: many candidates do not pass the internationally accredited IGCSEs and are particularly unsuccessful intechnical subjects such as science andmathematics. 18. Given the relatively modest, and recently declining, government expenditures on education, and the relatively poor education outcomes, we do not recommend any major cuts in government spending and rather suggest that policy makers focus on how to improve education services, and use expenditure savings to re-invest in sector reforms aimed at increasing quality o f education and education outcomes. As is typical, public education spending is principally on personal emoluments for schools-based staff. This also i s where we find the most potential to improve efficiency o f spending by contracting out and removing unproductive posts. Staffing reductions should be made once core functions have been defined and non-core services contracted out. Onthis basis we recommend that the education sector can achieve a targeted reduction o f 12.5 percent o f the wage bill. There is potential to improve efficiency in the sector by also introducing contracting-out o f services. We recommend prioritizing school cleaning and school meal provision for contracting out inthe short term. 19. The centralized management o f the education sector allows the government to take advantage o f economies o f scale-which makes a lot o f sense given the small size o f the country and school population. However, in order to maximize the expenditure savings for contracting out at the school level, we also recommend decentralizing the authority for managing service provision to the schools themselves once (i) financial management capacity i s raised at the school level, (ii) governance institutions are established and (iii) school once centralized contracting-out process guidelines are inplace and well understood. 20. Equivalent to about X percent o f the Ministry o f Education's budget is spent annually by the Social Security Fund on benefits such as education bursaries and pupil transportation vii subsidies. We recommend reconsidering this approachby phasing out non-targeted subsidies and replacing them with a needs-based scholarship program. This includes fixing bus subsidies for primary and secondary students at current levels and eliminating in a step-wise approach bus subsidies for post-secondary school students. It also includes reducing bursaries for post-secondary school students who are effectively being paid by the State to stay on at school, which given the poor academic results i s a questionable investment by both the State and the individual. For overseas studentswe recommend introducingco-payments for tuition fees, based on family income, for students eligible to study abroad, as well as basing cost of livingsupport onmeanstesting. We also recommend strengtheningthe alignment of overseas study with national development priorities. 21. While education unit costs are not completely out of line with comparators, we find that there is room for improving value for money in both the overseas and local post- secondary school institutions. In the case of the overseas program we support the government's plans to further focus government resources on supporting training in key sectors such as health, education, financial sector and tourism. We also recommend greater scrutiny be levelled at whether or not students are returning from overseas and strengthening the enforcement of the bonding mechanism which provides for the repayment of fees if students do not return. Inthe case o f the post secondary institutions benchmarking the unit costs shows that there are considerable improvements possible in some institutions to bring these unit costs down. There i s also scope to better align the resources dedicated to these institutions with the government's longer term strategy of having a workforce geared toward management in toursm, financial sector and off-shore services. Sharing administrative costs across more than one post-secondary institution would make greater use of economies o f scale. This could involve bringing the institutions (back) under a single administration, or in view of plans now being developed by the Seychelles University Foundation for a national university, developing the schools as faculties or departmentso f a future university. 22. The PER provides several examples of how to deepen the public sector reforms initiated in 2008 through more structural reforms and efficiency gains in high spending Ministries. The Government of the Seychelles i s taking a number of important steps in this regard. Given the scope of the problem and the ambitious nature of the vision, this process will need to continue over the next couple of years. In addition, the public expenditure reforms will need to expand its scope in other areas. To support the Government, the next phase of the PER work is expected to focus on the needed reforms in the social security system and public enterprise sector given the importance of both of these for a successful fiscal policy duringthe reform process. Inaddition, the work will support further analysis of alternative macroeconomic and fiscal scenarios in light of the improvements in commodity prices for a net-importer on the one hand, and the global slowdown in activity and its impact on Seychelles exports, including tourism, on the other, so as to help guide the authorities in their medium-termfiscal planningwithinanuncertain global environment. 23. The extent to which the government will want to move quickly on these fiscal reforms in2009 will also dependonthe macroeconomic environment. With near-full employment as an initial condition, under a relatively benign global outlook with limited impact on Seychelles tourism revenues there is considerable potential to move excess public employment to the private sector quickly with a social safety net in place to ease the transition. However, the bulk of the analysis in the Review was undertaken before the full viii implications o f the global slowdown were felt in Seychelles. With a global slowdown that impacts considerably on the Seychelles tourism industry the appetite for reforms could diminishrapidly and the opposition to the reform gain momentum. As we have seen in the past, Seychelles GDP growth has a history of volatility the most recent downturn being in 2001 as globally tourism receipts fell in response to the shock of the 9/11 terrorist attacks in the United States. At present, the global downturn has not dampened the policy-maker's commitments to the reforms, and both the business community and civil society groups recognize the importance o f the transition-even though that transition might be more painful that previously envisaged. In response, the government has requested that the Bank assist them as the government places even closer attention to the policies required to ease the transition in the form o f social security reform; and to the policies required to improve the businessclimate so that the private sector can and will grow as the macroeconomic situation i s stabilized. ix I. MACROECONOMICSTABILIZATIONANDFISCAL POLICY Backgroundand Objectivesof the Report 1. In 2008, after many years of unsustainablefiscal policy and a distorted and overvaluedforeign exchange regime, the Governmentof Seychelles embarked upon a bold economic reform program. This program aims to put the economy on a path toward macroeconomic stability, liberalize the economy andto allow the private sector to take over from the State as the driving force inthe economy. Seychelles, a small open, middle-income island state with relatively low incidence of poverty and near full employment, faced acute economic difficulties in 2008 as a result o f past economic management exacerbatedby the rising global oil and food prices and the downturn inthe global economy. This resulted in missed debt-service payments and the subsequent downgrading o f its credit rating by Standard and Poors. Faced with current debt service difficulties and a historically poor credit track record, the authorities responded quickly by adopting a comprehensive reform program supported by a 2 year Stand By Arrangement with the International Monetary Fund(IMF) and commencing negotiations with Paris Club and other private and official creditors for debt restructuring. The government has embarked upon a comprehensive reform strategy aimed at restoring internal and external balanceswith the assistance ofthe international financial institutions and development partners. The reform program includes: (i) complete liberalization the of the exchange rate regime and float o f the currency (which was introduced in November 2008), (ii)tightened fiscal policy, including improved targeting of the comprehensive social safety net and a privatizationprogram to deal with the many state- owned enterprises. 2. Following the repayment of arrears to the World Bank in 2006, the government sought a more active engagement with the World Bank toward the end of 2007 in the context o f the 2008 budget preparation. A new Interim Strategy Note outlining the World Bank and African Development Bank's joint program of support to Seychelles i s planned to go before the Board in early 2009. The Bank's strategy is to support the thrust of the economic structural reforms. Inparticular to support the fiscal adjustment required and assist the improvements needed in the business and regulatory environment. Pending resolution of the debt-sustainability and credit worthiness issues the Bank's support to the Government of Seychelles will likely include policy-based lending in2009 inaddition to demand-ledanalytical support. 3. This Public Expenditure Review (PER) is the first in a series of planned economic reports and analyticalwork respondingto requests from the government for World Bank assistance to implement structural reforms. The first phase of the PER focuses on reforms in the civil service and efficiency improvements in the health and education sectors as requested by the government. The PER is a rapid assessment 1 undertaken in the last quarter of 2008 designed to provide input to the government's policy agenda as the government embarked upon the fiscal adjustment, and in time for the 2009 budgetpreparation. It also provides the Bank with an analytical basis to inform potential financial support in2009. The specific objectives ofthe Revieware to: 0 Document the changing macroeconomic environment and issues that will impact the medium-term fiscal outlook. As the global slowdown gathered pace inthe last quarter of 2008 after the mainmission, the implicationsfor the Seychelles outlook will be investigated in the next phase as the situation develops. 0 Analyze key public finance reform issues, policy initiatives and reform proposals in the following areas: (i)civil service reform, (ii)education, (iii), and healthcare; and ina subsequentphase (iv) public enterprise reform and (v) social security reform. 0 Offer recommendations to the authorities regarding future policy actions that should be considered in the short and mediumterm. These policies will also be considered further inlight ofpotential policy-based lendingin2009. 4. The focus of the PER reflects the fact that revisiting the role and functions of government lie at the heart of the economic reforms that need to take place in the next two years. This chapter provides a survey of recent developments, medium-term macroeconomic developments and their fiscal policy implications. Chapter 2 examines public expenditure trends and budget management issues. Chapters 3, 4 and 5 examine civil service reform, health care and education issuesrespectively. Recent Economic Developments 5. The Seychelles faced rising fiscal and external account imbalances throughout 2008, culminating in extremely low foreign reserves, missed external debt service payments in July and October and a subsequent downgrade in Seychelles' credit rating to "SD" selective default. Despite a fiscal target of a 3.7 percent o f GDP budget surplus in 2007, the actual outturn was a deficit of 8.8 percent of GDP. The authorities developed a new fiscal consolidation plan for 2008 and a commitment to address fundamental fiscal imbalances. However, fiscal sustainability concerns have been brought about by a history of persistent budget overruns. An expansion infiscal policy duringthe period o fparliamentary and presidential elections in 2005-7 caused high budget deficits (averaging 7 percent o f GDP per annum over this period). Coupled with the accumulation of public debt inthe 1990s and 2000s meantthat at end 2007, Seychelles had a debt to GDP ratio of 146 percent with approximately half denominated in foreign exchange. At the beginning of the year foreign exchange reserves were at extremely low levels-less than one month of imports-and the cost o f Seychelles imports, especially food and oil were increasing rapidly. It became increasingly clear that the public debt situation was unsustainable, and international reserves would not be sufficient to meet external debt service obligations. This resulted in the missed external debt service payments in July and October and a subsequent downgrade inSeychelles' credit ratingto "SD" selective default. 2 6. The next few years are not likely to be easy as the economy is steered through the transition. The government, however, has demonstrated it has a strong commitment to continue on this difficult reform path, to allow the possibility o f a better and more sustainable growth path. Responding the situation, the government embarked upon a comprehensive reform strategy aimed at restoring internal and external imbalances and quickly sought the assistance of the international financial institutions and approached creditors for debt rescheduling negotiations. The reformprogramrequires: Liberalization o f the exchange rate regime, elimination of all restrictions and floating the rupee. Tight fiscal policy backed by public employment reforms and a reduction in direct and indirect subsidies. Improvedtargeting of the social safety net. A reform of the role of government and a reduction of the state in the economy throughfurther privatization. A reviewofthe tax regimeand eliminationof exemptions. A reformof the monetary policy framework to focus on liquidity management basedon indirect instruments. 7. By the time the PER was finalized, many of these reforms had already been implementedor were underway. InNovember 2008, the exchangerate was liberalized. The Seychelles rupee floated, and trading was SR16:$1 by the end o f the year representinga 50 percent depreciation, where it has broadly stabilized. The 2008 budget outcome showed that the government was able, through tighter fiscal controls, to keep to the 2008 budget aspirations recording an estimated primary fiscal surplus of 4 percent of GDP. The 2009 budget approved by Parliament at the end of 2008, inline withthe IMF- supported program continued the fiscal consolidation initiated in 2008 with a budgeted surplus of 6.2 percent o f GDP. The 2009 budget speech committed the government to continuing the reform program: requiring public enterprises to start operating with limitedor no direct subsidies; andbudgeting for the public sector voluntary departureand early retirement schemes as part of commitments to address structural reforms for fiscal sustainability. At the same time the government passed the new Welfare Act in November and established a new agency to administer a means-tested safety net for the existing vulnerable groups andthose adversely affected by the reforms. 8. To put public debt on a sustainable basis, the economic reforms will also need to be complemented by comprehensive public external debt restructuring consistent with Seychelles medium-term capacity to pay.-. Total public debt i s estimated to reach almost 143 percent of GDP by the end of 2008; external public debt to reach 91.4 percent of GDP including arrears, mainly to Paris Club creditors, on privately placed amortizing notes, and on the Eurobond-the later two that the government stopped servicing in July and October 2008, respectively. Paris Club creditors have decided to treat Seychelles under the Evianapproach and are considering alternative debt reliefoptions. Formalnegotiations with creditors are expected inSpring2009. 3 9. The macroeconomic outlook for Seychelles was revised in early 2009, as the impact of the global economic slow-down began to impact Seychelles tourism receipts and medium-term outlook. The overall impact on economic growth o f the macroeconomic reform program was initially (as o f November 2008) an anticipated fall in economic growth from 7.3 percent in 2007 to negative 0.5 percent of GDP in 2009 with a rebound o f 3.5 percent growth the following year. However, the macroeconomic situation and the 2009-2010 macroeconomic scenario (consistent with the targets and policies agreed inthe MEFP) were updated in early 2009 during the first IMF review, to take account o f the downturn in the global economy. As a result economic growth is expected to be a large and sudden drop to negative 9.5 percent o f GDP in 2009. The revised macroeconomic outlook i s summarized in Table 1. This is largely a result o f the knock-on impact on Seychelles tourism industry that dominates Seychelles GDP. Tourism receipts continued to decrease in January and February 2009 and receipts from this sector are expected to decline by 25-30 percent in 2009.' Under this case the transition to positive economic growth i s projectedto still be quick (but not quite as high) reaching 2.6 percent by 2010 and 3.8 percent the following year. The Stand-By Arrangement targets have been updated in light o f the more difficult external environment to maintain the fiscal adjustment, notwithstanding the much lower growth outlook on the strength o f the fiscal structural reforms. The program continues to focus on implementing supporting policies for macro stabilization including continued fiscal (and monetary) prudence. Further work to update the Bank's macroeconomic medium term scenarios is currently being undertakenincluding and will be presented infollow-up work. 10. The exchange rate depreciation is currently anticipated to pass through to domestic inflation averaging 37.0 and 38.9 percent for 2008 and 2009. The float o f the rupee has been successful and eliminated parallel marketdifferentials. The rates have broadly stabilized (US$1:SR16 represents a 50 percent depreciation against the US dollar). Domestic interest rates have risen markedly. High domestic inflation i s caused by the exchange rate regime changes feeding through to domestic price increases and on into domestic interest rate increases. This will stress public finances in these years as both domestic and foreign procured goods and services and external interest payments rise in nominal terms, and domestic debt interest service payments will also increase. External balances improve as the terms o f trade improve under the new exchange rate. Official reserves are also expected to recover in2010 to 2 months o f import cover. See World Bank P I14822 Back-to-Office ReportFebruary2009. 4 Table 1:Key Economic Indicators, 2005-2011 2005 2006 2007 2008 2009 2010 Actual Actual Actual. Est.. Proj. Proj. National income and prices YOchange NominalGDP (SR millions)) 4,861 5,342 6,113 7,925 9,632 I1,603 RealGDP(Percent change) 7.5 8.3 7.3 0.1 -9.6 2.6 CPI(Annual average) 0.6 -1.9 5.3 37.0 38.9 17.9 CPI(End-of-period) -1.6 0.2 16.8 63.3 16.1 11.5 GDP deflator average -2.1 1.5 6.7 29.6 34.5 17.5 Money and credit YOchange Net claimson government 1.9 0.4 9.3 25.3 16.5 16.5 Net claims onpublicentities 1.7 3.0 -14.9 3.2 3.7 Net claims onprivate sector 3.4 32.7 -23.1 0.6 -10.0 Broadmoney(M2(p)) 1.o 1.1 1.5 1.9 0.0 ReserveMoney 4.5 3.5 3.6 3.7 13.6 Velocity (GDP/averageM2) 1.9 0.4 9.3 25.3 27.7 MoneyMultiplier (M2heserve money) 1.7 3.O -14.9 3.2 27.7 Savings and investment YOof GDP Gross national savings 14.6 14.2 9.1 32.1 26.8 24.7 Of which: government savings 6.0 0.5 -4.8 3.9 3.5 6.4 Gross investment 34.3 28.1 32.5 36.0 30.3 31.1 Of which: governmentinvestment 5.3 8.1 6.1 2.3 3.7 5.2 Governmentbudget YOof GDP Totalrevenue 41.1 42.0 35.9 36.2 35.2 34.8 Expenditureandnet lending 40.4 49.5 45.9 43.9 39.9 36.7 Overallbalance,includinggrants 1.7 -6.1 -9.6 -3.7 -4.5 -1.9 Primarybalance 7.3 -0.5 -2.2 4.2 9.8 8.2 Totalpublicdebt 147.1 139.5 146.0 149.3 165.9 144.8 Domestic 100.5 85.8 74.1 57.8 43.9 31.2 External 46.6 53.7 71.9 91.4 122.0 113.7 External sector Current accountbalanceafter official transfers -19.7 -13.9 -23.4 -32.1 -26.8 -24.7 Totalstock of arrears ($ millions) 184.0 123.5 160.4 309.6 ... ... Totalexternal debt outstanding(% of GDP) 55.0 53.8 77.9 91.4 805.6 858.2 Terms oftrade (= - deterioration) 4.4 -0.3 -1.2 0.4 -3.1 2.5 Realeffective exchangerate (endofperiod) -2.3 -4.0 -19.7 -8.5 Gross official reserves (SR millionsendofyear) 56.1 112.7 9.8 50.9 90.9 140.9 Inmonthsofimports 0.7 1.3 0.1 0.7 1.2 1.7 Exchangerate Seychellesrupeesper US$l (end ofperiod) 5.5 5.8 8.0 16.6 ... Seychellesrupeesper US$l (periodaverage) 5.5 5.5 6.7 9.5 ... Source: IMFestimates, February 2009 5 Impact of MacroeconomicReformson ProductandLaborMarkets 11. This section providesa guideto the impactof the reformprogrampendinga more quantitativeapproach as a macroeconomicmodelof the reformsis developed. The introductionof reformsto reducedirect and indirectgovernmentsubsidieswill contribute to the anticipated short-run contraction in overall output, as the parastatalsandprivatesector adjust to higher inputprices. This is of courseapartial analysis, as output is also impacted by the changing (and in this case adverse) external environment. As a result o f the reform program, there is likely to be a short-run adverse impact on output: Initially GDP growth was expected to fall to -0.5 percent of GDP in 2009 from 7.3 percent o f GDP in 2007. This impact, however, has been overshadowed by the slow-down inglobal economic activity which is having a knock-on adverse effect on Seychelles' tourism and foreign direct investment projections. The latest projections from the IMF now show that GDP growth was almost zero in 2009 and is anticipated to be sharplyreducedto -9.5 percent in2009. 12. As far as the effects from the reform program are concerned, output will contract both directly as government consumption is reduced, and indirectly as transfers to the public enterprise sector diminish; prompting a realignment in prices. For example, in the case of the state-owned enterprises providing electricity, water and public transport the reduction in government subsidies i s leading to increased prices of these goods and services. This in turn raises input prices and alters the cost structures of other public and private enterprises. Output falls as some services and products are no longer profitable to produce or affordable to consumers (see Box 1 for several examples where prices will rise or have already risen as government transfers have fallen). Government policies to reduce subsidies and the timetable for their introductionare summarized inTable 3. 13. The exportingsectors includingtourism as well as import-competingsectors, however, will clearly benefit from the new exchange rate regime and will see an increase in output, even if they used importedinputs. This gain is likely to be quick as there is a supply response, and could be sustained if these structural reforms allow for a meaningful supply response and if the nominal devaluation is also a real one and not eroded by inflation. On the other hand, non-tradable sectors will see a price increase (both on account of domestic inflation as well as increase in rupee price of imported inputs), andcouldwitness a decline inoutput, dependingonthe elasticity ofdemand. 14. We should not lose sight of the medium term objectives-which of course is positive economic growth as the private sector responds to the improved macroeconomicfundamentals. As subsidiesto parastatalsare reducedthere should also be a positive reaction from the private sector as unprofitable enterprises go out of business (dynamic creative destruction?) and the playing field i s leveled between the public and private sectors. The private sector accounts for around 71 percent of GDP, parastatals contribute 14 percent and government remaining 15 percent of GDP. The institutional breakdown o f GDP has not changed significantly over the period 2004 to 2007 and i s expected to shift now that the government intends to limit its involvement in commercial activities and to improve the climate for the private sector. More work on 6 how to improve the business environment i s currently underway by the World Bank in the form o f an InvestmentClimate Assessment. Table 2: Structure of GDP, Percentof Total 2004 2005 2006 2007 2007of which Private Public Government Agriculture, Forestryand Fishing 2.9 2.9 2.7 0.0 Manufacturing 12.2 12.5 11.9 0.0 Services 76.5 79.0 82.4 15.1 of which AccommodationandFood 9.6 9.4 10.3 15.4 15.4 0.0 0.0 ProfessionalServices 14.4 15.0 15.2 15.1 14.8 0.3 0.0 Transportationand Storage 9.8 12.3 13.6 13.6 3.0 10.6 0.0 Financeandinsurance 6.0 5.8 6.3 6.7 3.I 3.6 0.0 Other 8.5 5.6 3.1 1.8 7.4 -5.6 0.0 Total 100 100 100 100 70.8 13.9 15.1 GDP SR (millions) 4653.6 4869.4 5366.7 6313.1 Source: National Statistics Bureau Table 3: Direct and Indirect Subsidiesto be Removedin MEFP Action Timing Abolish fishermen fuel subsidy coupons. October 1,2008 Eliminateindirectuniversalproduct subsidiesandreplacewith a targeted November 1,2008 social safety netby enactingthe Welfare Agency Act. Eliminate SR90 per monthelectricityrebatefor households. January 1,2009 RaiseandmaintainSeychellesPublic TransportationCompanybus fare at January 1,2009 operatingcost-recoverylevels. Eliminateimplicit andexplicit subsidiesfor Ago Industries,Hatcheries, January 1,2009 SeychellesTrading CompanyandCoevityPrawns. EliminateLPGsubsidyby the state oil company(SEPEC) (about SR3 per January 1,2009 15. The speed of the economic rebound will depend on the speed with which dynamic small and medium-sized enterprises respond to the more stable macroeconomicoutlook. Evidence from market reforms introduced in Eastern Europe inthe 1990s would implythat the devaluation impact on output will be relatively short- lived as long as barriers to new business creation are low, dynamic new entrants will quickly revitalize growth. The economy is predominantly service-based(accommodation andfood), drivenby the tourism industry (see Table 2). 16. Tourism has been a driver of growth in the past two years resulting in buoyant related-service and construction sectors which should also respond well to the exchange rate devaluation and an end to foreign exchange restrictions, making Seychelles a more affordable high-end holiday destination. The off-shore financial sector is another 7 potentialdriver of growthinthe short term, which has beengrowinginthe short term and providingnewjobs.2 Box 1: Price Liberalization, Subsidy Reformsand Global Price Changes The government has embarkedon several policies to liberalize prices, several ofwhich will directly impact the average household's foodbasket. For example, inOctober 2008the government eliminated the fisherman's fuel subsidy which was expected to raise the fish prices inthe market. From2008, Seychelles Trading Company, a commercially-oriented publicly-ownedenterprise with a social mandate to provide 15 core consumer products at affordable prices has been required to do so without government subsidies. It has thus far beenable to do this only through cross-subsidization from more profitable business units (such as the duty free store at the airport inVictoria). However, as Table 4 shows the expected in-store commercial prices are some 50 to 100times the fixed retail prices (as o fJuly 2008), with the biggest price increases on rice varieties which are currently substantial loss-making items. Table 4: Subsidized Core CommoditiesSR, 2008 Current Retail Retail Retail Product Expectedin-store price wholesale price price price mice Jan 08 Am408 July 08 Sunflower oil 218.6 262.9 16.5 23.0 23.O Milkpowder 654.3 708.7 61.0 61.0 62.0 Long grain rice 456.1 238.1 5.0 5.0 5.0 Regularbasmatirice 742.1 524.7 9.0 10.5 11.0 Premium basmatirice 1,012.1 1,023.8 16.5 18.0 21.5 Highprotein flour 404.9 392.1 8.0 8.0 8.0 White sugar domestic 238.1 238.1 5.0 5.0 5.0 Iodizedsalt 91.1 113.8 1.3 1.3 1.3 Margarine 336.4 382.0 16.5 17.5 17.5 Potatoes 4.9 6.4 7.0 7.0 7.0 Onions 4.9 6.4 7.0 7.0 7.0 Garlic 14.6 16.4 18.0 18. 0 18.0 Ginger 16.9 18.3 20.2 20.2 20.2 Apples 16.0 18.6 20.5 20.5 20.5 Oranges 9.2 14.6 16.0 16.0 16.0 Source: SeychellesTradingCompany From2009, transfers to public enterprises will drastically reduce resultinginfurther anticipated price increases inelectricity, water and public transportation. Fromthe beginning o f 2008 the Public Utilities Company was advised by the Ministryo f Finance that annual transfers from the central budget would no longer be forthcoming. As a result a new tariff schedule was introduced for electricity and water. Four electricity tariffhikeswere witnessed in2008; the latest in September 2008 raisedthe commercial tariff Agriculture, forestry andfishing comprise only 2.5 percent of GDP which, inthe current environmentcauses concerns with respectto food security as the costs of food importsare adverselyimpactedby boththe devaluationandthe externalenvironment. Agriculture could be apotentialdomesticgrowth area as it becomes moreprofitable to grow local producerather than purchaseexpensiveimports. As the governmenthas already sold its own assets infarming new private operators haveenteredthe market and are supplyingeesh localproduce. Manufacturingis relatively low at less than 11 percentof GDP and hasbeenstatic or indeclineinrecent years. As the cost o fnew manufacturing capitalgoodswill increase as aresultof the devaluationthis is unlikely to be a short term driver of areboundin growth, but may well be asector that inthe mediumterm also respondspositively to the new exchangerate improving the profitability of local production. Fish and fish processingis one potentialgrowth area inwhich Seychelleshas a largenaturalendowment 8 schedule as shown inTable 5 below. Such price rises were not solely due to the change inpolicy on subsidieshowever. Since fuel costs are approximately 80 percent o f electricity generation costs, global fuel price increases were also driving up the electricity tariffs in2008, see Figure 1: Table 5: Commercial Electricity Tariff Changes, 2008 First500 units Next 500 units After which SR per KWh SR per KWh SR per K W August 2008 SR 1.6 SR 1.8 SR 2.2 September 2008 SR 2.2 SR 2.4 SR 2.8 Source: Public UtiltiesCompany Also adversely impacted in2008 by risingfuel prices as well as anticipatedhalt ingovernment transfers to subsidize operations in2009, the Seychelles Public Transport Company is planning to introduce tariff increasesto accommodate the policy to remove their annual operating subsidy o f around SR 15 million. For the public transport company to remain solvent, the bus fare will likely increase from the current flat rate o f SR 3 per trip to a flat rate o f SR 6 per trip. This would become the first bus fare increase since 1994. Figure 1: Commercial FuelPriceIncreases, 1998-2008 -LlightFuelOil -Heavy FuelOil Source: Public Utilities Company 17. However, the world wide economic downturn looks set to significantly affect economic outturn in 2009 far exceeding the impact o f the reform program alone, and making it imperative for Seychelles to put the economy on a footing that will allow the private sector to weather the storm. While the fuel prices are now on a downward trajectory, the global slowdown in economic activity has resulted in a downturn in tourist arrivals and possibly a fall in previously buoyant foreign direct investment inflows. With the domestic agriculture sector being relatively small global food price increase have heavily impacted the non-fish food basket costs to the average household, which rose by 34 percent from July 2007 to June 2008. 18. While the downturn in economic growth is likely to impact employment too in 2009, one of the positive features of the current situation is the very low rates of unemployment witnessed at the start of the reforms, and the fact that Seychelles is an importer of labor, including unskilled and semi-skilled workers. The last Labor Force Survey in 2005 found only 5.5 percent to be unemployed and more recent 9 estimatesputthis inthe range of 1.9 to 2.5 percent. The total number of employees inthe formal sector improved by 5.2 percent in2007 over 2006, and by a further 3.7 percent in the first quarter o f 2008 (latest available figures). Employment in the private, parastatal and government sectors all increased from 2006 to 2007, but fell in government and parastatals during the first quarter of 2008. While the private sector accounts for 71 percent of GDP it employs only 59 percent of employees, while 15 percent are in the parastatal sector and27 percent inthe government. 19. There are certain skills shortages and labor supply constraints as evidenced by the number of expatriates living in the Seychelles. In the government sector, expatriates make up 2.7 percent of the workforce (down from 3.2 percent in 2007)-and are predominantly employed inthe health and education sectors. Expatriates are also 5.6 percent of parastatal employees (down from 6.2 percent in2007) with the highestnumber employed in the fishing industry. The equivalent information from the private sector i s not available officially. Anecdotally private-sector expatriates are concentrated in the tourism and construction ind~stries.~ 20. Average nominal earnings have also been increasingin recent years, by an average of 5.3 percent in 2007 over 2006; and 11.8 percent in the first quarter of 2008 (a new, higher, minimum wage was introduced at the end of 2007). Average earnings are highest in the parastatal sector (SR5,465 per month), followed by government (SR4,216 per month) and private (SR4,535 per month) sectors. Average earnings are highest inthe education private sector (SR6,622) followed by parastatal and private sector earnings inthe transport and financial sectors. 21. As reforms are implemented-particularly on the fiscal side we can anticipate a direct reduction in the numbers employed in the public and parastatal sectors. The low unemployment rates, sustained increase in private sector employment in 2007 and 2008, andthe presence of expatriate workers inthe country provides some degree of comfort that the private sector can continue to expand and providejobs for those affected directly and indirectly by the anticipated short-term economic downturn. Welfare Impact 22. The impact on real incomes and hence householdconsumptionare also likely to be negativeinthe short run, as employment falls with the slowdownin output, as real wages are initially eroded by high inflation caused by the devaluation and households cope with the immediate foreign exchange adjustment resulting in higher food costs. This should be a one-off adjustment, since households initially have Seychelles rupee denominated incomes, and predominantly import-related expenditures. While all households will be affected by the general price rises, those who work with (partially) indexed wages will be hurt less than those whose wages are more sticky in nominal terms (such as in the informal sector); and where real wages are more quickly eroded. Those working in sectors adversely impacted by the terms of trade shift are also Anecdotallythere are 9,000 expatriatesworking inthe country out ofatotal of almost 40,000 employees. 10 more likely to be worse off. In addition to the price effects, those who lose their jobs (public sector, or other sectors affected) will o f coursebe even more adversely impacted. 23. In the short-term the government should guard against high nominalwage increases in anticipationof risinginflation as this will leadto a wage-price inflation spiral and prolong the adjustment. Instead the government should, and is, focused on improving the welfare system, turning a large non means-tested welfare system present into one better targetedat maintaining reasonableincomes for poor andvulnerable groups The government is designing a new means-testedwelfare system to mitigate the impact of the reforms on the poorest. A new Welfare Act was passed by the Assembly in October 2008 and the detailed design work for implementation is underway. The approach is to protect the most vulnerable with monetary assistance, and to go beyond financial transfers to provide assistanceinthe form of incentive-to-work schemes. A new welfare agency responsible for implementing the new legislation began operations in November 1,2008. The agency is funded directly by the government budget rather than social security contributions. Social security contributions, however, continue to fund statutory benefit schemes as detailed in the Social Security Act. Further work to assist the authorities with the implementation of the new welfare system, improved targeting, addressing fiscal sustainability and streamlining the existing statutory benefit schemes will beundertakeninthe secondphaseofthe PERplannedin2009. 24. The impact on poverty of the reform program is difficult to ascertain at this stage. The most recent household expenditure survey data indicates around 13 percent of Seychellois are living below a SR 50 (approximately US$ 3.5) per day povertyline. This survey done in2006/07 shows that since the last survey in 1999/2000 poverty continues to be relatively low but that inequality has increased with the gini coefficient going from 0.28 to 0.42 over this period. Non-monetary measures of poverty show that life has improved and access to goods and services has increa~ed.~ Inorder to helpthe government with respondingto the impact on the poor, the World Banktogether with UNDP are exploring possibilities to assistthe government with analysis ofthe social impact and impact on poverty ofthe reform program in2009. FiscalPolicyand RecentDevelopments 25. The government has committed to undertake several far-reaching fiscal policy reforms as part of the MEFP, and these are central to the macroeconomic adjustment. Over the medium-term a large and sustainedfiscal adjustment is envisaged bring the public debt to a more sustainable basis. This will be achieved through a combination of revenue and expenditure measures, as well as improved budget management. The Medium-Term Budget Framework (MTBF) under this scenario envisages a tightening of fiscal policy and a targeting of a primary fiscal surplus of 6.2 percent o f GDP and 6.6 percent of GDP in 2009 and 2010 respectively. The primary balance i s a critical fiscal policy target, since it representsthe total amount o f government World Bank (2006) "Welfare ImpactsofExchangeRateAdjustment andPolicy Implications". Earlier work undertakenby the Bankfor the governmentin2006, estimateda6.6 percentagepoint increase inthe incidenceof povertyas aresult ofthe exchange rate devaluationat that time (SR5.5:$1 to SR8:$1). However,the paperalso found that the effect would be short-lived, andthat inadditionto atargeted safety netthe resumptionof growth would be necessaryfor povertyreduction. 11 saving in the economy that is under the government's direct influence. The primary surpluses would ease gradually over the medium term, allowing capital spending to double from 3.6 percent o f GDP in 2009 to 7.4 percent by 2013. The base case fiscal scenario is giveninTable 6. Table 6: Medium Term Budget Framework, 2008-2013 Projections (in YOof GDP) 2008 actual 2009 2010 2011 2012 2013 Total Revenue and Grants 40.2 35.4 34.8 34.3 34.5 34.0 1, Total domestic revenue 36.2 35.2 34.8 34.3 34.5 34.0 o fwhich Tax revenues 31.0 29.6 29.3 29.3 29.5 29.2 2. Grants /1 4.1 0.2 0.0 0.0 0.0 0.0 Total Expenditureand Net Lending 43.9 39.9 36.7 38.1 35.0 35.1 1. Current expenditures 31.6 37.1 31.9 31.2 27.6 27.2 ofwhich Wages and salaries 8.7 7.2 6.1 6.6 6.6 6.6 Goods and services 6.2 6.7 7.2 7.2 7.5 7.5 Interest payments 7.9 14.3 10.1 8.4 4.4 4.0 Foreign interest 4.3 5.4 4.1 3.8 1.2 1.1 Domestic interest 3.6 8.9 6.0 4.5 3.2 2.9 Transfers 8.7 8.8 8.5 9.0 9.1 9.0 Social programs and SSF 5.9 6.9 7.0 7.7 7.8 7.7 To rest o fpublic sector 2.8 1.9 1.4 1.2 1.2 1.2 2. Capital expenditures 2.3 3.7 5.2 6.9 7.3 7.8 3. Contingency 3.1 2.2 0.0 0.0 0.0 Overall FiscalBalance(cash basis) -3.3 -6.7 -1.9 -3.8 -0.5 3.0 Primary Fiscal Balance 4.2 9.8 8.2 4.5 3.9 -1.1 Overall Fiscal Balance (commitment basis) -3.7 -4.5 -1.9 -3.8 -0.5 -1.1 Source: IMFFebruary2009 Notes: /1 an unexpectedgrant was receivedfkom Dubaiat the end of 2008. 26. Public spending reductions are planned by eliminating direct and indirect subsidies (see Table 3) and by significantly lowering the real wage bill, which is targeted to fall from about 9 percent of GDP in 2008 to 6.5 percent of GDP in 2010. During 2008, government initiated several efforts to reduce the number of staff on the payroll: such as an early retirement scheme, a voluntary departure scheme and tight controls over new hiring. The potential to achieve this wage bill target and several recommendations on implementing public sector reform is discussedat lengthin Chapter 3. In addition to the fiscal implications of social welfare reforms, the next PER volume will also address the policies required for a sustainable reduction in subsidies to the public enterprise sector. 27. Tax policy measures are also planned to raise revenues and remove distortionary exemptions. These measures are summarized in Table 7 below. Structural reforms will be undertakento strengthenthe tax administration, improvepublic 12 financial management, reform the role of the public sector and further privatize publicly- owned enterprises. Given the revised macroeconomic scenario, it i s anticipated that tax revenues will be affected by the growth slowdown, and lower tourism revenues. This places even greater urgency on reviewingtax policy options and the need to ensure a tax regime that i s on the one hand consistent with fiscal targets, and on the other hand is supportive of the business climate reforms to help the private sector during the transition and downturn inglobal economic activity. Table 7: Revenue RaisingMeasures Agreed in the MEFP, 2008 Action Timing Raiseandharmonizetaxes on local and imported cigarettesto SR500 October 1,2008 per 200 cigarettes. Introduce 10 percentwithholding tax on interest income for residents. October 1,2008 ExtendGeneral Sales Tax (GST) to all telecom companies. October 1,2008 rentalincome, effective January 1,2009. Announce the introduction ofthe GST of 15 percenton residential October 10,2008 Announce the removal ofthe exemption on interest income by November 1,2008 companies(Tax Act) effective January 1,2009. Reintroduce GST on locally produced soft drinks. November 1,2008. RaiseGST ontourism services from 7 percentto 10percent. November 1,2008 Raisespecific taxes/excisetax rates for both locally manufacturedand November 1,2008 imported alcohol to adjust for inflation. Raise environmental levy to SR25 from SRlO per monthper January 1,2009 household. Adjust fees, fines, charges andrents and royalties for inflation. January 1,2009 Reinstate GST on LPG. January 1,2009 RaiseGST on tourism services from 10percentto 12 percent. November 1,2009 Repealall provisions for discretionary exemptionsinthe Trade Tax January 1,2009 and BusinessTax Acts Medium-TermExpenditureOutlook 28. The full impact and interaction between the macroeconomic and fiscal reforms, depends on the various linkages between the two as summarized in this section. The macroeconomic indicators and medium-term budget framework shown in Table 1 and Table 6 are consistent with the reform scenario envisaged under the MEFP agreed inNovember 2008, and updated in the first quarter of 2009 as a result o f (a) the slowdown in global activity leading to a fall in tourism arrivals, (b) the fall in global commodity prices seen at the end of 2008, and (c) a better than expected 2008 fiscal outturn. However, given the continuing uncertainties, particularly in the global environment and the impact on tourism receipts and FDI, the government will need to continuously monitor and evaluate outcomes on key targets as the program proceeds. The macroeconomic fiscal linkages are summarized below. Interest payments 29. The foreign exchange devaluation has increased the costs of servicing external debt, inpercentageo f GDP terms external interest payments inthird quarter 2008 were x 13 percent o f GDP compared to first quarter 2008. While external debt workout and debt rescheduling will be required to ensure debt service obligations can be met in the medium-termwithout runningup unsustainable arrears, the exact terms remainuncertain and so too will the required external debt service in the medium-term. Secondly the domestic interest rate will also adjust to the rise ininflation, and risingnominal rates will increase the costs of domestic debt servicing. There i s a further implication of large domestic interest rate increases, as the domestic banking sector i s adversely affected, and the government is put under increasing pressure to "bail out the banks". This has been accommodated in part by a contingency (equivalent to 3.1 percent of GDP in the 2009 budget). By end 2008, the increase in interest on loans in the domestic banking sector has changed from 10 percent to 18 percent in one bank and from 7 percent to 13 percent inanother. The rise ininterest rates will also feed back into domestic economic activity as borrowers cope with rising mortgage and other loan payments. While the government's initial estimates were that more than 50 percent of borrowers would be able to meet the increase in monthly payments, a significant portion would not and this has already prompted concerns about housing loanforeclosures and homelessness. Goods and services 30. The rupee-equivalent costs of foreign-currency denominated government consumption has increasedby x percent inresponse to the 50 percent rupee depreciation. As the price of imports will also feed through to domestic prices, higher inflation is also reflected in the high cost to government for locally procured goods and services. With the current mix of local and overseas procurement, the anticipated nominal goods and services spending could increase by 40 percent in 2009 or an additional 0.7 percent o f GDP should the average foreign exchange rate for 2009 be SR12:$1 and inflation reach 34 percent. An average foreign exchange rate o f SR14:$1 for the year, however, would increasethe bill by afurther SR 50 million or 0.5 percent o f GDP at current procurement levels. Wages and salaries 31. Reforms underway to reduce government employment will lower the total number employed in the sector, and nominal wage increases below inflation would erode real wages and lower the real wage bill. However, as rising prices can lead to pressure on government to raise nominal wages this can lead to a rising wage-price inflation spiral and will delay efforts to reach the wage bill target as well as prolong the impact of the reforms. Public employment reforms and effects on the wage bill are discussedfurther in Chapter 3. Subsidies and transfers 32. Reforms are also underway to privatize government assets and to eliminate subsidies to the parastatals-largely those that are commercially oriented but in many cases also have a social function. For many enterprises who continue to provide a public service, they will be required to cross-subsidize unprofitable business units from 14 profitable ones. When profitable business units are also in a competitive environment this will reducethe enterprises' ability to do so without losing-out to competitors (e.g. the public transport company with private bus hire, and Seychelles Trading Company with the duty free store). Without a more strategic approach to reform in the sector, with an explicit contract betweenthe government and service provider for social objectives; or an explicit acceptance that the social objectives is no longer required, there will continue to be contingent liabilities arising from the sector and risks that the government will be requiredto transfer subsidiesto ensure the institutions solvency. Parastatal governance and risk issues are discussed at a general level in Chapters 2 and 3 and more detailed work will beundertakenon the sector inthe secondPERphase. 33. Inthe case of transfers to households through the social welfare system, this too will depend upon the full magnitude of the macroeconomic reforms on output and employment levels and hence household incomes; as well as the re-design of the social welfare net to improve targeting at the poorest and most vulnerable in society. With the forthcoming analysis on social security reforms, a more informedassessmentof the fiscal impact should be forthcoming. Revenues 34. The high CPI and foreign exchange devaluations will likely cause the nominal tax collected on domestic sales and imports to increase. Import duties are particularly high on relatively price-inelastic goods such as alcohol and tobacco. However, reduced demand (and hence reduced tax collection) might be anticipated in responseto the devaluation on several highvalue goods-such as vehicles. A downturn in economic activity would reduce profits and related business tax collections. With a relatively narrow base the extent to which the overall tax revenue collection i s effected depends on the extent to which the downturn inoutput affects the construction, banking, telecommunications, brewery and oil transportation industries. As we can see from table 1, public sector revenues are historically volatile as a result of both the narrow tax base and the introduction of both new taxes and levies and exemptions. With many more policy changes anticipated during the reform period over the next two years this is likely to add to the volatility of revenues. Conclusion 35. Chapters 3, 4 and 5 o f the Review analyze indetailthe policies that will assist the government in its fiscal consolidation efforts as part of the macroeconomic reform program. It is clearly the case that for the reform program to be successful in the medium-term the government must make progress with not only debt restructuring but also the size and sustainability o f the government sector to avoid a resumption o f the credit problems faced in2008. The potential wage bill savings and efficiency gains inthe health and education sectors are examined in detail in this Review and various recommendations proposed. The key finding is that there is potential to make considerable wage bill savings consistent with the targets o f the medium-term budget 15 framework, and several efficiency measures in the health and education sectors could also be implemented. 36. The extent to which the governmentwill want to move quickly on these fiscal reforms in2009 will also depend on the macroeconomicenvironment. With near-full employment as an initial condition, under a relatively benignglobal outlook with limited impact on Seychelles tourism revenues there i s considerable potential to move excess public employment to the private sector quickly with a social safety net in place to ease the transition. However, the bulk of the analysis in the Review was undertakenbefore the full implications of the global slowdown were felt in Seychelles. With a global slowdown that impacts considerably on the Seychelles tourism industry the appetite for reforms could diminishrapidly and the opposition to the reform gain momentum. As we have seen in the past, Seychelles GDP growth has a history o f volatility the most recent downturn being in 2001 as globally tourism receipts fell in response to the shock of the 9/11 terrorist attacks in the United States. At present, the global downturn has not dampened the policy-maker's commitments to the reforms, and both the business community and civil society groups recognize the importance o f the transition-even though that transition might be more painful that previously envisaged. Inresponse, the government has requestedthat the Bank assist them as the government places even closer attention to the policies required to ease the transition in the form o f social security reform; and to the policies required to improve the business climate so that the private sector can andwill grow as the macroeconomic situation is stabilized. Table 8: Potential ExpenditureSavings, 2008-2011 Projections (in SR millions nominal) 2009 2010 2011 Civil Service Reforms Wage bill savings (net) from VDS, MBEand early retirement 2008 reforms /a 2.3 74.8 89.8 Wage bill savings from additional medium-termstructural reforms 48.7 12.7 26.6 Total wage bill savings 51.0 87.5 116.4 Of which Health care workforce reductions (posts reduced) 326 326 326 Education employee reductions (posts reduced) 380 380 380 Healthcare wages bill savings 12.9 15.5 18.6 Education wage bill savings 13 15.6 18.7 Healthcare Reforms Hospital efficiency improvements 4.6 6.4 7.5 Social Security Reforms Changesto sick benefit 5.1 5.7 6.7 Elimination o f funeral benefits 0.9 1.2 1.4 EducationReforms Education-relatedcashtransfer savings 5 9.6 21.9 Education contracting out net savings 5.0 6.9 8.1 Source: Bank Staff estimates assuming nominal wage increases of 20 percent per annum in 2009-11 and CPI consistent with Table 1 Notes a:In 2009 net wage bill savings assumes SR13.8 million saved fi-om the manpower budgeting exercise and payouts of SR11.5 million for the voluntary departure scheme. 2010 and 2011combines total wage savings from early retirement and Voluntary Departure schemes incorporating nominal wage increases. 16 37. While there are already short-term policy measures underway to reduce the numbers employed in the civil service such as the voluntary departure scheme and early retirement scheme; critically more fundamental reforms (to realign roles and functions of governmentand to contract out support functions) are requiredto meet wage billtargets. Expenditure scenarios associated withthese reforms are shown in 38. Table 8 below. O f the wage bill savings more detailed recommendations in Chapters 4 and 5 identify which posts in the health and education sectors could be contracted out or reduced without impacting on service delivery. The table does not show the net impact o f the expenditure savings, and some increase in goods and services spending associated with contracting out support functions in health and education sectors can be anticipated. 39. We also find that in general the health and education sectors have potential to make considerableimprovementsto efficiency. This can be achieved by reducing spending on service delivery areas that are underutilized (see for example the underutilized maternity wards discussed in the healthcare chapter), and reducing expenditures on cash transfers that are not well targeted (such as bus fare subsidies for post-secondary school students outlined inthe education chapter). However, expenditure savings within the sector should not automatically imply a reduction in overall spending inthe sector since a healthy, well-educated labor force is critical for longrungrowth. In education in particular, the chapter documents the poor education outcomes and low value-for-money o f investment inthis sector which must also be addressed for Seychelles to develop and achieve its developmental aspirations. Therefore, any savings additional to the wage bill savings envisaged above should be invested in improving outcomes in these sectors. 17 11. PUBLICEXPENDITURESAND EXPENDITURE MANAGEMENT TrendsinPublicExpenditures 35. Seychelles has a history of a high spendinggovernment that it has not been able to finance from domestic revenues-resulting in a high and unsustainable public debt stock. (See Figure 2). While in the 1980s, development grant assistance helped to finance fiscal deficits, as grants have ceased, the government increasingly turned to loans, including commercial and short-term debt, to finance spending. (See Figure 3 andTable 9). Figure2: Government Revenues,Spendingand BudgetDeficits, 1988-20( 1 80 1 , 5 I+F'ubtic Evenditures -Government Revenues ---x---.OveraUbalanceI Source: IMF 36. Seychelles is now one of the most highly indebtedcountriesin the worldwith a debt to GDP ratio of 160 percent. Roughly half of the debt is domestic, and half external, including arrears and sovereign bonds, totaling US$230 million. Debt service i s now over 10 percent o f GDP annually, and dependingon the rate of growth it could stay at this level for the next seven to eight years, indicatingthat the past development model i s unaffordable and unsustainable. The debt situation i s unsustainable. As of end 2007 the country was in arrears in the amount of about US$147.9 million. During 2008 Seychellesreserves fell to extremely low levels and the external debt situation resulted in a default on external debt service payments inthe latter half ofthe year. 37. While studies of small states show that on average they tend to spend more on public services, Seychelles is also at the top-end of this group. Government consumption to GDP is around 19.4 percent on average in small states compared to only 15.7 percent inlarger states.s The gap reflects the higher costs of producingpublic goods Favaro(2008). Small states are definedas those with less than 2 million people. 18 as a result o f indivisibilities in production and the small size of the domestic market results in fewer government suppliers and a lack of competition (Alesina and Wacziag 1998). Small states are also characterized by a much closer interaction between individuals in the public, parastatal and private sector that tends to blur roles and potentially lead to sub-optimal decision making. Small island states additionally suffer from high transportation and telecommunication costs related to their remoteness. Inthe case of Seychelles, however, we find that the higher costs o f producingpublic goods only explains part ofthe largepublic sector story, andthat even compared to other small island states at similar per capita incomes, spending i s high. This reflects both a high, historic social preference, and development model for public sector provision(or a welfare state). Inmore recent years it is also a reflection of high interest payment associated with the stock of debt that has arisen from these aspirations. re 3: External Debt and Extentof Concessionality, 1980-2006 0 Cancossionaldebt(%oftotalc~maldebt) Memaldobt ("/.afCM) Table 9: External Debt Composition,2002-2006, (US$ million) 2002 2003 2004 2005 2006est Public sector externaldebt (end ofperiod) 392.3 361.5 380.7 411.5 577.7 Multilateral 100.7 73 77.8 83.3 47.1 World Bank 3.5 3.2 3.6 2.7 0.6 African DevelopmentBank 82.7 55.8 57.6 63.2 28.7 Other 14.5 14 16.6 17.5 17.9 Bilateral 176.3 72.9 199.5 240.9 218.4 Paris Club 118.5 119 139.2 177 168.8 Other 57.8 53.9 60.3 63.9 49.6 Commercial 115.3 15.6 103.4 87.3 3 12.2 Source: GOS, WDI (2008) 38. Comparingthe 2000-2005 pattern of spendinginSeychelles with other small economies we find average government expenditure of 36.1 percent of GDP that is 6.6 percentagepoints of GDP higherthan the average (Table 10). Comparing primary expenditures only (i.e. without interest payments), and taking account of Wagner's Law (i.e. countries with a higher per capita income tend to have higher public spending in proportionto GDP) we find that Seychelles lies above the observed correlation between size of government andper capita income (Figure 4). 19 Figure 4: Primary Expendituresas Percentof GDP, Seychelles and Comparators, average 2000-2005 55 1 .. I 50 .................................................................... ...................... s 45 a 88n40 35 3 2 8 25 30 20 15 .......................... ?............................................................ 10 6 7 8 9 10 11 LNGDPpercapita,PPP Source: GFS, WEO, WDI and ECA Fiscal Database 39. Relatively high social welfare spending, in part, explains L e large p~,..c sector. Compared to Organization for Economic Cooperation and Development (OECD) and Eastern Europe and Central Asian (ECA) countries, both groups which also have high social welfare expenditures, Seychelles i s again, above the norm given its per capita income. In fact, average primary spending in Seychelles over 2000-05 was higher than two thirds of OECD nations. The IMF's Fiscal Affairs Department recently conducted a similar exercise using a different small island state comparator group and found that in 2007, primary spending in the Seychelles was 20 percentage points o f GDP higher than the average.6 While data limitations prohibited a greater analysis of small island state comparators, we note that primary expenditures on average over 2000-2005 was more thantwicethat ofneighboringMauritius. Table 10 :Seychelles and ComparatorsPublic Spending, average 2000-2005 Government Percent of Expenses Recurrent Subsidies ComDensation Goods Interest Expenses and of employees and (% of GDP) Transfers Services Barbados 21.1 18.5 43.0 16.5 14.0 Estonia 24.3 43.7 21.3 17.3 0.0 Fiji 26.7 22.5 43.0 16.0 10.0 Maldives 33.3 3.O 24.8 67.5 5.0 Mauritius 28.2 33.0 38.8 12.8 13.0 Seychelles 36.1 29.8 29.3 21.5 15.3 Trinidad and Tobago 36.6 31.7 36.0 16.0 15.3 Group average 29.5 26.0 33.7 23.9 10.4 Source: WDI 2008 IMF(2008) 20 40. As a share of government spending, public spending on more discretionary expendituressuch as goods and services and capital projectshave been squeezed in recentyears. This is despite the step devaluations inthe foreign exchange rate in2006 and 2007 which would have led to increased costs o f foreign-procured goods and services. The goods and services and capital spending squeeze i s most evident inthe case o f the 2008 expenditure consolidation. Discretionary expenditures have the advantage o f being relatively easy to reduce in the short run, but the disadvantage that spending cuts are less likely to be sustained (for the simple reason that they are also easy to increase again). Furthermore, squeezing capital spending can eventually result in an erosion o f the capital stock and build-upa back-log o f maintenance expenditures that will need to be settled inthe future. Figure5: Expenditureby EconomicClassification, Figure6: Expenditure by Functional Percentof GDP Classification,Percentof Total 2000-2008 60 100% 50 80% 60% z$30 40% 20 20% L I O 0% 0 2000 2001 2002 2003 2004 ZOOS 2006 2007 2003 2004 2W5 2006 ux)7 2008cst Other 8 Health CapitalSpending Goods and Services OTransfen Ewnomio affairs 0 Defense, publicorderand safety 0Wager and Salaries InterestPayments Edwation 0 ?acid protection GonerdPublio Scrviws Source: IMF Source: MoF Note: Primary ExpendituresOnly 41. At the same time non-discretionaryexpenditures-suchas wages and salaries and transfers have remained high since, until 2008, more fundamental and structural reforms of public spending have not been on the government's agenda. Wages and salaries have remained at around one third o f spending per year. Now, in addition to the debt restructuring, structural reforms are envisaged: o f the civil service (Le. wages and salaries spending), the social welfare system (i.e. transfers to households) and public enterprise reforms (i.e. subsidies and transfers to the rest o f the public sector) which will start to address more fundamental spending pressures and bring these under control. Wage bill spending trends are addressed indetail inChapter 3. 42. Comparing the trend in spending by function over time we find that social protectionspendinghas beengraduallyincreasingbetween2003 and2007, although this has not ledto an improvementin equity. (Figure 6). Social security spending, (an average for the period 2000-05 o f 29.8 percent o f expendituresor 8 percent o f GDP) is on a par with European countries, at the top end o f middle-income countries, and higher than a comparator group of small island developing states averages. Redistributive policies can have a positive impact on equity. Seychelles has a relatively low gini coefficient provisionally estimated to be 0.40 in 2007; however, this has increased since 2000 when the gini was only 0.28 in 2000 and so the recent increase in social security spending has not been associated with an improvement in equity. Spending on socially- provided housing and community amenities has also been increasing in recent years-in 21 response to pledges made by the government to increase the availability o f social housing intherunupto the 2007 election. Table 11: The 2007 Top 6 ParastatalsReceivingCentral BudgetTransfers 2004 2005 2006 2007 Public UtilityCorporation 59,715 77,000 Seychelles MarketingBoard (now Seychelles Trading Company) 68,000 Seychelles Tourism MarketingAuthority 23,399 29,641 32,362 43,477 Seychelles BroadcastingCorporation 3,000 18,448 20,694 25,000 IndianOcean Tuna 22,500 Seychelles Public Transport Company 17,000 9,635 18,700 15,000 Total Top 6 in2007 43,399 57,723 131,471 250,977 As Percentage of Total Outlays 51 54 70 78 Source: MOF 43. Several functional categories of spendinghave increasedin the 2005-7 period including health and education. The functional breakdown o f central government expenditures (see Table 12) shows that over 20 percent o f non-interest government spending is on general public services, and defense and public order and safety combined make up 14 percent o f spending. There has been a gradual increase in both defense and public order and safety spending since 2000 o f 78 percent and 74 percent to 2007 in nominal terms. Health and education spending has also been on the rise in the period 2005 to 2007, and as discussed further in Chapters 4 and 5 there are several policy measures that should be considered to improve efficiency inthese sectors. Table 12: FunctionalCompositionof Central Government Spending, 2002-7 2002 2003 2004 2005 2006 2007 General public services 24.9 30.9 28.9 31.9 20.9 20.6 Defense 4.2 5.2 6.5 3.8 4.0 6.3 Public order and safety 4.3 6.1 6.1 4.9 4.9 7.8 Economic affairs 8.9 9.6 11.3 5.5 6.5 11.7 Housing and community amenities 2.9 1.4 1.1 0.9 2.1 4.0 Health 7.3 12.2 12.7 9.9 8.2 11.4 Recreation Culture and Religion 1.3 5.3 4.2 3.2 3.7 3.0 Education 11.4 12.4 11.9 9.2 9.1 16.0 Social protection 16.2 16.9 17.2 16.8 31.4 16.3 Total (after statistical discrepancies) 100.0 100.0 100.0 100.0 100.0 100.0 Source: GOS 44. I t is clear that further investigationof the public enterprise sector is critical to a successful fiscal policy. Net transfers to the parastatal sector are large and erratic, and have required an increase in public spending in recent years. Furthermore the amount o f dividends paid to the government has been decreasing (Figure 7). The state has provided significant subsidies to commercial and non-commercial enterprises, which as recent as 2007 amounted to 8.6 percent o f public expenditure or over 4 percent o f 22 GDP.7 As shown inTable 11, in2007, the top six parastatalsreceivingbudget transfers accountedfor 78 percent of all transfersto the sector. Not only i s the work critical from a fiscal policy point of view, but also in light of the fact that the parastatals dominate the economy would reiterate the importance of studying public enterprises as soon as possible, given their impact on the economy, such as their role as providers of inputs to the private sector (inthe case of the utility and oil companies), significant employers with higher wages and (until very recently) subsidized suppliers in potentially competitive markets(e.g. Seychelles Public Transport Company and private bus hire). A framework for dealing with the parastatalsshould be developed as part ofthe PERfollow-up work. Figure7: Flows to and From the Central Budget to Parastatals,2004-07 I 0Expenditures Dividends 1 200 100 2I 0 .- - 8E -100 -200 -300 Source: MOF Public Finances and Economic Growth 45. Can public spending be good for growth? Evidence from the fastest growing countries in the world show that the overall size of government tends to be relatively There have been a number of studies investigating the relationship betweenfiscal policy and growth. Robust empirical relationships, however, have been difficult to establish despite the analytical rationale that public spending can influence growth. Annex 1 summarizes the empirical findings on size and composition o f growth. The size of government can affect growth in two main ways. First, public spending needs to be financed. Tax revenues reduce the returns to private sector activity and can therefore lower new investments if the tax burden on the private sector i s high to finance government activity. Alternatively, government borrowing raises the costs of capital to the non-government sector, and as interest rates rise, the threshold rate of returnon new investment also rises and reduces new private sector investments (i.e. government spending crowds out private investments). The empirical literature consistently finds private sector investment i s positively correlated to growth. Secondly big governments are more likely be less-flexible to respond pro-cyclically, since the size of non- discretionary expenditures are tend to be high. Finally, big governments tend to also 'ArecentIMFreport (IMF, 2008b) providesan overview of all public enterprises, andevaluatesthe fiscal risks that these organizations poseto the state. World Bank (2008a) 23 have larger fiscal deficits which are not good for growth. Empirically, fiscal surplus in proportionto GDP is positive and statistically significantly correlated with growth. 46. There are mixedresultson the compositionof public spendingand the effect on growth;but productivespendingsuch as humanand physicalcapitalinvestments are generally found to be positive, through both their direct effect on factor accumulation and indirectly by increasingthe marginal productivity of public and private production. Perhaps the most consistent conclusion from the literature is the positive correlation between public spending on education and growth and public investment and growth. Additionally, Bloom, Canning and Sevilla (2001) find good healthhas a positive, sizable, and statistically significant effect on aggregate output. 47. Seychelles is at the bottomend of the comparator group in terms of the mix of productiveand unproductivepublic spending. Based on the typology put forward inBleaney Gemmel and Kneller (2001) we compare the available data on "productive" (Le. good for growth) and "unproductive" public spending in Seychelles with a comparator group. Productive spending defined as spending on health, education, environmental protection and transport, and is more than one third of public spending in Barbados, Fiji, the BahamasandTrinidad and Tobago; while inSeychelles it accounts for around 18 percent of total outlays. Unproductive expenditures, on the other hand, defined as social security and welfare payments as well as spending on recreation, culture, religion, and public debt are significantly higher in Seychelles accounting for more than half of all spending.l0 This illustrates the challenge in Seychelles of finding fiscal space to finance productive spending. Undertakinga fiscal consolidation should keep in mind the requirement not only to improve technical efficiency and productivity within sectors-which the chapterson health, education andpublic administration provide specific recommendations on, but also how to improve allocative efficiency across spending categoriesto improve the overall contributionof public spending to growth. 48. Good practiceon determiningappropriategovernmentspendingis consistent with positive economic growth. Focusing expenditures on core government functions such as the provision of public goods i s consistent with a positive impact on economic growth. The government should also ensure good spending practices across all sectors: such as determiningwhether there is a market failure requiring government intervention, considering options for government and private sector provision and the relative efficiencies and risks involved (e.g. considering whether there i s potential for collusion on the part of the private sector providers, and government failure on the part of state actors), understandingthe costs and benefits of government provisionand where possible Most recently, World Bank (2008) concludes (i)private capital accumulationhas been one of the main engines of growth inthe seven fastest growing developingcountries:Korea, Singapore, Malaysia,Thailand, Indonesia,Botswana and Mauritius which have been among the top performersinterms o f GDP per capitagrowth duringthe period (1960- 2006); and(ii) fiscal surplus to GDP ratio is always positively correlatedwith GDP growth. the loThere is some debate over what should be counted as productiveand what as unproductivespending inthe literature. The finding that Seychelles has a low productive to unproductive spending ratio is not sensitive to some of the potential changes in definition. For example including housing in productive spending, or general public services in unproductive spending. The definitions used here depart somewhat from the definition in Bleanny et a1 given the specific nature of these economies. We do not include all general public services in the definition of unproductive spending- only the sub-category of public debt transactions. Also we do not include housing in the category of productive spending, but we do include environmental protection. Defense and public order are in the "other category". 24 quantifying these and allocating spending to areas with a positive net present value. Where quantification of benefits is not possible or problematic, policy makers should analyze cost effectiveness to ensure that the least cost alternative is chosen. Figure8: Comparisonof Productiveand UnproductiveExpenditures UnproductweSpendmg Other 0 ProductweSpendmg Source: GFS (2008) Notes: Dataare for latestyear reportedinGFS. Maldives (2007), Fiji, Jamaica, Mauritius and Seychelles(2006), Bahamas,Malta, Trinidad andTobago (2005), Barbados, St Kitts andNevis and St Vincent and Grenadines(2004). 49. The way in which the government chooses to finance public spending (inflationary financing, taxation and public borrowing) can result in crowding out private investmentwhich in turn has a negative impact on growth. The literature is more consistent on this finding and most recently, World Bank (2008) found that total fiscal revenue to GDP i s negatively (and statistically significant) correlated with GDP growth. Lessons for a Successful FiscalConsolidation 50. An attempt to reduce the fiscal deficit during 2003-5 was successful but short-livedas spendingincreasedin2006 and 2007 inresponse to political pressures and pending elections. The sizeable 2003 adjustment was achieved through a simultaneous reduction in expenditures (by a significant 11 percent of GDP) k d an equally impressive but not sustained increase in revenues (by 7 percent of GDP). The expenditure cut was largely reversed in 2006, and the revenue increases were not sustained beyond 2006, causing public debt to increase exponentially that year. The projected path ofthe debt i s estimatedto be fiscally unsustainable. 51. Success at sustaining fiscal adjustments (at least until the impacts can be positively seen on economic growth) and limiting the adverse impact on vulnerable groups, depends on the way in which the deficit is reduced. While the appropriate combination of fiscal adjustment measures depends on country-specific circumstances of course, the following stylized facts based on international experience describe more 25 successful fiscal adjustments, associated with a positive growth response, which can help Seychelles incharting its own course o f fiscal adjustment." Fiscal adjustments based on expenditure reductions are more likely to be successful and sustained than those based on revenue increases.i2 A fiscal consolidation that persists over time has the greatest positive effect on growth. Expenditure composition matters, shifting from non-productive to productive spending will have the greatest impact on growth, and shifts from current to capital spending are associated with longer periods o f fiscal consolidation. Expenditure consolidation is more likely to be sustained when a result o f structural reforms (e.g. civil service and social security reform) rather than cuts indiscretionary expenditures. The size o f adjustment matters: large cumulative reductions in the deficit are more likely to be sustained. Figure 9: Overall and Primary Balance, Figure 10: Compositionof FiscalAdjustment, 1999-2007 1999-2007 I I m I S I O @ lo 5 5 -IO U -IS Source:IMF 52. The current government can also learn from the previous 2003-5 fiscal adjustment, which was largely drive by short-lived expenditure cuts. This is to be expected when the initial size o f government i s already large. Looking at the composition o f the adjustment we find that almost 65 percent o f the 2003 expenditure cuts were in capital spending, while the reversals in 2006 were largely a result o f a massive increase in transfers to the rest o f the public sector (Table 13). To sustain the adjustment on the expenditure-side the government will need to address the structural reforms required to bring down wages and salaries spending, and limit the claims on budgetary spending from the parastatals. "SeeBaldacci, ClementsandGupta(2003),Bladacci, HillmanandKojo(2003),WorldBank(2007) l2 Purfield (2003), Afonso, Nickel and Rother (2006) 26 Table 13: ExpenditureAdjustment Composition, 2003-2007 2003 2004 2005 2006 2007 Expenditure and net lending -11.2 4.6 -1.8 12.5 -5.0 Current expenditure -2.9 2.5 -3.9 9.0 -1.6 Wages and salaries 0.4 1.o -1.3 1.1 -0.6 Goodsand services -0.6 2.1 -1.8 -0.9 -0.1 Interest paymentsdue -0.7 0.8 -0.9 0.1 1.7 Foreign interest -0.3 -0.1 0.3 0.2 2.0 Domestic interest -1.8 1.o -1.2 -0.1 -0.2 Transfers -2.1 -1.4 -0.1 8.7 -2.7 Social programs of centralgovernment -0.8 0.3 -0.1 0.3 0.7 Transfersto public sector -2.3 -1.2 0.3 8.1 -2.8 Benefits and Social Security Fund 1.o -0.4 -0.4 0.4 -0.6 Other 0.0 0.0 0.1 -0.1 0.1 Capital expenditure -7.2 2.1 2.1 3.6 -2.2 Net lending -1.1 0.0 0.0 -0.1 -1.2 Source:IMF 53. Strengthening the public financial management framework and the budgetary process will be necessary to implement the proposed fiscal consolidation since budget credibility is weak. Budget outcomes have tendedto exceed the approved appropriation at the start of the fiscal year, by on average 22 percent per annum in the period 2005 to 2007. Figure 11 below shows the deviation between spending patterns and the original intentions by the main economic categories of spending. With the exception of wages and salaries spending in very recent years, across the board the budget is exceeded. 54. The poor budgetary performance is a result of a variety of problems with public expenditure managementthat have been well-covered in assessments carried out in 2008. The first, a Public Financial Management Review (or PEFA assessment) was undertakeninApril financed by the European Commission. Second, a review o f the budget process was undertakenby IMF's Fiscal Affairs Department inJune and as part of the structural reform program, the government has committed themselves to undertaking the reforms recommendedinthe IMF report (see Box 2). To avoid duplication therefore we summarize key concerns and highlight recommendations which we would propose should be prioritized. Box 2: The BudgetProcess The startingpoint ofbudgetformulation is an internal assessment-primarily basedonthe execution of the current year's budget-by the Financial Planningand Control Division ofthe MoF of what is a reasonable financing of each ministryand authority. These proposedministerial budgetsare sent out together with the budgetpreparation circulars in late July. Budget submissionftom ministries and authorities are sent to the MoF approximately one month later, Le. in early September. On the basis of these draft estimates, bilateral meetings between the MoF-the Minister of Finance andor the Principal Secretary-and the minister, principal secretary and the accountingofficer of the line ministryor authority are held, where the allocations for the upcoming year are negotiated. Following this, the MoF prepares a consolidated budget, which is evaluated against the Government's fiscal objective of a surplus correspondingto 5.0 per cent of GDP. Ifnecessary, the MoF will make adjustments inthe proposedrevenue or expenditure policies, after which the budget is submitted to the President for approval in mid November, and to the Cabinet shortly thereafter. The Government's draft estimates of revenue and expenditure.are submitted to the National Assembly inlate November or early December, and are adoptedby late December. 27 Expenditure for major capital projects13 is budgeted separately from current expenditure. The capitalbudget is not presentedfor approval by the NationalAssembly, but is included in the summary of budget estimatesinthebudgetdocument. The Social Security Fund is organizedas an entity fully separate from the budget. It collects revenue through employer and employee contributions, and bears the responsibility for social security expenditure andfor specialprojects commissionedby the Government. Inthe event ofa surplus, a transfer-the size of which is determined discretionally by the Government-is made to the budget. Any remaining surplus is invested by the Fund. The MoF is not involved in the preparation of the budget for the Social Security Fund. The PensionFund-also set up as an extra-budgetaryfund-makes payments for old-age pensions. Itis financedbytransfers from the SocialSecurityFund. Source: Reproducedfrom IMF(2008) Figure 11: BudgetCredibility: Budgetand Outcomes 2005-2008 Wages and Salaries Transfers 800, 1 a00 700 - 900 600. 500 600 400: /- 400, 3 0 0 . 100 200. :0 2005 2008 , 20007 2008 1 DO. O * 2005 2W6 ~ 20007 2W8 Capital Spending Goods and Services ::I , , , , 0 2005 2006 20007 2008 2005 2008 20007 2008 Source: IMF,MOF BudgetPreparation 55. The macroeconomic assumptions underpinning fiscal policy analysis and budget preparationare not preparedsystematicallynor usedin a consistent fashion. There is no unit with central responsibility for preparing projections of relevant macroeconomic variables such as GDP-growth, the inflationrates, exchange rate, interest rates, unemployment, etc. As a result: (a) the macroeconomic framework ad budget l3Minor capitaloutlays, suchas the purchaseofofice hrniture, computersandvehicles, are includedinthe current budget. 28 framework are not internally inconsistent and (b) various revenue and expenditure items are not prepared on the basis of consistent macroeconomic assumptions. 56. Budget targets are focused on aggregate fiscal surpluddeficit targets but do not drive strategic expenditure allocations. Disaggregated budget ceilings are preparedby the Ministryof Finance on the basis of an increment over the previous year, they take only limited or no account of: (a) spending pressures from non-discretionary items, (b) the implied resource available (c) consistency with the macroeconomic variables and fiscal balance targets and (d) the alignment of spending with strategic priorities within the overall fiscal framework. Only after individual budget submissions are received is total expenditure consolidated and compared to the revenue pr~jections.'~ The budget also has a one year time horizon andthis further inhibits any forum for policy discussion over medium-termpriorities and the use of the budget as a tool to implement those policies. Furthermore, policies even for the upcoming year are not set by Cabinet inacomprehensiveprocess. 57. The budget is not focused on measuring performance or results, and no assessment is done of productivity, efficiency or value-for-money in the allocation of funds. The annual exercise of allocating resources does not take into account the performance of various sectors indelivering against agreed upontargets (such as primary school enrollments for example). Neither is any assessment of cost-effectiveness o f efficiency taken into consideration to assess whether there is room for deliveringresults with less. With a small budget department in the Ministry of Finance, there are few resources in the MOF to engage more actively inthe discussion of budget estimates and preparation by the line Ministries which could drive the inclusion o f these aspects to the budgetprocess. 58. Separate budget circulars are currently issued for recurrent and capital budgets and, given the annual time horizon for the recurrent budget, there is no requirement to ensure recurrent cost implications of capital projects can be afforded. The process for new capital project i s initiated by the line Ministry with the submission of a policy paper to be discussed at Cabinet level. There are no centralized guidelines on what sort of information should be contained in the project proposal and robust and consistent capital project economic appraisal techniques are not used. As a result the economic benefits o f the project may or may not exceed their costs; and the project may or may not be adequately funded depending on the degree of uncertainty surrounding cost estimates. IfCabinet approves the project, the details are passed on to the MOF to finance andor co-finance the project. If the budget does not allow the additional capital expenditures frequently a token amount is allocated toward the project and the time horizon is stretchedto fit the likely availability of resources. The end result i s of course significant cost and time overruns, and a back-log of incomplete capital projects. I4Itis, however, not consolidatedwith the budgetof the Social Security Fundandthe PensionFund, which make up a significantpart oftotal government expenditure. 29 BudgetExecution 59. There is a reasonablesystem for monitoringand controllingspendingduring the course of the year. The considerable cost overruns witness in the last few years have largely occurred as a result of new budget outcome approvals made during the course of the financial year, which up until 2007 were not approved by the Assembly as supplemental budgets. The financial information system i s available in line Ministries too so they can keep track o ftheir commitments and expenditures. 60. In order to enhance oversight over parastatals and publicly-owned enterprises, the Ministry of Finance(MoF) establisheda ParastatalMonitoring Unit in2008. The Unitis currently managedbyjust one expatriate staff. Discussionswith the Unitfor the PEIRrevealedthe lack ofinformationcurrently available to government over the operations and financial position of many of the enterprises which the government manages or has a stake in. For example, regular financial reports are generally not available. Even though Government intends to phase out subsidies in the course of the year 2009, it i s clear that the government will continue to be exposed to serious contingent liabilities and fiscal arising from the operations of its enterprises which highlights the need to have a more standardized approach to the governance and more active oversight, particularlyo fthe financial positions. Recommendations 61. To achieve the fiscal adjustment requiredwe recommend the government tackle structural reforms requiredto lower spending, particularly inthe wage bill. This requires the government look systematically across the public sector to determine the core functions of government and align jobs with these roles and responsibilities. Recommendations on how to implement such a plan are provided in detail in the next chapter. This requires the policy makers to go beyond the short-term measuresthat have already beenundertakensuch as the voluntary departurescheme. 62. We also find that the gradual increase insocial security spendingis not associated with improvements in equity outcomes. At the same time the high public spending is also not associated with the experience of fast-growing. economies. There i s therefore potential to reduce transfers to households in general, and as highlighted in chapter 1 a need to improve the targeting of the welfare system since there will be groups who will be adversely impacted by the macroeconomic reforms underway. Detailed recommendations to assist implementation will be forthcoming inthe next volume. 63. While we commend the commitment o f the government to reduce subsidies to the public enterprise sector, we note the need to address more fundamental issues o f the role of the public sector particularly in commercial activities and urge the rapid implementation o f the privatizationprogram. Furthermore, there i s a need to address the more complex roles of individual parastatals and separating commercial, regulatory and social functions. Inaddition to improved monitoring o f the financial performance of the parastatals this needs to closely feed into the budget department to ensure appropriate contingency planningis undertaken. 30 64. A functional breakdown of spendingshows a relatively high level of military and defense spending for a small island economy with only limited historical precedent of social and political unrest. This should be an area for future consideration by the policy makersbut lies beyondthe scope ofthe World Bank's technical advice. 65. Inother functional areas, the emphasis should be on how to improve value-for- money and maintain or improve public service delivery levels with lower public spending. Chapters 4 and 5 provide detailed recommendations on how to achieve this in the health and education sectors. 66. To sustain the fiscal adjustment, the government should concentrate on the expenditure consolidation required, and ensure that the measures are based on deep- seated reforms, rather than short-term reductions which in the end cannot be sustained since they are drivenby external factors which continue to lie beyond the government's direct control. 67. Inadditionto the full set of recommendations captured inthe IMF (2008) report we highlight the following budget process reformpriorities: Near-termpriorities 0 As a high priority the Ministry of Finance should develop scenario planning and ensure adequate attention is paid to the macroeconomic forecasts and consistency with the fiscal framework at the beginning of the budget process. The 2010 Budget guidelines should provide sufficient information on the macroeconomic assumptions underpinning the framework to ensure internal consistency and a consistent approach to budget preparation across government ministries and agencies. The budget department should continue their efforts to consolidate the budget and present a comprehensive budget consistent with the definitions in the Government Finance Statistics Manual. 0 A multi-year outlook to the budget should be provided to indicate the direction of inter- and intra-sectoral policy shifts-such as a decline in subsidies to the parastatals, and a shift from wage bill to goods and services spending within sectors where there is an agreement to contract out large support functions. 0 Ensure the PEMU is adequately staffed and financed so that more active financial monitoring o f public enterprises is done and the risks and contingent liabilities associated with the sector better understood and integrated in the budget process. We strongly support the external audits ofthe parastatalsto be undertakenas part of the reform program. Integrate the monitoring function with the unit responsible for public enterprise restructuring and privatization so that scarce skills are concentrated on the comprehensive reform o f the sector. We would recommend the combined Unit have at least four experienced professional staff and a budget that i s sufficient to hire in the industry-specific expertise for financial auditing and monitoring, as well as advice on industry structure and parastatal restructuring prior to privatization. 31 A strategy for dealing with the public enterprises should be drafted and presented to Cabinet, and as necessary the appropriate legislation and regulations put in place to give the Minister of Finance the authority to deal with public assets and liabilities as per the strategy. As the government adjusts capital spending as part of the fiscal consolidation, this should give the policy makers space to define new capital project planning processes and investment priorities consistent with Vision 2030. The back-log of capital projects that are receiving on-going small and still insufficient funds in each budget year should be reviewedand sunk costs re- examined to determine whether the capital project still has a positive economic return, should still be a national priority, and/or can be afforded at this time. Non-priority and projects that no longer have positive economic returns should be halted and capital funds be focused on fewer high priority projects. Priorities for the next 2 years Initiate the budget process with a policy discussion at Cabinet on the macroeconomic environment, short term spending targets and medium-term development objectives to drive policy priorities, spending ceilings and allocations. The development of a policy paper to prepare the Cabinet and Assembly prior to budget discussions should follow once the government has developed macroeconomic forecasting capacity and has consolidated the budget. 0 Ensurethat there is an adequate contingency budgeted for to account for the volatility of revenues and expenditures and the medium-term fiscal risks that can impact upon these. Further work should be undertakenon this aspect to determine appropriate planning for both global implications and domestic impacts on revenue and expenditure volatility in the subsequent phase of the PER. 0 Prepare guidelines for the preparation of capital investment projects, requiring minimum standards of cost information, and economic appraisal based on consistent assumptions (e.g. economic rate of return, CPI projections). Capital projects should primarily be considered at the start o f the fiscal year and should only be approved if sufficient financing (from all sources) is available for the project to be completed. This will necessitate a multi-year approach to budgeting since capital projects typically require the capital and recurrent costs to be considered over more than one budget cycle. Integrate the budget circulars so that capital and recurrent implications are considered comprehensively. 32 Table 14. Summary of Public Financial Management Next Steps. Implementation Step Timeframe Budget circular for 2010 budget contains June 2009 information on macroeconomic forecasts and assumptionsfor budgetpreparationpurposes. 2010 Budget is comprehensive and publicly December2009 presentedusingGFS guidelines. 2010 Budget is presentedwith forward estimates o f December2009 broad aggregates (at least: revenues, expenditures - recurrent (wages, interest, other) and capital) into the mediumterm2010-2015. ExternalAudits for Parastatalsconducted On-goingthroughout 2009 Revisecapitalprojectplanningprocedures. January 2010 Introduce new procedures and multi-year costing of December2010 capitalprojects. Initiate budget discussion in Parliament with December2010 presentation on economic program and achievements,expectationsandpolicypriorities. Undertake work on volatility of revenues and December2010 expendituresand updatebudgetpreparationprocess to take into accountrisks andcontingency plans. 33 111. PUBLICADMINISTRATIONAND PUBLIC SERVICE REFORM Context 68. One of the key elements of the economic reform program is to change the role of the state, which historically has provided a package of services that is literally `cradle to the grave'-ranging from free pre-primary care, management of playgroundsto funeral benefits and burial services. The emphasisonpublic provision extends to the provision of many services that are often provided by the private sector such as housing, oil shipment, food imports and distribution. Currently, services are provided either directly by central government or through one of the 44 parastatals (used here to refer to all regulatory or statutory bodies and publicly-owned enterprise^)^^. This chapter examines insome detail the steps to be taken to take forward the reform of public administration, and details the cost-savings associated with these reforms. Notwithstanding the strong commitment o f the government and the support of the business community and civil society to take these forward, we recognize that should the adverse external environment result in a slower economic recovery (beyond the current rebound projected in 2010), this may make the reforms more difficult to introduce in the near term. Table 15: Comparative Wage Billsof 69. Reflecting the size of the state, total Small States. 2000-2005 public spendingand wage bill expendituresas Percentof a percentage of GDP are high, and beyond Government what is generally considered good practice. Expenses Public sector employment levels are similarly very high at about 11percent of GDP and have .Barbados 43.O been falling in recent years (down fiom 14 Estonia 21.3 Fiji 43.O percent o f GDP i112003).~~In 2007, total public Maldives 24.8 sector employment accounted for 46 percent of Mauritius 38.8 total employment (estimated to be at 41 percent Seychelles 29.3 as at mid-2008) including those employed in Trinidad andTobago 36.0 agencies and commercial and non-commercial Groupaverage 33.7 parastatal organizations, which alone account for Source: WDI 2008 close to 15 percent of total employment. 70. The public wage bill is high, partly as a result of economies of scale challenges in providing services to a small population residing on multiple islands (which automatically entails a certain level of administrative overheads). A IsThe total number of parastatalsvaries accordingto definition. Here we includecompaniesinwhich the government hasaminority shareholdingandthe totalnumber isbasedonthe numberbeingmonitoredbythe newly established Public EnterpriseMonitoring Unit. l6Overall benchmarksthat are generally appliedis that public sector wages shouldnot exceed 10percent of GDP and 30 percent ofpublic expenditure ifthese expendituresare not to crowd out privatesector activity throughexcessive taxationand limit the scope for public investment ininfrastructure 34 comparative table reflecting the high wage bill as a percentage o f public spending in other states with similar challenges is shown in Table 15. This illustrates that while Seychelles is on a par with other several countries there are also countries whose wage bill is a lower proportion o f government expenditures. The government is estimated to have spent 8.7 percent o f GDP on wages and salaries in 2008, down from a high o f 14.4 percent o f GDP in2003.17 Interms ofprimary public expenditures, more than 30 percent o fpublic expenditure goes towards the payment o f wages and salaries. 71. The chapter i s organized in three main sections to address the following questions: Reforms underway What is the impact o f the public employment reforms introduced in 2008 and is this likely to be sufficient to meet wage billtargets inthe medium-term fiscal framework? Organizationaland structural reforms In what aspects do the functions of government in the Seychelles deviate from internationalgood practice on core government functions? What are the main areas o f state involvement in the economy where privatizationo f contracting out is recommended? H o w could the remaining core government institutions be reorganizedto more efficiently provide services? What would be the combined fiscal impact o fthese reforms? Wage structurereforms How can the public sector wage system be made transparent and efficient so that it creates the right conditions to attract and retain qualified staff and thereby allow the state to effectively deliver its core functions? 72. In short we find that the reforms undertaken in 2008 will produce fiscal savings of approximately 7.5 percent of the wage bill by 2010 through the lower number of posts. However, this is not sufficient to meet fiscal targets in the medium term or to address the underlying efficiency and overall size o f government that is hampering public sector performance and economic growth. Further measures are encouraged over the course o f the next 2 years principally to privatize non core functions (essentially commercial activities producing private goods that can be self-standing business units) and contract out services which will lead to a reduced wage bill and a compensating increase in the goods and services budget which experience indicates will likely decline over time as long as there is a sound process for contracting services Furthermore, the practice o f the public sector as the employer o f last resort needs to IMFArticle IV (2008) 35 change and the intake of a large number of employees from the Unemployment Reduction Scheme in 2006 needs to be reversed. Active labor market policies will be considered inthe nextphase of the PERto provide further advice on how to transition the excess public workers to the private sector. Finally fundamental reforms of the wage grid are recommended to ensure that the remaining posts in the public sector can attract and retain qualified staff, and that the lack of transparency surrounding wage-setting through the use ofmultipleallowance schemes bediscontinued. ReformsInitiated in2008 73. The government's reform program initiated in 2008 has already brought about wage bill savings. The reforms have brought about a reduction of posts in the public administration through the elimination o f vacant posts, and the introduction of early retirement and voluntary departure schemes. The subsidy reductions to publicly- owned enterprises have prompted employment cuts in several o f these too. Interms of wage bill expenditure, the main savings have come through the Manpower Budgeting Exercise (MBE), which was conducted at the end o f the first quarter (in 2008), to reduce the projected wage bill `overrun' of SR 17.8 million (3 percent of the 2008 budgeted wage bill). Following the MBE exercise, a projected `deficit' of only SR 4 million or 0.62 percent of the wage bill remained.'* It is proposedthat in2009 the MBE exercise to be replaced with a strategic review of functions that would generate additional savings in 2009-2011. 74. Secondly, an early retirement scheme was introduced at the beginningof the year for civil servants over the age of 55 years. The scheme has remained open for the remainder of 2008. Those eligible can apply for the scheme which pays 40 percent of salary untilthe official retirementage of 65 years. Since, the scheme is still active, a full impact assessment cannot yet be calculated, as this would require the final list of retirees and their specific salary information. While the early retirement scheme may be continued into 2009, it is recommended insteadthat more targetedpackagesbe devisedin its place. 75. The next phase of public employment reforms was introduced in October 2008, which consists of a freeze in non-essential vacancies (which will remove an estimated 503 posts) and the introduction of a voluntary departure scheme O S ) . The VDS is expected to remove approximately 927 staff currently in post.19 The VDS offers to pay a voluntary redundancy payout in two installments the first at the end o f December 2008 and the second in mid 2009. At the time o f writing, it was not possible to assess the net impact o fthe VDS (considering the application deadline i s 21 November 2008)' however, based on the Department of Public Administration's (DPA) preliminary calculations we estimate net savings for 2009 o f SR 36 million20,or 5.8 percent o f the '*This comparesto an executionratio of 99 percent in2007 and 110percent in2006 The full estimateof 1274 staff includesstaff ofCoetivyprawns and the Public Utilities Corporation,which are no *'Basedonthe includedinthe public sector wage bill assumptionthat 2/3 ofvoluntary departureswould be from the low skilled staff while 1/3 would be professionalstaff. Inaddition, for VDS participants, 3 months of the departureallowancewill bepaid from the 2009 budget, which reducesrelative savings 36 current wage bill and permanent annual savings would be approximately SR 48 million, or 7.9 percent o f the wage bill." 76. Given the magnitude of the fiscal adjustment required, as discussed in chapter 1, continued efforts to reduce wage bill spending will be required, particularly if the government i s to achieve its medium term targets o f a wage bill in proportion to GDP down o f 7.2 percent o f GDP by 2012, down from 11.2 percent in 2008. A preliminary estimate o f the cumulative effect o f the MBE exercise, VDS and early retirement schemes is an approximate a permanent net saving o f 10 percent o f the wage bill or 3 percent o f primary public expenditures.22This implies significant further reform measures will be needed for a wage bill reduction o f 4 percent o f GDP or 12 percent o f primary public expenditure. Table 16: Estimates of the Wage Bill SavingsMeasures, SR millions(nominal) andPercent ofthe Wage Bill Savingsfrom MBE Savingsfrom Early Savingsfrom VDS /b Retirement la Year SR YOofwage bill SR YOofwage in SR YOof wage bill bill 2008 13.8 2.3 ... -11.5 -2.0 2009 14.4 1.9. 34.5 4.5 2010 14.4 1.9 46 5.5 Source: World Bank Staffestimatesbased on 2008 wage bill levels, MOF data. Notes: a/ Whereas completenumberson early retirementare not yet known, the number ofrequestsreceivedup until midOctober is approximately250, andmayreach 400 by the endofthe year. More than 80 percentof these are low skilled workers b/ 44 staff inthe Department ofCommunityDevelopmenthadbeendoublecountedin2009 andis correctedfor here. TowardsaMore StrategicApproach: OrganizationalandStructuralReforms 77. Whereasongoingreformsmeasures are bothnecessaryand appropriate,and represent`quickwin' measures, it is importantthat future reformsteps be basedon a more strategic approach to public sector reform. This is required both to achieve the significantly higher wage bill savings required to meet the fiscal andmacroeconomic objectives as well as to ensure that the quality o f governance and service delivery does not suffer. 78. There are two risks inherent in the current staff reduction approach to the reforms being implemented. First, cutting vacant posts poses the risk o f eliminating posts that are difficult to fill, but nevertheless core to service delivery. Second, voluntary departure schemes, based on experience in other countries and institutions, tend to be taken up by those who would most easily find employment elsewhere or have the entrepreneurial spirit to set up a business, thus reducing overall capacity in the administration and service delivery institutions. 23 Similarly, across the board reductions 2'The SR amount saved is likely to be higher as wages will be increasedto offset the impactof currency devaluation, thoughthe relative amount is likelyto remainthe same 22This number does not yet take into account additionalpensionpayments. However, it also does not account for wage increases 23World Bank(1999). 37 insubsidies and other government support measures canhave anadverse effect onpublic service quality, ifnot properly designed andtargeted. 79. Therefore, whereas the early retirement and VDS should be one-off exercises, it would be desirable to transform the MBE exercise, which was an ad hoc process in 2008, into a more strategic review of functions and related staffing numbers. This would aim to re-allocate functions to the private and voluntary sectors, seek organizational efficiency gains as well as reducing civil service staff numbers accordingly. A strategic process o f reflection on the core role o f the state in the Seychellois economy and society, and the introduction o f a program o f targeted reforms should replace the `emergency measures' o f 2008. Such a process would not be unlike processes undertaken recently in Central and Eastern European transition states, (such as the Baltic States and Slovakia), which all faced similar fiscal challenges to the Seychelles. 240therexamples include the strategic reflection on the role o f the state carried out in Cape Verde in 2005-06, which led to a fundamental re-orientation o f the role o f the state, paired with the implementation o f an alternative vision for the development o f the country, towards a technology-based and investment friendly economy and an emphasis on the development o ftourism-related infrastr~cture.~~ Defining the Core Functions of Government 80. The re-definition of the role of government is a complex undertaking as, contrary to what is often assumed, there is no clear `menu' or recipe for defining the `core'. Whereas there is largely no dispute on sovereign functions such as defense, police, finance, the environment and other generally recognized public goods, in which the state tends to be the exclusive guarantor and provider o f services. However; the extent to which the state engages in service delivery in other areas is subject to much academic and political debate. Even intraditional public service areas such as health and education there is more consensus on the need for the state to guarantee access to services, but not necessarily on the degree to which the state itself should provide those services. Traditionally, discussions on the role o f the state use certain standard comparators, e.g. OECD practices, which define a minimum threshold o f service delivery, or the EU system which also sets certain minimum requirements for state involvement, through regulation or service provision. Other methods o f assessing minimum levels o f service provision include cross-country comparisons focusing on countries with a similar size or level o f economic development and orientation. However, inthe end the limits o f state provision depend both on the strategic orientation o f the government, based on citizen preferences, and fiscal capacity. Inthis context it is important for the GOS to rapidly translate its strategic vision (2017) into a reform program for the public sector, since many o f the principles outlined in the vision statement are clearly at odds with the still over-extended system o f state-provided public services, which the country can ill-afford. 24See Verheijen(2007). A review of civil service and administrativereformprocesses inthe eightnew CEE member states ofthe EUhighlightsthe performanceof Latvia andLithuania inparticularas states that achievedaradicaland successful transformationof public sector managementsystems, in contrastto the performanceof other states inthe same regionthat did not engage indeep public sector reforms. 25World Bank(2006), CapeVerde, Re-Definingthe Roleofthe State 38 81. It is important to ensure that the public sector reforms take into considerationthe quality of development outcomes, includinghealth and education outcomes; and ensure that these outcomes do not decline. Overall spending decisions related to these outcomes should be based on improving efficiency and productivity improvements rather than across the board cuts. As noted in the following chapters, spending on health and education, which together constitute the majority of primary public expenditure, does not exceedpatterns observed in states o f similar size or level of economic development. Education expenditures are approximately 5 percent o f GDP and 8 percent of public expenditures, while health expenditures amount to 4 percent o f GDP and 9 percent of total public expenditure. (Spending on health and education as a proportion of primary expenditures i s 22.3 percent which i s also in line with comparator states). 82. The evaluation of expenditure composition in health and education sectors (see Chapters 4 and 5) draws very different conclusions with respect to the wage bill. In the area of education, considering the relatively poor quality of learning outcomes, it i s recommended that teaching staff should be retained at current levels, though significant cost savings could be generatedby rationalization o f support functions and office staff, some of which could be re-invested in developing teaching capacity in areas where education outcomes are currently weak (mathematics, science etc.). In the health sector on the other hand, the share of wages in total government spending on health care i s 50 percent. This i s considered excessive considering (i) there is no tertiary care sector and (ii) utilization rates; (inpatient and out-patient visits per doctor) are very low when compared with even Western European countries. The proposed strategy here i s to re-invest some ofthe savedwage bill resources inupgrading primary care capacity. Table 17: Wage Bill and Primary Expendituresby Function, 2007 Proportion of Wage Bill Proportionof Total Spending Primary Expenditure Defense 9.6 6.3 Police 8.2 6.1 Community Development 6.6 ... Youth, Sports, Art and Culture 4.7 6.1 Economic Affairs 9.6 11.7 Environment andNaturalResources 5.6 ... Health 17.4 11.4 Education 24.4 16.0 Source:Bank staff estimates basedon MOF data 83. Priority policy areas for lowering wage bill spending include economic management, community development and youth sports and culture police and defense. Table 17 shows eachpolicy areathat accounted for more than5 percent of total wage bill expenditure or more than 5 percent of total primary expenditure in 2007. In terms of the wage bill, these categories combined accounted for over 85 percent. Therefore, any further wage bill savings would have to come mainly from these sectors and apragmatic approach to public sector reformwould needto consider these sectors as priority areas for reform. 39 Reviewing Sector Functions: An Initial Assessment 84. One o f the main methods for reviewing government functions and matching organizational structures to strategic priorities is a functional review (see Annex 3 for types of functional review). Functional reviews are essential to organizational reform, especially inpublic sector organizations. They typically distinguish between(a) strategic and policy-making functions, (b) regulatory and licensing functions; (c) supervisory functions, (d) inspection functions, and (e) service delivery functions. Each type of function brings with it specific requirements for accountability and reporting relations, legal status and management systems. The main purpose of the initial review undertaken here i s to examine core government functions and ways to enhance efficiency in public sector operations. This section provides: (a) an overall assessment of inter-institutional relations between core government institutions, parastatals and commercial and non- commercial enterprises; (b) a review o f arrangements for the systemic functions of personnel and public financial management; (c) a basic review o f common support functions, (over 30 percent of all public sector staff work in these roles which i s highly unusual); and (d) a basic review of the functions and organizational structures of: the Ministries of Community Development; Youth, Sports, Arts and Culture; Employment; Finance; as well as of the structure of: the Departments of Environment; Employment; Public Administration; Police and Defense; and a selected number of subordinate bodies.2627 Core Government and the PublicSector 85. The administrative structure of the Seychelles public sector is highly complex. It includes a large number of parastatals (including here, statutory and regulatory bodies, commercial and non-commercial publicly-owned enterprises). This section reviews parastatals and state owned enterprises from an accountability and governance perspective, while fiscal risk issues are addressed in Chapter 1 and trends in transfers to the public sector inChapter 2. 86. A review of the parastatal sector reveals the lack of a clear pattern of accountability regimes. Whereas all bodies in which there is a significant level of government participation should have government representation on their Boards of Directors, in reality government is often not represented. Where government is represented, this tends to be by the Principal Secretary o f the Ministry of Finance, who does not (or should not) have the necessary time to fulfill this finction in an appropriate manner. Occasionally, representation is by the Central Bank, which as an independent institutionshould not normally fulfill this role. 87. The fiscal risks inherent in governance arrangements concern mostly the non-commercial and commercial publicly-owned enterprises. Most other parastatals are agency type institutions, which tend to function under the strict budgetary control of 26Bankreviewsusuallydo not addresspoliceanddefense issues, but inview ofthe specific contextit was agreedto conduct alimited organizationalreviewofthese institutions 27Other public administrationbodieshavebeenreviewedinparallelby the DPA. 40 their parent ministry, and are requiredto fully apply public service employment rules.28 Whereas agency-type parastatalshave greater flexibility in budget management than the ministries and core public sector organizations, this does not apply to setting their establishment numbers or to wage setting, in which they are obliged to seek permission o f the DPA as well as their parent ministry. Inrelation to these institutions, it might be desirable to design a more arms lengthaccountability relationship, as they are engaged in sensitive functions such as regulation and licensing. 88. The adoption of a standardized approach to governance and accountability relations would significantly reduce government exposure to risks and contingent liabilities. Each agency or enterprise is established based on its own Act. Reporting requirements differ according to the Act causing a potential lack o f transparency intheir operations. Furthermore, government currently lacks the manpower and capacity to effectively monitor the operations of these institutions, which until recently received subsidies in the order of close to 4 percent of GDP. Although the newly established Public Enterprise Monitoring unit goes some way to addressing this concern, it is currently insufficiently staffed and lacks the legal framework to improve financial monitoring, governance andoversight. 89. Standardizing the accountability regime will facilitate a more systematic approachto reforming the sector. Four different types o f oversight relations should be developedbasedon the type of institution andrelationship with government. This would meanone for agency type institutions (regulatory and inspection functions), one for non- commercial state enterprises, one for commercial state enterprises with over 50 percent government ownership and one for commercial state enterprises where government has a minority shareholding, until such time as the government shares inthese enterprises are divested. This would allow a more systematic approach to introducing public sector reforms, such as: privatization, bringing in firms under management contracts, splitting regulatory and commercial functions, and sale of minority interests. Furthermore, the current lack of clarity inaccountability and oversight regimeswould likely detract serious private sector interest inmany of the sectors. 90. The accountability regime would need to define the extent to which government policies on wages and hiring and firing would apply. Whereas the Seychelleshas a public service employment regimethat i s very close to the private sector employment regime, there are a number o f specific regulations that apply only to the public sector, like the Public Service Orders. Whereas these rules do not fully apply to non-commercial publicly-owned enterprises and generally do not apply to commercial publicly-owned enterprises, the extent to which they apply again depends on the specific Act of establishment of each enterprise. This includes the extent to which management has to seek approval from the DPA on the level of additional supplements that can be paid to staff. In the context of the move to put all commercial and non commercial publicly-owned enterprises on a cost-recovery mechanism, it is desirable that all public 28The main exceptionis the Health Service Authority, which hasa largenumber of senior managementpositionsto which wage limits do not apply. 41 service rules (including wage setting), are abrogated for these institutions and that accountability for budget managementpractices is exercisedthrough the Boards only. 91. In the short term government should: (a) significantly strengthen governance arrangements, including consistent government participation on Boards; (b) categorize andstandardize establishmentacts, at least as far as accountability andreporting relations are concerned and; (c) define a coherent policy on personnel and wage management, which should includethe abrogation of public sector rules for all enterprises. With time, the introduction of more flexibility on wage setting and personnel managementpractices inagencies could also be considered, though inthe current context of fiscal adjustment this is not yet recommended. An exceptionmay bemadefor ChiefExecutive Officers of such organizations. Systemic Functionsof Personneland FinancialManagement 92. There is a large discrepancy between Human Resources Management (HRM), which is relatively well staffed, and the budget support function at the Ministry of Finance, which appears to be staffed well below what is required.2gIn terms of HRM, the DPA provides central support and guidance on job evaluation and grading, on the negotiation o f performance contracts (Public Service Commission contracts), it reviews and approves schemes of service and controls wage setting for individual staff, except for the police and the defense department, and for agencies with delegated authority. Concerning the management of the budget function, central support for the budgeting function i s not only poorly staffed, with only some 8 staff in the two units engaged inbudget preparation, but also dilutedby the separationof the management ofthe capital andrecurrent 93. There is a relatively good degree of consistency inthe way HRMand budget management functions are organized. They are usually placed under a Director of Corporate Services who reports directly to the Principal Secretary of the institution. The Health Services Authority has a special status, as it executes its own payroll, and therefore has important additional discretion on administering the allocation of allowances and supplements. Whereas the task of the DPA is complicated by the complex and convoluted process of wage setting, DPA is seen as providing adequate support. However, HRunitsinministries tendto be weak, which enhancesthe role o fthe DPA inproviding guidance and support, yet takes away some of its capacity to engage in strategic planning of HR policies or, indeed, in the management of HR reform p~ocesses.~~ 94. There are two key issues that negatively affect the performance of cross- cutting functional units: (a) shortage of skilled staff and (b) overly complex 29The DepartmentofPublic Administration has a staffnumber of approximately80, including support staff, while it has 100positions. See IMF (2008) with respectto the BudgetDepartment's 30This, for instance, is one ofthe reasons why the MBE exercisehasto be conductedonly three months into the budget year, salary increases anddecisions on supplementshadnot beenadequatelyreflectedinline ministry budgets 31The fact that the ManagementAudit department, responsiblefor the MBEexercise andthe currentfunctionalreview work hasjust one staff is an illustration ofthe kind ofproblems experienced. 42 processes. The limited professional staff able to conduct HR and budget management functions tends to be based at the central ministries responsible for these functions, the DPA (which is part of the Office of the Vice President), and the MOF. Ministry level units are often considered to be little more than mailbox functions. The main solution to this problem lies both in considering re-grading these positions, as well as in the development o f targeted training programs. The Seychelles Institute of Management is intending to offer a targeted trainingprogram on HRMinthe public sector, but this i s still under development. This would be the best possible solutionto the capacity constraints. Overly complex processes, in particular on public sector wage management and, to a lesser degree, on budget management are another constraint. The public sector wage system will be discussed in the next section, it is comprised of an unwieldy system of allowances, some o f which are general, some based on the "scheme of service" and others periodic. Each of these areas requires policy guidance and control. A significant simplification o f the wage system would not only bring benefits in terms of enhanced transparency andpredictabilityof the wage system, but also allow for the DPA to shift its attention fkom control and guidance to strategic directionandcapacity development. 95. Budget management itself is another example of a process that should be simplified. The separation of recurrent and investment budget planning dilutes the already limitedcapacity for budgetplanninginMOF and reduces the amount o f guidance and support that can be provided by the Ministry. A reform of budget preparation and execution procedures, with an integrated budget preparation process, would significantly enhancethe effectiveness ofthe central support function of the ministry. 96. Addressing the above concerns would require the government to initiate a three-pronged rationalization process. First, strengthening central functions. This impliesstaffing-upthe policy planningdepartment inthe MOF to an appropriate level, as well as investment inthe training of staff of finance and HR units inthe line ministries. Second, and in parallel, design a program o f process reforms. In the area o f budget management this would imply integrating capital and current expenditure budgeting processes and building up clear manuals and guidelines for budget preparation for line ministries, including incapital budgeting, as well as on the job coaching of budget units inline ministries. InHRMthis would imply a drastic simplification of the public sector wage system, along the lines proposed inthe next section, as well as a rationalization of the scheme o f service and performance contracting system. A third phase of the proposed plan o f action would require a re-alignment of the organization of the budget department, which would gradually need to build up strategic, and eventually results based budgeting capacity, and of the DPA, which would need to re-allocate internal resources to engage in strategic humanresource planning and, eventually, deepening the current approach to performance contracting. StreamliningSupportFunctions 97. The Seychelles administration is heavily skewed towards the provision of support services: low-skilled workers make up around one third of total public 43 service e m p l ~ y m e n t .This reflects the implicit strategy of the government to be the ~ ~ `employer o f last resort', thus absorbing large numbers o f staff into hnctions and positions that, based on international practice, should not be part of the core public service. While the debate on what is "core" interms of the public service does not have a single answer, there is consensus that basic support functions should where possible be contracted out, either through individual contracts that would generally be basedon hours or through contracting with private sector providers where a competitive service sector i s inplace. 98. There are three types of support functions that rely on low-skilled workers, requiring individualstrategies to be designed: classic support function; office clerks and employees formerly from the employment scheme. The `classic' support functions are those that administrations tend to contract out, such as cleaning, cooking, security, and laundry. The number of staff currently holding such positions in the administration is estimated to be approximately 70 percent of the total number of staff in 34thebottom wage bracket. This estimate is based on a review of the payroll and HR databases, the PEIR analysis on health and education (see Chapters 4 and 5) and discussions held with counterparts. Parastatals employ similar or in some cases higher proportiono f low skilledworkers. 99. While the small scale of the Seychelles economy and relatively under- developed role of the private sector poses challenges to any attempts to contract out services, this does not mean that the option should not be further d e ~ e l o p e d . ~ ~ Recent experience with contracting out support functions has not always been positive. For instance, the contracting out o f the laundry service in the Ministry o f Health i s considered a success by the Ministry, (although it has not undertaken a detailed cost comparison analysis). However, contracting out of kitchen services in Victoria's main hospital, i s estimated to have increased costs by almost 50 percent inthe last two years36 Attempts to contract out security services, for instance by the Ministry of National Development, failed as no competitive bids were received. However, there are three over-arching reasons why contracting out services (to individuals or companies) should be an important strandofthe reformprogram. First, contracting out is likely, over time, to lead to cost savings. In this regardit is important to pair the implementation of a contracting strategy with measures that facilitate the establishment of small and medium-sized 32According to DPAdata in2008. 33Contractingservices suchas security cleaning, cookingand landscapingto individual was for instancesuccessfully completedinTajikistan in2006-2007, andtook 20 percento fall previouspublic servicepositionsoff payroll. Even though the countrydoes not haveawell developedservice sector, estimatesshow that eventhroughindividual contractingimportantsaving levelswere achieved. 34This might not apply acrossthe boardas the educationsector has support servicesthat are relatively easy to contract out. 35The businessenvironmentis currentlynot conduciveto settingup smallbusinessand largeforeign investors(resorts andhotels)drive up contract cost, finally the servicesector is not well developed 36Basedon discussionswith the Principal SecretaryHealth, insteadofasking a contractorto providekitchenservices while usingthe existingfacilities in the hospital,a cateringsolution was opted for, which entailssignificantly higher cost. The ministry is exploringways of gettingout ofthe contractandto re-contractthe serviceto afirm that would providekitchenservicesusingthe hospital's facilities 44 enterprises, which would be likely to bid for contracts. Initial estimates for contracting out education services, as presented inthe education chapter, show that savings of up to 30 percent o f current costs could bepossible. 0 Second, even if cost savings may be limitedinitially, contracting provides the government with flexibility to respond to fiscal constraints, as services contracted as part o f the goods and services budget can be more easily revised downwards thanpersonnel. 0 Third, without a rationalization of support staff functions it will be impossible to implement wage system reform measures, due to the over-extension of the public service system. 100. Taking into considerationthe economic context and the mixed experiencein implementing contracting reforms thus far, the following strategy for contracting out classic support functionsis proposed. First, to take a government wide decision on contracting out certain categories of services, including at least kitchen services, cleaning services and warden services. Security services for low risk objects and buildings could also be included in this category. Secretarial support services, in particular in core ministries, should remainwithin the public service, but more effective ways of providing these services could be sought. Second, define common parameters for contracting (e.g. for kitchen services, inhouse facilities should be used, cleaning services should generally be contracted to firms, in view on security concerns, a specific study on how security services might be contracted out would need to be conducted). Third, test contracting mechanisms for a representative set of services in each area. Fourth, launch a parallel communication campaign on the type of services government i s likely to contract, and provide fast track business registration services to facilitate the establishment of new enterprises in these areas. Fifth, where possible, use pooled contracting arrangements, that are likely to make contracts more attractive for bidders. It is important to phase-in contracting measuresinan appropriate time frame, e.g. over a 1year period, to avoidthe kindofnegative experiencesaccumulated thus far. 101. A second set of low-skilledworkers comprises mainly office clerks, charged with filing copying, and typing. These are different fiom the more-high end office management skills that the government would need to retain, but are classified often at a similar level. Indiscussions with different ministry representatives it was revealed that there is significant scope for reducing staff levels among this group through rationalization and a change in the current `presumptions' that each member of senior staff has access to at least one or more clerks that can collect and re-file documents, type up reports and do copying and other tasks. In reality, most office clerks are not fully occupied and evenwhere they are, much o fthe work they do i s low value-added. 102. A third set of low-skilledworkers constitutes a very specific case: these are staff recruitedfrom the former social employment schemes (e.g. the beautification andor Unemployment Reduction Scheme). It i s estimated that in the Department of Community Development alone there are some 550 staff in this category, and another 203 staff work in the remainder of the administration. It is estimated that this category makes up the remaining 30 percent of low skilled workers. In discussions with the 45 Department of Community Development it was emphasized that of the 984 district level positions currently existing inthe Ministry(178 of which are vacant), approximately 730 are low skilled posts (550 occupied) and that district offices could be runwith as little as 120-125 staff. Productivity of these workers is said to be negligible, and they therefore represent a clear burden on the budget. 103. I t is recommended that government at the highest level take a strategic decision to terminate their employment relationship. At the same time government should review options to assist all those facing redundancies in seeking alternative employment (and other active-labor market policies), in light o f the extent of expatriate labor relied upon in the country. Active labor market policies and social security issues will be considered in more detail in phase two of the PEIR. Net savings to the government could amount to over SR 28 million per annum, or 4.7 percent of the public sector wage bill, which would give the government options to re-invest part of these resourcesinto active-labor marketprograms.37 Review of Selected Institutions 104. Based on discussions with the authorities, and an initial review of public expenditure composition, more in-depth reviews of the following institutions was conducted: Department of Community Development; Department o f Youth, Sports, Culture and the Arts; Ministry of National Development; Ministry of Finance; Department of the Environment; Ministry of Employment and the National Human Resource Development Council; Department of Public Administration; Police and Defense departments under the President's Office. The details of the individual organizational reviews can be found inthe Annexes. 105. T o summarize, these in-depth reviews together with the education and healthcare chapters, provide evidence that there is significant scope for rationalization measures in the administration. A strategic approach to restructuring andrightsizing should involve: Changing the role of the state from provider to facilitator. This is the most complex area of the process, and should include e.g. provision of social housing. Design and implement a program o f gradual transfer o f functions to other actors (communities (e.g. youth programs), not-for profit institutions (e.g. homes for the elderly) and, private sector (e.g. burial services). Design and implement a program of contracting-out support services that would apply across the board where feasible. Suggest phasing this with a focus on catering, landscaping and cleaning services in the first half of 2009 and more complex functions (security) later. Strengthen core functions such as budget management and HRM functions, where neededby adding or training additional staff. 37Not including potentialretirementcostwhere applicable. 46 0 Buildcapacity to managethe public sector reformprograms. 0 Implementation of `quick win' solutions such as departmental mergers and phasing out staff that do not fulfill core functions. 0 Phase out the superfluous staffat the District Offices. EstimatedFiscalImpactof StructuralReforms 106. An initialand conservativeestimateof the potentialemploymentimpactis up to 2,939 staffwhich is close to 28 percent of current total staff. (See Annex 5). This estimate does not take into account all institutions, but does comprise all main mini~tries.~~ of these staff are low skilled and earn below the average monthly Most public service salary of SR 4,292. Potential permanent annual savings would amount to SR 107 million. Whereas some duplication with VDS and early retirement numbers is likely, additional savings will also come from reviews o f other organizations that are beingconducted by the DPA, and real wage bill savings are therefore likely to amount to at least SR 150 million per annum or 26 percent of the wage bill. However, some o f these savings would need to be re-invested in the contracting o f goods and services and spending in other areas might also increase-such as social security and/or active labor marketprograms-which would haveto beworked out inthe courseof2009. 107. There are some important conditions that would need to be respectedifthe reform program is to be successful. First, a communication strategy to engage with communities on their role and responsibility in partnering with government on the delivery of programs is essential. This may pose problems as it requires a change inmentality, which, based on experience in CEE transition states, may take several years to come about. However, given the small size of the Seychelles and the closely interwoven nature of society, this may be less problematic inthis case. Second, the government needs to move away from ad hoc initiatives and instead plan carefully reform measures. Many of the measures outlined are complex (e.g. housing sector, but even straightforward areas such as burial services will need to be thought through carefully) and will require a serious effort to be designed. External technical assistance would certainly be needed. Third, accompanying policy frameworks in areas such as insurance policy, small and medium-sized enterprise development and others will need to be designedifany contracting or transfer effort is to be successful. 108. Finally, care would need to be taken that reasons for redundancies are clearly formulated and argued. The independent Public Service Appeal Board, which is an impartial body with a strong track record inhandlingpublic sector employment disputes, i s unlikely to accept collective dismissals, unless inthe context of agreed programs (such as VDS and early retirement). Individual dismissal notices would therefore be formulated in a way as to not leave these open to contestation. An alternative approach 38Numberson the police anddefenseforces cannotat this point be established. 47 would be using other instruments (voluntary redundancy and early retirement) also in 2009, which would avoid the risk of contestation, but the former of course brings with it significant cost. PublicSector Wage StructureReform 109. This section reviews the public sector wage system and examines what measures could be taken to bring it into line with international best practice. Reforming the wage system as such is unlikely to lead to cost savings. Experience from other states shows that if anything it leads to an increase in wage costs as: (a) the re- alignment of wages usually impliesthat some staff will needto be `bumped up' to fit into new categories, while those that are above grade are grandfathered, and (b) the integration of bonuses and allowances into base pay, which is an essential element of wage system reform, usually brings with it additional costs as there i s an alignment o f staff along the highest Nevertheless, wage system reform is essential if the government is to ensure that the core of state functions that remain after the adjustment program is completed, are executed with high quality and that the skills needed for the fulfillmentofthese functions are retained. Box 3: International Best Practice in Wage System Reform Basedon the experienceof OECD countries, bestpracticeinwage system reform can be summarizedas follows: Base pay i s the main element of total pay, typically forming at least 80 percent (and usually more) of total Pay. Bonuses are not common-it is generally considered difficult to devise bonus schemes in the civil service environment that are objective and that motivate staff. Where bonuses exist they are usually on an annual basis, takingaccount ofperformanceover the fullpreviousyear. Benefits in kind (Le., housing, cars, mobile phones) are not common-benefit schemes are regarded as expensive to administer and potentially divisive, i.e., some people get greater value from the benefitsthan others for whomthe benefitsmay not be relevant. Total pay levels inthe civil service are typically 80 percent to 90 percent of private sector pay levels. This recognizes that civil servants usually have greaterjob security than in the private sector, and civil service pensionschemes are generally comparablewith those inthe private sector. Pay structures are usually based on a series of grades that reflect relativejob levels. The grade of ajob is usually decided by means of a job evaluation system that allocates jobs to grades on the basis of an assessment of relative job outputs, accountability, knowledge and skills required, management responsibility,the extent and natureof contacts insideand outsidethe department, etc. For each grade there is usually apay rangethat allows staff at each level to receive an annual salary increase each year (up to the maximum of the pay range) to reflect increasingability and performance at that job level. There is a significant differential betweenpay levelsat successive grades, normally at least 12 percent (and oftenmore). This provides the financial motivationfor staffto accept ahigher level of responsibility. There is a common grade and pay structure, at least across the public service, which reflects the critical HR principle of "equal pay for equal work." Having a common structure and common pay levels facilitates the movement of people betweeninstitutions, opens up career and promotionprospects on at least asector-wide basis, and helpsto foster acorporateidentity.40 39Somegood recent examplesofwage systemreformsincludeSerbiaand Latvia. Among islandstates Cape Verde has engagedin an importantwage systemreformexercise, butthis hasnot yet beencompleted. 40Higher pay levels are sometimes provided for specificjobs that are at a premiuminthe market, Le., high level IT or financial skills. (Such pay levels are regarded as exceptional, require specificjustification, and are subject to regular review.) Also, agenciesthat are created as separate entities generally havemore freedomto decide their ownpay levels but inpracticetendto be fairly consistent with general pay levels. 48 Main Featuresof the Current Wage System 110. The mainfeatures of the current system are:41 A highly compressed base pay system, which is less so when allowances are taken into consideration. Base pay compression ratios are approximately 1:2.7, while a minimum o f 1:6 i s considered essential to retain staff. However, when all supplements and allowances are taken into account, compressionratios actually go up to 1:7. A large number o f allowances and supplements. These include: (a) `schemes o f service' which provide specific allowances for specific professional groups andor institutions, (b) performance contracts, (c) `inducement supplements' for hard to recruit posts, and (d) periodic allowances, such as overtime payments, reimbursement o f personal telephone costs etc.. Staff can receive upto 14different types o f supplements andallowances. A partially integrated system, covering most o f the public service, except for the police and defense sector. This is not uncommon. However, in terms o f payroll management the health sector i s administered separately from the rest o f the public service, which poses certain risks as controls on the proper application o f rules are limited. A wage grid that has a relatively small number o f grades and steps compared to the range o f positions it i s expected to cover, e.g. from cleaners to principal secretaries. 111. Severalreform steps have been taken over the last two years with the aim to make the wage system more performance based, includingthe use of performance contracts for certain categories of staff. The posts to which performance contracts apply are defined through a job evaluation system which was designed with the assistance o f the Commonwealth Secretariat. However, so far the job evaluation system has been used only for this specific purpose. RealWages, Allowancesand Supplements 112. The current salary structure includes 5 non-graduate grades and 4 senior (graduate) grades, with 6 salary points (steps) in each, except for the two lowest grades that have 4 and 5 points respectively. The structure is heavily skewed towards the low skilled and support office staff that make up 35 percent o f the public service. Inaddition itestablishes salary levelsrather thandistance percentage points, which makes the system inflexible and subject to subjective wage setting. The salary structure sets base wages only, between SR2,200 and SR6,400 per month.42 4'This section is basedon Kwami, E. (2006), Public Sector Salary Review, Summary FinalReport, Commonwealth Secretariat. 42A few staffinthe Youth department are listedas earningSR 1,864 per month, which is lower thanthe minimum wage inthe public service. 49 113. Base pay can be as low as one third of real wages. The basic features o f the system of allowances and supplementsare discussedat lengthinKwami(2006); we draw upon this work to highlight a few key features of the system here. The first important feature o f the current system is the discrepancy between base pay and real pay, and the asymmetric nature of this discrepancy. Base wages bear no relation to real take-home wages, which range from about SR 2,400 (low skilled worker) to SR 18,000 (e.g. a Principal Secretary) for most of the public service, and even higher for a few outlying agencies. The averagereal wage inthe public service as o fAugust 2008 was SR 4,292. 114. The wage system has a multitude of schemes of service and periodic allowances. The first inparticular is problematic. Whereas schemes of service hadbeen designed to determine professional requirements for specialized positions and the related rate o f career advancement, they have become an instrument to address the shortcomings o f the current wage system without addressing the root cause. Schemes o f services, which have mushroomed inrecent years, basically provide additional salary supplements based on qualification levels of staff. However, in a well-designed wage system, qualification levels should be reflected in the job evaluation process not assessed separately. Therefore, schemes o f service as currently used present a clear break with best practice. Inaddition, some schemes of service, in particular those for health sector staff, include a number of factors, which are subsequently lumped together as one category in the payroll system. Not only is this inappropriate from the point of view o f good practice in wage policy, it is non-transparent and open to potential abuse, particularly since the health payroll is administered separately from the general payroll. For particular categories of employee or professional it might be necessaryto review the salary system andprovide a separatewage grid. This might apply for example to medical professionals and teachers. However, a decision on this issue would depend on the final designof a newwage grid. 115. Periodic allowances are a common feature of many .public service systems, though the globaltrend is to move towards consolidating such allowances into base pay. The reasons for this are that they are; (i) to administer and; (ii) to abuse costly open and mismanagement. Periodic allowances in the Seychelles include the `classical' categories such as overtime, transport, telephone cost, on-call etc. 116. Public Service Commission Supplements are large and beyond what is established good practice. Whereas the mechanism of performance contracts for definedpositions is inline with modern principles o fpublic management, and the method of identifying the posts is transparent (i.e. basedon ajob evaluation process) the size o f such supplements goes well beyond what i s good practice (see the principles listed above). Similarly, the `inducement allowances' for posts for which skills are in short supply are a feature of many pay and grading systems, but also inthis case appear to be applied to many more positions than would normally be the case, i.e. they should be the exception and not the rule. 117. Top salaries are significantly higher in agency-type institutions (such as Boards and Authorities). For example, inthe RevenueCommissioners, the top salary i s 50 SR 41,000 per month; and inthe Health Service Authority (HSA), three senior staff earn monthly wages of between SR 31,000 and 32,000 compared to the Principal Secretary wages of around SR 18,000.43(While the inclusion o f expatriate employees on payroll is an anomaly-these should be hired under service contracts since they are temporary services contracted in and not public service permanent staff-it is striking that the HSA has top salary levels for local employees 70 percent higher than the average for a PrincipalSecretary.44 118. There is a trend to public sector wage increases by establishing`Authorities' to take on elements of state functions. While moving certain regulatory and service delivery functions to agency-type institutions make sense from the point of view of effective public management, at the same time wage levels for managers in these units appear to have skyrocketed (e.g. in the HSA which previously had a top salary of SR 23,000). While it may be necessary to pay higher wages for (temporary) management of these bodies, care should be taken that `Authorities' are not proposed solely for the sake of circumventing pay policy principles. 119. As a result, average wages per core public sector institution vary significantly. Among the ministries and institutions review, the average monthly salary ranges from SR 3,119 in the Ministry of Community Development, Youth, Sports, Culture and Arts (MCDYSCA) to SR 4,865 inthe Ministry of Finance. By comparison, the average wage in the public health sector is SR 4,578 and in public education SR 4,231. Public sector health and education wages are relatively high due to scheme of service allowances (see below) and in the health sectors, as discussed a result of the outlying senior management salaries. The MCDYSCA on the other hand has few schemes of service and a large proportionof low skilled workers. 120. In sum, the wage system is neither efficient nor transparent, nor necessarily provides for a competitive wage system to attract and retain qualified senior staff. Inshortthese featuresarisefrom: (a) includinga large anumberofcategoriesofstaff; (b) setting artificially low base wage levels for senior staff, usually to give the impression of egalitarianism; and (c) fragmenting pay composition. Such wage systems typically lack transparency, are costly to administer (as payroll needs to take into account o f ten or more components), opento abuse, andmakepay levels unpredictable for staff. Establishinga FunctioningWage System. 121. The establishment of a functional wage and grading system will need to be based on an in-depth fiscal analysis, as it will need to reflect the budget constraints which the government will continue to face for at least the next five years. Nevertheless, this reform i s an essential element o f a reform process that aims to reduce the size of the'public service while retaining the quality of development outcomes. Putting in place a new wage system with the 2010 budget would therefore be an important reform objective. Here, we set out the overview o f a reform agendathat would 43The posts are for expatriate and Seychellois employees. 44Infact, H A S hastenpositionswith amonthly salary inthe rangeof SR23,OOO to SR32,OOO. 51 subsequentlyneedto be followed up by detailed technical work. The government should continue to draw upon the technical expertise providedby the Commonwealth Secretariat onjob evaluation and process design. Additional technical expertise should be sought to conduct a detailed fiscal impact assessment which, based on experience inother states, is likely to take a few months to complete. 122. Bringing the pay and grading system in line with international principles would require: a revision of the current salary structure, bringing schemes of service back to their original purpose and phasing out periodic allowances and limiting PSC supplements. A revision o f the salary structure should integrate most allowances and supplements into base pay, and therefore reflect an appropriate compression ratio. The new structure should be permanent, and be defined in fixed percentage steps that would automatically change with each increase of the base salary level (the lowest pay grade). This would prevent the erosion of senior salaries that tends to lead to the invention of additional supplements and allowances. The new wage structure should also reflect the new structure of the administration and an emphasis on retaining essential and professional staff, as well as be fiscally viable. 123. The compression ratio for current real salary levels (lowest paid staff to the average Principal Secretary) implies of approximately 1:6 is at the lower end of what would constitute an acceptablecompression ratio ininternational comparative terms. Establishing a durable wage grid may therefore require setting a higher compression ratio target, e.g. 1:7 or above, though this should be determinedfollowing a fiscal impact assessment to ensure that this i s feasible inthe near fbture. This does not take into account a small number (up to 14 posts intotal) of outlying salary levels paidto senior management inagencies. A policy on pay of senior executives o f Authorities and Agencies should be adopted which could be based on negotiated contract levels if their Act of establishment so provides. It i s also recommended to review the specific case of the HSA, which appears to have set exceptionally high supplements for senior staff compared to other state bodies, to establish whether there i s a necessaryjustification on technical grounds. Making a wage grid durable requires setting differentials and percentagesrather than absolute numbers. 124. The new wage grid should reflect the changed profile of public sector organization following restructuring. Based on the conclusions of the review conducted in the previous section and its conclusions on the need to reduce low skilled and support service posts by two thirds or more, the grade structure equivalently should have no more than 2 grades for support staff (reflecting moves to contract out or eliminate most of these functions by 2010). This should be sufficient to accommodate essential secretarial and clerical support and essential drivers. It is proposed to have 6 grades for professional staff, while each grade should have at least 10 steps to ensure the possibility for career growth and to allow for the elimination o f the current practice o f paying experienced staff `off pay-band, (see Kwami 2006 reference). A wage grid based on these assumptionsis shown inTable 18. 52 Table 18: PotentialWage GridStructure underRestructuredPublic ServiceModel Positions Grade Step:I 1 I 2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 I 10 1Differential ChiefExecutive Grade 4.29 4.51 4.73 4.97 5.22 5.48 5.75 6.04 6.34 6.66 25.0% SeniorExecutive 1 3.43 3.6 3.79 3.97 4.17 4.38 4.6 4.83 5.07 5.33 25.0% Senior Executive2 2.75 2.88 3.03 3.18 3.34 3.51 3.68 3.86 4.06 4.26 25.0% Senior Officer 1 2.20 2.31 2.42 2.54 2.67 2.8 2.94 3.09 3.25 3.41 25.0% Senior Officer 2 1.76 1.85 1.94 2.03 2.14 2.24 2.36 2.47 2.6 2.73 25.0% Senior Officer 3 1.41 1.48 1.55 1.63 1.71 1.79 1.88 1.98 2.08 2.18 25.0% Grade 1 1.13 1.18 1.24 1.30 1.37 1.44 1.51 1.58 1.66 1.75 12.5% Grade2 1.0 1.05 1.1 1.16 1.22 1.28 1.34 1.41 1.48 1.55 Step Differential: 50% 125. The grid should apply only to budget-funded organizations and not to commercial and non-commercial publicly-owned enterprises. As an exception contracts outside the grid could be negotiated, but only for the heads o f Agencies and Authorities, as per their approved Acts of establishment. For all other agency staff the grading system should fully apply, at least untilthe end of the fiscal adjustment program, even though agencies should be given delegatedauthority to administer the wage system. Fiscal viability, the `bottom-up' method of setting the wage grid, should limit the fiscal cost of this option. The proposed wage grid reflects the fact that supplements and allowances are currently skewed towards higher-end staff, by setting the grade differentials between grades 1and 2 at a lower level than those between grade 2 and the subsequently professional grades. Nevertheless, costs of introducing a new system will needto be assessed indetailed. Particularly, as a certain number o fjobs will need to be re-graded, due to the distortions currently introduced through different schemes of service and allowances which may reflect only partially the degree of post-holder responsibility andjob complexity. This should bethe starting point ofthejob evaluation exercise. 126. A job mapping exercise can be conducted once decisions on the overall reform programare taken, and could be started in the second trimester of 2009, so that fiscal impact on the 2010 budget could be assessed on this basis. For this the government will need to bring in a technical team, which could be led by the expert currently financed by the Commonwealth Secretariat, supported by sector specific reviewers for job evaluations in health, education, other social services (including community development, youth, arts and sports), productive sectors and environment, and a small team of fiscal analysts. 45 127. . The proposedwage grid is based on the assumptionthat most allowancesand supplements would be eliminated and this will therefore require a fundamental re- thinking of the approach to using schemes of services. Instead, the grading system proposed would provide sufficient scope to account for complexity of work (which i s one element of the current scheme of service supplements) for all professional groups through ajob evaluation system. Inorder to arrive at a commonwage grid, even ifpossibly with differentmechanisms for determining placement andpromotionaccording to professional 45Job evaluations shouldbe doneby the respective institutionsbut externallyreviewed. 53 groups if this i s needed, schemes of service would, need to be brought back to their original purpose, which i s to determine professional standards. The DPA would therefore need to instruct all institutions that remain under the central wage grid to revise their schemes of service accordingly. 128. Periodic allowances (yet another factor limiting transparency and predictability in public sector wage policy) would also be phased out under this model, and limits placed on the PSC supplement^.^^ It would be proposed to apply periodic allowances only to those positions in grades 1 and 2, and to tighten the monitoring system for their application. A rationalization of all possible allowances i s also proposed. Finally, it is proposedthat the current systemo f PSC posts be retained for certain categories of posts, including all the chief executive grade and selected positions inthe two senior executive grades, andthat the methodfor identifyingthese posts (based on the job evaluation method designed by the Commonwealth Secretariat consultant) should also be retained (and the method should in fact be applied to the classification of all posts). Performance contracts should also continue to apply. However, supplements for performance should be reduced to 15 percent or less of base pay, based on a performance assessment (annual performance evaluation), to ensure that a base pay to real pay ratio o f at least 80 percent is respected for these positions. Inducements for difficult-to-hire skills are an appropriate tool for personnel management and may also be retained. Their use should be basedon a proper analysis o f labor marketconditions inthe sector concerned. These inducements should be revised on an annual basis. ConclusionsandImplementationSteps 129. In conclusion, considering the macro-fiscal context of the Seychelles, and the contours of the adjustment program on which the Government has engaged, a two pronged approach is needed: e A transition from emergency across the board staff cuts to a more strategic approach on the functions undertakenby the state, and the way in which these functions are provided (e.g. direct provisionor facilitation). e Initiate a wage system reform to put in place the conditions to safeguard the impressive development outcomes that the Seychelles has already achieved. 130. The two sections of this chapter have set out a possible path towards achieving both objectives, with a tentative timeline along which these measures could be achieved. The review undertaken shows that turning around the current system, both in terms of h c t i o n s fulfilled, delivery methods and incentives, is possible in a medium term timeframe o f four years, the objective set by government. In doing so there should be active engagement by senior government leaders to encourage community responsibility for important aspects of policies currently delivered solely by the state. Furthermore, there needs to be creative solutions for the issues that make the implementation o f `classical solutions' such as contracting out, concessions, cost sharing more difficult to 46They are also reviewedat lengthin Kwami(2006). 54 implement in a remote small island context, while recognizing that remoteness and size are not reasons for a lag in productivity. This means investment in those functions that are crucial to the operation o f the state, even ina difficult fiscal context, and resisting the temptation to see cost reductions as an ideology. At the same time, transparency and effectiveness o f public spending should be placed before political interests or counterproductive aspects o f egalitarianism, especially in public sector wage policy. If these basic principles, which are referred to throughout this report, are adhered to, the more technical solutions proposed in this Chapter are likely to be successfully implemented. ImplementationStep Timeframe Government decision on the structure and design o fthe wage grid, its scope o f December 2009 applicability (what organizations and what positions) as well as decisions in principle on schemes o f service, periodic allowances, PSC supplements and inducements. Undertake initial fiscal impact assessment December 2009 Issue mandatory instructions onrevising schemes o f services January 2009, for completion by end February2009 Conduct a review o f periodic allowances and scope for phasingout at least 50 by endFebruary 2009 percent o f all categories, considering they will no longer apply to professional andmanagement staff. Revise regulations on PSC supplements and inducements inline with revised by end February2009 wage policy. Initiate combinedjob mapping and fiscal impact assessmentexercise, including byendMarch2009 Proposals by individual institutions Initialcosting exercise to be conducted based on proposals submitted April-May 2009, Review to be conducted. arbitration as needed in Final review o f cost based on changes introduced June 2009 Determination o f final base wage number for 2010, based on fiscal scenarios, September 2009 real cost savings fiom restructuring and projectedwage growth, 55 IV. HEALTHCARE HealthSystem Context 131. This Chapter examines issues of financial sustainability, efficiency in the allocationof funds and productivityin the delivery of care in the health sector; and proposes short-term and medium-term measures to improve the sector's performance. The Chapter also aims to respond to the government's request to present key-issues to consider ifthe health systemwere to move from a tax-funded health system (as it currently is) to one based on social health insurance. A complete overview on the subject social health insurance or any recommendations on its feasibility for the Seychellesis not undertaken, as this would go beyond the scope of the PEIR. 132. Following a brief description of the health sector context, the Chapter examines the extent of total funds for health and a breakdown of public spending in the health sector to compare this as well as health outcomes, with other small island states. The broad overview leads into a discussion and recommendations in several specific areas where there is scope for productivity and efficiency improvements. Since we do not find that the total amount of public resources spent inthe health sector is particularly low by international standards, these funds could be reallocated within the sector in order to ensure even better health outcomes (which are for the most part are quite good) and improvedfinancial viability of the sector. 133. The system is characterized by successful health outcomes, and low utilization rates comparable to Europeanlevels. Seychelles has a tax-funded health systemthat offers primary and secondary health care inthe public sector and provides for prioritized patients to travel overseas when in need of tertiary and specialized care. The Ministryof Health(MOH) has policy, strategic, planning and analytical functions and is institutionally separate from the HSA which is responsible for the management oversight of the public health sector (including hospitals). Health facilities do not have any managementautonomy 134. At the same time, the public health sector is highly indebted and characterized by several inefficiencies in the allocation of funds and provision of care. The health sector is heavily indebted in foreign currency, as a result of services procured for the overseas treatment program, and all pharmaceuticals and medical supplies are imported. The health budget is primarily formulated on historical expenditures of input factors. Funds are allocated from the Ministryof Finance (MOF) to the Ministry of Health (MOH); and funds and service provision are managed centrally. This has resulted in several areas of inefficiency in funds allocation, and poor productivity indicators. The government has started to address overcapacity and inefficiency inthe health sector and is committed to implement measuresto reduce costs in line with the fiscal adjustment program. The impact of reforms on the sector's performance will need to be monitored and evaluated carefully, in order to identify any adverse effects, andto develop corrective measures as necessary. 56 135. The government is interested in the possibility of introducing social health insurance to raise additional funds for the health sector. To prevent any negative effect of adding a payroll tax on the labor market, there i s a need to implement several measures before considering implementation of a social health insurance scheme. First, the health sector needs to become more efficient to ensure the labor market does not have to pay for the current inefficiencies; second, there i s a need to streamline the social security system and consolidate current benefits to reduce the existing social costs borne by the taxpayer; and third, if the government wishes to introduce a health insurance payroll tax without increasing the overall labor cost, thenthe social security contribution rate should be lowered accordingly. HealthStatus 136. Health outcome indicators; including life expectancy, child and maternal mortality rates are better than many other small island states and are comparable to Europeanlevels. Life expectancy is 73 years, and non-communicable and life-style related diseases dominate the country's burdeno f disease. Mortality rates are highest for heart diseases (13.2 percent), hypertensive diseases (8.9 percent), and pneumonia (6.8 percent). Diabetes and traffic accidents cause 3.7 percent and 2.5 percent of all deaths, respectively, highlighting the need to invest in both healthy lifestyle and promotion accident prevention. (See Table 19). Table 19 :Health Outcomes Indicatorsfor Seychelles and Comparators, LatestYear Available Trinidad Cape & Seychelles Barbados Mauritius Verde Tobago Fiji Maldives Life Expectancy, years 73.0 75.4 73.0 70.7 70.0 68.3 59.0 Infant Mortality, per 1000births 11.0 11.0 13.0 26.0 17.0 15.7 75.0 Under-5Mortality, per 1000 13.0 12.0 15.0 35.0 19.0 17.9 114.0 MaternalMortality, per 100,000 births 0 24.0 150.0 .. 32.0 684.0 Percentof births attended by skilled healthstaff 98.0 99.2 92.0 41.0 Source:WDI (2008). Seychelles Annual Health Statistics (2007). 57 HealthSpending 137. Total health spending, includingfrom private and public sources, amounted to about 4 percent of GDP in2007 (Table 20). About 89 percent ofthis comes from the government health budget, and an estimated 11 percent i s from patients in the form of out-of-pocket payments.47However, private spending is expected to be much higher as this amount probably does not include out-of- Table 20: Total Health Spending, 2007 pocket spending of patients who seek treatment SRmillions abroad at their own cost. Private spending is Public 214.5 mainly used to pay for private sector care and to Private Total 25.6 purchase pharmaceuticals, which averages SR 300 per capita(SR) 240*1 2,823 per capita per year. In addition, there are some inpercentofGDP 3.9 percent small donor-funded investmentsinthe health sector Source:MOF, MOH, NBS including capital investment; (for example, Anse Royale hospital renovation i s financed by a Chinese grant), and donor-funding of expatriate physicians. These amounts should be added to the total health spending when a National Health Accounts (NHA), which are due to conducted later this year. Table 21: Trend in Government Health Expenditures,2005-2007 2005 2006 2007 Publichealthexpenditures,SR millions 174.7 203.7 214.5 in percentoftotalexpenditures 8.9 7.7 7.8 in percentofGDP 3.6 3.8 3.5 Source: Ministry ofFinance 138. Government spending on healthcare is comparable with other small island states and countries at similar levels of GDP (see Table 22). Interms of the share of total government spending, health care spending declined slightly between 2005 and 2007 from 8.9 percent to 7.8 percent of total spending, and as a share o f GDP fiom 3.8 percent to 3.5 percent (Table 21). 139. Government health spending is predominantly for hospital treatment and primaryhealthcare (PHC) in community healthcenters. The share ofthe total health budget spent on hospital care (46 percent) is very high, especially when compared to European countries with much more sophisticated hospital care systems. For example, Portugal spends around half this, only 23 percent of the health budget and Poland 29 percent on hospitals. Primary health care accounts for around 25 percent o f spending, while around 20 percent of public health spending is for "corporate services" (previously administration and planning) which i s mainly used to pay administrative salaries and wages (35 percent), some goods and services (21 percent) and vehicles (13 percent). The public/environmental health budget (4 percent o f spending) is used to pay for the environmental health workforce, which i s quite sizeable. The largest increase in 47Note, the 2007 householdbudget survey (HBS) reportshealthexpendituresby householdsfor pharmaceuticalsand privatesector care inthe amount SR12.77million. However,HBSgenerallyunder-reportprivatehealthspending; hence, we assume that householdsspend twice as much. The resultingamount is still less than the WHO 2004 estimatesfor privatehealthexpendituresin Seychelleswhich is 24 percent o ftotal healthexpenditures. 58 spending fiom 2007 to 2008 is reported by the division for planning and information; (fiom SR 4 million to SR 19 million in the first six months of 2008) and this increase should be further examined to determine the rationale and possible cost-reducing measures(See Table 23). Table 22: Seychellesand Comparators,Health Expenditures,Average 2002-2004 GDP per Private health capita Public health expenditure,in Health 2006 expenditure, percentof total expenditure per (current in percentof health capita $) GDP expenditures (current $) Maldives 2,375 4.0 21.0 159 Fiji 3,826 3.4 36.5 128 Dominica 3,978 2.9 28.7 211 St. Vincent andthe Grenadines 4,032 5.0 34.6 200 Belize 4,457 2.5 48.9 186 Grenada 4,796 3.6 26.9 288 Mauritius 5,105 3.9 46.9 190 St. Lucia 5,354 4.2 33.3 225 Seychelles 8,899 3.5 11.0 534 St. KittsandNevis 10,316 4.7 36.6 478 Estonia 11,238 3.4 23.3 364 Antigua andBarbuda 11,583 1.4 28.2 478 Barbados 11,751 2.2 33.8 712 TrinidadandTobago 13,700 5.7 62.0 303 Groupaverage 7,244 3.7 33.7 3 16 Source: WDI 2008 140. Half of government health spending is for wages and salaries, which is high given the levelof care providedin-country. In2007, the public health sector employed 12.8 percent of the staff working in the public sector. The health workforce wage bill accounted for 17.4 percent o f the total government wage bill in that year (see Table 24). This i s very high compared to the EU average of 29 percent, especially considering that tertiary care (with more specialized staff) is not offered in the Seychelles but patients travel overseas for treatment.48As reported in Chapter 3, the average monthly income in the health sector is also high compared to elsewhere inthe public sector and amounts to SR 4,213 of which SR 3,386 (80.4 percent) is salary and SR 827 (19.6 percent) allowances on average. 141. Expenditures for salary and wages could be reduced substantially by releasing staff in areas with lower productivity. The Government is advised to substantially reduce the current wage bill by identifying and releasing staff in areas of low productivity, and examine the possibility for reducing salaries and allowances for highly paid positions based on a ,comparison of salaries and functions across the Government. 48See WHO Euro: HealthFor All database. 59 Table 23: Government Recurrent Health Expenditures by Division, 2005-2008 2008 2005 2006 2007 (Jan-Jun) SR Yo of SR Yoof SR Yo of SR Division millions total millions total millions total millions Hospital Services 79.6 47.9 85.4 46.3 92.0 45.8 58.4 PHC 40.3 24.3 44.4 24.1 50.2 25.0 23.5 Corporate Services n.a. n.a. 36.3 19.7 41.5 20.6 7.7 Administration and Planning 34.0 20.5 4.8 2.6 Environmental / Public Health 5.3 2.9 7.9 3.9 1.9 DiseasePrevention & Control 4.2 2.5 Home for the Elderly 3.1 1.9 4.0 2.2 4.5 2.2 1.9 Planning and Information 3.4 2.1 3.9 2.1 4.1 2.0 19.2 Minister's Secretariat 1.5 0.9 0.6 0.3 0.8 . 0.4 0.4 Total 166.0 100 184.6 100 201.0 100 112.9 Source: MOH 142. Pharmaceutical spending has been brought down by adherence to expenditure control measures introduced in the last couple of years. MOH have already introduced several measures to improve the efficiency of spending on pharmaceuticals, and these measures have ledto a substantial decrease inpharmaceutical expenditures since 2004 (Table 24). These measures include procuring only generic drugs and least costly drugs on the essential drug list. This highlights the need for continuous tight expenditure control in tendering and procurement practices, price setting, and ensuring physicians' adherenceto standardprescription protocols. 143. Pharmaceutical spending could potentially be more efficient still, by eliminating consumption tax, introducing co-payments for patients to avoid over- demand and reviewing the timely allocation of foreign exchange to pay foreign pharmaceuticalsuppliers. There are two hrther measures to be considered. First, the rationale for charging consumption or sales tax on publicly-provided pharmaceuticals should be re-examined, since the government is incurring an administrative cost to collect a tax on its own spending. Second, patients currently do not pay for pharmaceuticals provided inthe public sector. Inother countries this policy has ledto over-prescription of pharmaceuticals and escalating costs. The MOH is advised to follow the example of health reforms in other countries to share costs with patients by introducing a small co- payment. These measures are particularly important in a financially depleted health sector and will help to prevent over-demand which can lead to rationing and stock-outs- particularly where pharmaceuticals have to be imported and prepaid in foreign currency (the shortage of which has constrained spendinginthe past). It is also recommended to evaluate the system for foreign exchange allocation by MOF for pharmaceutical purchases to facilitate purchasing products inbulk (even larger than currently undertake) which would therefore be at a lower unit-price, and to ensure timely payment so as to establish a relationship with abroad range ofpotential suppliers. 144. Capital expenditure commitments should be re-examined, prioritized and kept to projects which can be afforded in the medium-term (Table 24). In general, 60 capital expenditures are not too high, insufficient funds to pay for construction often leads to delays inproject completion resulting inup to 30 percent cost overruns over time (see Chapter 2). Hence, to prevent such cost increases, the overall capital budget should not be spread across too many projects that cannot be completed or maintained-and the same i s true in the health sector. Several capital investments are often supported and financed in part by donors this can influence the relative priority o f capital projects according to the financing available. The M O H is advised to monitor the financial flow of these investments for the purpose of the NHA; and conduct investment planning to prevent highmaintenancecosts, and ensure that new investments inthe health sector can be runand do not addto inefficiencies that already exist. Table 24: Government Health Expenditures by Economic Classification, SR Millions 2004 2005 2006 2007 2008 Wages and salaries 45.6 94.2 106.7 106.0 55.8 Goodsandservices 31.8 35.1 40.5 51.8 31.9 Of which Pharmaceuticals 50.9 36.7 37.5 43.3 25.2 Maintenance 2.1 1.7 3.0 2.9 1.5 Vehicles 4.1 5.3 5.4 5.8 2.5 Capital n/a 8.6 19.1 13.5 8.0 Total 128.3 174.7 203.7 214.5 120.9 Source: Bank Staffestimates based on MOH and MOF data 145. There is scope to lower incidentalcosts across the healthsector through cost controls and improvements in contracting-out. The government is recommended to examine expenditures in each division and in each expenditure category to identify unwarranted spending, particularly for non-medical costs. For example, in 2007 corporate services spent 6 percent of its total expenditures on local telephone costs, which was considerably higher than other departments. Corrective action by the M O H meant that in the first six months in 2008, this amount has been reduced substantially. The M O H is therefore encouraged to continue with tight cost control to reduce spending to lower levels. Another high cost itemis the food suppliescontract for hospitals which has beenoutsourcedto a private provider. Expendituresfor hospital food increasedradically from SR 6.8 million in 2005 to SR 10.8 million in 2007, comprising an astonishing 12 percent of total hospital expenditures. Clearly, the M O H needs to re-examine the contract for food supplies and is advised to conduct a comparative cost analysis to evaluate different food providers. Critically, this should be done on the basis that the hospital kitchen(which is currently being usedas a store) could be usedby the contracted out private provider which could considerably lower costs. In line with the recommendations in Chapter 3, instead of each individual Ministrypursuing contracting- out for similar services to private companies; the government should also consider a more coherent approach across government possibly centralizing the contracting-out function for all Ministries at the Department for Public Administration. This would potentially allow the government scope to negotiate a lower price for a larger quantity of goods and/or services. 146. The health sector is highly indebted, mainly because of the overseas treatment program and imports of medicalsupplies. Arrears have accumulated over 61 the past six years and the stock of arrears combined with outstanding debts as at October 2008 amounted to 45 percent of 2007 government health spending. Now that the Seychelles rupee has floated the highly indebted health sector i s also exposed to exchange rate risk since the majority o f outstanding invoices are denominated in US$, Euros and IndianRupees. With an average exchange rate of say SR15: US$ 1 for 2009 for example, without clearing the stock of external arrears the SR value will double from the estimates shown inTable 25. The domestic debt and arrears have also accumulatedto a further SR 6.4 million. The main creditors are private companies of services that have been contracted out, communication, transport, hotel service providers and parastatal companies. The M O H i s advised to clear these debts, improve debt and arrears management and implement measures to reduce expenditure in order to improve the sector's financial sustainability. Table 25: Arrears and Debt Stock, October 2008 SR USD External arrears 90,044,628 11,116,62 1 Overseas treatment 79,251,302 9,784,111 Pharmaceuticalsandmedical supplies 10,793,326 1,332,509 Local debts andarrears 6,412,369 791,650 Total 96,456,997 11,908,271 Inpercentof2007 governmenthealthspending 45 percent Source: Ministry of Finance; as of Oct 15.2008 Notes: ExchangerateUS$l= SR8.1 Availability of Health Care Facilities 147. Seychelles has an oversupply of health care facilities. With a total of 5 hospitals49,the Seychelles has considerably more hospitals and bedsper capita than other middle-income countries (Figure 12). The Victoria hospital is the central referral hospital. Seychelles has currently 16 health centers and some outposts (Figure 13). Recognizing that there is low utilizationof some of these centers, M O H i s inthe process of rationalizing health centers down to 10 and phasing-out health posts. There are more hospital beds than needed by the small population (Figure 14). This is evidenced by extremely low occupancy rates inLa Digue, Praslin and Anse Royale hospitals (which is currently under reconstruction) (Figure 15). Upon further examination the low overall occupancy rate inVictoria hospital i s a result of the particularly low at, occupancy rate in the maternity and female medical ward-at only 50 percent-pointing to the option to close hospital beds, merge wards and reduce staff to lower costs while still offering adequateaccess to facilities. 49Source: AnnualHealth Statistics 2007, including Victoria, Anse Royale, Praslin, LaDigue, andNorthEastPoint. Silhouttewith 4 beds andLes Canellesmentalhospitalwith 45 beds did not report any activities in2007. 62 Figure 12: Hospitalsper 100,000 Figure 13: PHCUnits per 100,000 5 2 35 00 5 88 s 7 30 25 $ 4 20 -Q & 3 15 LR 10 *" m 2 5 22 01 0 Slovenia Seychelles Lithuania Hungary Bulgaria Figure 14: Hospital Beds per 1,000 Figure 15: Acute Hospital Occupancy Rate - 1 i 5 A F 4.7 00% 5- 3 0 4 80% 60% $ 2 0. 40% c n l U 20% a 0 0% Source: WHO (2006); Seychelleshealthstatistics (2007) 148. T o increase the average acute care occupancy rate in hospitals to 80 percent, the government is advised to close around 50 beds initially and an additional 10 to meet the productivity targets. This measure would result in a total of 340 beds and a bedpopulationratio of 4, which should be set as a ceiling. The M O Hplansto restructure hospitals into health centers and reduce hospital beds and staff. The M O H has already started reforms and is currently redefining the required number of hospitals and health centers through the regionalization strategy to reconfigure the Praslin and La Digue hospitals into health centers, reduce the total number of hospital beds, and also the number o f health centers from 16 to 10. The renovated Anse Royale hospital will continue to have 19 beds and house the health center in the same building. This will allow dismantling of the adjacent old healthcenter. 149. Closing a combined 50 beds in Baise St Anne, Logan and Victoria and maintaining a maximum of 19 beds in Anse Royale will result in around SR 4.6 millionsavings annually.5oThe number of health postswill be phasedout over time by reducing opening hours. The Islandsof Praslin, La Digue and Silhouette could offer first aid and maternity care only, as the emergency referrals to the Victoria hospital is already Annual savings basedon 2007 hospitalexpendituresof SR 92.0 million projectedto fall to SR 87.4 million after reforms, providedempty facilities are rentedout and/or soldoff. 63 assured by air transport. The Victoria hospital i s advised to close about 40 beds to increase its occupancy rate; particularly in anticipation of the opening o f a private hospital and the re-opening of the Anse Royale hospital. In 2008, hospitals are overstaffed with 742 staff resulting in 3.4 staff per occupied bed at an average occupancy rate of 55 percent. Inline with bed reductions, the number o f staff working in hospitals ought to be reduced (see below), empty buildings and rooms should be sold or rentedout to the private sector or other health and social activities (e.g. private physicians, crhches, elderly day care etc). It is estimated that implementingthese measuresand reducing the related costs including staffing, utilities and maintenance could lead to a 5 percent reduction in hospital expenditures over time. Short-term cost increases to implement these measuresmay occur. 150. The healthsector has been dominated by public provision, but inaddition to several private health care centers, a new private sector hospital is scheduled to open in 2009. This private hospital is being constructed on the outskirts o f Victoria and will have about 90 beds. It plans to offer specialized secondary and tertiary care including open heart surgery, renal transplantation, haemodialysis and cosmetic surgery. The hospital will largely cater for expatriates, tourists, andthe local populationwho can afford paying private sector prices-including patients who would otherwise have to go overseas for treatment. Once operational the government could also consider contracting with the private hospital, as a more cost-effective solution to either providing these secondary and tertiary services itself, or sending patients for treatment abroad. The government i s thus advised to negotiate and if cost-effective contract selected services with the local private hospital to decrease the number of patients on the overseas treatment program and improve access to care for patients inneed of specialized care. 151. Telemedicine should help to improve the availability of tertiary and specialized diagnostics. Since October 2008, a five-year telemedicine project commenced to connect the Victoria Hospital with hospitals based in India where Indian specialists can provide consultations, second opinions and interpret diagnostics. This project i s supported by EUfunds andthe IndianGovernment, who will sponsor all of the operational costs for five years, after which the prices for telemedicine services will have to be negotiated by the Government of Seychelles with individual suppliers. Availability and Productivity of the Health Workforce 152. The numbers employed in the public health sector increasedby 5 percent in 2008 over the previous year (Table 26). Most staff work in community health centers (30 percent) andhospitals (41 percent). Since 2006, the share o f ancillary staff (including drivers, clerks, assistants, cleaners, etc) increased considerably from 22 percent to 33 percent o f the total health workforce, a level that is extremely high compared to other countries. E.g. only 13 percent o fhealthstaffperformthese duties inthe UK. Seychelles has 95 staff working in environmental/public health, resulting in 11 public health specialists per 10,000 inhabitants which is again very high-compare this to Mauritius where the ratio is 1.9 per 10,000 populations'. A productivity analysis should be WHO data and statistics at www.who.org 64 conducted to identify an efficient target ratio for the health sector including ancillary and environmental health staff. 153. Physicians in the public sector are not working at full capacity. Mast physicians work in hospitals that only provide primary and limited secondary care), resultingina ratio of about 3.5 occupied bedsper doctor and only 4 hospitalized patients per doctor per week, suggestingthat hospital doctors do not work at full capacity. Forty- eight physicians work in outpatient care, based on the 2007 health statistics, they see on average 22 patients per day. These numbers compare with say 33 visits per doctor inthe USA, a level that is reasonable to apply as a standard for capacity.52 Inthe absence of tertiary and specialized treatment, and given the rather low patient throughput per week andvisit rate per day, the current ratio ofphysicians to patients appearsto be at the upper endofrequirements. Table 26: Public Sector Health Workforce,2005-2007 2005 2006 2007 Yo of Yo of Yo of Number Total Number Total Number Total Physicians (GPs) 72 4.0 75 4.5 91 5.3 Consultant physicians 15 0.8 16 1.o 15 0.9 Dentists 10 0.6 15 0.9 16 0.9 Pharmacists 7 0.4 4 0.2 4 0.2 Other MedicalProfessionals 185 10.3 187 11.3 106 6.1 Para-Medicals 429 23.8 493 29.9 432 25.0 Nurses 390 21.7 414 25.1 411 23.7 Student Nurses 86 4.8 73 4.4 80 4.6 Ancillaries staff 607 33.7 372 22.6 576 33.3 Total 1,801 100.0 1,649 100.0 1,73 1 100.0 Annual change, (percent) -8.4 5.0 Source: Ministry of Health. Annual health statistics 2007 154. Substantial cost reductions could therefore be achieved by reducing the number of physicians in areas of low productivity. With 106 physicians working in the public sector in 2007, Seychelles reports more physicians for its population than countries such as Mauritius and Maldives(Table 20). They are also predominantly from abroad. Expatriates account for 62 percent o f physicians and dentists inthe public sector. 53 To increase the number of local physicians, the requirementfor Seychellois physicians and dentists who are trained abroad to return, should be enforced. Currently, many medical students are stay on for several years to practice and specialize following training, and there should be stronger incentives for them to return to practice in Seychelles to reduce the reliance on expatriate doctors. The government plans to invest into the training of nurse practitioners who will be able to take over some o f the workload of physicians, which could also help in this regard as long as they are not hired in I additionto the existing doctor andnursingstaff. 52The US full capacity norm for PHC physicians is 33 visits per day. See: USDepartment for Health and Human Services, http://bphc.hrsa.gov/ 53Most ofthem are from India, Sri Lanka and Cuba. 65 155. Seychelles also has more nurses for its population than other small island states and several European countries (Figure 16). Assuming that in each country a similar share of nurses work in outpatient care, the productivity of nurses can be approximated by calculating the total number of nurses per occupied hospital bed (Table 27). Comparing across countries would imply that the hospital nurses in Seychelles are also operating at less than full capacity and seem to be less busy than, for example nurses working in Cyprus and Portugal. Furthermore, nurses Table 27: Nursesper OccupiedHospital Bed2006/7 inthe Seychelles do not have to Nurses Per take care of work-intensive Nurses Beds occupancy rate occupied bed tertiary care patients, andhence, Cyprus 4.4 3.8 the average time a nurse needs 64 85 1.4 Turkey 2.4 2.7 1.4 to spend with a patient i s likely Portugal 4.6 3.7 73 1.7 to be lower in the Seychelles. Seychelles 4.8 4.7 55 1.9 For every two nurses in the Bosnia 4.4 3.O 71 2.0 Seychelles there i s also on Albania 4.1 3.0 54 2.5 average one health care Source: Bank staff estimates assistant, which is rather high given the already very high number of ancillary staff and nurse students. Reducing this ratio to 3 nurses per assistant would allow releasing approximately one-third o f nurse assistants and lead to substantial savings insalary expenditures. Figure 16 :Physicians and Nurses, Per 1000Population, 2006/7 Physicans 13 Nurses 6 5 gk 32 k 4 1 0 Source: WHO and Seychelles Annual Health Statistics 2007 156. The healthworkforce should be reduced in areas of low productivity. As part of ongoing reforms to reduce the public sector by 12.5 percent of total positions in2008 the MOHhas eliminated 85 vacant posts and offeredthe early voluntary departurewith a compensation package to 105 positions. By the end of 2008, this measure i s expected to reducethe healthworkforce by 10.4 percent to 1,638 positions, reaching a level similar to that established in 2006. The government is advised to conduct functional productivity analysis inthe health sector to examine departmentswhere productivity is low to propose sustainable staff reductions. The implementation o f this program should be monitored 66 carefully to prevent re-hiring in 2009 and 2010. Based on productivity analysis, departments should set newceilings for their total positions. 157. Preliminary analysis conducted for this Review suggests staff reductions could reduce the health sector wage bill by almost SR 13 million reflecting 6.4 percent of 2007 total governmenthealth spending(see Table 28). This sum could be reinvested to improve access to specialized and tertiary care for patients and improving targeting of scarce funds to lower-income groups. Based on indicators of low productivity, preliminary analysis shows the total number of health carehurse assistants could be reducedby 68 positions (33 percent), ancillary staff by 216 posts to 20 percent of the total health workforce or approximately 320 positions; and the number of environmental/public health staff by approximately 51 to 42 positions to reach the target ratio o f 5 staff per 10,000 population. Table 28: Health Sector Wages and Salaries Savings, 2008-09, SR millions Potential Projected reductionin 2008 2009 expenditures Reducenumber ofhealthcare assistantsby 68 positions (33 percent) to 139positions 8.6 5.7 2.8 Reducenumber ofpublic/environmental healthstaff by 42 positions fiom 95 to 51 5.3 3.0 2.3 Reduce ancillary staff by 216 to 2006 levelsof 360, or approx 20 percentoftotal health staff 20.7 13.0 7.8 Total Savings 12.9 Source: MOHdatafor number of staff andaverage incomeincluding salary and allowances Utilization of Health Care 158. Hospital care is beingused adequately and inpatient and outpatient use is at a level comparable to European standards. There is an inpatient admission rate of 15 admissions per 100 population per year, which i s comparable to Sweden. The average lengthof hospital stay ranges from 2 days inLa Digue to 5 days at the Victoria hospital, and 7.8 days in Anse Royale. The lengthof stay is expected to be low as there is no tertiary and specialized care in the Seychelles. The Seychelles report four outpatient doctor visits per capita per year, which is similar to Finlandand Denmark. Most patients seek care in the English River Health Center in Victoria. Some health centers and outposts are less busy than others. For example, the SMB health center in Central Mahe reports only about 7 patients per doctor per day, which is extremely low. The MOH has already started evaluating the need for these health centers based on a productivity analysis and taking into account the growing private health sector, and plans to reduce total health centers to 10 andphase out healthposts. 159. The growingprivate sector suggests that there is a strongdemand for private sector outpatient care. There are at least six private practices with each of them employing around 3 to 4 physicians (generalists and specialists); in addition the private sector counts 4 dental practices. Private practitioners set their own prices and apply differential pricing to cross-subsidize care across their patients depending on their socio- 67 economic background. With the exception of communicable diseases, the provision of care in the private sector is not monitored. However, private practices appear to work near full capacity with a physician seeing about 33 patients per day54.The government i s advised to facilitate the growth of the private sector, use the private health sector to supplement the public sector where shortages exist, and monitor and evaluate the use of private sector care over time. 160. The Government rations access to tertiary and specialized care abroad by fundingtreatment for a smallnumber of prioritizedpatients. About 200 patients per year are transferred abroad (to La Reunion and India) for specialized andtertiary care not available in the Seychelles, (e.g. radiotherapy, transplantations, hip replacement, open heart surgery etc). This is a very small number of patients and reflects only 1.6 percent of total hospital admissions in 2007. Assuming that about 10 percent o f hospitalized cases would need tertiary or specialized care; this would result in 1,072 patients either having to pay out-of-pocket for catastrophic expenditures abroad, or not being able to receive care. Over the past years, total expenditures for the program as well as the unit cost per patient has increased substantially, reflecting 6.1 percent of total government health expendituresin 2007 (Table 29). The M O H is advised to monitor and evaluate all patients who need treatment overseas, including those who pay out-of-pocket or cannot afford to go, to assess total private overseas expenditures, andthe rationing impact of not offering these services in the Seychelles, and the limited public fund available for overseas care. Table 29: Overseas Treatment, Expendituresand Patients, 2005-2007 2005 2006 2007 Total overseas expenditures (US$) 847,344 1,043,302 1,525,775 Annual change, in percent 23 percent 46 percent Number ofpatients treated abroad 181 231 199 Unitcost per patient (US$) 4,68 1 4,516 7,667 Source: Expendituredatafrom MOF; Numberof patients from MOH. 161. Access to the overseas treatment program is rationed based on guidelines with priority criteria such as patientage and expected healthy lifeyears gained. The program i s not officially means-tested; however the M O H conducts with each patient, a family conference to discuss possible cost-sharing options. A board o f five physicians proposes the selection which has to be approved by the Health Service Authority CEO. Board members are not allowed to present their own patients. As o f 2009, patients will be asked to pay transport cost and cost-share other expenses. While overseas treatment may be less expensive than investing in offering these limited specialist services in the Seychelles, the government i s advised to improve the transparency o f the selection process, introduce and publish explicit selection criteria and an official means test, but still supplement information on the household's socio-economic background through family conferences. The patient composition on this list is expected to change with the opening of a private hospital with specialized services being offered from 2009 (including renal transplantation and open heart surgery). 54Basedon interview with privatepractitioner. 68 162. Utilization of preventive care should be increased to reduce the number of diseases that require high-cost treatment. Several high-cost diseases that are preventable rank highly in the country's Burden of Diseases among them cancer, led by breast cXncer and cervical cancer, heart Table 30: PreventableDiseases with High-Cost diseases and diabetes. While cervical Treatment, Number of Cases cancer prevention rates are rather high (59 percent), the government is advised to 2005 2006 2007 improve breast cancer screening and HIV 45 42 43 evaluate the effectiveness of the current AIDS 21 23 12 family program, Theratherhigh Source: Annual Health Statistics 2007 abortion rate (29 percent) indicates a need to improve access to modern contraceptives for teenagers and women to reduce the relatively high teenage pregnancy rate and abortions. Similarly, the HIV prevention program should be targeted to teenagers and high-risk groups including prostitutes, and drug users who share needles, to prevent an increaseinHIV/AIDS (Table 30). Out-of-PocketPaymentsinFormof Co-PaymentsandPrivateInsurance 163. Introducesmall co-paymentswith explicit exemptionmechanism. According to the Constitution, primary health care is provided free of charge to the population. Currently there are no co-payments in the public sector for primary and secondary care, dental care and pharmaceuticals on the essential drug list. User fees are charged to expatriates, which are plannedincreaseto cover full costs. The Victoria hospital offers a small number ofprivate rooms to paying patients. The M O H is planning to introduce co- payments for physiotherapy, dental care and non-emergency visits to the emergency center. 164. European countries have some form of co-payment for patients combined with exemption mechanisms that exclude vulnerable groups from paying. In the Seychelles, patients already co-pay for the use of private sector care and treatment abroad. Many other countries have introduced co-payments with the objective of reducing unnecessary use of care and raising additional revenue for a financially depleted health sector. Co-payments are generally charged for pharmaceuticals; and they tend to be lower if a patient has a referral from a general practitioner before visiting a specialist or a hospital. The M O H i s currently considering introducing co-payments for specific services, and i s encouragedto follow the example of other countries that introduced small co-payments for services such as curative care visits, dressings and issuing of sick leave certificates at the community health center; pharmaceuticals and hospital stay. Using the utilization statistics from 2007, and assuming that 30 percent of encounters will be exempt from paying, the government could raise approximately SR 8.5 million per year inform of co-payments, equivalent to 4 percentofthe government healthexpendituresin 2007 (Table 31). To prevent leakages into private pockets of staff, charging health facilities will have to follow professional accounting practice and need to be audited regularly. The government's co-payment policy should clearly define the use of revenues from co-payments inhealth facilities. 69 Table 31: PotentialAnnual Revenue from Co-Payments Utilization in ProjectedRevenue 2007 Co-payment SR la Outpatient visits, curativecare, dressing(visits) 586,018 SR5 per visit 2,05 1,063 Cost of Pharmaceuticals, in(SR) 43,251,584 20 percent 6,055,222 No. ofhospital night 56,542 SRlOper night 395,797 Total (SR) 8,5 02,082 Source: Bank staffestimates Notes: a Basedonthe assumptionthat 30 percentof encountersare exempt 165. Transparent co-payment exemption policies aim to ensure access to care for vulnerable groups. As in Europe to protect the poor from the financial impact of co- payments, the following population groups and services could be exempt from co- payments: (i) children and adolescents under 18 years o f age; (ii) homeless people; (iii) emergency services (the lack of attending the patient in emergency status involves threat o f death or possibility of permanent damage to health); (iv) preventive care services, public health services, pregnancy, obstetric and neonatal care services. It is recommended to monitor and evaluatethe effectiveness of exemption policies regularly. 166. Private health insurance is expected to grow as private healthcare provision increases. There are two private insurers and six branches with indemnity insurance and travel insurance to cover unexpected health risks during travel without covering pre- existing and existing conditions. The insurers also work as agents for international private health insurance institutions such as Axa and IMISingapore and offer an overseas treatment policy. However, due to the small numbers and risk-rated premiums, uptake has been low and the population has limited incentive to purchase private health insurance ,since care is largelyprovided for free inthe public sector and the probability to need high-cost tertiary treatment abroad is relatively low. Inthe future, the growing private health sector for outpatient and hospital care will make it more attractive for private health insurers to provide insurance policies. The government is advised to negotiate with private insurers to cover high-cost care not funded by the government and ensure appropriate regulation of the sector. 70 Social SecurityBenefits - country's institutional framework including generosity of sickness 3 &5% g bo./, benefits, type o f job contracts and =s ?5% 3 0 % strictness o f employment 10% protection legislation. In the 5% Seychelles, sickness benefits are 0% granted starting the first day o f MON TUE WED THU FRI SAT SUN sickness up to 130 days to individuals with a medical 168. Expendituresfor sick, maternaland funeral benefit are very high, reflecting 6.7 percent of total public health spending (Table 32). This is higher than many Table 32: Social Security Direct Benefits Expenditures, SR countries, e.g. in Serbia 2006 before the benefit reforms. 2007 In 2007, the social security Sickness benefit 1092719209 13269,759 fund spent 0.18 percent of Maternitybenefit 850,599 1,394,010 GDP on sickness benefits. Funeralbenefit 990,306 869,539 On average, about 4 percent Total inSR 12,112,114 13,533,308 o f the workforce is on sick- Source: Social Security FundBalance Sheet December 21,2007 leave at any given time. The English River health center in Victoria reports that 11.5 percent of total visits are by patients who need a medical certificate to qualify for sick leave benefits. While the number o f births per annum has not changed; maternity benefit payments increased by 64 percent from 2006 to 2007. In 2007, funeral benefits were paid for 630 deaths resulting in an average payment o f SR 1,380, suggesting that the program pays a small benefit at rather high administrative costs, and does not serve any equity purpose. By adjusting the current social benefit system to European standards, the Seychelles would be able to realize immediate cost reductions inhealth and social security. 169. Direct benefits paid by the Social Security Fund could be reducedby almost SR 6 million. The government is advised to change the Social Security Act such that 71 employers cover the first 30 workdays o f sickness, and reduce the maximum numbers o f sick days per person to 100 days per year. Beneficiaries with more than 30 days should be audited regularly. In addition, sickness during maternity should be consolidated into the sickness benefit. Funeral benefits should be phased out completely and related administrative costs eliminated. These measures are expected to lead to about 40 percent reduction in related expenditure. Accordingly, the Social Security Fund could reduce expenditures for direct benefits by almost SR 6 millionper year (Table 33). Table 33: Estimated Reduction in Expendituresfor Sick Leaveand Funeral Benefits, SR Potential reductionin 2008 Projected2009 expenditures Sickness benefit. Pay as of 31st day o f sickness only, maximum o f 100 days per year, audit long- term users 11,269,759 7,598,261 5,065,508 Eliminate funeral benefit 869,539 0 869,539 Potential cost reductions, in SR 5,935,047 Source: SocialSecurityFund The Case for SocialHealthInsurance 170. The MOH is interested in introducing social health insurance to improve access to high-cost care and raise funds for the financially depleted health sector. Introducing an insurer who will take the function o f a purchaser o f care, would require decisions about the insurance features, including (i) financing, (ii) pooling, (iii) risk purchasing and provider payment, and (iv) the insurance benefit package. It would also require changes in the current tax-financed health system which does not separate between the purchaser and providers. The following section raises some key-issues that need to be considered when moving towards a health system with SHI in the context o f the Seychelles. Table 34: Comparing the Financingof Social Health InsuranceFunds Austria Germany' Franceb Switzerland' -Contributionshare, inpercent ofgross earnings 6.9-9.1 14.3 average 5.25 Flat per capita - Employer percent of contribution 50 50 94 0 Employee share, percent of contribution 50 50 6 100 Contributions, percent o ftotal 80.8 100 54.5 81.8 Subsidies from tax revenue 0 45.5 18.2 Other revenues 19.2 Source: Country specific reports Notes a): Germany: Government transfers to SocialHealthInsurance starts in2004. Averagecontribution ratesare 14.3 percent, but vary across funds. As of July 2005, financing shares are 54 percent for employeesand46 percent for employers; b) HIT France: In2000, annual incomethresholdto be exempt from premiumpaymentis6600; c) 2004: Householdswith annual incomethresholdbelowspecific levelpay socialhealthinsurancepremiumsandare reimbursedby the governmentwhen income is assessedduringthe tax filing season. 171. Social health insurance is financed by contributions from employers and employees as well as tax-funded governmentsubsidies. InEuropean countries, social insurers are financed from tax revenues (Latvia and Poland), payroll taxes (Germany), and most often from a mix o fthe two (France). InSwitzerland andto some extend inthe 72 Netherland, people pay per capita premiumsdirectly to the social insurer. The collecting agent in tax-funded and payroll funded insurance system is generally the tax administration who transfers funds to the insurer, or the social insurer directly. Health insurance funds in Germany and Austria receive most of their revenues from payroll contributions; in France, payroll contributions reflect only 54.5 percent of total revenues o f the social health insurances, with the rest being paid fiom government tax-revenues. Payroll contribution rates vary across countries and in France have also decreased over time (Table 34). Government transfers are either paiddirectly to the insurance fund as in France, or indirectly by reimbursing premium-paying households based on their tax- statementas inSwitzerland. Table 35: Scenarios for Contribution Ratesand Revenuesfor Social Health Insurance Revenuepotentialfor insurance 2007 Annual Contribution (SR lions) workforce wageinSR 6 % 8 YO 10% 6 % 8 % 10% Private 22,155 46,692 2,802 3,735 4,669 62.0 82.8 103.5 Government 13,537 42,792 2,568 3,423 4,279 34.8 46.3 57.9 Parastatal 6,142 54,336 3,260 4,347 5,434 20.0 26.7 33.4 Total 41,834 116.8 155.8 194.7 In percentofGovernment 2007 health expenditures 58 77 97 Source: WorkforceNSB, Seychelles infigures (2007); NSB, StatisticalBulletin, December 2007 172. The government is currently looking into introducing a social health insurer with mixed funding from the government general revenues and payroll taxes as inmost other countries. The government has an active and growing labor market with about 5.5 percent o f the labor force being unemployeds5. Depending on the average salary, contribution rates, administrative costs and contribution evasion, the introduction of payroll taxes could generate substantial revenues for the health sector. The revenue raising potential o f an insurer with a 6 percent contribution rate on payroll (same as in Bulgaria) and no contribution evasion is estimated to be approximately SR 117 million reflecting 58 percent of the 2007 government health expenditures. This amount could increase to almost equally as high as the 2007 government health spending if the payroll tax is set at 10percent (Table 35). However, social insurers intransition economies often report substantial contribution evasion, resulting in up to 40 percent revenue shortfall. Social insurers inEurope report low administrative costs: InPoland, the single insurance fund has 1 percent administrative costs; in Slovakia they are 3 percent, in Austria 3 percent, inthe Netherlands4 percent and in Switzerland 5.7 percents6.The formal sector i s too small to fund the entire health sector and introducing payroll taxes for health insurance does not meanthe government should get disengagedfrom financingthe health sector; however, payroll taxes will allow reducing health spending from government generalrevenues substantially. ss NSB (2005). s6The World Bank (2008b): Healthinsuranceandcompetition. EuropeCentralAsia HumanDevelopment. 73 173. The decision to introduce payroll taxes in the Seychelles to finance social health insurance will affect labor costs and the labor market. Inthe Seychelles, 72 percent o f the population is economically active. There is no income tax in the Seychelles but various consumption taxes are levied on goods and services. Payroll taxes are deducted for social security and a pension flat rate which combined with different average salaries results in a different tax wedge57across the sectors (Table 36). A high tax wedge on labor income can be expected to reduce employment inthe formal sector. The tax wedge in the Seychelles is lower than in other transition economies in Europe and Central Asia, andthan inOECDcountries (Figure 18). Table 36: Payroll Taxes and Tax Wedge across Sectors, In SR, 2008 Private Government Contribution sector sector Parastatal Average salary, SR 3,891 3,566 4,528 Employer contribution (percent) Social security 20 778.2 713.2 905.6 Pension 50 50 50 50 Total labor cost 4,719 4,329 5,484 Employee contribution (percent) Social security 2.5 97.3 89.2 113.2 Pension 25 25 25 25 Takehomepay 3,769 3,452 4,390 Tax wedge 20.1Yo 20.3 Yo 19.9 Yo Source: Bank staff estimates Figure 18: Seychelles Tax Wedge Compared to OECD, Europe and Central Asia -0 GO 50 10 30 20 10 0 Sources: OECD, Taxing Wages 2002/03 for OECD and ECA OECD, except Slovenia (based on 2001); Bank staff estimates for others (using 2003 for ECA countries taken from World Bank ECA Labor Market Study, forthcoming, and 2004 for RS and FBH). Tax wedge calculatedfor non-agriculturalAW worker without dependents in ECA and productionAW worker without dependents in OECD. OECD groupings exclude ECA OECD: (i) low (less than 40 percentwedge) includesAustralia,Iceland, Ireland, Japan, Korea,Mexico, New Zealand, Portugal, Switzerland, United Kingdom and United States; (ii) mid (40-50 percent) includesCanada, Denmark, Greece, Luxembourg,Norway, Spain and Sweden; (iii)high(51+ percent) includesAustria, Belgium, Finland,France, Germany, Italy andNetherlands. 57The tax wedge on labor expressesthe wedge betweenthe employer's total labor cost andthe individual's take-home pay and is definedas follows: tax wedge =(total laborcost-take-homepay)/ total labor cost*100. 74 174. Adding a payroll tax for social health insurance without decreasing the contribution rate for social security and pensions, will increase the tax wedge. For each scenario in Table 19 it is assumed that social security and pension contributions remain unchanged; and health insurance contributions paid by the employee are 2 percent. In scenario 1, the employer part i s 4 percent (total 6 percent), in scenario 2 it increases to 6 percent (total 8 percent) and in scenario 3 employers pay 8 percent resulting in a total o f 10 percent with employees paying the difference. As a result, the tax wedge increases from currently 20 percent to 24 percent in scenario 1, to 25 percent inscenario 2 and 26 percent inscenario 3. Adding apayroll tax for healthmay therefore be politically difficult to introduce as it will increase labor costs to employers and may have a negative effect on employment. The government is thus advised to identify possible reductions in benefits and inefficiency in social security that would allow reducing the related contribution rate o f currently 22.5 percent to a level that will make the introductiono f social health insurance overall almost tax-neutral. Table 37: Health Insurance Scenarios and Impact On L a b o r Costs and T a x Wedge, SR Scenario 1 Scenario 2 Scenario 3 Parastat Parastat Parastat Sectors Private Gov ai Private Gov al Private Gov al Average Salary 3,891 3,566 4,528 3,891 3,566 4,528 3,891 3,566 4,528 Employer Contribution Social Security 778.2 713.2 905.6 778.2 713.2 905.6 778.2 713.2 905.6 Pension 50 50 50 50 50 50 50 50 50 Health Insurance 155.6 142.6 181.1 233.5 214.0 271.7 311.3 285.3 362.2 Total Labor cost 4,875 4,472 5,665 4,953 4,543 5,755 5,030 4,614 5,846 Employer Contribution Social Security 77.8 71.3 90.6 77.8 71.3 90.6 77.8 71.3 90.6 Pension 25 25 25 25 25 25 25 25 25 Health Insurance 78 71 91 78 71 91 78 71 91 Take home Pay 3,710 3,398 4,322 3,710 3,398 4,322 3,710 3,398 4,322 Tax wedge 23.9% 24.0% 23.7% 25.1% 25.2% 24.9% 26.2% 26.4% 26.1% Source: Bank staff calculations 175. Riskpoolingin most countries is off-budget by one insurer if the population is small. The small population size in the Seychelles will favor a single risk pool. Once SHI i s introduced, the MOF would have to redirect the financial flow to the health insurer, which will assume full responsibility for risk pooling and purchasing o f health care. Insurance revenue in the risk pool (whether generated by general taxation, payroll contributions, or individual premiums) seeks to cover a chosen package of health care services as contracted with providers. Insurance risk-pools are generally managed and administrated by not-for profit private insurers or a public autonomous entity that reports to the government and contracts with the MOH and private sector providers. Poor financial management, lack o f guidelines for the investment o f insurance funds, weak banking systems, and incidents o f fraud and misappropriation o f funds aggravate performance o f the insurance systems. Therefore, insurers have to apply international 75 accounting standards, publish their financial and performance results on their webpage and undergo regular external audits. To ensure political independence, the legal form of the insurer could be a public autonomous not-for-profit organization. At the beginning, the Seychelles may want to consider contracting out o f insurance management to an experienced international health insurance company that could also help build human capacity by training local staff on the job and provide the necessary IT investment (data bases are neededfor claims, members, providers etc.). 176. Purchasing includes contracting between the insurer and providers and the provider payment systems. Inthe Seychelles the insurer would be expected to contract with accredited health care providers who offer a defined set of services to the population against an established price. Service providers would be given increased autonomy to effectively produce these services and the defined benefit package and their performance evaluated against an established set of performance standards. In other countries, insurers increasingly contract selectively and exclude providers with lower quality care and productivity from contracts. Payments are then made to providers for services provided to patients, based on the terms agreed upon inthe contract between the insurer and providers. Around the world, provider payment reforms show a move from input- based payment based on the number o f staff and other expenditures, towards output- based payment. Consequently, outpatient providers are paid a capitation amount per person registered with the provider, which can be adjusted by some performance incentives (e.g. for quality of care compliance); and hospitals receive a case-based payment to set them an incentive to increase the number of patients hospitalized. 177. Mostly, social insurancebenefit packagegenerally covers all levels of care in the public sector; and patients are charged co-payments to prevent overuse of pharmaceuticals and medical care (moral hazard problem). Considering the importance of the private sector inthe Seychelles and the lack of tertiary care inthe public sector, it i s advisable for the social insurer to cover inpatient and specialist care in the public and private sector as well as catastrophic expenditures related to treatment abroad. Actuarial cost analysis of the benefit package should be conducted to estimate the future funding needs, adjust the benefit package to an affordable level, and propose a composition of funding from public and private sources that leads to equity in access to care and financially sustainablehealth financing. 178. Health facility directors will need greater autonomy and flexibility to respond to the new financial incentives set by S H I and improve productivity. HospitalandPHC facilities couldbe corporatized as nonprofit autonomous organizations, competing for patients with private for-profit providers. On the regional level, a community oversight body should be formed to supervise the functioning and performance of the PHC center or hospital and ensure transparency inmajor financial and operational decisions. The responsibility and accountability for management and financial decisions rests with the hospital and PHC directors. Management autonomy involves expanding managementresponsibility for key areas including hiring and firing; determining the number of staff and its skill mix based on the MOH guidelines; doing financial management, determining the level and scope o f activities, and deciding on 76 capital developments, the number of beds, and technology mix. This autonomy needs to be accompanied by professional financial management in health facilities with annual financial and performance audits to prevent management failure. Managers must be equippedwith the necessary resources and tools to make decisions, and kept accountable for performance results. 179. Introducing social health insurance will require investments in legislation, regulations, new governance and organizational structures, and information management so as to ensure proper accountability of all actors. The M O H would assume a policy-making and stewardship role, and implement reforms in quality assurance in the provision of care, organization of health facility management, and management of resources including staffing and pharmaceuticals. The government will need a clear vision about what kind of health insurance would be financially and organizationally most feasible in the Seychelles and what the implications would be for the current financing functions. Such a vision and the related strategy should be basedon the overall health policy goals of the sector and taking into account the financial, institutional, organizational, and humanresource situation. Concluding Remarks 180. Ingeneral, the Seychelles does not spendtoo much on health care; however, the way health funds are currently allocated across expenditures categories, does not lead to an efficient production of care. Currently, there appears to be substantial room to reduce cost and improve productivity by reducing the number of staff, examining the levels of salaries paid to staff, reducing non-medical expenditures including for services that have been contracted out to the private sector and by closing overcapacities in hospitals and health centers. The resulting cost savings should be reinvested in the health sector by improving access to specialized and tertiary care for more patients either in the private sector in the Seychelles or at a lower unit cost price abroad; and by investing in the prevention of high-cost diseases. The government is recommended to implement first a series of efficiency-enhancing and cost-reducing measures and revisit the current benefit structure of the social security system with the objective of a possible contribution reduction for social security, before giving any further considerations to Social Health Insurance. Recommendations 181. Basedon the analysis presentedinthis Chapter, the following short- and medium- term measures are recommendedto be implemented. 77 Short-term Reduce inefficiency in health care spending 0 Conduct a comparative cost-efficiency analysis for all contracts outsourced to the private sector (food, laundry, cleaning, etc) and identify less costly private contractors for these services. Instead of each Line Ministry contracting-out similar servicesto private companies; the Government is advised to centralize the contracting-out function for all Ministries at the Department for Public Administration. This would allow negotiating a lower price for a larger quantity. 0 Streamline and consolidate the current 266 job positions to fit into a wage grid, in line with overall public administration reforms; and revisit the levels of salary payments by comparing across different Government functions. Conduct a productivity analysis o fthe health workforce to identify the number of staff neededat a level of higher productivity particularly among health care assistants, ancillary services and environmental/public health staff. 0 Convert the Baie St Anne (Praslin), Logan (La Digue) and Silhoutte district hospitals into triage health centers with approximately 8 beds in Praslin and 4 beds in La Digue mainly for maternity and first aid care, which would allow closing of about 40 beds. Emergency referrals to the Victoria hospital are already assured by air transport. The Victoria hospital i s advised to close about 20 beds on its maternity and female medical ward, and both wards should be reorganized or merged to increase the hospital's ALOS to 80 percent. Inline with the reduction of beds and restructuring of hospitals into health centers, andphasing out o f six health centers, the number o fhealth staff working inthese healthfacilities needs to be reduced. Introduce explicit selection criteria and cost-sharing rules for specialized care overseas Ensure transparency, explicit selection criteria and guidelines for selecting patients and cost-sharing. Consider setting-up a fund to finance overseas treatment, against which patients can borrow money for treatment. Reimbursement by patients to the fund should depend on patients' socio-economic background to ensure equity inaccess. Negotiate an attractive contract with the new private hospital to be opened in Victoria in2009 to allow patients to be treated locally instead of sendingthem overseas (e.g. open heart surgery, renal transplantation etc). 0 To maximize the number of beneficiaries, the Government needs to negotiate a package at lower unit costs inneighboring countries (e.g. Nairobi hospital, Mauritius). 0 Introduce small co-payments on pharmaceuticals and inpatient and outpatient care. 78 182. Reduce inefficiency and abuse of social security system: The Government is advised to revisit the Social Security Act Chapter 225, and implement the recommendations o f the study conducted by the Social Security Fundon the Overview of Sickness Benefits in2008. Inaddition, andbased on the experience from other countries, the following measures are expected to lead to substantial expenditure reductions for direct benefits, reduce social security administrative costs, and reduce the workload on the healthworkforce. First, Social Security should pay sick leave benefits only starting on the 31st sick day with the employer paying the first 30 days per year. Inaddition, the maximumnumber o f sick days should be reduced from currently 130 days to 100 days. Second, eliminate funeral benefits as a direct benefit and the related administration. Third, improve the monitoring o f sick leave by reporting annually the total number o f cases and the average number o f sick leave days per case; request second opinions for sick leave patients who report more than 30 days per year, andfrequent sick leave users. Monitor and evaluatethe flow of funds and performanceof the healthsector 0 Conduct a first National Health Accounts (NHA) and approve a plan to institutionalizeNHA 0 Analyze the impact o f reforms on the performance o f the health sector based on routine data collected in health facilities on utilization rates, occupancy rates and levels o fproductivity Medium-term Clear all local debts and arrears and introduce cost saving measures in communication, transport andhotel expenditures to reduce future debts. 0 Reduce the capital budget to prevent cost increases due to delays in construction andpayment. Improvethe availability of medicalprofessionals 0 Enforce the requirement for Seychellois physicians and dentists to return within an agreed number o f years after having finished University to work at least five years in the Seychelles (public or private sector); or otherwise reimburse the Government for the total amount invested into their University education. 0 Do not allow public physicians to work in private practice while on public payroll, as they will otherwise refer public patients to their private practice 79 0 Introduce a nurse practitioner training program and adjust the job description o f physiciansto delegate designated tasks to nurse practitioners. Invest into better availability of preventivemeasures Ensure access for all population groups to preventive care such as modern contraceptives, cancer screening, early detection o f hypertension and heart diseases, and other life-style diseases. 183. The impact of these reforms should be carefully monitoredand evaluated to identify and correct for possible negative effects at an early stage. Some o f changes currently being implemented may lead to unexpected adverse effects that would have to be corrected, such as inequity in health financing, or substandard quality o f care. To monitor progress and detect negative effects, a monitoring and evaluation framework should be adopted that assesses baseline results before the introduction o f reforms and conducts regular follow-up surveys to measure progress. A baseline could establish results based on surveys on equity in utilization and financing o f health care, patient satisfaction and care seeking behavior, quality o f care and cost and efficiency levels in health facilities. Findings from the baseline could help to inform the reforms and identify progress as well as areas that would need strengthening. Table 38. Summary of Health Sector Implementation Next Steps Implementation Step Timeframe Conduct a comparative cost-efficiency analysis for June 2009 all contracts outsourced to the private sector. Revise out-sourcing contracts as necessary. Conduct a productivity analysis o f the health June 2009 workforce to identify the number o f staff needed at a level o f higher productivity particularly among health care assistants, ancillary services and environmental/public health staff Convert the Baie St Anne (Praslin), Logan (La December 2009 Digue) and Silhoutte district hospitals into triage health centers with approximately 8 beds in Praslin and 4 beds in La Digue mainly for maternity and first aid care, which would allow closing o f about 40 beds Clear all local debts and arrears and introduce cost On-going throughout 2009 saving measures in communication, transport and hotel expenditures to reduce future debts Reduce inefficiency and abuse o f social security January 2010 system(see para 182 for details) Introduce explicit selection criteria and cost-sharing January 2010 rules for specialized care overseas. Conduct a first National HealthAccounts (NHA) December 2010 and approve a planto institutionalize NHA 80 V. EDUCATION Education Sector Context 184. This Chapter continues the analysis of how to achieve short term fiscal adjustment efforts, while maintaining, if not improving, public sector performance, with respect to the education sector. The chapter examines the funding for the sector, room for efficiency and value-for-money improvements and provides some recommendations of how to allocate funds to improve learning outcomes. While the education sector appears to be reasonably well fundedcompared to comparator countries, learning outcomes need to be considerably improved if the Seychelles i s to achieve dynamic andmodemeconomy vision laidout inStrategy 2017. 185. Like health care, the provision of education in the Seychelles is predominantly by the public sector, and centralized with both financing and provision largely in the hands of central government. The Ministry of Education (MOE) operates 29 kindergartens ("crbches"), 22 primary schools and 10 secondary schools. Crbche education covers two years (Crl and Cr2), and the official age range of crbchepupils i s between 3.5 years and 5.5 years. Primary education covers six years (Pl- P6), officially for those between the ages of 5.5 years and 11.5 years, and secondary education covers five years (Sl-SS), for those aged between 11.5 years and 16.5 years. Most schools inthe Seychelles are situated on Mahe, the main island, where 87 percent o f the population lives. At least one school at each level can also be found on Praslin and La Digue, the other two islands with significant year-round populations. There are only three private schools-the International School (the oldest of the three), the Independent School and 1'Ecole Franqaise-all in Victoria, each offering classes from Crl to S5 and together enrolling about 7-8 percent of all students at these levels (approximately 1.4 thousand out of 19.2 thousand students). While not compulsory, government-provided crbche education is free of fees, and participation is nearly universal.58 The Constitution o f 1993 and the Education Act of 2004 guarantees education free o f fees through the secondary level and specifies ten years as compulsory, meaning that students cannot generally leave school before having completed S4. 186. Degree-level tertiary education is not provided in Seychelles, and at some cost to the government, those that are eligible are fully funded to study overseas. Students can sit the Cambridge International General Certificate of Secondary Education (IGCSE) examinations at the end of S5, and performance here determines which students progress to the final two years of academic study at the School of Advanced Level Studies. There are nine post-secondary institutions, and all are government-r~n.~~ Selection o f students for tertiary study (whether overseas or in one of the degree-level programs operated inthe Seychelles inpartnershipwith overseas universities) is basedon 58In2007,the populationyounger than 5 was 7,303 (dataprovidedto thePERteam byNSB), andthe numberof creche pupilswas 2,835 (MOE 2007b). 59Inaddition, there isnow oneprivatepost-secondaryinstitution,the American InstituteofMedicine,anunaccredited institution with tiesto education inthe United States, but it draws nearlyall of its studentscurrently from outsidethe Seychelles. Just two Seychellois were enrolledin2008. 81 student performance on the Cambridge A-level exams. With the exception o f a few small degree-granting programs in some o f the nine linked to overseas universities inAustralia, Austria, Ireland, Kenya, Republic o f South Africa, Singapore and the United Kingdom, post-secondary training inthe Seychelles i s entirely pre-tertiary, offering training only to certificate and diploma levels. For most degree-level education, students must go abroad. A number o f Seychellois (407 as of October 2008) are studying abroad, most o f them with full funding from the Government (or, ina few cases, from the recipient countries) to cover tuition fees, travel and living costs. Figure 19 shows the breakdown o f the overseas training provided. Twenty-five percent o f overseas students were studying in Australia, and 14 percent in the United Kingdom. About three-quarters o f overseas students are recent secondary school graduates who passed the minimum A level grade requirements and the rest are in-service (Le,, within public service) candidates. Most are pursuingbachelor's degrees. Figure 19: Sponsored StudentsStudyingAbroad (N=407) as of October 2008 Receiving Country Pre-Service or In-Service Malaysia-, Kingdom Gender of Students Course Level Doctoral Male Femle Source: Dataprovidedto MOEteamby InternationalRelationsandTraining SectionofMOE. 187. The Ministry of Education has the responsibility for sector policy strategy and management of the provision of education services. An organizational chart showing MOE's structure, which was modified slightly in 2008, is presented in Annex 13. The system i s highly centralized. Thus the government does have the potential to maximize economies o f scale, for example, in the purchase o f text books. However, schools have very little autonomy and virtually no responsibility to manage resources in order to improve learning, which i s likely to impede optimizing resowce-use. 82 EducationOutcomes 188. Compared with other small island states at similar levels o f development we find that Seychelles is doing relatively well interms o f the enrollment rates as shown inTable 37. Recent reviews o f the education sector, however, have raised concerns about quality.60 As Figure 20 shows the results in IGCSE examinations are quite poor, particularly in mathematics. Inthe four subjects shown, exam results were considerably better inthe private sector, establishing a potential benchmark to which the public sector can aspire. In English language, 88 percent o f the 45 candidates fiom this one private school earned grades o f A* and A, while only 10 percent o f the 930 government school candidates did so. In geography, the percentage o f candidates earning either o f the top two grades was 51 percent and 3 percent inthe private and public sectors respectively; in mathematics, 35 percent and 1percent; and inhistory, 25 percent and 7 percent. Clearly private schools are selective whereas the government schools offer comprehensive education. However, there may well be more that the public sector can learn fiom the practices inthe private sector. Table 39: Comparison of EducationIndicators,LatestYear Available. St. Kitts St. Vincent & Barbados Belize Fiji Jamaica Maldives Malta Mauritius Seychelles &Nevis Grenadines Gross enrollmentrate,pre-primary(%) 94 34 16 92 82 97 101 109 99 88 Gross enrollmentrate,primary(%) 103 123 100 95 116 100 102 125 94 97 Gross enrollmentrate,lower secondary(%) 100 87 99 93 124 104 100 116 99 90 Gross enrollmentrate,secondary(%) 102 79 84 87 83 99 88 112 105 75 Net enrollmentrate,primary(%) 96 91 91 90 97 91 95 99 I 1 90 Net enrollmentrate, secondary(%) 89 67 79 78 61 87 82 94 65 64 Girlsenrollmentshare, primary(%) 49 49 48 49 48 48 49 49 54 51 Girls enrollmentshare, secondary(%) 50 51 51 50 50 49 49 50 50 55 Source: UNESCO Institute for Statistics. 6oSee Nolan (2008) 83 Figure 20: Some IGCSEResults,2007 English(2nd language) Mathematics 50% """: 50%j 40%' . . . . . . . 40% ...";. - . __ -- - - - .... ................... .. . . . . .-.........-...... I . 20% 30% t ' ....................... . . . . .............. 10% A * A B C D E F G U 0% * A B C D E F G U -Government -AGovernment-647 candidates .*.*..Private (Independent School) 45 candidates - 930 candidates- . m m - - m Private (IndependentSchool) 45 candidates - Geography History oo/oa ........ _ _ .......... 2 o q, .- a / - > ' - '. - 1OYOl e.... .,,.*..*.** ............... . . . . . 0%' , ._.__.._..,-,__ . , ~ A * A B C D E F G U A * A B C D E F G U -Government ' m ' s ' ' Private(IndependentSchool) 45 candidates - 358 candidates- -Government - 167candidates "...'Private (Independent School) .24 candidates Source: MOE (2008) EducationSpending 189. Total public education spending is around 5 percent of GDP. Ministry of Education (MOE) expenditure has ranged between 3 percent and 4 percent o f GDP between 2004 and 2007; and it fell fiom 10 percent to 7 percent of current primary expenditures over this period. Including capital spending on education and other education spending (e.g., education bursaries and foreign exchange payments for overseas tuition fees) education is about 9 percent of total government spending and 5 percent of GDP. 190. A comparison with a selection of other small island countries suggests that total public education spendingas a share of total government spending is on a par with comparators. This is despite the fact that education in the Seychelles is predominantly publicly provided and free of user costs and the fact that total government spending is unusually high (50 percent of GDP). Household expenditure surveys show some private spending on education - which amounts to an additional 1percent of GDP (SR 61 million by all households in 2007), and this brings total (public plus private) spendingon education to about 6 percent of GDP (Table 40). 84 - Figure 21: MOE Spendingon Education,2004- Figure 22: Public Spending on Educationin 2007 Small Island Countries (latest availableyear) % St. Kitts & Nevis St. Vicent & Grenadines +% loo 8 0 I ofcunent Malta Pnrrari Maldives 6 0 '-\ +%oftotal Fiji govt Barbados expenditure Jamaica 4 0 : -4-%ofCDP 2 0 1 Mauritius 111 AS% o f C3lP 00 1 SEYCHELLES (all govt) uxli ZOOS Mo6 2W7 SEYCHELLESWOEonly) ~ . - . ~ 0 5 10 15 20 25 Source: Ministry o fEducation Source: UNESCO Institute for Statistics 191. Giventhe relativelymodest,and recentlydeclining,government expenditures on education, we do not recommend any major cuts in government spending on education. Despite the fiscal situation at this time and an acknowledged need to reduce total government spending, we do not recommend increased spending but we do recommend making needed improvements in efficiency and using these resources to tackle the problem of learning outcomes. Recalling the literature on public education spending on growth, we recommend ensuring that the public investment in education becomes more productive with a focus on outcomes for the longer-term growth strategy of Seychelles. Table 40: Total EducationSpending, 2007 1. Recurrentexpenditures 282 (a) Spendingby MOE 190 (b) MOF subventionsto educationinstitutions/a 10 (d) Spendingby SSF ontransportationsubsidiesandpost-secondarybursaries 18 (e) Spendingby MOF on overseas tuitionandstudentbursaries 65 2. Capitalexpenditureby MOF onprojects for education 25 As percent of government capitalspending 7.4 3. Totalgovernment spending on education 307 4. Householdspendingon education(estimatefromNSB) 61 5. Totalpublicandprivate spendingoneducation 368 As percent of GDP 6.0 Sources: IMF (2008), MOE, MOF, SSF andNSB Nofes: a/ This is to Seychelles Institute o f Management and Seychelles Qualifications Authority. 192. Government education spending is principally on personal emoluments for school-basedstaff. MOE spending in2007 totaled SR 190 million, 60 percent of which was spent by the Schools Division to cover the personal emoluments o f crbche, primary and secondary school teachers. Around 16 percent is allocated to Technical and Further Education (TFE), from whose budget post-secondary salaries are paid. Personal emoluments account for the vast majority of MOE's budget (79 percent) as shown in Table A14-1 in Annex 14. The Finance, Administration 8z Personnel Division accounts 85 for around 16 percent of MOE spending. Giventhe structure of the budget, it is possible to allocate SR 139 million (73 percent) of MOE's expenditure in 2007 to the specific levels of education and post-secondary institutions, as shown in Table A14-2. The remaining SR 51 million (27 percent) cannot be tied to specific levels or institutions, and for computing unit costs, therefore, these "overhead" expenditures are allocated on a pro- rated basis according to the allocations of direct spending. 193. MOE spending accounts for only about two-thirds of total government spending on education in the Seychelles. In 2007 a further SR 64 million was spent directly from the budget of the Ministry of Finance (MOF), to pay the tuition fees, travel and living expenses of tertiary students studying abroad; SR 18 million was spent by the Social Security Fund on education-related benefits; and SR 25 million was spent on education capital projects from the MOF budget. Figure23: EducationExDenditureDer Student. 2007 AU tertiary (post-secondary +overseas) overseas Sey Institute ofTecholoey School of Advanced LevelStudies SeychellesTourismAcademy NattionalInstitute ofHealth& SocialScience MaritimeTrainingCenter NationalInstituteofEducation Seychelles Polytechnic Agricultural& HorticuturalTrainingCentre Post-secondary secondary Primary (includingcreche) 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 SR Source: MOE 194. Total unit costs vary considerablyacross levels of education, and particularly at the post-secondary level some institutions are more cost-effective than others. Combining recurrent costs across the public budget and allocating these to levels of education gives us a good idea of unit costs. The per student cost o f overseas tertiary- level training is considerably higher than that at institutions based in Seychelles. The average per student cost of overseas study is approximately SR 99,655 per annum (approximately US$ 12,500 in 2007 prices) for tuition fees and an additional SR 58,964 (US$ 7,400) for the bursaries that cover the students' travel and living expenses. (See Table Annex 14-3 for more details o f unit costs). O f the post-secondary institutions based in Seychelles there i s also considerable variation in unit costs, ranging from the Seychelles Institute of Technology (SR 51,263 per student) to the Seychelles Agricultural andHorticulturalTraining Center (SAHTC) (SR 15,960 per student). 86 195. Comparing across the systemwe find that the unit costs are only fractionally higher for secondary than for primary levelschooling. This is giventhat considerably more instructional materials and qualified staffing inputs are generally required in secondary education shows that the unit fiscal cost of secondary education is only 10 percent higher thanthat of primary education, while the costs of domestic post-secondary education and overseas study are three and twenty times higher. Tertiary education (the weighted average of domestic post-secondary education and overseas study) is six times higher. Figure 24: Unit Fiscal Costs as Percentage of Figure 25: Unit Fiscal Costs Selected Countries UnitFiscal Cost ofPrimary Education 2007 (latest available per year) ` I Overseas GDPpercapita Kenya , 3Tertiary Teltmy (post-sec+overseas) Swanland Secondary 1 Botswana 7- Post-secondary South Afnca Primary Lesotho I Secondary 1 . 1 ` t l 0 50 100 150 200 250 300 350 4 I . I 1 0.0 5.0 10.0 15.0 20.0 25.0 Unit FiscalCosts as Percentages ofCdlP perCapita Source: MOE, WDI Source: World Bank (2005) 196. Comparedwith several other countries inthe region, the ratio of the tertiary- level unit cost to GDP per capita levels is not high. To compare the Seychelles with other countries, unit fiscal costs can be "standardized" by expressing them as a percentage of GDP per capita. By comparison with small African states such as Lesotho and Swaziland, which also rely heavily on overseas tertiary education provision, the relatively high tertiary level unit costs in Seychelles are less pronounced. South Africa andBotswana show similar relativiteunitcosts, although at a lower GDP per capita. 197. While unit costs are not way out of linewith comparators, there is room for improving value for money in both the overseas program and in local post- secondary school institutions. Inthe case of the overseas program, we agree with the government's plans to further focus government resources on supporting training in key sectors such as health, education, financial sector and tourism. We also recommend that greater scrutiny be levelled at whether or not students are returning from overseas and that the bonding mechanism ensuring the repayment o f fees if students do not return be strengthenedand enforced. Inthe case o f the post secondary institutions inSeychelles, a benchmarking of unit costs shows that there are considerable improvements possible in some institutions to bring unit costs down. There is also scope for better alignment of the resourcesdedicatedto these institutions withthe government's longer term strategy of having a workforce geared toward management intoursm, financial sector and off-shore services. One possibility is to consider sharingadministrative costs across more than one post-secondary institutionto make greater use of economies of scale. This could involve 87 bringing the institutions (back) under a single administration or, in view o f plans now being developed by the Seychelles University Foundation for a national university, developingthe schools as faculties or departments o f a future university. 198. About 10 percent of the education budget is spent annually on education benefits in the form of bursaries and transportation subsidies. Primary (including crbche) and secondary students living more than 3.5 km from their schools are entitled to free bus passesto use the Seychelles Public Transport Company buses. These are funded by the Social Security Fund, which transfers the funds to the public transport company, which then provides the bus passesto the MOE. All post-secondary students also receive transportation subsidies giving them free travel .between their homes and where they study. Furthermore, despite the fact that the majority o f the direct costs asscoiated with continuing education i s covered by MOE, post-secondary students receive bursaries- ostensibly to offset the private costs o f their study (foregone earnings plus any direct costs they might incur). Ineffect, these students are being paidby the taxpayers. 199. We recommend reconsideringthis approach and phasing out non-targeted education subsidies and replacing them with needs-based scholarships. From an equity point o f view the transportation subsidy at the post secondary level i s not well targetted since the subsidy i s given universally and since, in general, post-secondary education is better accessed by the middle-classes. Table 41 summarizes the recommendations and indicates the potential budgetary savings. In addition, to greater use o f co-payments (see next section) we recommend replacing the current system with a needs-based scholarship program to assist overseas students (who have already met the merit criteria) and who demonstrate an inability to meet increased cost-sharing obligations-in effect, allowing the bursary and tuition payments to vary between 0 percent and 100 percent o f current levels but equaling a 19 percent reduction in costs over current levels on average. 200. Capitalspendingin educationaccounts for about 8 percentof totaleducation expendituresand fluctuates significantlyfrom year to year. The separation o f capital and recurrent budgets means that these investments are not necessarily driven by maximizing education outcomes. Furthermore, the strong link between capital projects and the existence o f an external donor often drives the choice o f capital project. We recommend instituting a system withinMOE to prioritize capital projects. This should be based on an assessment o f critical rehabilitation and maintenance needs firstly and should take due consideration o f student number projections and the potential to share resources across schools so as to maximize beneficiaries. Principles o f cost effectiveness and cost benefit analysis should be applied. 88 Table 41: Recommendationsfor EducationSubsidies Total Proposed amount annual in 2007 budget (SR savings Subsidy Recommendation Timing million) (SR million) Bus subsidies for Leaveat current January 2009 2.3 primary and levels, even ifbus secondary education fares go up inthe students future Bussubsidies for Eliminateintwo steps Leave at current levels in 5.0 5.0 post-secondary 2009 students Eliminatein2010 Bursaries for post- Grandfather students Reduceper student 10.5 4.6 secondary students entering in2009 at amount by 25 percent in current levels. 2010. Reducevalue by 44 Reduceper student percentby 2011 amountsby a further 25 percent in2011. Bursaries andtuition Grandfather existing Reduceper student 64.6 12.3 payments for students in2009 at amounts for students overseas students current levels. starting in2010 by 10 Target 19percent percent reductiononaverage Reduceper student through introduction amounts for students of co-payments and starting in2011by a choice oftraining fixther 10percent. program. " Total annualsavings when all recommendationshavebeenfully implemented 21.9 Source: Bank staff estimates 201. Based on our analysis of efficiency and equity in the sector, we find that major reallocations in government spending on education would achieve greater "value for money" in the sector. The unit cost analysis provides a basis for examining whether Seychelles i s getting good value for money for its education investment. Certainly, at the post-secondary level there are a number o f institutions that are expensive to run but that do not provide training in the economic sectors prioritized in Strategy 2017. At the same time the much lower unit costs for secondary education and academic post-secondary education are inline with the general observation that vocational training is generally more expensive, yet even here there i s considerable room to improve learning outcomes for this investment as we have seen above. Over time, increased total spending may be warranted, but certainly at the present time, this should not rely on increased government spending. Greater cost sharing, together with better targeting o f government subsidies to reflect socio-economic differences on the part o f students, will be needed to raise the quality (learning outcomes) and relevance (labor market outcomes) o f Seychellois education. The remaining analysis will focus on a number o f specific ways andmake recommendations that couldhelpthe country to meet these goals. 89 Co-Payments and Cost Sharing 202. Some level of cost-sharing (private financing) could address differences in government subsidies between students and other population groups; and also between students at higher and lower levels of the education system. At present, except for those attending the three private schools inVictoria, nearly all costs of study in the Seychelles are financed by the Government. Some degree of cost-sharing could also render the education system more efficient than it is at present. When students are investingsome of their own resources, their incentive to learn is greater, particularly at higher levels of study, and they are more likely to seek training in skills that are valued by the economy. Many educators and government officials interviewedfor this study were of the opinion that students who pay practically nothing at all for their education today fail as a result o f not valuing their education adequately and that they are prone to making ill-considered decisions (e.g., on what to study and when to stop studying), resultingina less thanoptimal allocation of scarce public resources. 203. W e recommend a sharing of costs in those areas where subsidies will be reduced and also the introduction of a co-payment for examination fees. Inaddition to the subsidies already discussed, a proposal i s made to introduce some modest cost- sharing to help cover the fees (now paid in full by the government to Cambridge International Examinations in the UK) for students to sit the IGCSE and A-level examinations. Enrollment Trends 204. The total student population has been relatively static over the last 4 years at around 21,000 students shows the number o f pupils in crikhe, primary and secondary education in the five years between 2004 and 2008 by level and grade. The diagonals shown are sample cohorts moving their way through the system. Sometimes we find more students inone grade than were enrolled a year earlier inthe prior grade, suggesting either that there i s repetition inthe system or that some studentstransfer into the system, perhaps arriving inor returningto the Seychelles from abroad.61 Table 42: School Enrollments (including Private School Enrollments) by Level and Grade, 2004-2008 Y O Academic year change Grade 2004 2005 2006 2007 2008 2004-8 Creche 2,812 2,833 2,823 2,835 2,923 3.9 Primary 9,504 9,173 8,9 10 8,998 8,744 -8.0 P1 1.1 P2 -5.9 P3 -8.8 P4 -9.7 P5 -16.0 6'The Ministry has a policy of "automatic promotion" and claims that little or no repetition exists. 90 P6 1,679 1,546 1,577 I I -7.2 Secondary 7,827 7,852 7,756 7,852 7,542 -3.6 s1 -3.8 s2 -10.5 s3 -2.2 s4 3.0 s5 -4.0 Source: MOE 205. Relatively large numbers of students leave the system ("drop out" to start w o r k or enter a certificate course in one of the post-secondary institutions) at the end o f secondary level form 4. S4 marks the end of the compulsory 10-year education cycle inthe country. To have students leave secondary education after S4, just one grade before they become eligible to sit the IGCSE examinations, i s not a natural breaking point. Nolan (2008) has argued for a restructuring of the education system as summarized inBox 4.62 Box 4: Nolan Recommendations for Restructuring the Secondary School System Dr. Nolan, a Special Advisor on Education to the President o f the Seychelles, in his 2008 report recommended that: (a) by 2012, the existing five-year program plus the additional two years at the "A" Level school be replaced by a common six-year secondary school program, to be offered by each o f the ten (10) Secondary Schools, which would get "added value" fi-om the number o f teachers already inthese schools who are qualifiedto teach beyond S5 level, but who, to date, have not had the opportunity to teach beyond that level, (b) the sixth year (S6) be regarded as a Pre-University Year, aimed at raising the entry standard for hture Seychellois students entering the University o f Seychelles, or Universities and other third- level institutions overseas, or entering employment inthe public and private sectors inSeychelles, (c) the five-year and a six-year comprehensive program eventually be reduced to a five-year Secondary School Cycle. Inother words, Dr. Nolan's proposal calls for a reduction inthe length of the post-primary cycle fi-om seven years (Sl-S5 followed by the two-year A-level course) to six years (Sl-S6) in step 1, and then, in step 2, to five years (S 1-SS). According to his proposal, students would continue to sit for the Cambridge IGCSE examinations (or a national examination introduced to replace the IGCSE) at the end o f S5, and Seychellois students would no longer sit for the A-level examinations. Givenconcerns at present about the average performance o f Seychellois students on both the IGCSE and A-level examinations, Nolan's proposal to reduce the number o f years between primary education and (for those who qualify) tertiary education deserves some careful further research and debate. Nolan(2008) 91 206. Whether or not secondary education is reduced in length, there is a strong argument for introducing a break in the cycle after S3 and marking a transition between what might be called "junior" and "senior" secondary education. This would require a redefinition of the 10-year compulsory education cycle mandatedunder the Constitution, perhaps making Cr&che2 (Cr2) the first year of compulsory education. It would probably also require the introduction of a (national) examination at the end of the S3 year. Table 43 shows post-secondary enrollments over the five-year period between2004 and 2008. The analysis is complicated by the fact that several institutions were redefined and/or renamed during this period, including bringing some that came under the authority of other line ministries (e.g., the Ministry of Health and Social Services in the case of the National Institute of Health and Social Science and the MinistryofEnvironment, NaturalResourcesand Transport inthe case of SAHTC) under the umbrella of MOE. In addition, some study programs were moved from one institutionto another. For example, several technical subjects were moved in2006 from the Seychelles Polytechnic to the Industrial Training Center, which became the Seychelles Institute of Technology. Table 43: Enrollments by Level and Institution, 2004-2008 YO Academicyear change 2004 2005 2006 2007 2008 2004-8 CrBche, primary and secondary 20,143 19,858 19,489 19,685 19,209 -4.6 Post-secondary 1,655 1,837 1,931 2,217 2,130 28.7 Seychelles Polytechnic 389 421 329 311 287 -26.2 BusinessArea 154 174 193 181 172 11.7 VisualArts a/ 112 106 136 130 115 2.7 TechnicalArea b/ 123 141 48.7 Seychelles Institute o f Technology c/ 261 343 494 567 571 School o f Advanced Level Studies d/ 279 292 339 ,375 369 32.3 National Institute o fEducation 204 223 243 274 231 13.2 Maritime Training Center 55 58 72 97 103 87.3 SAHTC 54 58 59 59 57 5.6 Seychelles Tourism Academy e/ 211 275 259 330 301 42.7 National Institute o f Health & Social Science 202 167 91 168 151 -25.2 International School (A-level students) 45 .- 36 - _ 60 _ _ All levels 21,798 21,695 21,420 21,902 21,339 -2.1 Source: MOE(2008) Notes: a/ Before 2006, operated as separate institution (National College o f the Arts). b/ Transferred to Seychelles Institute o f Technology in 2006, c/ Name changed in 2006: formerly known as Industrial Training Center. d/ Before 2006, operated as division o f Seychelles Polytechnic. e/ Formerly known as Seychelles Hotel & Tourism Training Center. 92 207. T h e observed trends in enrollment reflect both demographics (fluctuations in cohort sizes in the case of crkche, primary and secondary education) and market demand (fluctuations in the popularity of different post-secondary courses). In general, post-secondary education was the biggest education "growth sector," with Figure 26: School Enrollments by Cycle (Sub-Level) of - enrollments across the nine Education,2004:2008 post-secondary institutions 7,000 +C.2 P3-P6 rising by 29 percent over (-10.5%) the five-year period. While 6,000 --CC.3: S143 enrollments at the Maritime (-5.6%) Training Center and School +C.l@): P1- o f Advanced Level Studies P2(-2.6%) grew by 87 percent and 49 3,000 percent, respectively, between 2004 and 2008, (+3,Yh) growth at SAHTC was not quite 6 percent. Creche 1,000 --+C.6: Pst-sc. 2ML1 2005 2006 2007 2008 (+28.7%) enrollments also grew, Source: MOE reflecting higher labor- force participation rates, which now approach 100 percent, but also the fact that children born inthe early years o f the new millenniumcomprised an unusually large cohort with the result that these children reached the age o f creche entry between 2004 and 2008. O n the other hand, primary and secondary school populations declined between 2004 and 2008, by as much as 10.5 percent inthe case o f "cycle 2" (P3-P6). These differences can be seen inFigure 27 which shows changes projected for the next five years (2007-2012) o f different school-age population^.^^ Figure 27: Projected Growth of School-AgePopulationCohorts, 2007- 2012 20.0 315 0 Ee%lo0 v ` e, 5 0 s 5 89e, 00 Ages 0-4F're- Ages 5-9Pnmary Ages 15-19Post- Ages 20-24 $-50 schl (population sec Univenrty s bulge) u*lo 0 -150 Age cohort and approx correspondmgeducationlevel Source: NSB 63These projections are based on a recent study by the NSB that updated earlier estimates reflecting the results o fthe 2002 population census. The "population bulge" that hit crtche education earlier inthis decade will now beginto affect primary education. Interestingly, this unusually large cohort follows an unusually small one that affected primary education in recent years and will now start to affect secondary education. 93 208. There is considerable regional variation in student population growth with implications for demand on regional schools and resources. Figure 28 shows that, while the pre-school (0-4 years) age population is projected to grow quite slowly on average (by 2.1 percent) over the next five years, there is likely to be significant variation across the country's 26 districts. At the two extremes, both o f which districts happen to be within the same geographic zone (Central Mahe), projections show that the pre-school age population of St. Louis will drop by nearly 11 percent whereas that o f Mont Buxton will grow by over 82 percent. 209. New demographic patterns and changing preferences need to be factored into MOE planning and resource allocation decisions. For example, the Ministry will need to have more flexible arrangements to shift teachers and other inputs between institutions so as to avoid the emergence of inefficient allocations. While achieving this should not require an increase inthe budget for education, it definitely requires foresight andpolitical will to adapt to trends particularly ifthis leads to downsizing institutions in some areas. Figure 28: ProjectedGrowth in 0-4 Year Age Cohort by District, 2007-2012 100% 40% - 20% Note: CM=Central Mahe, EM=EastM,NM=NorthM, WM = West M, LD= La Digue, P =Praslin. 210. To improve the flexibility of education staff, adapting pre-service and in- service teacher training programs run by the National Institute of Education (NIE) i s recommended. The first curriculum change would involve a new requirement that all new students training to be certified as secondary school teachers qualify in at least two subject areas (a major subject and a minor subject specified in each trainee's study program) in order to give secondary schools more flexibility in drawing up timetables and to ensure that all teachers carry full teaching loads. Single-subject teachers already teaching in schools would be encouraged to add a second subject through in-service training. The second curriculum change would involve an opportunity for those training to become primary school teachers to study multi-grade teaching methods which, while not needed inmany primary schools, would be useful for those teaching in more remote schools with smaller class cohorts. The introduction or improvement of multi-grade 94 teaching in these schools should prove cost-effectiveness, and some observers argue for multi-grade classes even in schools with adequate-sized age cohorts in light o f international research showing that younger students benefit from exposure to and help from older students, while older students are not held back. The up-front costs o f curriculum change at NIE would not be great, but technical assistance might be needed, and international donor(s) should be sought to provide this on grant or concessional loan terms. 211. The teacher compensation package should be amended to encourage flexibility. To encourage new as well as existing teachers to acquire the desired attributes (such as qualification intwo or more subject areas, multi-grade teaching skills, as well as qualification insubject areas currently inshort supply e.g. mathematics and the physical sciences), the DPA and MOE should work together to design and implement effective incentives. An obvious incentive would be to reward teachers with the desired attribute(s), by placing them at a higher point on the civil service wage grid for example. This reform could be budget neutral if attention were given to ensure the reverse - that teachers without the desired attribute(s) are placed at a lower point on the grid or even, given notice, declared redundantifthey do not, within a reasonable time period, upgrade themselves inways specified by MOEmanagement and school heads. Productivity of Education Staff As with most educationsystemsworldwide, staffcosts dominatethe budget ofMOE. 212. Table A14. 1 in Annex 14 presents the expenditure on personal emoluments by division and section in 2007. Any effort to improve the efficiency o f government spending on education must look at staffing issues to see how teachers and other workers are being used and whether staff reallocations and/or reductions can lead to efficiency gains. Ofthe total number o f MOE staff (2,821), 71 percent are classified as instructional staff-teachers, lecturers, ancillaries and others who, in their current jobs, are in regular direct contact with students in classrooms. The remaining 29 percent o f staff are either office staff (administrators, accountants, secretaries, and messengers) or support staff (cleaners, maintenance workers, kitchen staff, watchmen, security guards and school wardens). The average monthly salary varies across and within these three groups, but office workers are the highest paid on average, even though many secretaries, clerks, messengers and low-level office staff earn below the ministry average. Included also in this broad category are senior administrative workers, who in many (probably most) cases are former teachers promoted out o fthe classroom. 213. Student-teacher ratios are low in the Seychelles, ranging from 9.9 in post- secondary institutions to 14.2 in cr&ches. L o w ratios are common in small island countries, but Seychelles i s still at the low end o f this spectrum. Figure 29 shows student-teacher ratios in a sample o f other small island countries. Mauritius reports student-teacher ratios inprimary and secondary education o f 22:1 and 17:1respectively - which i s significantly higher than those observed currently in the Seychelles (13:l and 14:1,respectively). 95 Table 44: MOE Staffing, 2008 Staffing Payroll Average Salary. Yo of Yo of SR YOof Per Month Num. total Group `000 total (SR) Instructional staff 1,991 70.6 100.0 8,72 1 74.2 4,380 Teachers, lecturers 1,533 54.3 77.0 7,227 61.5 4,714 HeadTeachers, principals 51 1.8 2.6 372 3.2 7,285 Ancillary teachers, lab technicians, librarians, etc. 407 14.4 20.4 1,123 9.5 2,759 Office staff 410 14.5 100.0 1,957 16.6 4,774 support staff 420 14.9 100.0 1,082 9.2 2,575 Maintenance staff 113 4.0 26.9 296 2.5 2,6 17 Cleaners 202 7.2 48.1 501 4.3 2,482 Cooks, kitchen staff 14 0.5 3.3 45 0.4 3,214 --- Drivers 15 0.5 3.6 41 0.3 2,741 Watchmen, securityworkers 37 1.3 8.8 97 0.8 2,612 Schoolwardens 39 1.4 9.3 102 0.9 2,613 Total 2,821 100.0 -- 11,760 100.0 4,169 Source: MOE Figure 29: Student-TeacherRatios in Small Island Countries (latest year available) B e h I-- Mauntius Cyprus St Vincent and Grenadines7 Barbados smCHEm'- Malta -...________+- -1 0 5 10 15 20 2s m P m r y Secondary Student-teacher ratio Source: UNESCO 214. Increasing student-teacher ratios should be goals for the medium-term, but emphasis inthe short-termshouldbe on upgradinginstructionalstaff performance. Student-teacher ratios are especially low in primary education. Ordinarily we would expect to find higher student-teacher ratios inprimary than in secondary education. The ratios are also particularly low inpost-secondary institutions. However, inthe short term, given the low education outcomes observed we would caution against introducing policies that would reduce the number of instructional staff and, instead, introduce measures that include incentives for teachers to upgrade their skills. Also, greater attention should be given to the performance of teachers and to greater autonomy, 96 including measures that would allow schools to encourage less productive teachers to leave the system. 215. Seychelles has recently introduced ancillary teachers to assist regular classroom teachers in the youngest classes (Crl-P2). We encourage MOE to undertake rigorous monitoring and evaluation (possibly through use of case studies and comparative surveys) of the initiative to determine whether this policy improves learningoutcomes. Table 45: Student-Teacher Ratios, 2008 Level of education Students Teachers Ratio Creche 2,923 206 14.2:1 Primary 8,744 670 13.1:l Creche andprimary 11,667 876 13.3:l Secondary 7,542 547 13.8:l Post-Secondary-Polytechnics 11 326 34 9.6:1 Post-Secondary-other /1 1,906 175 10.9:l Source:Bankstaff estimates Notes: 1Data are for 2007 216. Improved productivity of the workforce would therefore concentrate on reducingthe numbers of office and support staff. MOF and DPA have targeted an across-the-board 12.5 percent reduction in staff under the VDS. Given the current staffing of MOE this should be concentrated in the office and support functions. The numbersof office and support staff seem quite highas compared with instructional staff. In 2008, three out of every ten workers in MOE have no classroom duties currently (although many office workers in administrative positions were probably classroom teachers earlier intheir careers. Table 46 presents our recommendations on where to cut staff inMOE. Table 46: Proposed Reductions in Office and Support Staff 217. Office staff are C h ~ e n t Proposed Average proposed to be cut by staff new salary per 12 staffing. . percent, in line fSR) month with the government- Instructional staff wide target. With \---I 1,99 1 1,99 1 4,380 Office staff (12.5 percent reduction) 410 359 4,774 respect to support Support staff (78.6 percent 420 91 2,634 staff, the ction) Maintenance staff (contract out) 113 0 recommendation i s to Cleaners (contract out) 202 0 contract out all Cooks, kitchen staff (contract out) 14 0 maintenance, cleaning Drivers 15 15 2,74 1 andkitchen staff to the Watchmen, security workers 37 37 2,612 mivate sector. The School wardens Total 2,82 1 39 2,44 1 39 2,6 13 effect o f the Source: Bankstaff estimates 4'373 employment reduction i s estimated to be SR 13 million per annum saved from the wages and salaries bill. O f course, to hire in maintenance, cleaning and meal services from the private sector would result inincreases in "goods and services" spending but, as arguedinChapter 3, this can lead over time to substantial savings and flexibility for the government. Although the cost o f procuring 97 these services from the private sector cannot be known in advance with certainty, the working assumption reflected in the table is that the same levels of service will initially cost 20 percent less and hence net savingswould be SR 5.0 millionannually, or 4 percent ofthe current payroll budget. School Autonomy 218. Increasing school autonomy is recommended in order to encourage greater oversight of funds and responsibility for efficiency improvements in the education sector to the first-line level of service delivery. This i s in line with the government's own plans for schools to be "given greater autonomy from central government, reducing bureaucracy and fostering a greater sense of school ownership amongst staff, students andparents. Inaddition, schools will be encouragedto seek private sector expertise and funding to enhance their education provision.yy64Recent talks among the Department o f Public Administration (DPA), MOF and MOE have identifiedsteps neededto implement this policy. Inpractice, school autonomy means that a part of MOE's budget allocation in the future will be deposited into school bank accounts and be used by local school administrators for on-time procurement of approved categories of school inputs. Certainly, for example, the contracting out of maintenance, cleaning and meal services, discussed above, could be entrusted to individual institutions rather than procured centrally. To oversee the use of funds, school boards of governors should be elected by parents, teachers and other community members. Addressing Quality of Education Concerns 219. As discussed above, there is considerable concern with respect to the quality of basic education in Seychelles as evidenced by the relatively poor examination outcomes. At present, the curricula for primary and secondary education seem crowded. There are 11 core subjects in primary education65and 14 in secondary education.66. Streamlining the two curricula would increase the focus (time given) to core subjects, including mathematics, languages and the sciences. This should improve quality o f learning in core subjects and reduce the need for specialized teachers, especially in secondary education, which results inthe low student-teacher ratios. There is a particular concern with respectto mathematics and the sciences, since poor instructionleads inturn to unacceptably low levels of learning on the part of students, who end up fearing and avoiding these subjects. As a result, of those who decide to become teachers, too few choose to specialize in mathematics and the sciences, and so the circle repeats itself. 64Republic of Seychelles(2007) 65English(7-8 periodsper week, dependingon the class (PI-P6) inprimary), Creole(4-8), French(3-9, mathematics (7-8), science (2-3), personalandsocialeducation(3), art and music(2), physicaleducation(2), religion (2), technologyenterprise(2), social studies(0-3). 66Requiredsubjectsin SI-S3: English(6 periodsper week), French(9,mathematics(6), combined science (6), geography (3), history(3), technicalenterprise (2), ICTandarts (2), personaland social education(2), physical education (2), religion (3).Requiredsubjects inS4 and S5: English(9,French(4), mathematics(6), combined science (4), coordinatedscience (8), personalandsocialeducation(2), careers (I),physicaleducation (2), religion(2). Optionalsubjects inS4 and S5: geography(4), history(4), technicalenterprise(4), ICT andarts (4). 98 MOE recruits expatriate teacher^,^^ but these teachers do not usually stay in the country for more than one or two years. Moreover, even with expatriate recruitment, good teachers of mathematicsand the sciencesare the most difficult to attract. 220. A strategy is needed to retard and reverse the mathematics and science teacher downward cycle. One policy option to consider is to develop, in consultation with NIE, a program of master teachers, whereby the best specialists in these subject areas in the Seychelles, whether in MOE, elsewhere in government or in the private sector, are mobilized to design and deliver lectures aimed at students in different classes inprimary and secondary education. NIE would record these lectures and make them available to schools on C D S . ~Inexperienced or less qualified teachers of these subjects ~ would help students to understandthe lectures and complete follow-up assignments, and in so doing, these teachers' own skills would grow over time, until at some point the recorded lectures would no longer be needed. This strategy is relatively "low-tech" and would not be expensive, although some investment might be neededto place CD players andor ensure intranet connectivity in all schools and also to compensate the master teachers, at least those from outside the Government. The recurrent costs (for example, CDs and maintenance o f the system) would be small compared with the much higher costs of recruiting large numberso fnewteachers from the private sector or from abroad. Private Education 221. One strategy to increase private spending on education is to increase the number and student coverage of private education providers. As indicated, at present only three private schools operate in the Seychelles. Figure 30 shows private and government enrollments by grade in crkche, primary and secondary education in 2008. Private education accounts for only 8 .percent of enrollments in crbche and primary, and 6.5 percent in secondary. To ease the burden o f education and training on the budget, GOS may want to consider incentives to attract new private providers, at the academic levels where they now exist and also invocational and technical education and training at both the secondary and post-secondary levels.69Attracting private providers does not obviate the Government's responsibility to assure quality and help consumers to make informed decisions inregardto the selection of education andtraining programs. 67In2008, approximately15 percentof secondaryschoolteachersare non-Seychellois, with the largestnumbersof expatriate teachers recruitedfrom Kenya(5 percentof all secondary school teachers) andfrom Uganda, India(3 percent), and Sri LankaandUganda(2 percent each). Alternatively, the lectures couldresideon a server inVictoria., makingit easier to updateand revise them, and schools could access them via anMOE intranet 69SomeprivateVOTECH establishments, for example, inICT and foreign languagetraining, do exist inthe Seychelles, but asurveyof this sub-sectorwas deemedto outside the scope of this PER. 99 Figure 30: Enrollmentsin Public and Private Schools by Level and Grade, 2008 1,800 1 1,600 Private (Independent Sch, International ~ 1,400 1I I Sch, &ole Francaise) 1,200 1 1,000 I 800 Government (32 creches, 25 600 , 1 primaryschs, 13 400 secondary schs) 200 ~ 0 i I l l CllC2 P1 P21P31P41 P5 P6 S1 S2i S31S4'S5 Creche Primary Secondary Source: MOE2008 University (Degree-Level) Education 222. InJune 2007, President Michel announcedthat he was setting up "a foundationto create a Seychelles University comprised o f local and international partners to develop a high-level institution o f training for Seychellois, as well as foreigners." The establishment o f the Seychelles University Foundation, together with a Cabinet decision inAugust 2007 according to which government ministers agreed to contribute one day's salary per month to help finance the costs o f the Foundation, indicates that the creation o f a university is seen as a high priority by the government. The plans are driven, not just by national pride, but also by a desire to reduce the large amount now spent from the budget to support Seychellois pursuinguniversity degrees overseas. 223. We recommend a cautious approach and gradual process toward establishment of a national university. In light o f the nation's very small population, certain caveats are called for to ensure that the costs o f this new initiative do not escalate out o f control. The national university should begin as an affiliated college o f an established overseas university-one carefilly selected and demonstrating willingness to be a serious partner. For the foreseeable fiture, the degrees earned by those studying at the national university college would be awarded by the overseas partner institution. When it first opens its doors, the college should offer degrees in a limited number o f high-priority study areas, this number to be increased only when the success and cost- effectiveness o f the initial programs have been clearly demonstrated. To the extent possible, the college should make use o f distance teaching methods, including correspondence, recorded lectures and video-conferencing. This places the responsibility for success on individual students. The likelihood that graduation rates will be (a lot) lower than they have been for students studying abroad needs to be acknowledged, but the potentially (much) lower unit costs couldjustify the difference. 100 224. Studentsat the college should pay the full cost (or a substantial portion of the full cost) of their education, but as with the overseas training, needs-based scholarships should be offered to ensure that poor but deserving students are not barred from study becausethey cannot afford the fees. 225. For students at the new institution (as well as those studying abroad) who still have difficulty covering the direct costs of their study, the government might consider a program of student loans (and pilot the program before bringing it to scale). To be sustainable, however, and to avoid the creation o f a new but hidden subsidy, the loan program should charge market rates of interest. Moreover, loans should be given only to those backed by credible (credit-worthy) guarantors, and the earnings or pensions of the guarantors must be subject to automatic deductions (no exceptions) in the event of loan non-repayment. Inlight of the unusually good information on individual earnings inthe Seychelles, with every individual assigned a unique universal identification number, and also given the efficient operation of the Social Security Fund, it might be possible to consider the creation of an income-contingent student loan scheme for the Seychelles as opposedto a program of mortgage-type studentloans. Summaryof KeyRecommendations 226. The key recommendations from the sections above and their estimated impact on the government budget are summarized inTable 47. 101 Table 47: Recommendationsand EstimatedImpact on the Budget EstimatedImpact on Annual GOS Spending Recommendation (in 2007 prices) Reduce bursaries for post-secondary studentsby 50 percent SR 5.3 million (savings) Reduce bursaries for bverseas students by 20 percent on average SR 4.8 million (savings) Reduce tuition payments for overseas students by 20 percent on average SR 8.1 million (savings) Budget neutral if cost-sharing inversely related to Implement needs-based scholarships for post-secondary and scholarships, with richer families paying more tertiary students and poorer families paying less but families, on average, satisfying the cost-sharing targets Freeze bus subsidies for creche, primary and secondary education None (families to cover any increases in bus students at current level (SR 2 per trip) fares) Eliminate bus subsidies for post-secondary students SR 5.0 million (savings) Charge students taking IGCSE and A-level exams SR 50 per subject SR 3.2 million (savings) Rationalize the administration and staffing o f post-secondary Savings fiom this are captured in the education through institutional mergers that make sense recommendationto reduce MOE office staff MOE to respond in timely fashion to new demographic patterns as well as changing preferences on the part o f secondary and None; requires leadership and political will only post-secondary students intheir choice o f study programs Require all secondary school teachers to be certified in at least Little or none; perhaps some upfront costs to help two subject areas NIEmodify its training curriculum Provide more primary school teachers with skills in teaching multi-grade classes Ditto Introduce salary incentives for teachers certified in subject areas inshort supply (e.g., mathematics and the physical sciences) as Budget neutral given incentives that are well as secondary teachers certified in two or more subject areas symmetric, meaning that teachers without the andprimaryteachers trained inmulti-grade teaching methods desired attributes are paid less Reduce office staff inMOEby 12.5 percent SR 2.9 million (savings) Eliminate maintenance, cleaning and kitchen staff from MOE payroll SR 10.1million (savings) Procure maintenance, cleaning and meal services fiom the private SR 8.1 million (addition to "goods and services" sector budget o fMOE) Give greater autonomy to schools and other educational Budget neutral but should result in efficiency institutions gains (improved education outcomes) Streamline curricula o fprimary and secondary education so as to Perhaps none, although it might lower costs by increase the focus (time given) to core subjects reducing the need for specialized teachers Mobilize "master teachers" o f mathematics and the sciences to Some investment may be needed to improve design and deliver lectures aimed at students in different classes intranet connectivity and to compensate the inprimary and secondary education and record the lectures for master teachers, but inexpensive relative to the access on CDs and/or the intranet by the schools cost o f recruiting large numbers o f new teachers o f these subjects Consider incentives to encourage an increase inprivate provision Budget savings resulting from less reliance on o f education andtraining government financing difficult to quantify in advance, butthey could be significant The plans formulated by Seychelles University Foundation and Budget trade-off betweentraining degree students the steps taken by GOS to create a national university should be domestically and sending them abroad needs to gradual and careful so as to ensure that costs (financed from the studied as art o f a detailed costing and careful budget) do not escalate out o f control cost-benefi; analysis o fplans for the-miversity 102 Annex 1: SummaryTable of the EmpiricalResearchon PublicFinanceand Growth Significantly positive effect Inconclusive/No Significantly negative effect/Complex effects effect Impactof Cronovich(1998) Ram Kromendi& Meguire (1985) Landau(1983). Scully government (1986), Sattar (1993), Grossman(1990) Levineand (1989), Barro(l991),- consumption Macnair, MurdochPiand Renelt(1992) Sheeby (1993) DurdenandElledge onlong-run Sandier (1995), Devarajan, Lee & Lin(1994) Garrison& (1993), Hanssonand growth SwaroopandZou (1996) Lee (1999, Grossman Henkerson(1994) (1988), Hansen(1994), Hsieh Karikari(1995) Landau & Lai(1994), Gemmel (1985), Landau(1986) (1983), Saunders (1985) Rao Grier andTullock (1989) Bairam(1990) Sattar (1989), Assane and (1993) Evans & Karras Pourgerami,(1994) (1994) Hansen(1994) Barro(1997), Guseh Andres, Domenechand (1997) Molinas (1996) Zhangand Zhou (1998) Impact oftaxes Koester & Kormendi (1989) Garrison& Lee( 1996) on long-run Easterly& Rebelo(1993) KocherlakotaandYi growth KocherlakotaandYi (1997) (1997) Helms (1985) Easterly& Rebelo(1993) Canto& Webb (1987) Yu, Wallace & Nardinelli(1991) Impactof Landau(1983) Barro(1991) education Moomaw& Williams (1991) expenditure on Hansson& Henrekson(1994) long-run Ansari & Singh(1997) Singh growth & Weber (1997)Evans& Karras (1994) Barro (1997) Baffes& Shah(1998) Impactof DaSilvaCosta, Ellson& Mullen& Williams (1990) Landau(1985) Evans& public Munnel(l990) Moomaw & Barro (1991)Hansson& Karras (1994) infkastructure Williams (1991)Binswanger, Henrekson(1994) Laudau Devarajan, Swaroop& and/or public Khandker & Rosenzweig (19986) Hulten& Schwab Zou (1996) investmenton (1993) Easterly& Rebelo (1991) Holtz-Eakin& long-run (1993) Sanchez-Robles(1998) Schwartz(1995) Hulten& growth Ratner(1983) Aschauer Scwab (1991) (1989) Munnell(l990) Lynde & Richmond(1992)Bajo- Rubio& Sosvilla-River0 (1993) Lynde & Richmond (1993) Harmatuck(1996) Wylie (1996) Kocherlakota& Yi (1996) Kocherlakota& Yi (1997) Lau& Sin (1997) Aschauer (1989)Easterly & Rebelo(1993) Morrison& Schwartz(1996) Odedokun (1997) Eisner (1991)Munnell (1992) Glomm& Ravikumar (1997) Source: Basedon Poot (2000) 103 Annex 2: Descriptionof the Legaland Institutional Framework for Public FinancialManagement (PFM) 70 The legalframework for PFM Constitution 24. Chapter XI1of the 1993 Constitution of the Seychelles (as amended) sets out the basic foundations for PFM inthe Seychelles. This includes the presentation of estimates before Parliament, the operation of the Consolidated Fund, the establishment of other funds, the impositionoftaxation andthe broadmandate andindependenceofthe Auditor General. Public FinanceAct 1996 25. The Public Finance Act 1996 (Act no. 22 of 1996) and its associated Financial Instructions from July 1997 provides for the control and management of the public finances of the Seychelles. The Act of 1996 repeals the original Public Finance Act of 1991 (Chapter 188 o f the Laws of Seychelles). However, statutory instruments made under chapter 188 continue inforce ifitis not withdrawn or amendedby the act of 1996. 26. The Public Finance Act and its associated Financial Instructions regulates among others: i)the powers and duties of the Minister o f Finance; ii)the powers and duties o f the Principal Secretary; iii)the dutiesand responsibilities ofthe Accounting Officers; iv) the establishment of various funds (consolidated fund, contingencies fund, development fund) and procedures to establish other funds; v) procedures for procurement and payments from the funds; vi) procedures for collection and receipt of revenue; vii) procedures for advances, imprests, deposits and suspense accounts; viii) the custody o f public money and ix) the custody and control of other assets. TheAudit Act 1973 27. The Audit Act dates back to 1973 and had been amended in 1991 (chapter 11 of the Laws of Seychelles) to bring it into conformity with the Constitution that came into force on 31StDecember 1991. The Audit Act specifies the duties and powers of the Auditor General and its staff. Moreover, it regulates the appointment and salary of the Auditor General. A new Audit Bill has been drafted and i s currently with the Council of Ministers. Revenuelegislation 28. The main laws applicable to revenue include the Revenue Commission Act (2007), The Goods and Service Tax Act (2001), the Social Security Act, The Business Tax Act and the Trades Tax Act. With the exception of the GST Act, all other tax acts date back to 1987withrevisions only for rates and application. ~ ' OReproducedfrom the PEFAAssessmentJune 2008. 104 Procurement 29. Procurement regulations are currently set out in the financial regulations. The National Tenders Board Act 2004 established a six member National Tender Board with powers to administer and make recommendationsto the Government for the procurement of goods and services, and the hiring and letting o f assets and properties belonging to the Government that are valued above SR 500,0007', for all budget-dependent government agencies. It also has the powers to administer and make recommendations to the Government on the disposal of government assets and properties. A Procurement Bill has recently beendrafted. The institutionalframeworkfor PFM President 30. The President is the Head of State and Government, as well as Commander in Chief o f the armedforces. The President is elected by direct universal adult suffrage and i s restrictedto three terms of office of five years each. Legislative 31. Legislative power is vested in a unicameral parliament, the National Assembly. 25 members are elected in first-past-the-post single member constituency elections. Up to 10 further members are elected by proportional representation (PR); each party is allocated 1 seat for every 10% of the vote obtained; the threshold for a PR seat is 10%. The term of the National Assembly is five years. Presidential elections took place in June 2006 and parliamentary elections in May 2007. There is one committee, the Finance and Public Accounts Committee, responsible for public financial matters. The Committee comprises of 11 MPs selected to reflect the weight of powers in the National Assembly. The mandate of the Committee is to scrutinize the budget estimates, the budget statements and the reports of the Auditor General. It is not currently chaired by the Opposition inaccordancewith Commonwealth guidelines. Executive 32. Executive authority is established in the office of the President. The Council of Ministers comprises of a minimum of seven and a maximum o f 14 members. Members are appointed by the Presidentwith the approval o f the Assembly Judiciary 33. The legal systemis basedonEnglishCommonLaw, theNapoleonic Code andthe 1993 Constitution. Company law is based on English Law and the highest court is the Court o f Appeal. The court system comprises a Court of Appeal, a Supreme Court and subordinate courts andtribunals. There is no specialized commercial court. 7' This excludes militaryequipmentandother securityrelateditems. 105 Administration 34. Since 2007, the Business of Government is distributedamongst 15 ministriesand departments. As noted earlier, recent reform initiatives have created a number of semi autonomous regulatory bodies and agencies. These bodies have been created either through specific enabling acts or administrative orders. 35. The Ministry of Finance is responsible for overall financial and economic management. It has four main "divisions", the Treasury, Financial Planning and Control, Policy and Researchand Administration. The Revenue Commission came into operation inMarch2008 and is chargedwiththe collection ofall domestictaxes andsocial security contributions. The National Economic Planning Council is responsible for the development of the national strategy. The keyfeatures of thePFMsystem 36. The financial year in the Seychelles is from 1st January to 31st December. Financial statements are currently prepared on a cash Capital projects are accounted for through a Development Fund. For central ministries and departments, the GoS has a centralized payments system and uses Visual Accounts Mate financial software. Processing and recording of transactions i s on a decentralized basis with all ministries and departments having access to the Visual Accounts Mate system. For ministries and departments, the budget process should be as follows: appropriation (by parliament), authorization (by the Minister through the signing of a general warrant), commitment (by the relevant accounting officer through the raising of a local purchase order) andpayment (on receipt andvalidationof invoice by Treasury). , 37. Businesses and employers, not individuals are responsible for all tax and social security payments. There i s no capital gains tax or tax on interest. The Auditor General i s a constitutional appointment with his powers, scope and mandate derived from the Constitution andthe Audit Act. '*The Financialstatements for 2006 referto the use of modifiedcash, but no evidence of accruedrevenuecouldbe found. 106 Annex 3: Categorizing Functional Reviews73 Vertical Review 1. A vertical review focuses on the activities o f one institution. The institution may be a ministry, an agency, or a central body such as the government secretariat or the presidential administration. A vertical review o f a ministry may or may not include a review o f subordinate agencies, andmay focus only on the central ministry or include de- concentrated units. The main focus o f a vertical review i s the extent to which the institution performs the functions required to meet its objectives and the extent to which the organizational structure o f the institution fits logically, without duplication or gaps, the requirements for the performance o f those functions. At any one time, one or more vertical reviews may be conducted, but the vertical review o f each institution i s essentially separate from the reviews o f other institutions. There are numerous good and bad examples o f vertical reviews, with the case o f the Latvian ministry o f Agriculture (1997) often highlighted as `best practice'. SystemReview 2. A system review focuses on a comparative review o f one or more common functions across a number o f institutions, and thus mainly assesses the ability o f administrations to function as inintegrated system. A common function i s one performed by all or most institutions, such as personnel, internal administration, legislative drafting and budgeting. A system review o f one or more common functions is carried out across the entire administration or one part o f the administration, such as all ministries, all subordinate agencies, or all ministries in a given sector. The main focus o f a system review is on the comparability in performance o f common functions across different institutions. In particular, a system review seeks to determine the extent to which the status and position o f a function within different institutions is comparable, e.g., i s there a personnel department insome ministries but only a section within a department inothers? Ifthere is a difference instatus, is itjustified by differences inthe size or complexity of the institutions? It also allows for examination o f the equitability of staffing levels and staff quality for a given function between different institutions, and o f the extent to which the same activities are performed, in a similar fashion in all units. For example, do all personnel departments perform activities related to recruitment, or are there some institutions inwhich recruitment i s strictly the prerogative o f line managers. 3. A number o f system reviews can be conducted concurrently, but the review o f each function is essentially separated from the review o f other functions. Even if there have been cases where system reviews were carried out separately, to address particular problems in, for instance, legislation drafting, system reviews are most often conducted in combination with one or more vertical reviews. Good examples of combined functional reviews are the Centre o f Government reviews, carried out by the OECD Governance division for OECD member governments, which address all common functions, or the HRM, budget planningandpolicy planningreviews carried out inLatvia andLithuania in 1999-2001andthe HRMreview inRussiaconductedin2004. 73UNDP (2002) 107 HorizontalReview 4. A horizontal review focuses on the distribution of functions between institutions. The focus of such a review is primarily on objectives and competencies, seeking to establish ifat the level of the administration as a whole the distributionof competencesis rationalized, without undue duplications and gaps. A horizontal review can also focus on the extent to which all ministries follow the same methods in defining relations between central and deconcentrated units, or the extent to which financial and accountability relations betweenministries and subordinated agencies are comparable across the system. Such horizontalreviews are particularly difficult to conduct and are relatively rare. They may be carried out not as separate reviews but as an attempt to draw systemic conclusions from a series of vertical and system reviews. Good examples of horizontal reviews, with or without in-depthvertical follow up reviews include the `organizational audit' o f the Slovak government, carried out in 2000-2001 and the horizontal review of the administration of Cape Verde carried out under the strategic re-alignment program in 2007-2008. 108 Annex 4: Ministry of CommunityDevelopment,Youth, Sports,Cultureandthe Arts InstitutionalReview 1. The MCDYSCA includes two main departments: (a) Community Development and (b) Youth, Sports, Culture andthe Arts) as well as several subordinated organizations (National A r t s Council, National Sports Council etc.) Department o f Community Development 2. The Department o f Community Development (DCD) defined and implements community development programs and manages 25 district offices, which form the backbone o f the de-concentrated services o f the Government. The Department has 1148 posts, 178 o f which are vacant, and to be suppressed in the ongoing rationalization exercise. 3. The Division for Community Development has 85 positions, 52 o f which are to manage the nine homes for the elderly which together constitute a department o f the ministry. The remaining staff in this division are responsible for the design and implementation o f Community Development Programs, one unit is responsible for programs (17 posts) and one for project implementation (13 posts). The division currently has 100project requests for a total o f SR 27 Million. 4. The second main division o f the Ministry is the Community Management Division is heavily skewed towards the management o f district offices, which employ a total number o f some 645 staff in post. The other section in this department i s the District Operation division, which houses the inspection and emergency management units. 5. The third division is Burial Services which includes 118 staff and is responsible for organizing burials. 6. Finally the Administration and Finance division employs 44 staff, and provides HR, budget management and support services. 7. The Community Development Department is a typical example o f the state driven development model o f the Seychelles: Instead o f funding bottom-up defined community initiatives through a fund or subsidy mechanism, the Department defines programs and projects (though the latter with community input) and is directly involved in their implementation. The state run homes for the elderly, as a section o f the Department, are an anomaly, as such services are rarely managed as a government department in other states. The core function o f the district offices, which is the coordination o f public service delivery in the districts, has been severely diluted through the mandatory absorption o f workers taken on under a social employment 109 scheme, which brought the department from a staff number of 325 inJanuary 2006 to 1111in July 2006. The problem inthis case i s not only the artificial increase o f staff numbers, but also the fact that by having to manage large numbers of low productivity low-skilled workers, the district offices are unable to effectively fulfill their primary function, which is the local coordination o fpublic service delivery. This i s provenby the fact that none o f the other Ministriesreviewed currentlyuse the services of the district offices or recognize their coordination role, and operate their own de-concentrated services inisolation. The inspection function should not be housed in the same department as it is supposed to be inspecting, but rather put directly under the Principal Secretary. Support services are overstaffed, the directorate includes 18 cleaners and other low skilledworkers. 8. The core functions of the Department, support for community development initiatives and the coordination o f public service delivery in district offices, could be delivered with a significantly smaller workforce and structure. 9. The three divisions in the Community Development Division could be easily merged into one by: i) Closing down the projects section and only retaining a program section. It is up to communities themselves to define and implementprojects and submitthese for financing to government, where such financing is available. The government could define overall priority programs under which applications could be submitted. ii)Thefunctionofhomesfortheelderlyshouldbetakenoutofgovernmentand replaced with a means-tested subsidy mechanism, while those than can afford to pay should finance their own stay. The homes for the elderly should be run as not for profit organizations under a board of trustees. The district offices could nominate a government board member as needed. 10. This would allow for the suppression of 60 of the current 85 positions in the Division, leaving 25. 11. The Community Management Division could be significantly streamlined, as in the view o f the Principal Secretary it takes only 120 staff to manage effectively the district offices, instead of the 960 current positions, about 111 of which are vacant. However, streamlining this department would be achieved under the measures on rationalizing support staff inthe previous section. The departmentwould inthis case not needmore than 125 staff, includingcentral coordination. 12. The current District Operations section would be moved directly under the Principal Secretary and could also be streamlined to 10 staff, instead of the current 16. 13. Finally the Burial Services division i s another anomaly in the structure of the Ministry. For this department, a strategy for privatization would need to be defined, 110 though currently there are no private undertakers in the Seychelles, nor is there an adequate insurance system to handle burials. Since this i s a sensitive function, changing provision to private and putting in place an insurance mechanism will take time. However, the objective should be to privatize this function within the four years of the fiscal adjustment program. 14. Cemetery maintenance, where this cannot be ensured by religious organizations, could be handled by the district offices, which could contract landscaping and other maintenance functions to individual contractors or firms. As this would not impose a significant burden on district offices this could be absorbed by the 4-5 core staff. Reorganizing the provision of this function would therefore lead to net savings o f 118 posts. 15. Inrelation to support services, low skilled support services could be contracted out underthe overall strategy set out above. 16. Inconclusion, it appears that the Departmentwould needno more than some 195 positions, compared to the current number of 1148. Whereas much of the impact of this reform is already included in the review o f the support services section, savings o f an additional 220 positions would seem feasible over time. Youth, Suorts, Culture andthe Arts 17. The Youth, Sports, Culture and Arts Department currently has some 415 staff, 66 o fwhich are likely to bereducedinthe context ofthe ongoing rationalization exercise. 18. The structure of the Department is complex, and has 6 divisions, sports strategic planning and marketing, public relations, marketing and special events, culture, major games, youth and administration and finance. 19. Under these divisions the structure of the Departmentis highly fragmented, with many single post sections that could easily be merged together. A rationalization exercise looking into each of the units of the department and review the potential for merging units (with related overhead savings) should therefore be conducted. 20. Based on initial reviews and discussion, the Department includes a number of functions that are not generally consideredcore state functions: The National Museum and National Conservation of Performing Arts (under the culture division), with 60 staff, 0 The International Conference Centre (under administration and finance), with 37 staff. 0 A playground, underthe youth division, with 19staff. 0 The Major events andKreol festival units, with 15 staff. 0 Major games, with 10posts. 111 21. The functions inherent ineachofthese units could beprovidedinamore effective manner: i)Playground and International Conference Centre should be privatized (ongoing). ii)TheNationalMuseumandConservationshouldbetransformed innot-for- profit foundations, with Boards of Trustees. A subsidy arrangement on a declining rate could be put in place to ease the transition, as concerns have been expressedabout safeguarding national heritage. iii)Major Games should be made the responsibility of the different Sports Federations. iv) The Kreol festival organization should equally be housed in a not-for-profit foundation with a potential state subsidy. 22. Introducingthese `quick win' reforms would lead to a reduction of posts by about 150. Whereas net budget savings would be lower due to the initial subsidy arrangements itis likely that significant savingswould be achieved overall. 23. Apart from these obvious measures it is recommended that the Youth section and its operations be rationalized. For instance, Youth activities could be coordinated by the 7 program coordinators, butthe 42 youth workers (which work from 8-16 when youth are actually in school) posts could be suppressed. It is suggested that other aspects o f the work of the Department be reviewed in detail. Many of the sections and units in this division perform functions that could be transferred to communities or community based organizations, such as youth centers, young citizens' movement etc. 24. Finally the administration and finance section has a very large number o f security personnel and a disproportionate number of support service staff (26, compared to 18 in the much larger DCD). The implementation of reforms in the provision of support services couldtherefore lead to significant savings for this Department. 25. Apart from the core ministry, the extensive mandate of the National Sports Council has also beennoted, inparticular the fact that the sports council currently fulfills functions that go well beyond its expected mandate of coordination of sports federations and cross cutting issues, and includes for instance the direct management of the national swimming pool. There is therefore significant potential for rationalization also in this autonomous organization, which currently employs 166 staff, through the privatization of functions such as swimmingpool management, as well as transferring responsibilities to the various sports federations. 112 Annex 5: Ministryof Employmentandthe NationalHumanResourceDevelopment CouncilInstitutionalReview 1. The Ministry of Employment and the subordinated National Human Resource Development Council constitute the smallest of the organizations reviewed in this chapter. The Ministry was created in 2005, when the previous Department of Employment was upgraded to a Ministry. The National HumanResource Development Council, which is an institution with largely strategic functions, was moved under the Ministry in2008. 2. The Ministry does not have Main Departments and is organized intwo divisions, Industrial Relations and Employment and Administration and Finance. A small policy unit charged with analyzing issues impinging on productivity as recently established under the Principal Secretary, and a Planning, Research and Information department is responsible for date collection and the liaison with bodies such as the ILO and other international organizations. 3. The Division of Industrial Relations and Employment provides employment services, including services to job seekers and employers, registration and referral services, monitoring of labor market trends and established the regulatory framework for foreign workers. 15 staff are engaged inthe unit charged with this function. The Labor Inspections Unit has 10 staff and performs classical labor inspection functions, such as enforcing the labor code and health and safety at work regulations. A further 15 staff work in the Industrial Relations unit and are responsible for designing the normative framework for settling labor disputes, but also currently for mediationservices. 4. The current orientation of the Division reflects the traditional perception of the role of the state in the Seychelles as the provider of all services. In the context of the ongoing reformprogram the Ministry plansto: i) Outsourceservicestojobseekersandemployerstoaprivateemploymentagency, there i s an ongoing search for potential interestedpartners. ii)Transferthesettlementoflabordisputestoanewindustrialrelationstribunal. At a later stage, the transfer of mediation services to a joint entity established by employers and employee organizations might also be considered. 5. These measures, which are sensible, may reduce staff numbers from the current 40 to about 25. Further savings would be possible in the support services unit, which employs some 20 low skilledworkers, such as cleaners, drivers and office clerks. 6. On the other hand, in view of the obvious productivity issues identified, for instance, inthe chapter on Health Expenditures, it would be recommendedto enhancethe capacity of the Productivity unit, which supports an inter-institutional committee charged with analyzing key issues reducing productivity levels in the Seychelles. It would be recommendedto add an additional 2-3 staffto this unit, at least inthe short term. 113 7. The National Human Resource Development Council (NHRDC) is mainly a strategy setting institution, and has 19 staff. It coordinates professional training and formulates long term skill development plans. Based on this, the Council also sets norms for overseas programs, includingto what venues candidates can be sent. Recent changes inapproved venues have started to significantly reduce cost (e.g. doctors can now only be sent to India, Mauritius and South-Africa, while previously the preferred destination was New Zealand). The Council also is expected to monitor the respect for the Bondthat overseas students sign with the government, but enforcement i s left to the Ministry of Education. 8. One recommendation that has been made, and which is supported by this study, based on the analysis in the education chapter, that the management o f the overseas studies program i s also moved from the Ministry o f Education to the NHRDC, as this institution is already responsible for defining venues and monitoring the application of the Bond. The NHRDC's Governing body also has to approve all placements. Centralizing program management could in particular enhance the enforcement of the Bond, as currently functions are divided between monitoring and enforcement. In addition, the NHRDC, as an inter-ministerial body, i s better placed to handle the coordination o f the program. The NHRDC, with its small staffing size, is unlikely to be able to make significant staff cuts, though some savings on support staffmay bepossible. These will be more limited than in other institutions as the NHRDC makes use o f the pooled administrative services ofNationalHouse. 9. Finally, an anomaly on the governance arrangements for the NHRDC was noted, inthat the Minister chairs the board of the Council, while he is also responsible for its oversight. This is a clear case of conflict of interest and would need to be removed. Alternatively, the Principal Secretary Employment could represent the Ministry on the Board, so that the Minister can take final political decisions without regard to hisker role inthe Board. 114 Annex 6: MinistryofFinanceInstitutionalReview 1. The Ministryof Finance is a relatively flat organization, which includes two large Departments placed under the Principal Secretary, the Revenue Commission and the Treasury, as well as 11 central divisions or units. This includes departments as varied as the Postal Services andthe single person Public EnterpriseMonitoring Unit. 2. Total number of staff employed in the Ministry i s 273, but this includes 118 Postal workers. The RevenueCommission employs an additional 224 staff. 3. The capacity constraints in the Ministry were already noted in the section on systemic functions, whereas the Ministry has a large number o f units and divisions, staffing levels on core functions are very weak, with less than 10 full time staff in the Policy and Strategy Department. The key aspect of reorganization inthis ministry would therefore be a focus on core functions and the transfer or privatizationo f everything non- core. 4. The organization of the Ministry also poses span of control issues; the Principal Secretary is directly responsible for overseen 11 diverse entities, including several that would be best organized as autonomous entities (consumer protection, commercial credit), or privatized. However, it would still make sense to organize the remaining entities into two departments, a budget department and a trade and state owned enterprises department. 5. In relation to this point, the obvious candidate for privatization or at least commercialization are the postal services, which should be taken out of the Ministry as soon as possible and be made either a non-commercial state owned enterprise or, if feasible, be privatized. This would take 118 posts off wage bill and allow the Ministryto focus on its core functions. Other organizations that could be run in an autonomous manner would be the Consumer Protection Authority and the Commercial Credit Authority, though a chance of status in these two organizations i s already being contemplated. This would allow for staffing up the Policy and Strategy Department which is severely understaffed. 6. Implementing these measures i s likely to reduce the net number of posts in the Ministry by about 100. However, it is likely that making the postal services self sufficient may take 2-3 years, and net savings therefore need to take into account any state contribution that will bemade. 115 Annex 7: Ministry of NationalDevelopmentInstitutionalReview 1. The Ministry of National Development is a highly complex structure which currently employs 269 staff in the core ministry, plus an additional 43 in the Planning Authority and the Seychelles Investment Bureau. The ministry includes three departments, each headed by a Principal Secretary, a Division for Corporate Services headed by a Director General and two parastatal organizations that report directly to the Minister, the PlanningAuthority andthe Seychelles InvestmentBureau. 2. However, from the point of view o f administrative processes the Ministry deals with three basic functions, physical planning and land management, housing and information and communications technology (ICT). From the discussions with the Ministry,the Seychelles InvestmentBureau, the Planning Authority and the Investment, Land Management and Industries operate in a single chain of administrative process on decisions on landmanagement. 3. The Housing Management Department deals mainly with the planning and provision of social housing, but depends on the other chain of administrative processes for landallocation. 4. The ICT department operates largely separately fiom the remainder of the ministry, and was recently transferred from the Vice President's Office. The rationale for this decision is not fully clear, as IT services are an across government function that is generally better placed at either the President's or Vice President's office. It is equally unclear why the Ministrystill has its own IT services unit. 5. The review of the organization of this ministry focused on two issues; (i)are the functions it performs core state functions and, (ii) there be ways to organize those would services that are core ina more effective manner. 6. Inrelation to the first question, the answer is clear on landmanagement, which is a classical state function, and ICT, but much less clear on social housing, where the Seychelles have focused on the direct provision of housing rather than on making housing accessibleto a large portionof the population. 7. Considering the area o f land management, problems arise mainly with administrative processes. Even though the Department o f Investment, Land Use and Industries operates in a single administrative process chain with the Planning Authority and the Seychelles Investment Bureau, the three units are clearly silos. A first recommendation in relation to this ministry would be therefore to place the Planning Authority and the Bureau under the Department, rather than directly under the Minister, which would significantly facilitate administrative processes. 8. Inrelation to the services provided by these three institutions, most of these do constitute core functions of the state, apart from possibly landsurveying, which could be contracted out. The Ministry feels that based on initial attempts to contract out services (as the relevant division i s understaffed and has a significant backlog), this solution is unlikelyto be cost efficient. However, a full costing exercise of the function has not yet 116 been done, and it is recommended that this be undertaken. Similarly, a merger of the landplanning and landmanagement and development divisions couldbe considered. 9. Regarding the provision of social housing, it would be recommended that the Government of the Seychelles focus on facilitating home ownership rather than engage in direct provisiono f social housing, as it currently does. The Departmento f Housing could inthis case bereorganized into a single division, focusing onthe definitionofpolicies to make home ownership accessible to an as large as possible proportionof all Seychellois, with access to be handled through the banking system. The management of land allocation for housing projects as well as permits for individual home construction and for housing projects could in this case be transferred to the land planning and management division. 10. The Planning Authority and Seychelles Investment Bureau were not visited so no direct rationalization measures for these divisions can be proposed. However, the proposed rationalization of administrative procedures should also lead to cost savings in these two entities. 11. Interms of Corporate Services this ministry has disproportionally small HR and Finance units, and it would be important that staffing up these units be considered, inthe context of the earlier discussion on systemic functions. 12. Unlike for the two previously reviewed departments, it would not appear that significant staffing cuts could be achieved inthe Ministryof National Development. The main short and mediumterm actions to be consideredare: i) Conductafullcostingexerciseoflandsurveyingworkandconsidercontracting out this function, which may needto be carefully phased. ii)RationalizetheHousingDepartmentbyorganizingservicesinasingledivision andchange the policy focus to facilitationrather thandirect provision. iii)MovethePlanningAuthorityandthe SeychellesInvestmentBureauunderthe Principal Secretary Investment, Land Use and Industries and rationalize administrative proceduresfor landplanning andallocation. iv) Consider moving the ICT department back to a Centre of Government institution (Presidency or Vice Presidency), as this is a clear cross cutting function. 13. Whereas some reduction in post numbers would be achieved through these actions (approximately 20-25 positions), the main savings in this ministry would come from contracting out the support service function, as the ministry employs a relatively large number o f low skilled workers (chainmen, gardeners, as well as a large number of secretarialsupport staff). 117 Annex 8: Departmentof PublicAdministrationInstitutionalReview 1. Some elements of the work o f the DPA have already beendiscussedinthe section on systemic issues, but the team was requested to also review the structure of the DPA itself. The Department currently employs 79 staff, equally divided between administration and support services and specialist departments. Specialist departments include several policy support units directly subordinated to the Principal Secretary as well as the Public Sector Support Department. 2. The policy support units supporting the Principal Secretary mainly deal with the secretariat and substantive preparation functions of the Public Service Commission and the Chief Executive Forum (the secretariat of which is held by the Director General Public Sector), the Terminal Employment Benefit Unit and a Technical Advisory Team (consisting of the externally funded Commonwealth Secretariat Consultant and a national advisor on Quality and PerformanceManagement). 3. The Public Sector Support Department handles the Human Resources database, processing and monitoring database changes, monitoring the application of Public Service Orders and Schemes o f Service and the Management Audit Function. This unit in particular suffers from the convoluted nature of the wage and payroll management systems. The former is discussedindetail inthe next section, but the latter poses serious problems as well. 4. Payroll management i s heavily decentralized. Eventhough pay i s executedby the Treasury (except for Health, Police andDefense), it is supposedto be calculated basedon HumanResourcesdatacollected at the DPA. However, there isno effective linkbetween this database and the Treasury payroll information and a simple comparison of data reveals serious discrepancies indata, even betweenDPA and Treasury, leaving aside the potential risks posed by the separate administration of the health sector, which has the most complex scheme of service inthe public sector. Whereas these may not necessarily cause errors inpayments levels, they do pose serious risks, and rapid action to establish a single HRM-Payroll module linkingbothsections should be taken.74 5. The other issue facing the Department is the lack of staff in the Management Audit unit. Inview of the complexity of the program outlined in this chapter, and the challenges even more simple rationalization processes are already posing to the current team (consisting effective o f the Director General, one senior specialist and one administrative assistant) the Government will need to invest in building up the capacity of this unit with at least 4 additional staff, as well as to seek technical assistance support to monitor and accompany the implementation o fthe program. 74This conclusionis in contrast with the recentlycompleted PEFA assessment which evaluatespayroll controls as solid, aconclusionthat is unjustified basedon amore detailedreviewo fthe realoperationofpayroll management. 118 6. The division of administration and finance employs almost half of the staff of the Department, a total number of 38, some 28 of which are support staff. Even for Seychellois standardsthe number of support staff i s therefore excessive at 36 percent of total staff. The main cost savings inthis Department could therefore be made by support staff rationalization, which could reduce current staff by 20 positions, while other minor gains might be possible in central policy support and the public sector support department. However, increasing the capacity of the Management Audit Unit will be essential ifthe reformprogram i s to be implementedsuccessfully. 119 Annex 9: Department of EnvironmentInstitutionalReview 1. The Department o f Environment is part o f the Ministry o f Environment, Natural Resources and Transport. The reason for reviewing environment in particular i s its strategic importance to the Seychellois economy (both interms o f external grant income andbecause the attraction o fthe Seychelles to tourists is to a large extent the still pristine nature o f many o f the islands). This i s therefore an area in which any reduction in staff size would have to be carefully considered against the value o f the environment to the economic and quality o f life inthe country. 2. The Department currently employs some 358 staff, or around 3 percent o f the active public service, and i s divided in three divisions, Nature and Conservation, Pollution Control and Environmental Impact and Climate andEnvironmental Services. 3. The Nature and Conservation Division employs some 160 staff, most o f whom are employed as national park rangers and in the forestry section, which deals with planting,harvestingand marketing o fhighendtimber (Mahogany and Sandalwood). The remainder o f staff work inthe ConservationDepartment (13), which i s responsible for the implementation o f international agreements (which bring significant revenue to the Seychelles) and Terrestrial Ecological Research centers, which include the botanical gardens and a biodiversity center (40). 4. The Pollution Control and Environmental Impact Division includes the environmental police, an inspection and enforcement service (18 staff), and the Environmental Impact Assessment unit, with only 3 staff, which is responsible for conducting the internal review o f EIA studies for major investment projects, inparticular inthe tourist sector. 5. The Climate and Environmental Service division includes the meteorological service (46 staff), the wetland program management service (24 staff) and the environmental engineering unit (4 staff), which i s in charge o f policies and assistance on drainage andwater issues and sea level projections. 6. Central units o f the Department include an international cooperation officer responsible for GEF issues, 6 district officers based on Praslin and la Digue and administrative and support services. Total central service employment is 66 staff, which includes some 40 support staff, most o f which are low skilled workers. 7. Based on discussions, and considering the strategic priorities o f the Seychelles, there appears to be significant scope to right size the Department. It fulfills a number o f services which should be handled under a concession (forestry exploitation) or under a separate, self-financing service (national park services, biodiversity center and botanical garden). 8. Attempts at issuing a concession for the exploitation o f forests have been made, but only few options were explored. Inview o f the high end nature o f production, even the small volume produced currently may attract outside interest, potentially from countries that were not yet considered. In addition, the Department reports that forestry 120 management poses significant risks of corruption andthat several officials have hadto be dismissedfrom service for this reason. 9. Plans for creating a National Park Service are being developed and the Department estimates that this can be made self-sufficient, under condition that the Service would manage all national parks and not, as is currently the case, only those that are less likely to generate revenue. Including the Botanical Gardens and the Biodiversity Center under the National Park Service may also be considered, especially since the former already generates some revenue(Euro 100,000 annually). 10. The Department currently also charges a fee for the internal review of EIA studies, which covers its operational cost for producing these reports. It does not yet charge for meteorological services to the airport, which may also be considered. However, the revenue generatedgenerally does not fully flow back to the Department. 11. The creation of a National Park Services, which could be made self-financing within the period of the adjustment program, including the Botanical Gardens and Biodiversity Center andplacingthe forestry management under concessionwould free up significant resources, and couldreduce the number of current positions by 140. A further reduction of 15 staff will be achieved by the plannedtermination of the wetlandprogram. Some of these savings would need to be re-invested in initial subsidy arrangements for the National Park Service, which would be provided on a decliningrate. 12. However, at the same time, the Department urgently needs to staff up key departments such as Environmental Impact Assessment, Inspections and Environment Engineering, where severe staff shortages pose considerable risks to the Seychellois environment and, by extension, the economy. In addition the staffing profile in the Conservation Department would need to be upgraded to staff of at least MA/MSc education level, in order to effectively engage with international NGOs that monitor international agreements. 13. Net budget savings of reforms will therefore be lower than the number of potentially reduced posts would suggest, as lower end staff would depart, but higher end staff would need to be additionally recruited for the critical functions that are highlighted above. In addition, if no concession agreement on forestry could indeed be reached, alternative forms of provisions would need to be studied, which could take additional time. 121 Annex 10: Departmentof the Police 1. The Police Department is placed under the President's office. Its payroll is managed separately from the overall payroll, and the Department does not follow the central pay and grading system, but rather has its own. The Department has 6 divisions, the Crime Support Wing, the Operations Support Wing, the Public Security Support Wing, which includes the Fire Brigade, the Port and Airport Police, the Resources Development Wing and the Administration and Finance Wing. Total current staff is 1163, out of which 97 are civilian posts. The Police Department has a large vacancy ratio. Key issues for the police force are the growing drug trade, but petty and major crime levels have beensignificantly reducedover the last months. 2. The organization and management of the, relative large, police services has been the subject o f intensive debate inrecent months. An Irishpolice expert was brought into review police operations and his report suggests that these i s a need to fully reorganize the police force, as well as to reduce its staff, mostly by having the Police Department focus on core functions at community level. The Police force has responded by conducting its own review, which shows the need for a significant increase in staffing levels. 3. Discussions with the Commissioner for Police andthe headof the Administration andFinance supportwing highlighted anumberof organizational issues: 0 Some core functions, such as airport security and port security are inadequately staffed. Based on international norms, total numbers should be up to 320 staff, while only 180posts are currently filled. 0 At the same time, the police department also provides functions such as the fire brigade, which, apart from the airport and port services, i s usually not fully state provided, but basedon a volunteer's service. 0 There is a lack of flexibly deployable units, the police force currently aims to fully staff all units, which is not an effective approach to management, considering that most police services are rarely required. For instance, there is a fully staffed riot squad which has not had to be operational for many years. Whereas at times riot squad staff is usedfor other functions, this i s not done ina systematic manner. 4. Striving for a fully staffed police organization, fulfilling all currently defined functions, is not a realistic objective inthe current fiscal context. At the same time, many o f the organizational objectives set out by the Police Department are sensible, e.g. the objective to ensure that more police stations are open 24 hours a day. Therefore, a reform strategy would need to combine a focus on core functions with more flexible deployment of staff. Some areas that might be considered inthis context are: i)Buildingupavoluntaryfirebrigade,inparticularonMaheIsland. ii)Mergingthe TourismPoliceandCommunity Policingsections, asthesefulfill largely similar functions. iii)Constitute ariot squadofgeneralpoliceofficers, who would receive special training, rather than establishing a full time riot squad. Once the fire brigade 122 would be reorganized as a community service (while the airport and port sections would be brought under port security), it would be possible to merge all operational functions into a single support wing with a community policing (incl. tourism) and a security division. iv) Mergethe different administration andpersonnel sections into a single HRMunit. v) Consider reorganizing the police academy into a budget supported autonomous entity. 5. Implementing these reform measures would allow for; (i)reallocation of wage a budget resources to those areas which are now under resourced (airport and port police); (ii) meeting the Departments objectives of having 24 hour community police support available. 123 Annex 11: Departmentof Defense 1. Whereas the World Bank does not generally take position on the organization and management o f Departments o f Defense, at the request o f the Government discussions were held with the Management o f the Defense Department, which i s subordinated to the President, who is the Commander inChief. 2. The Defense Department has experienced serious problems with staff retention, and suffers from continuous rapid turnover o f new recruits. This is a pattern that has established itself in the past 4 years, and is attributed to `mentality issues', a problem raised frequently also by other Ministries and Departments. The Department currently takes inthree new groups o f recruits o f 90 staff each every year, but does not manage to retain more than 30, which is insufficient to fill vacancies arising from retirement and voluntary departures. This problem that has accumulated for the last four years, establishment numbers are currently 600, while effective numbers are 320. 3. In many ways, this situation is surprising. The Defense Department offers employment conditions similar to those inthe Police, and has attractive foreign training programs (France, India), which are fully externally funded, creating good opportunities for skill development. The Department also has an active recruitment program, and i s engaged in a publicity effort. Nevertheless, most young Seychellois apparently find a Defense career unattractive. 4. Due to the problems highlighted above, the Department is unable to effectively fulfill many o f its core functions. For instance, the Department has three patrol boats to patrol the economic zone o f the Seychelles, but lacks personnel to put together full crews for these boats, unless staff are put on double shifts. This is problematic as the increasing risks posed by the operation o f Somali Pirates close to the territorial waters o f the Seychelles and the growing drug trade, pose new security challenges. One o f the patrol boats was recently refitted in India to serve more effectively in countering such threats. Effectiveness is further hindered by the fact that the Coast Guarddoes not have any posts on outlying islands, due to a lack o f facilities. In addition, the Department has one surveillance aircraft, but has not been able to recruit or train a pilot. 5. Other key fimctions o f the Department are the protection o f the airport perimeter, the Dog Unit (mostly used for airport security), the Defense Academy, and Presidential Security. The Department i s also involvement indisaster management. However, inthis area responsibilities are divided between three units, all based at the Office o f the President, the DisasterEmergency Committee, the Police and the Military. It would be more effective if a single unit to handle emergency response issues were to be created, an issue already discussed inthe section on the Police Department. 6. Inconclusion, the Defense Department is likely to face a number o f further years o f staff deficits, which is not in the national interest o f the country. Whereas the development o f an integrated approach to emergency and disaster management might lead to some efficiency gains, further measures would not be recommended until current understaffing (excessive vacancy levels on operational forces) are addressed. 124 Annex 12: Summaryof Government-WidePotentialStaff reduction^'^ MinistryiFunction Assumptions made about staff reductions Potential Establishment reduction to remain l a Unemployment Reduction Can be made redundant, canpotentially find low skilled 203 0 Scheme-financed staff work intourism or other sectors. Beautification initiative Can be made redundant, canpotentially find low skilled 550 0 andUnemployment work intourism or other sectors. Reduction Scheme staff at the Department of Community Development Support staff and low MOE(330). MOH(247). Estimatedpotential pro-rated 1127 800 across skilledworkers number inother ministries:(550) /b government M O E other Administrative staff reductions 51 2489 M O H other (inc.HSA) Nursingassistance/nurseratio reducedto 1:4 from the 272 1295 current 1:2 (22 1). Rationalization environmental health: (5 1) Community Development Homes o fthe elderly made not-for-profit organizations 189 195 (58). Suppress community projects section (merge into community programs, (7). Privatize Burial services and contract out cemetery maintenance (118). Rationalize inspectorates (6). Youth, Sports, Culture Make museums and conservatory independent not-for- 235 andArts and National profit organizations, privatize playground and Sports Council International Conference Center, major games to be moved to Federations, major events to be set up as independentnot-for-profit organization (150). Remove Youth Worker district posts (42). Privatize Swimming Pool (11staff). Close down sports-for-all program (8). Close down Federations Support Program and phase out foreign coaching program (24). MinistryofEmployment Privatize employment agency functions. Reduce 12 andNational Human mediation department once alternative provisionavailable. Resource Development Add staffto productivity unit (+3 positions). Council Department o f Create NationalParks Authority and make this self 137 Environment financing, issue concession on forestry exploitation (140). Terminate Wetland Cleaning program (15). Strengthen environmental impact assessmentunit and environment engineering section (+18 staff). MOF Postal services privatized. Strengthen budget department (+lo positions) 118 MinistryofNational Land Surveying function contracted out. Land 25 Development management procedures rationalized. Housing policy: change from provisionto facilitation. 75Basedon reviewof selectedministriesonly (thosewith over 5 percent wage bill spending). 125 Ministryrnunction Assumptionsmadeabout staff reductions Potential Establishment reduction to remainla DPA Reduce staff inprocessing and monitoringunit (2 staff) 20 56 Strengthen Management Audit unit (+4 staff for 4 years) Rationalize finance division and centralized transfer payment fimctions to payroll (2 staff) Contract out Support Services (20 staff) Department o f Police IC Merge Community and Tourism Policing. Conduct feasibility study on voluntary fire brigade creation. Change the status o fthe policy academy. Merge different administration and finance units. Create a flexibly deployable emergency responseunit instead o f a permanent riot squad. Staffup airport and port units up to required levels. Department o f Defense /c Addressrecruitment problems (vacancy ratio of40 percent). Create integrated emergency response division instead o fthe three separateunitsnow responsible under the Presidency Total 2939 Source: Bank staffestimates Notes: a/ basedonAugust 2008 payroll; b/ Where possibleexcludingthose working in institutionsto beprivatizedandexcluding those already countedunder other institutions.c/ Numbers on policeanddefensewere not availableand specific estimatescannot at this point beprovided. Net savings on bothorganizationsare likely to be limited due to the recruitmentproblems inthe defense forces andthe needto strengthenport andairport security inthe policeforce. 126 !I 11 p-q Acl I f 'E 2c"d ~5 -8 c < v1 1 ' I I I I Annex 14: MOEExpenditures,2007 Table A14.1: MOE ExpenditureBreakdown byDivision Ofwhich, Spend as % Personal Actual Personal o ftotal Emoluments Expenditure Emoluments MOE as % o f total (SR 000s) (SR 000s) spending. spending. Minister's Secretariat 303.5 112.7 0.2 37.1 Finance, Administration & Personnel 30881.2 6986.0 16.2 22.6 Education Planning & Resource Dev. 9871.7 3920.0 5.2 39.7 Schools 116626.7 112324.0 61.3 96.3 Secretariat 113893.7 59.9 98.6 Primary Schools 1464.5 0.8 Secondary Schools ' 1268.5 0.7 Technical & Further Education 31172.7 25443.4 16.4 81.6 Secretariat 25643.7 13.5 99.2 Seychelles Polytechnic 1246.5 0.7 Adult Learning& DistanceEducation 118.8 0.1 Seychelles Institute o f Technology 701.4 0.4 National Institute o fEducation 521.1 0.3 International Relations & Training (administration only) 31.1 0.0 Seychelles Tourism Academy 1182.7 0.6 National Institute o f Health& Social Studies 311.6 0.2 Sey Agricultural & Horticultural Training Centre (SAHTC) 372.3 0.2 School ofAdvanced Level Studies 325.8 0.2 Maritime Training Centre 717.8 0.4 InformationTechnology 1279.9 1006.1 0.7 78.6 Quality Assurance 25.2 0.0 Total for MOE 190160.8 149792.3 100.0 78.8 Source: MOE 128 Table A14.2: MOE Expenditureby Level of Education2007 Level- Pro-rated No. of Unit Specific Overhead Total students Fiscal Costs (SR 000s) Costs (SR 000s) Costs enrolled - Cost SR Primary(including Creche) 61,948 22,633 84,581 10,929 i,739 Secondary 48,008 17,540 65,548 7,364 8,901 Tertiary 29,075 10,957 40,03 1 2,175 18,405 Adult learninganddistance education 1,211 456 1,668 Sey Agricultural & HorticulturalTraining Centre 1,891 713 2,604 59 44,133 Seychelles Polytechnic 6,610 2,49 1 9,101 311 29,263 National Institute of Education 5,759 2,170 7,930 274 28,940 Maritime Training Center 1,733 653 2,386 97 24,600 National Institute of Health & Social Science 2,479 934 3,413 168 20,3 16 Seychelles Tourism Academy 3,300 1,244 4,544 330 13,769 School of Advanced Level Studies 2,455 925 3,381 369 9,161 Sey Institute of Technology 3,636 1,370 5,006 567 8,829 All levels 139,03 1 51,129 190,161 20,468 9,29 1 Source: MOE Table A14.3: Total EducationExpenditureper Student by Level of Education,2007 Total MOE Public Post- Oversea Overseas Education Costs Transport secondary S Bursary UnitCosts Subsidies Bursary Tuition (MOF) (SSF) (SSF) (MOF) Primary (including creche) 7,857 7,739 118 -- -- -- Secondary 9,0 19 8,90 1 118 _ _ _ _ Post-secondary 25,536 18,405 2,302 4,829 -- Agricultural & HorticulturalTraining Centre 51,263 44,133 2,302 4,829 Seychelles Polytechnic 36,394 29,263 2,302 4,829 _--___ __ __ __ National Institute of Education 36,071 28,940 2,302 4,829 MaritimeTraining Center 3 1,73 1 24,600 2,302 4,829 _--_ _--_ National Institute of Health& Social Science 27,447 20,316 2,302 4,829 -- Seychelles Tourism Academy 20,900 13,769 2,302 4,829 School of Advanced Level Studies 16,292 9,161 2,302 4,829 Seychelles Institute o fTechnology 15,960 8,829 2,302 4,829 __--__ ___--___ Overseas 158,620 _ _ -- _ _ 99,655 58,964 All tertiary (post-secondary + overseas) 46,5 14 All levels (primary+secondary +tertiary) 13,049 Source: MOE 129 Annex 15: Map of Seychelles 130 REFERENCES African Development Fund. 2008: Support to University of Seychelles System: MIC Report. 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Fiscal decentralization, public spending and economic growth in China. Journal of Public Economics 67,221-240. 137 APPENDIX Government ResponseTo The Review PublicAdministrationandPublicServiceReform: This section provides a summary on sector implementation of the world bank's recommendations which was derived from review work conducted in coordination with ongoing discussions betweenthe DPA and the line ministries. The public sector reforms focused on aiming for: 0 Better government administration through a leaner structure: Contracting out of services to the private sector, or privatization, a component of downsizing. e The work focused on the reduction ofthe number of employees ineach institution by 12.5 percent, and a review of functions for which alternative modes ofprovisioncould be considered as well as efficiency gains that could be obtained. 0 Greater public expenditure reduction and control: better management of organizations, budgets and personnel emoluments to ensure the sustainability of the organization and managemento frecurrent costs to ensure sustainability o f projects. e The Manpower Budgeting Exercises (MBE) was conducted in Ministries and Departments to verify how the budget allocation is handled so as to streamline the organization's establishment to fit within the financial resources allocated. It also enabled DPA to carry out a strategic planning exercise to establish the needs for a given year vis-a-vis the costs involved. To ensure the use of a fair andtransparent procurement system the Ministry of Finance has set up the National Tender Board under the Public Procurement Act, 2008to see to amongst others the program of contracting out of services. 0 Increased managerial efficiency: focus on organizational restructuring; decentralized management and creation of executive agencies out o f monolithic bureaucracies, and the introduction of market or quasi-market principles in the delivery of services. Strategy 2017 has provided the impetus through a strategic positioning o f Government as facilitator. A functional reviewof certain ministrieswas undertakenand good governance structures created taking into account the need to separate corporate responsibility from social responsibility; one being a function o f a business entity and the latter an important role o f government as is policy formulation, planning and development. The functional review process examined what functions could be commercialized and what could merely be 138 contracted out so that the responsibility of service provision remains that of government, through an agency for a periodof time. The report covers the following Ministries andDepartments: The Ministry of Education; Community Development Department Youth, Sports andCulture Department, includingthe National Sports Council. The Ministryof National Development The Ministry of Finance Environment Department Natural Resourcesand Transport Department The Ministry of Employment and the Human Resources Development, including the Council; The HealthSector The Departmentof Police; and The Department of Public Administration Ministryof Education The Ministry went through the process of streamlining to include the Voluntary Retirement Scheme and this brought the establishment down to 3188 posts comparedto the previous of 3427. The World Bank recommended that there should be a potential reduction o f 51 administrative staff but in this area only 14 such employees exited on VDS The Ministry of Education is moving towards the role of facilitator, to that o f leadership, funding, policy and legislation development, education system governance, setting results-based standards, develop accountability frameworks, and monitor and evaluate performance. Inthe long term plans autonomy of schools is being considered, and work on the structures o f schools is being undertakenand there is the possibility of further cuts (reduction innumber o f laborers and handymen). Outsourcing of cleaning services in educational institutions is being undertaken after phasing out o f 62.7% o f institutional-based cleaners (113 out o f 180). Rationalization Physical Planning i s limited to planning, technical and advisory services, project preparation, pre-investment and feasibility studies as these are requirements of donors (BADEA), and once contracts have been allocated to the private sector implementation and monitoring of project construction should take place; all construction and maintenancework is contracted out thus closing down the Maintenance Unit. The work previously undertakenby the NationalAudio-visual Centre is to be contracted out. 139 The portfolio for International Training has been transferred to the National Human Resources Development Council. Other specificities raised in the report on Education will be undertaken as medium and longterm action. Ministryof CommunityDevelopment,Youth, Sports,CultureAnd TheArts This Ministry has two main departments, the Community Development and the Youth, Sports, Culture and the Arts, as well as a few agencies, amongst others the National Arts Council andthe National Sports Council. CommunityDevelopmentDepartment In response to the government's call to down size the public service it is to note that significant attention has already been given by the Department in this regard. The Department has undertakenthe following changes to its structure andnominal roll: There are now two main divisions replacing the previous three-the Community Development Division and the Community Management Division. The total work force prior to the cuts was 838. Apart from the 407 who exited on the different schemes, 2 retired at the age o f 63 and 1person resigned. Currently the Department has a workforce o f 428 staff. As per the Department o f Public Administration's recommendation the Districts Operations section in the Community Management Division has been phased out. The suggestion to re-name the Inspectorate unit to Quality Assessment and Inspectorate unit has been strongly appreciated. There are only 4 posts o f which one is vacant. It i s hoped that the District Administration offices take the work o f that unit seriously. The Department has reduced the number o f cleaners inthe District Administration offices to one cleaner per district whilst at secretariat level the number has been reduced from six to three. We do not share the view that such duties (both at secretariat and district offices) should be outsourced due to the sensitivity o f these offices. Furthermore the outsourcing o f these services would be muchmore expensive; so common senseprevails. The Department emphasizes that some o f the recommendations made in the document should be reconsidered due to the fact that our mandate requires us to manage certain aspects specific to the matters o fthe local communities. DistrictsProjects This section has been there since the establishment o f the Local Government Department and then Community Development Department. It is not a program area. Though the request for projects emanates from the districts, it i s more cost effective for the projects to be managed centrally in terms o f effective quality control, standards and accountability. 140 Please note that the request for 2009 was 27 million. Due to budgetary constraints it has been reduced to 16 millions. A total of 250 small community projects are to be implemented.This has to be professionally managedas per the Public Procurement Act - 2008. Communities need to be advised and guided with regards to undertaking major capital projects. Community projects once identified, the District Authority seeks professional advice from the District Project Section whereby based on the experience andknowledge ofthe officers, the project is validated. The mainfunctions ofthe District Project Section are as follows: Administration: management of projects, overseeing section staff, advising the districts on new project proposals, preparation of tender and contract documents, organizing meetings. Finance: budget management o f all projects, preparation of payments, of periodic reports for Managemeneroject Appraisal Committee and the preparation of monthly reconciliations with Ministryof Finance. Planning and Implementation: preparation of program of works, scope o f works and the preparation of plans and submit to the Planning Authority as well as going on District visits for monitoring. Homesfor theElderly The remarksmaderegarding the runningof the Homes for the Elderlybythe government should be addressed by higher authorities of the State. The Department has advised the government since 2004 that the running of the Homes should be community owned. It is to that effect that we have initiated the "Community ownership program". Since then there has been a remarkable move in gradually transferring ownership from Government to Community; aprocess which started with the establishmento f the Board of Trustees in 2004. It is the Department's aim inthe coming years to handover the total responsibility of the management of the Homes to the respective Boards of Trustees. It i s to be noted that the Homes are not run for profit making, however through the various activities organized funds are raised to cater for improved general environment and social programs. VoluntaryDepartureScheme As at December 2008, the staffing for the Homes for the Elderly has been reduced ` considerably to being manned by a Home Administrator only; 20 staff exited on VDS, while 15 vacant postswere deleted bringing atotal deduction of 35 posts. Other recommendationsmadere Burialand support services: With regards to the recommendations made in the World Bank Report No. 13, 14 & 15 the Department will, in its mediumto long term plans, review the services being offered by the Burial Unit as well as the provision of security services in the District 141 Administration offices. It must be noted however, that inthe Burial Services Unit 20 staff exited on the VDS program. The Department emphasizes that caution must be applied with the idea o f streamlining central government through decentralization bearing in mind the needs o f the most vulnerable at community level, the capacity o f the District Administrations, costs and controls. The reform program must not turn out to cause more harm than good with regardthe effectiveness, efficiency and timeliness o f service delivery at community level. The Community Development Department would like to place on record that it has contributed substantially towards the reforms and was engaged in the restructuring process way before the mention o f economic reforms. Youth, SportsAnd CultureDepartment Voluntary DepartureScheme InDecember 2008, the Department o f Youth, Sports and Culture finalized the voluntary departure o f 72 members o f staff with 8 others exiting the service on the Early Retirement Scheme bringing the total to 80. The Department had 324 people on the Department's payroll as at January 31, 2009 from the original 415 staff. This goes to show that there is no more "a large number of security personnel and disproportionate number of staff." We cannot abolish all the security posts because we will always need some in-house security staff. Reforms Short Term Phase(2008/09) - The major change in the structural reforms attempts to separate policy, planning and development (setting goals and direction) from that o f implementation (the `doing and achieving) this will slowly help steer the Department from the role o f direct service provision to that o f a facilitator. This action can be seen in the removal o f the public relations, marketing and special events division, the sports strategic planning and policy analysis division, the major games division and the culture policy planning and development section. Instead the Department has created a Policy, Planning and Development Section in the Secretariat o f the Principal Secretary to provide the advice required on the variety o f issues the Department deals with. The section i s comprised o f policy analysts and planners; professionals with knowledge and experience in the fields of culture, sports, physical planningand youth issues. 142 Reforms-Mediumto LongTermPhase(2009- 2011) PrivatizationProgram The process of privatizingthe Children's Playground is on-going. Meanwhilethe 13 staff membersofthe playground have left on voluntary departurescheme, making it easier for when the talks on the privatization processis finalize andthe playground handedover to the new owner. The International Conference Centre (ICCS) too features in the plans for privatization andonce this becomes areality the Departmentwill bereadyto handover. Autonomy of certain affiliate bodies Discussions have started on the drafting of the necessary legislation that will give autonomy to the Kreol Institute. The other institution in the medidlong term plans of the Department is the National Conservatoire of Performing Arts. Studies are beingundertakento decide on its structural form; whether as an agency or abody corporate that could sell its servicesto the public. Not-for-profit organizations The Ministry feels that the proposal to turn the museums and conservatory into independentnot for profit organizations cannot be entertained at this stage because of the fear that the country would lose its national heritage. Inthe mediumto long term phase o f the reforms athorough study will haveto be undertaken. Youth Division The Youth Division has streamlined its operations and has merged a number of its operations for more efficiency and cost effectiveness. It has become leaner especially after the voluntary departure exercise. However the suppression of the 42 post of youth workers will have to be discussed further because it would mean a radical change o f focus of the National Youth Policy. Talks will be held shortly between the Principal Secretaries o f Community Development and Education to discuss the portfolio for the Young Citizens Movement, aprogram currently carried out by bothministries. NationalSports Council Seychelles currently has only one Olympic size Swimming Pool which equitable serves our school and the public at large. Its operation is fairly complex and demanding. Inour opinion, the suggestion to privatize the swimming pool should be differed until we are satisfied that the know-how exists for its managementand general upkeep. Nevertheless, the staff compliments have been reduced by 3 who opted for the voluntary departure scheme. 143 Sports-for-All-Program: this program is one o f the pillars o f our sports policy objectives which i s relied upon by a huge sector o f our population for a healthier lifestyle andtheir social well being, more so now withthe economic reforms inplace. FederationSupport Program: this has to be maintained in view o f its importance for the development o f high level sports. We have also given consideration to the fact that since federations are driven by voluntarism, they need as much support as possible for the laid down objectives to be fulfilled. But the division has been downsized by 5 posts abolishedunder the voluntary departure scheme. Foreign Coaching: NSC has taken this recommendation on board, and as and when a foreign coach contracts ends, no replacement is being done and hence post i s localized or deleted; foreign coaches have reduced considerably, only two remain on the payroll. Ministryof Environment,NaturalResourcesAnd Transport Departmentof Environment The Department o f Environment is part o f the Ministry o f Environment, Natural Resources and Transport; a Department o f strategic importance to the Seychellois economy both in terms o f external grant income and because the attraction o f the Seychelles to tourists i s to a large extent the still pristine nature o f many o f the islands. It is for these reasons that the reduction instaff size has been carefully considered. The Department previous to the streamlining exercise employed some 304 staff, or around 3 percent o f the active public service, and is divided inthree divisions, Nature and Conservation, Pollution Control and Environmental Impact and Climate and Environmental Services. Following the reforms the Department has retained 192 staff; with the introduction o fthe VDS program 39 staff o fthe low and unskilled cadres exited the service as well as 5 administrative staff and 5 staff from technical fields, hence, 49 left through the VDS program and the remaining staff have been transferred to the newly created Agencies and Trust. Whilst there is a need to streamline given the structural adjustment program, the Department at the same time urgently needs professional staff in key areas such as Environmental Impact Assessment, Inspections and Environment Engineering, where severe staff shortages pose considerable risks to the Seychellois environment and, by extension, the economy. In addition the staffing profile inthe Conservation Department would need to be upgraded to staff o f at least MA/MSc level, up from the current N O level, in order to effectively engage with international NGOs that monitor international agreements. Both these issues are still need to be addressed given the budgetary restrictions and the unavailability o f graduates inthe country. 144 StructuralReforms Considering the strategic priorities o f the Seychelles and recalling the strategic direction o f government - from service provision to facilitator, certain functions o f the Department are to be handledby a different system o f management: The National Park Unit withinForestry (21posts) has been transferredto the National Park Authority (operational, currently as the Seychelles Centre for Marine Research Technology-Marine Parks Authority [SCMRT-MPA]); a separate, self-financing service that will raise all their funds from the existing Marine National Parks. The National Botanical Garden Trust has been composed from posts from the botanical garden and biodiversity center (52 posts) transferred from the Nature and Conservation Division. The Trust will function along the same principle as the National Park Authority, but this has to be undertaken within the full period o f the adjustment program before it becomes self-financing. Landscape and Waste Management Agency has been created from the SWAC and Waste ManagementUnits (22 posts) o f the Environment Department. The WetlandsUnit previously had 9 posts o f which 7 posts o f Field Workers, these posts no longer exist: 3 posts have been deleted under the VDS, 2 vacant posts have been deleted, and 2 posts were transferred to the newly created Landscape & Waste ManagementAgency. PolicyIssues The Forestry Section, which deals with planting, harvesting and marketing o f high end timber (Mahogany and Santol), should be handled under a concession (forestry exploitation), however, for such the assistance o f FA0 technical expertise has been sought to study the issue carefully before a final decision is made. All the harvesting o f timber activities are undertaken by private timber merchants and this will now be done by a competitive tendering process and the successful bidder will harvest the timber in a particular area at a set price. Government officials will simply assess the wood for harvesting, set the reserve price and monitor exploitation. This mew approach should tackle the existing loopholes inthe system. The Department is currently planning to charge fees for the internal review o f EIA studies, which covers its operational cost for producing these reports. The revenue generated will go towards the consolidated funds in the Ministry o f Finance. As for the meteorological services, setting charges for its services is currently under consideration, but once it is operation, as is usually the case the money will be recoupedby the Ministry o f Finance. 145 NaturalResourcesDepartment In the functional review of the Natural Resources Department it was decided to leave production in the hands of the private sector, and the Department would limit its functions to formulating, coordinating, monitoring and evaluating the implementation of policies andregulatory instruments. The Government has set up an Agency to take on the role of service provision, the Seychelles Agriculture Agency (SAA). It has an establishment that operates managerially and budgetary separate; and is establishedas a statutory body under a Board of Directors. Prior to the restructuring the Department o f Natural Resources had a total o f 313 posts and with the establishment of the Seychelles Agricultural Agency 213 posts were transferred. The Department now has only nineposts. Transport LandDivision The Transport Department of the Ministryof Environment, Agriculture and Fisheries, and Transport maintains only the mandate for policy formulation and planning to provide for a safe, reliable, affordable and convenient LandTransportation Systemfor the social and economical well being o f the entire population; that safely supports the requirementsof sustainablenational development. To ensure service provisionthere is the new establishment created by the LandTransport Authority Act that sets up a statutory body in the form of an Authority the Seychelles Land Transport Agency (SLTA). The Land Transport Division previously had 161 posts and 118 were transferredto the Seychelles LandTransport Agency. The Seychelles Maritime Administration was restructured but shed only one post, hence from 10to 9. The Transport Departmentnow shares the same Principal Secretary with the Natural ResourcesDepartment, and each has a total of 9 posts. Departmentof Police Since the PER mission there has been a change in the post of the Commissioner of Police. The new Commissioner together with a special working group set up by the President will now require some time to acquaint themselves with the functioning of the Department and the problems faced both by and in the police force before particular attention can be given to the requiredreforms as addressed inthe World Bank report. At a later stage the new Commissioner o f Police will be ina better positionto examine and respondto the World Bank recommendations. 146 The Health Sector With the Voluntary Departure Scheme and Early Retirement Scheme the workforce has been reduced to 1640. Re-organization and re-scheduling of work has also helped to achieve a further reduction. The present salary on offer is not sufficient to attract Medical professionals even from third-world countries. The government i s now looking more towards cheaper alternatives through recruiting these under bilateral co-operation agreements with other countries such as Cuba, Morocco, Egypt. Even when the salaries may not be less likeinthe case of Morocco the sendingparty meets the costs o f airfares. The HealthWorkforce includingPublic HealthDepartment to date stands as follows: No. % of Total Physicians 75 Consultants 15 Dentists 13 Pharmacists 4 Other MedicalProfessionals 223 Para-Medicals 389 Nurses 440 Ancillaries staff 481 TOTAL 1640 There are plans to reduce further Ancillaries staff with the planned reduction of Health Centers and outposts. We do not have student nurses on our payroll. The NIHSS which trains nurses falls under the Ministryo f Education. Physicians have beenreduced from 91 to 72. We plan to recruit more specialists now that we are upgrading our Specialized Secondary and Tertiary Care. It i s difficult to entice Seychellois Physicians to return to work in Seychelles with the present salary structure for medical professionals, more so now with the reducedvalue of the rupee. One option i s to allow private practice by public service doctors. On this point we do not agree that this will constitute a problem of patientsjumping the queue. There are systems which can be put inplace to monitor this and other problems of conflict of interest which may come up. However this is one good incentive to helpretain Seychellois Medical professionals. 76 Rationalization of Environmental Health Officers A total o f 23 vacant posts were deleted 15 officers opted for the voluntary departure scheme. The reduction is 38, with only 17postsremaining. Utilization of Health Care: The Regionalization of physician consultations has started withthree Health Centersno longer providing suchservices. Followingthe completion of the BeauVallon HealthCenter the Glacis one will no longer provide such services. Later 76To notethat the figure givento IMFNorldBankwas not correct, the totalnursingstaff including NursingAssistantswas 421not 670. There were 220Nurses and221NursingAssistants. However, 16 NursingAssistant exitedon VDS and26 vacantposts deleted, that is a totalreductionof42 posts. 147 on when the new Anse Royale Hospital cum Health Center is completed, two other Health Centers which now provide for Consultations twice a week will also stop the service. The need for the Anse Aux Pins Health Center (which is not entirely suited for the purpose and needs repair and renovation) will also be considered when the Anse Royale Hospital i s completed. The situation is being closely monitored and indications are that further reduction and phasing out i s possible without the service being affected. The SMB HealthCenter no longer exists. Utilization. There has beena reduction inhospitals which is being completed by end of March. The number of beds inBaie Ste Anne Hospital on Praslin has beenreduced from 35 to 20. Logan Hospital La Digue has been reduced from 15 to 8. (Reduction 22 beds). The Ante-Natal ward in Victoria Hospital (24 beds) now has only 13 beds reserved for patients who lose their babies and for psychological reasons cannot be placed in Maternity where there are mothers with live babies. The other space has been used for other purposes. Reduction 11beds.The ante-natal clinics for patients with no complications will be de-centralized completely as andwhenthe Regional HealthCenters are ready. Presently the English River Health Center does its own ante-natal clinics and Anse Boileau and Anse Royale will start and finally Beau Vallon. This will also ensure full utilization of the midwives in Community Care. The number of stays hospital stay after giving birth will be reduced and the patients will be followed up at district level. Part of the Male Medical Ward (the rear bay with 6 beds) is being closed and will be rented to a Private NGO. A Cardio Unit - 6 beds - has been created on part of the Female Medical Ward (which now has low occupancy rate) so both male and female cardio patients can be hospitalized there to increase occupancy on that ward. The 12 beds on front bay o f Male Surgical ward will be usedas Day Unit for minor surgical day cases such Ophthalmology cases such as cataract removal, Orthopedic cases and other minor surgery. The Gynecological bay (12 beds) on the Female Surgical Ward will also be turned into a Day Unit only as there i s no need for these gynecology patients inthat unit to remain overnight inhospital. Reduction24 beds. Surgical Unit will now be reviewing its protocols for admission in an attempt to reduce hospital days. With this reduction in surgical beds, the physicians will have to manage their admissions for non-emergency cases whenthe wards are fully occupied. This meansa total reduction of 63 beds. With the plannedde-centralization of Specialist Outpatients services such minor surgical proceduresmay also be done inthe Regional Health Centers. Specialized Treatment Overseas: Clear policies, guidelines and selection criteria are being laid down for patients referred for overseas treatment. This includes Means testing before final approval is given. The Health Services aims to upgrade its specialized care both through acquiring better and more modern equipment and training of its Specialists as well as bringinginqualified specialists as locums to performprocedures in Seychelles when the equipment and facilities are in place. This is already the case for some Orthopedic Surgery like hip and knee replacements, Child Orthopedic Surgery, Maxillo- facial surgery, Plastic Surgery, Vascular Surgery andNeurological Surgery. Government now plans to have a contract with the new Private Hospital for Heart Surgery. Cancer patients for Radiotherapy and Surgery will still have to go overseas. New negotiations 148 took place last year with the MIOT Hospital which was considered to be giving better value for money than Apollo in India. We also have a contract with MMM where we send patients requiring vascular surgery. Co-Payments: Co-payments have already been introduced for services like Ambulance, De-compression chamber, Physiotherapy, Rehabilitation Aids such wheelchairs, frames, walking sticks. Patients are now required to pay for any non-formulary medicines. The proposal for a co-payment in Pharmaceuticals as a Prescription fee is still under considerationby government. Inefficiency in Health Care Spending: All contracts which are outsourced are being reviewed and some have been put on public tender to assess the response. The provision o f food for the whole complex at North East Point which includes 250 patients has been tendered with the use o f the kitchen facilities there. Should the recommended bidder be approved by the Board this will mean a reduction from R135 to R80 per day per head. Security Services and maintenance have also been outsourced. Although we have published tenders for laundry Services we only got the bid from the present contractor. Other operators are either too small or cannot mix Health Services laundry with their other clients' laundry such as the airline. Streamline And Consolidate Job Positions: The Department o f Administration is working on this. It is recommendedthat all Health Technicians for example are grouped into one common cadre. 1. Reduction of operating costs: There has already been a big reduction in operating costs such as for fuel, electricity and telephone. Even with the increase infuel prices andelectricity costs which meansthat there is no apparent decrease inthe amount paid, the units of electricity and petrol consumed have decreased. The telephone costs for 2008 and part o f 2009 has seen a reduction o f more than 40%. Further reductions are being made using the cheaper options on offer by the telecom companies. 2. Reductionin Pharmaceuticalcosts: There has been a remarkable reduction in costs of drugdmedicines as pointed inthe report. The removal o f GST on Medicines should now also make it more affordable for patients to go to the private sector. The introduction o f a Prescription fee i s still beingconsidered by the government. This would reduce wastage andabuse further. 3. The Health Services will monitor the changes for any adverse effects as recommended by the IMFand World Bank. 149 \ ReductioninNon-MedicalSpending A total o f 147 staff have exited the service, 99 through the VDS and 48 through Early Retirement Scheme, andthis mostly insupport services. Some services have been contracted out to the private sector including Security, ground maintenance andthe maintenance o f buildings. Reductions have been made intelephone costs through different cost-cutting exercises New tenders have been published for the provision o f food and laundry services in order to source cheaper suppliers. An Oxygen Plant has been purchased and this will mean a reduction in cost for oxygen andmedical air supplies. Transport costs have been reduced through the introduction o f better controls; pooling and sharing o f all Transport o fthe HealthDepartment andthe Agency andno more rental o f cars andbuses. Ministryof Employmentandthe NationalHumanResourceDevelopmentCouncil EmploymentDepartment The Ministry is made up o f one Department (Employment Department) and one autonomous body the, National HumanResources Development Council (NHRDC). The Productivity Unit under the Principal Secretary's Secretariat remains and the PlanningResearch andInformation is a unitandnot a Department. Future Plans: the intention i s to turn it into a Section eventually, once the direction is settled. The PS's secretariat also has the Cooperation Unit and the IAEA Unit (International Atomic Energy Agency). The IAEA Unit i s currently working closely with the Ministry o f Foreign Affairs for the setting up o f the regulatory legal instruments and authority which i s to be based withinthe structures o fthe Employment Department. Future Plans: eventually, the IAEA unit will integrate the Labor Inspection Section. However, for direction it now remains under the purview o fthe PS. There are actually 4 Sections; we do not have Divisions except for the newly created Employment Tribunal headed by a Tribunal Secretary, a post pitched at DOlevel. We have for other Sections headed by Directors reporting directly to the PS; they are Industrial Relations Section Labor Inspectorate Section Employment Service Section and 150 Finance andAdministration Section At this juncture we have no intention of increasing the number of people in the Productivity Unit. We have two posts; a research officer and a support staff. The Productivity Unit serves as the secretariat for a multi agency team made up actors from bothpublic andprivate sectors, NGOs as well from workers and employer organizations. Future Plans: it is envisaged in the long run to transform the Unit into a hlly fledged body similar to the Singapore model. NationalHumanResourceDevelopmentCouncil(NHRDC) The National Human Resource Development Council (NHRDC) is mainly a strategy setting institution, that has 18 staff as one exited through the VDS program. One significant functional change during the first phase of the reforms i s the transfer of responsibility from the Ministryof Education to the Council o f the International Training Unit and the Fund. A scholarship Review Committee has been set up to review the criteria for the award of scholarships and the findings of the committee will be reported intwo months. The comments on the governance of the Council have beennoted and appropriate action will follow. Ministry ofNationalDevelopment Introduction The Ministry of National Development employs 263 staff in the core ministry. It has three departments, each headed by a Principal Secretary: the Housing Department, the Land and Industries Department, the Information, Communications and Technology Department (55 staff), and a Division for Corporate Services headed by a Director General. It has two semi-autonomous organizations that report directly to the Minister; the PlanningAuthority (29 staff) andthe Seychelles Investment Bureau (13 staff). StructuralReforms Short Term Action: 08/09: The structural reforms have brought about a change in the way the ministry operates. The Housing Management Departmenthas beenmerged with the Land Management Department hence merging the administrative processes for both housing and land allocation, this main Department i s headed by just one Principal Secretary. MediumTermAction: 09/2010 The recommendation to place the Planning Authority and the SIB under the Department, andthe merger ofthe landplanningand landmanagementanddevelopment divisions and 151 the staffing of Corporate Services is an exercise that will discussed with the Department of Public Administration shortly. Interms of this ministry has disproportionally small HR andFinance units, and it would be important that staffing up these units be considered, in the context of the earlier discussion on systemic functions. The Ministry has began to examine the ,feasibility of relocating the portfolio responsibilities for Investmentto the Seychelles Investment Bureau andthat o f Industries to its autonomous agency the Seychelles ENPA, while maintaining the mandate for all such policy matters. The ICT department operates largely separately from the remainder of the ministry, and was recently transferred from the Vice President's Office. Higher authorities have yet to decide whether this portfolio, which cross-cuts all sectors, will be relocated centrally. The contracting out land surveying relies on a full costing exercise of this function, and the assistanceofthe World Bankwould be appreciated. Policy Issues The function on state housing is dictated by the national policy of the Government which is, "to ensure an adequate supply of housing and basic services for all, on a sustainable basis, land, material and financial resources should be planned and managed in such a way that every Seychellois family can confidently aspire to its own house within the parameters of its own means or state help" (SPPF Manifesto), hence the focus of direct provisionofhousing, and any reforms would meana complete review o fthis policy. Ministry of Finance Government i s looking into the possibilities of privatizing the Postal Services. Currently the 2009 Budget of the Postal Services stands at SR 8,939,610 but the total receipts projected from Postal Services is SR 11,808,000. The moves for privatizationmight take place under the mediumto long phase; as the World Bank has aptly put it,' making the postal service's self sufficient may take 2-3 years. The Ministry has established a Parastatal Monitoring Unit, and this Unit once adequately staffed and trained would be the appropriate body to regulate, set guidelines, monitor and inspect commercial enterprises where Government has some stake. This is an area where the WorldBank could assist the Ministry with capacity building. As proposed by the World Bank, a reform of budget preparation and execution procedures, with an integrated budget preparation process (integrating capital and current expenditure budgeting), would significantly enhance the effectiveness of the central support function o fthe ministry.Similar to DPA, the development o f manuals and guidelines on budget preparation and capital budgeting, for line ministries, would benefit 152 everyone and this should be complimented with a well targeted training program on budget management; this too is an areawherethe WorldBank could assist. Departmentof PublicAdministration A previous report has been sent on action DPA intends to take with regard the Public Sector and the Departmentitself. The AdministrationDivisionhas 33 active staff, of whichhalf are cleaners and security guards. On the one hand, it is to be noted that DPA has a building of its own to maintain, especially so, given that it rents out its national hall; most meetings of importance are held here. To note, the security of the building is undertaken by DPA's own security guards on a shift system. Onthe other hand, DPA has learnt from the experience of other organizations who have attemptedto contract-out cleaning and security services and have found it to be too expensive. Outsourced security services leave much to be desired, but never-the-less with reforms inplace most of the cleaners work part-time. Amongst others, the remaining staff takes care of centralized services such as gratuity, compensation, pensions, Government office accommodation, expatriates passages and housing allowance for graduates. The Administrative Division has lost 3 Administrative staff to VDS and several staff members have resigned during the year 2008 and have not been replaced inan effort to reduce on staffing. The remaining posts are vacant of which 2 will beusedto strengthenthe ManagementAudit Unit. The Public Sector Support Division is in the process of setting up the Management Audit Unit and a first audit was conducted on the Seychelles Tourism Board. The Management Audit Unit is in dire need of management analysts that are efficient in structural reforms, human resource administration and budget management, notably conducting MBE. The setting up of the professional course on the Public Sector Orders i s gaining momentum and it i s through the retraining of public administration practitioners that DPA hopes to get some people to help with the management audits. Specific moves towards aprofessional Public Management Audit Unitare as follows: ShortTerm Action: 08/09. ManagementAudit Unit: The proceduresand processare being set up, posts have been made available buthelp is requiredto develop the services it is to provide. IT Data Base: DPA is placing all personnel and establishment data currently on handin the HRISdatabase. MediumTermAction: 09/2010 Management Audit Unit: The assistance of the World Bank is required with the strengthening o fthe capacity of management audit staff. 153 Management Audit: audits have begun in selected organizations to (i)determine compliance to Government Orders, and (ii) the performance capacity and ability of test the Mgt audit staff. IT Data Base: Networking, that is, linking the HRIS data base with other organizations so that any staff movements and establishment changes can be done in by the organization (delegated authority) andmonitored by the PSSD Desk Officers. LongTermAction: 2010/2011 The Management Audit Unit: produces a comprehensive report on the Public Sector Reforms and this could be complimented by one fiom the Budget management Unit in Finance. IT DataBase: Establisha linkbetweenthe HRM-andthe Payroll, linkingthe HRISwith Treasury. Talks will beginon its planning inmid-FebruaryDPA/ICT/MOF. Downsizing The following table shows the reduction of 24 staff taking into consideration the implementation of the exit schemes: Technical Cadres- 5. Administrative Cadre- 8. Low andunskilled- 11 'hroughthe Voluntary Departure Scheme Organizations ITechnicalI Administrative ILow and 154 feral1 URS Financed Staff employed invarious Ministries 800 Beautification initiativestaff and 207 URS absorbed in 2006. World Bank Recommendation Government Action OverallURS financed staff in II452 low skilledworkers exited on VDS, including those recruited on URS - various ministries potential - butexcluding Beautification. reduction o f203. Beautification initiative Beautification initiative- 283 exited on VDS, fiom 2006 up to 2008 a stafWRS inthe Department o f number left and so 417 posts were deleted, that is there is now a total Community Development - reduction o f 700 beautification posts, as a 100Beautification staffhave potential reduction-550 beenretaineduntilprivatization o fwaste management takes place in communities. Fport Staff, Low and Unskilled Workers - Potential Reduction o f 1127 World Bank Recommendation I Government Action Potential Reduction inEducation - 330 I 110 workers exited on VDS and 107 vacant posts deleted. Potential Reduction inHealth - 247 64 workers exited on VDS and 25 vacant posts deleted. (HSA & h4HSD) Potential Reduction inOther Ministries 550 - 561 workers exited on VDS. Further cuts are possible upon finalization o fthe reforms o fthe outstanding departments/ministries. 155 THE FISCAL IMPACT VDS Payment in Organisation December Amount on VDS for December'2008 January 2009 Oll(including March 2009 Payroll payroll accrued leave) PRESIDENT'S OFFICE Risk& DisasterManagement 56,690.80 42,887.50 109,534.00 54,005.00 Administrative Dept. 9,675.00 9,675.00 356,472.00 334,103 .OO PublicRelation& Info.Dept. 50,610.24 45,125.00 205,183.00 188,062.00 Departmentof LegalAffairs I 1272,493.66 228,578.11 Department of Police 1,200,458.90 I1,096,460.53 I5,530,749.56 5,012,954.73 VICE-PRESIDENT'SOFFICE Ofliceofthe Vice-president 38,954.00 37,110.00 Dept. ofPublicAdmin 182,180.64 156,870.00 456,718.27 385,401.85 Dept. ofInternalAffairs 288,852.79 251,207.40 845,866.66 777,906.41 MINISTRY OF FINANCE MinOf .Finance 356,361.95 356,361.95 1,175,069.00 845,360.00 Sey.Revenue.Commission 712,256.03 621,779.38 1,732,842.63 1,341,632.03 MINISTRY OF ENVIRONMENT, NATURAL RESOURCES, AND TRANSPORT EnvironmentDepartment 704,453.58 672,098.63 1,591,682.94 1,308,804.78 NaturalResourcesDept. 948,589.18 868,202.98 1,193,675.72 Transport Department 200,060.40 177,495.50 875,953.03 **188,939.21 MINISTRY OF HEALTHAND SOCIAL DEVELOPMENT MinistersSecretariat 45,050,.00 43,250.00 Social Services Dept. 595,395.77 537,689.75 1,004,620.39 765,984.86 HealthDept. 250,942.55 208,800.00 952,762.99 813,623.34 HealthServices Agency 1,658331.84 1,361,682.00 I9,155,164.46 8,3 11,044.05 ~~ ~ MINISTRY OF EDUCATION 2,230,450.24 2,134,12 1.55 14,256,870.36 13,492,O 15.07 MINISTRY OF NATIONAL DEVELOPMENT NationalDevelopmentDept. 379,892.70 325,562.25 1,153,000.56 962,614.60 PlanningAuthority 10,275.00 10,275.00 178,574.54 163,950.00 Info.Tech. andCom. Dept. 11,943.85 11,943.85 434,432.23 371,654.48 MINISTRY OF COMMUNITY 1 DEVELOPMENT, YOUTH SPORT AND CULTURE Youth, Sport & CultureDept 1,184,567.40 974,684.75 2,237,476.54 1,487,2 12.11 CommunityDev.Dept 4,634,4 13.28 3,909,115.02 3,195,477.72 1,761,583.53 NationalSportCouncil 365721.33 381,97 1.33 782,037.02 610,25 1.54 NationalArts Council 24,898.05 23;156.25 110,848.87 85,714.81 MINISTRY OF EMPLOYMENTAND HUMAN RESOURCES DEVELOPMENT EmploymentDept 124,807.95 104,489.75 441,254.99 366,166.36 MINISTRY OF FOREIGN AFFAIRS 54,037.50 I47,737.50 1764,163.95 674,537.68 GRANDTOTAL 16,236,066.97 14,329,392.87 49,051,879.09 40,612,45955 ESTIMATED ESTIMATEDTOTAL YEAR PAYROLLTOTAL YEARLY VDS PAYMENTS (YEARLY SALARY +VDS SALARY PAYMENTS) 2008 DEC: 49,051,879.09 588,622,549.08 16,236,066.97 604,858,6 16.05 2009 JAN: 40,612,459.55 487,349,514.60 14,329,392.87 501,678,907.47 2010 JAN 2009: 40,612,459.55 487,349,5 14.60 NIL 487,349,514.60 EstimatedFiscalImpact The first savings on the wage bill was established through the Manpower Budget Exercises undertaken in February 2008, in ministries and departments. This exercise allowed the MBEteams to verify how the budget allocation was being handledandwhere deficits were found a streamlining exercise took place to enable the organisation's establishment to fit within the financial resources allocated. The MBE revealed that a number of organisations were operating with a deficit totalling approximately SR17, 797,000.00. The surplus amounted to SR13, 767,000.00, which reducedthe deficit to SR4.0million onthe PersonnelEmoluments Budget. As a measure to reduce the number of employees inthe employment of government an Early Retirement Scheme (55 - 59yrs) was introduced on the 1st January 2008 and this was followed by the Voluntary Departure Scheme inOctober 2008. All posts occupied by personswho exited underthese schemes were abolished. The VDS scheme has brought a reduction of SR8,439,419.54 per monthinthe wage bill giving a total savings of SR101, 273,034 per year. O f the total VDS, one third were from Community Development exiting with a salary package o f SR3125, using this as a guide, the total VDS for low and unskilled cadres amounts to a saving of SR27,637,500.00 for the year, excluding those exiting inparastatalbodies. Those exiting the service in 2009, have benefits due payment by the end o f March amounting to SR14, 329, 392.87, this means that by the end of 2009 the savings will be SR86,943,641.00. The benefitspaid for those exiting the service will have costed government SR30, 565, 459.84 although this does not take into consideration the pension payments or those exitingthe service inparastatalorganizations. Itis to berememberedthat inNovember2008 an incrementof SR 500 and SR450 was given to all full time employees with a personal salary of SR2200 - 3000 and those with a personal salary higher than SR3000, respectively. For these increments the Ministry o f Finance did not disburse additional funds hence part of the saving of the exit schemes 157 will be used to absorb the increase in salaries in November, in ministries and departments. Hence the total wage bill for 2010 for ministries and departments for existing employees will be reduced by SR101, 273,034, due to the exit o f 1047 government employees. As of September2008 Government (MidDept) hada total of 8,987 occupiedposts with the departure of 1047VDs and 200 Early Retirement, the civilservice is leftwith a total of 7740 posts and this does not include vacant postshave been deleted , Public Sector Wage Reforms A Commonwealth Secretariat Salary Expert has begun a comprehensive exercise to review the government's salary structure. Following a market research his proposal provides two scenarios o f wage grid and scope of applicability. Work on the components of the salary structure has reachedmin-point as the job evaluation exercise that began in November, on the common cadre posts; is completed and the exercise will resume in January 2009 for the evaluation of all closed cadre posts. The work under way will incorporate allowances currently paid out such as, those in schemes o f service, periodic allowances, and inducements; once taken into account inthejob evaluation exercisethese allowances will be stopped leaving only those unpredictable such as overtime. The main tasks that need to be undertaken, before the review of the salary structure is completed, have to do with policy andprocess issues. 0 Benchmarkjobs and criteria for definingclassification parameters. 0 Rationalizejob titles and career ladders. 0 Establish what constitutes the minimum educational requirement for each job/position. Transferjobs andjob incumbents onto the new salary structure. 0 Cost the implementation of the new salary structure, and based on an indicative implementation cost, devise the implementation strategy. Revise schemes o f service andsalary administration policies. Overall Conclusions The report shows that in this short period since the reforms have been launched significant progress has beenmade with regardstreamlining either throughpost reduction (cuts and freezing), exit schemes (VDS & Early Retirement) and the introduction of rationalization measures (out-sourcing, privatization) and in certain departments functional reviews. To calculate the real total savings on the wage bill, the actual salary o f those exiting must be addedto all vacant posts deleted, excluding organizations with a deficit. Suffice to say that a number o f organizations still have a long way to go in introducing significant reform measures, and further functional reviews will have to be carried out to 158 promote the role of government as a facilitating body and consolidate administrative and regulatory structures, and improved communication withthe public. As a measure to control the size of Government establishments and reduce on Public Sector expenditure, the Departmentof Public Administration issued a Circular reminding all Ministries and Departmentsthat the freeze on new recruitment is still inforce, andthis extended to include budget dependent Public Sector Agencies; recruitment in essential areas are to be referred to DPA. Furthermore, all balance of funds resulting from the abolition of posts of employees who had left the public service on 31" December under the voluntary departure scheme and whose pay is to cease with effect from 31StMarch 2009, i s not be committed for recruitment or for use for any other purpose; the Ministry of Finance will recallthe money. Inaneffort to further streamline Government the function ofnational government should be limitedto national policy formulation that will guide line ministries inthe formulation of sector policy. Planning, inspection, management o f national programs and projects, national security and foreign policy are the crucial elements o f central government. Cooperation... are services that should be centralized for a more coordinated, efficient Capacity development, ICT technical support, legal advice and services, International and effective Government. Functions essential to the Seychellois economy, such as Human Resource and budget management; monitoring, control and audit functions performed by the Ministry of Finance and the Department of Public Administration need to be reinforced in terms of staffing and capacity development. 159