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GOVERNMENT OF MONTSERRAT

FISCAL SUSTAINABILITY ROAD MAP

A. Introduction

This paper addresses the concerns received from Parliamentary Under-Secretary of State,

the Honourable Gillian Merron dated 20 and 26 November to the Honourable Chief

Minister and Roger Clarke’s letter to the Financial Secretary dated 25 February 2009. It

also attempts to provide a clear set of proposals aimed at showing over the next two to

three years GoM’s plans to address the budget deficit in a sustainable manner and record

progress made on key issues identified in the SDP.

On September 8, 2009, a new government was elected. In a letter dated 5 October, 2009,

the new Chief Minister and Minister of Finance wrote to Ministers of both DFID and FCO

outlining in broad terms his government’s focus over the next two (2) to three (3) years.

The proposals included in this Roadmap will reflect these ideas.

B. Context

Prior to the destruction of Montserrat’s economic infrastructure and the dislocation of

businesses and households from the more developed part of the island by volcanic

activities, Montserrat operated on a balanced recurrent budget. Unfortunately, since then

the island has survived on budgetary support from Her Majesty’s Government.

The Government of Montserrat (with the support of HMG) economic activities can be

discussed in two (2) phases. The first phase focused on the emergency as noted in the

period between 1995 and 2000. This time was characterised by emergency management

activities. During this period public expenditure was directed towards stabilising the

economy and responding to volcanic and other emergencies. The population also fell

from over 10,000 to as little as 3,500 and has only recently started to increase. This

caused a shift in public expenditure from just over $41 million to approximately $61

million by 1999 and $54 million in 2001.

The second phase was the development phase starting from 2001 to present which saw a

move away from emergency management to a more permanent and planned development

approach in the north of the island. In this period, considerable public expenditure was

allocated to sectors such as housing, education, health, infrastructure and transportation.

However, it can be argued that the investments in these sectors were inadequate to

promote the desired level of growth or promote sustainability. In September 2001, the

World Trade Centre tragedy occurred and considerable resources had to be diverted to

address security concerns and financial regulation as anti terrorism policies and

programmes became urgent. The national budget has had to absorb the cost of

sophisticated technologies and obtain the requisite expertise and personnel to implement

these measures. This added to the cost of number of unavoidable regulatory initiatives and

later the substantial increases in commodity prices would push the budget levels to its

current levels.

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Unfortunately in the development phase the private sector did not expand for a variety of

reasons and Government found itself in the forefront of economic generation and recovery

activities. A reversal of this trend is essential for long term growth even if this means high

levels of short term expenditure and investments.

HMG has made it clear that GoM must take steps to maintain public expenditure at more

sustainable levels. The key barriers to sustainability for GoM is well known as it forms

part of a number of key documents and include the limited populous to obtain revenues to

fund Government operations, limited exports and tourism levels have significantly

diminished since the volcanic eruptions. The Government’s Sustainable Development Plan

key goals address these areas however limited infrastructure and vulnerability to further

volcanic activity is causing a cautious approach to inward investment.

Given Montserrat’s unique experience, the primary aims of its development strategy in

general terms are to:

1. Rebuild the economic infrastructure in the north of the island to generate employment

and facilitate economic growth, and to manage the public sector in a manner that will

not crowd out the private sector;

2. Enhanced human development and improved quality of life of all people on

Montserrat.

3. Environmental Management and Disaster Mitigation – Montserrat’s natural resources

conserved within a system of environmentally sustainable development and

appropriate disaster mitigation strategies for.

4. Governance –An efficient, responsive and accountable system of governance and

public service.

5. Population – A sustainable population

6. Reposition Montserrat in the regional and international market to ensure that

opportunities are maximised and the effects of external threats are minimised.

C. Fiscal context and Existing Cost Classification

In 2009 the recurrent budget submissions to the Ministry of Finance by ministries and

departments after some earlier revisions totalled $123,092,400. The Ministry of Finance

with the support of ministers and accounting officers reduced the budget to $95,220,200

by eliminating programmes, suspending salary adjustments for cost of living increases and

requesting ministries and department to operate within their budget and to observe certain

limits and guidelines issued by the Financial Secretary. The General Warrant issued by

the Minister of Finance for instance was, unlike previous years, only made to cover an

operating period of seven months as appose to a full year and later adjusted based on

changes in the financial situation. It is obvious that for 2009, GoM is likely to cover

expenditure budgeted but given current levels of budgetary support, public expenditure in

2010 and beyond will have to be streamlined to match revenues. This process can be

reached using a planned approach or a crisis management.

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D. Potential Actions to Increase Revenue or Reduce Expenditure

Table XX in Appendix I provides a list of all the recurrent expenditure heads including the

statutory payments made directly from the Consolidated Fund. In the following

paragraphs an attempt will be made to examine the composition of several of the

expenditure and revenue heads. Expenditures will be analysed in terms of fixed

uncontrollable, semi variable and variable controllable costs for the purposes of

determining flexibility. Revenues will be examined in terms of scope for increases in the

context of the existing economy.

A full analysis of the potential revenue generating activities is included in appendix XX

however those that are considered to offer material gains are summarised below:

Recurrent Revenue

Using an estimated population of 5,000 persons, the analysis reveals that the local revenue

generated per capita was $6,423.49 in 2007, this rose to $8,033.64 in 2008. In 2009, local

revenue per capita is likely to increase further to $8,544.04. Montserrat has an aging

population with 20% over 60 and a similar percentage of school age. The working

population is estimated at approximately 2,000 persons meaning the revenue generated per

capita falls between $16,000 and $21,000 per working person. The Department of Labour

has also confirmed that based on their survey, the average monthly salary on Montserrat is

$1,011.33. Given that the recommended basic food basket is valued at over $600, there is

hardly sufficient left for rent, utilities and transport.

Theoretically, there is some scope for a restructuring of the tax structure that may yield

some modest increases provided the initial resistance has settled. These will include the

following:

i. Lowering the income threshold for tax purposes from $15,000 to the minimum

level stipulated for social welfare purposes that is $12,000. This will increase the

tax base but will reduce current disposable income by $450 per working person.

ii. Modify the rate of import duties across goods that have high consumption

volumes;

iii. Minimise the number of general exemptions both at the sector level and for

specific classes of businesses;

These measures will cause the economy to contract further and will impact public

revenues negatively. These measures are possible but it might be useful to implement

them when economic activity can be sustained rather than as it happens now in spurts

based on public infrastructure or publicly aided projects.

Fees, fines, permits, rent an interests represent 5.3% or $2.3m of the total revenue. Even

with significant increases in fees, the yield from these will not be significant in the short

term. While it is important and it is recommended that the fees be reviewed, GoM cannot

rely on these measures to significantly increase revenue. In the long term however, there is

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a positive correlation between user fees and population size and this is likely to help public

revenues as population increases if an appropriate level of fees and licensing regime is in

place.

The revenue from the Hotmix Plant and the Operation of Plant and Workshop accounts for

$4,000,000 of local revenue. Where there are no projects or economic activity these assets

will remain idle and budgeted revenue will not be realised despite an ongoing recurrent

cost of maintenance. This is a key financial risk to GoM if planned development

expenditures are required to be diverted to fund recurrent activities.

Potential Revenue Generating

Activities

2009 2010 2011 2012

Lower tax threshold 0 450,000 900,000 900,000

Modification of import tax 0

Minimise exemptions 0

Increase in fees and charges 0 12,000 24,000 36,000

Potential Increased Revenue 0

Expenditure Reduction

Government of Montserrat expenditure falls into three categories fixed being those that

cannot easily be changed without directly affecting standards of service, semi variable

being those that can be reduced with limited impact to services and variable being the

discretionary services that can be controlled to a degree. These are discussed in greater

depth in Appendix XX however the key areas are documented below:

Cost Classification 2009 2009

EC$ m Proportion

Fixed Cost 69.54 73%

Semi Variable Cost 12.16 12.8%

Variable Cost 13.53 14.2%

Total 95.22

Over 62% of all GoM expenditure is employee related and relatively fixed unless there is a

reduction in public service standards. It should also be noted that only essential vacant

positions have been budgeted for during 2009. This means that as we move closer to the

full establishment, the employee related expenditure will increase further unless the

recommendations from the reform programme address this issue.

Having regard for this, there are some initiatives that will begin to address the public

expenditure problem. They may however, lead to increased expenditure in 2010 and

2011. GoM Pension Reform, once agreed should release significant government funds

for alternate uses (Pension is EC$9.0m). It is anticipated that approximately 41.6%

reduction in expenditure will, this will not be fully recognised for a period of 10 years.

Approximately $4 million is spent on the gratuities of contract officers and ex gratia

payments and therefore policies aimed at reducing the number of contract officers,

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reducing the rate of gratuities and moving persons to the civil service scale without

compromising the quality of persons recruited will release pressure on the budget.

It is also anticipated that considerable efficiencies and savings will be gained in the long

term from the consolidation of public services. The merger of customs and Inland

Revenue, the liquidation of Philatelic Bureau and reorganisation of the General Post

Office, the reorganisation and development of the Treasury Department will lead in this

area. However, the merger and reorganisation of Broadcasting and Information Services,

reorganisation and restructuring of the hospital services along with similar reorganisation

in other ministries and departments will ensure that in the long term that the public service

will be focused and efficient. These activities are more difficult to cost until the

management is in place and a consolidated business plan and budget is presented.

The other major decision has to do with implementing an outsourcing/privatisation/public

private programme. The key areas identified for some degree of private sector

participation are listed in the attached Matrix.

If the development of new Government Accommodation is approved and constructed this

could reduce approximately $1m per annum in rental costs albeit the cost will be

approximately EC$10.6m meaning pay back could be made within 10 years.

Approximately 7% of the recurrent budget is assigned to subventions to Statutory Bodies

of which 52% represents that made to the Montserrat Volcano Observatory any reductions

in this could result in inadequate monitoring leading to poor decision making in the event

of eruptions.

Potential Expenditure

Saving

2009 2010 2011 2012

EC$ EC$ EC$ EC$

Pension & gratuity related

costs

0 499,200 998,400 1,497,600

Accommodation 0 0 500,000 1,000,000

Reduction in Overseas

Travel

0 25,000 25,000 25,000

Total Potential Savings 0 524,200 1,523,400 2,522,600

Key Conclusions:

Taxation is already a considerable proportion of workers earnings. However

additional revenue could be generated albeit this will mainly through direct and/or

indirect taxation which will greatly affect the disposable income of the population

and the overall economy of the private sector unless it is introduced at a time when

there is evidence of sustainable economic activity.

Public expenditure cannot be reduced without a major change in the structure of

the public services. Over 73% of the budget is fixed and difficult to cut in the

short term. Also if high proportions of variable expenditure are reduced, then

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human, plant and other resources become idle affecting revenue generation. This

will have a negative spiral effect on the recurrent and development budgets.

Significant changes to expenditure are unlikely without reductions in the standards

and services government provides.

If the capital budget and investment promotion budget enlarged the anticipated

benefits could be delivered in a quicker timeframe however there would need to be

assessments undertaken to ensure the capacity was available to achieve this.

Improved institutional arrangements are required for promoting investments and

delivery mechanisms fine-tuned to make Government operations more responsive.

E. Strategic Objectives

The full road map to a balanced budgeted is appended to this report however there are

seven primary objectives that the GoM considers critical to the economic viability of the

island.

1. Commence construction of the jetty, breakwater, and fishing fleet safe harbour and

small craft marina, and to reintroduce the ferry service. It is envisaged that this will

increase access to the island bringing tourism and attracting economic activity.

Whilst this is difficult to quantify in terms of economic benefits this is key to the

redevelopment of Little Bay as access has continued to be a barrier to growth.

2. Completion of the Little Bay infrastructure development including the development of

new Government accommodation.

Approvals in theory have been agreed for the Little Bay infrastructure that should

create an additional X No. of businesses and X No. of jobs. It has already been

highlighted that the development of permanent Government accommodation could

lead to in excess of EC$ 1m per annum.

3. Facilitate geographical survey, to ascertain sites and depth of geothermal lakes

facilitate initial drilling and testing to determine feasibility and commence construction

if it is practical to do so.

A functioning geothermal power plant would feed low cost energy to the population of

Montserrat increasing disposable income and act as an attraction to the private sector

wishing to locate their businesses. Whilst there would be a reduction of import duty for

the existing fossil fuel generators this would be offset against cheaper electricity to the

Government. Savings would also be realised in the frequent refurbishment of the

electricity generators by Montserrat Utilities Ltd.

4. Develop the tourism product and market niche tourism opportunities, i.e. volcano

tours, day tours, university and college tours, diving and bird watching.

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The economic benefits of tourism to some degree remain uncertain however if an

average visitor spends EC$500 per visit and an additional 2,000 tourists arrive this will

inject EC$ 1m into the economy.

5. Implement initiatives to enable better access to health care in areas of greatest need.

This is primarily a social development objective as improvements to Health Care are

required generally. It should also act as a benefit to attracting additional population.

6. Continue with the Public Sector Reform and Public Sector Outsourcing plans to

improve efficiency in the delivery of public services albeit the full benefits might not

be realised in the short term.

Public sector reform will continue in the medium term where it is envisaged that

efficiency improvements will be identified. Additional attention will be placed on

outsourcing government activities in order to stimulate the private sector linking

through to potential for outsourcing companies to expand into additional business as

the Little Bay development progresses. It is anticipated that as the private sector

expands into new business savings will be accrued to the GoM through a tapering

contract value built into the original agreements.

7. Enact the Public Integrity Legislation to improve confidence in donor agencies that

Montserrat is committed to transparency and good governance.

The existing plan is to present the Act to Legislative Council on the XX/XX/XX with a

view to full implementation by the XX/XX/XX.

F. 3 Year Projected Revenue and Development Budget

Taking into account the identified additional revenue generating activities and cost control

measures highlighted in this report, together with the anticipated economic benefits from

key development activities the following summarised table forecasts the future revenue

and development budgets for the GoM. Details are provided in appendix XX.

Income 2009 2010 2011 2012

EC$ m EC$ m EC$ m EC$ m

Total of Local Revenue 42.74

Budgetary Aid Approved 40.26

Budgetary Aid Unapproved 12.20

Total Revenue 95.22

Total Expenditure 95.22

Development Expenditure 42.83 45.3 14.7

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H. Conclusions

As sources of available tax and charges revenue are limited due to the small size of

population there will invariably be a required for continued budgetary aid in the medium

to long term. The present economic conditions will continue in the foreseeable future until

the population and internal investment increases to a degree where sustainability can be

achieved. Without this the only realistic options to reduce reliance on budgetary aid would

be to significantly reduce standards of living and public service levels on Montserrat.

Notwithstanding the above comments, advancement of developments such as Little Bay

and Port Redevelopment together with investments in tourism, exploitation of geothermal

technologies and improvements to governance should have a positive effect on the

economy. If these developments could be progressed faster than originally planned then

the expected economic benefits would materialise to the recurrent budget sooner.

Some expenditure savings and potential for increased revenue generating activities have

been identified, with the exception of Civil Service pensions these are not material in

terms of the annual expenditure requirements. It is anticipated that these would generate

savings of approximately XXX to the Government of Montserrat.

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List of Appendices

Road Map Action Plan

Economic Analysis

Financial Analysis

Update on key policy Initiatives

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APPENDIX I – ECONOMIC ANALYSIS

Economic Analyses

Additionally, the price of energy coupled with increases in commodity prices in

particular steel, cement and wheat saw the cost of living index rose significantly in 2007

and 2008.

Table I : Inflation Rates For Montserrat

Particulars 2003 2004 2005 2006 2007 2008

Annual Inflation Rate (%) 1.2 4.0 0 1.0 4.0 4.5

Despite the global economic crisis, economic activity in Montserrat grew by 5.4% in

2008, compared to 3.0% in 2007, thus outperforming the 1.7% economic growth in the

Eastern Caribbean currency Union in 2008.

This significant growth was attributable to a 22% growth in the wholesale/retail trade, as

well as a 5%, 3.3% and a 24% growth in the government services, construction and

agricultural sectors respectively. Growth in these sectors had a positive spill over effect in

the transportation, banking and insurance sectors which also grew by 5.0% and 7.4%

respectively. It is also worthy of note in terms of dollar value the 5.0% increase in

government services is greater that the dollar value of increases in the construction,

agricultural and wholesale/retail sectors together. Thus the government services sector is

critical in the short to medium for the growth and or stability of the economy.

Economic data available up to April 2009 indicates that agricultural production is over

70% more than that for the same period in 2008. Similarly in the case of new

constructions, for the period January to April, the value of new constructions is estimated

at 17% more that what it was for the corresponding period in 2008. The January to April

figures are however, not so positive for other key indicators of economic activity as Table

II indicates. Compared to the January to April figures for 2008, the figures for the

corresponding period this year are all down:

o Crude materials export is down by 35%.

o Total exports down by 47%

o Total imports down by 13%.

o Tourism - Visitor arrivals down by 24%.

o Tourism – visitor expenditures down by 81%.

Table II: Summary Indicators - January to April 2009

Jan.–April

2008

Jan.-April

2009

Jan.-Dec.

2008

Jan.-Dec.

2007

Agricultural Production (Lbs.) 38,664 66,900 91,597 81,847

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New Construction (EC$000) 4,130 4,850 12,240

Tourism: Visitor Expenditure (EC$000) 6,910 1,290 19,020 20,100

Tourism: Visitor Arrivals 4,151 3,167 10,364 10,449

Total Imports (EC$000) 29,660 25,860 102,730 80,030

Total Exports (EC$000) 5,260 2,780 10,960 7,290

Crude Materials Export (EC$000) 2,200 1,420 5,540

Inflation (%) 2.1 1.2 4.5 4.0

If this pattern continues, the prospects for 2009 are not good for the tourism and crude

materials sectors. The contraction of construction activities in the region has contributed

to a lowering of demand and consequent, a fall in the export of sand and aggregates.

Additionally, the visitor arrival figures are down and so are the expenditures, this is not

surprising as the economies from which they are expected are all projected by the IMF to

experience contraction, see Table III below. They are suffering from significant increases

in unemployment and many of the surviving businesses are experiencing falling demand,

shrinking profits and difficulty in accessing credit. Montserrat therefore cannot expect to

be immune from developments in the global economy.

TABLE III : Latest IMF Projections

(Year over Year % Change)

Countries/Regions 2007 2008 2009

World Output 5.2 3.2 (1.3)

USA 2.7 0.9 (3.8)

Euro Area 2.7 0.9 (4.2)

UK 3.0 0.7 (4.1)

Western Hemisphere 5.7 4.2 (1.5)

Brazil 5.7 5.1 (1.3)

Mexico 3.3 1.3 (3.7)

Source: IMF World Economic Outlook (April 2009).

Notwithstanding all these looming clouds however, the prospects are for growth of 2%

in 2009. This growth is expected to be largely driven the projected expansion in the

construction sector financed largely by the government of Montserrat. Therefore,

continued investment by the GOM in these economic infrastructure projects as well as all

other projects that impact the strengthening and growth of the private sector, is critical.

The governments of the world who are committed to leading their economies out of this

global recession, have for the most part recognised the important role that the government

sector must play if their economies to weather the ravages of the global economic crisis.

The strategic approach adopted by these countries, include increased investment in

capital projects and employment creation and /or injection of capital into financial

institutions experiencing financial difficulties.

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Consumer Price Index

Consumer prices were estimated to have increased by 4.5% during 2008, and for the

period January to April 2009, it was estimated at 1.2%, which is lower than the 2.1%

inflation registered for the same period in 2008. This trend which was influenced by

falling commodity prices, is indeed a very desirable one.

Central Government Fiscal Operations

The fiscal operations of the central government generated a current account deficit of

$2.3m in 2008, well below the surplus of $1.1m in 2007, see Table IV below. The current

account deficit was financed by inflows of current grants totalling $59.0m. Current

revenues rose to $40.2m, reflecting increased collection from both taxed and non-tax

sources. The increases in tax revenues were mainly attributable to increased collection

from taxes on international trade and transactions, associated in part with the expansion

in economic activity and higher import prices of particularly food and petroleum

products in the first half of 2008.

Table IV: Central Government Fiscal Operations

(EC$M) 2005 2006 2007 2008

Current Revenue 35.5 35.2 36.6 40.2

Current Expenditure 78.9 85.4 93.3 99.2

Balance Before Grants (43.4) (50.2) (56.7) (59.0)

Current Grants 48.9 53.4 57.8 56.7

Current A/c. Balance after Grants 5.5 3.2 1.1 (2.3)

Source: MOF Estimates of Revenue & Expenditure.

The fiscal deficit (before grants) is projected to increase based on an anticipated

expansion in public sector investment and a reduction in tax revenue inflows due among

other things to reduced activity in the private sector, and reduced petroleum and other

imported commodity prices.

While the current account deficit before grants is not likely to see a major reduction until

after a thorough independent review of the operations of the individual ministries with

clearly defined approach to restructuring and ‘rightsizing’ each ministry.

Credit

Although liquidity in the commercial banking system contracted during 2008, the

banking system continues to be very liquid. The ratio of liquid assets to total deposits

plus liquid liabilities fell by 4.8 percentage points to 102.7%. The loans to deposits ratio

rose by 3.1 percentage points to 23.6%, due primarily to a faster rate of growth in loans

and advance than in deposits.

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The spread between the weighted average interest rates on loans and that on deposits

narrowed to 7.05 percentage points at the end of 2008, compared to 7.7 percentage points

a year earlier. The narrowing of the spread was due mainly to a 0.72 percentage point

decline in the weighted average interest on loans. This is a positive development as it

makes bank credit more affordable. It is not surprising therefore, that commercial bank

credit to the private sector expanded by 15.95% to $6.3m during 2008. This was due

mainly to increased lending to households ($5.1m) to facilitate home ownership. An

analysis of the distribution of credit by economic activity indicates that credit for

personal use, which accounted for 80% of total credit during 2008, increased by 14.1%.

Credit to the distributive trades expanded by 26.3% to $1.0m.

Trade & Payments

The balance of payment deficit widened from just $0.3m in 2007 to $7.6m in 2008. This

deterioration in the balance of payment position was traced back to an increase in the

current account deficit. This deficit in the current account widened from $29.0m in 2007

to $47.4m in 2008. This is mainly due to a widening of the merchandise trade deficit.

Strong growth in imports contributed to a 26.4% increase to $78.5m in the merchandise

trade deficit. The value of export rose by 53.9% to $3.8m in 2008, reflecting an increase

in demand for construction aggregate.

The current account deficit on the balance of payments is set to increase, as larger import

payments and a decrease in the value of export is projected. Import payments are

expected to increase based on the expansion in construction activities, while external

demand for construction aggregates is expected to contract, resulting in reduced export

receipts.

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APPENDIX II – FINANCIAL ANALYSIS

Financial Analysis Expenditure Analysis

Table IV in appendix X is a summary of expenditure covering the period 2004 to 2009.

It is clear that without any further budget support from DFID, GoM recurrent expenditure

must be reduced to $83,020,200 ($95,220,200 minus $12,200,000). It must be also that

more than half the budget has now been spent which makes this an extremely difficult

task. The last time the Government of Montserrat’s budget was at this level was in 2006

when the actual expenditure on the recurrent budget was $84,093,672. The 2006 budget

was however $83,213,400. This means that even in 2006 given the content and structure

of current expenditure, the Government of Montserrat spent over $83 million dollars.

Prices have also risen dramatically since then, fuel for instance, increased from around $7

to almost $17 dollars per gallon.

Again in 2008, the unaudited actual expenditure was $97,220,200 and in 2007 was

$93,332,896. The total budgets for both years were $96,142,500 and $90,002,500

respectively. This further emphasizes the fact that the cost current public services

provided exceeds $83 million dollars by a substantial margin.

Finally, it should be noted that in 2009 the recurrent budget submissions to the Ministry

of Finance by ministries and departments after some earlier revisions totalled

$123,092,400. The Ministry of Finance with the support of ministers and accounting

officers reduced the budget to $95,220,200 by eliminating programmes, suspending

salary adjustments for cost of living increases and to request ministries and department to

operate within their budget within certain limits and guidelines, the General Warrant

issued by the Minister of Finance for instance was unlike previous years only made to

cover an operating period of seven months as appose to a full year. The case being made

here suggests that any attempt to reduce the budget to $83 million will require a

significant reduction and restructuring of the public service.

In the following paragraphs an attempt will be made to examine the composition of

several of the expenditure and revenue heads. Expenditures will be analysed in terms of

uncontrollable, semi variable and variable costs for the purposes of determining

flexibility and revenues will be examined in terms of scope for increases in the context of

the existing economy.

Short Term Uncontrollable Costs

Consolidated Fund Services

Total expenditure on Consolidated Fund Services ($14,887,200 in 2009) has remained

fairly stable since 2007 with variations of less than $1 million. There was a significant

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increase between 2006 and 2007. The increase in 2007 over 2006 relates to an increase

in pensions and the consequential cost in terms of social security payments of the transfer

of public servants to the Social Security Scheme. It was also the last time that there was a

salary increase and therefore lower paid workers who are below the social security

insured earnings ceiling were required to contribute at a higher level to the scheme and

this would have served to increase the payments to Social Security on this head in 2007.

The first point to be made is that approximately 81% of this head is used to pay pensions

and gratuities and 6.4% relates to salaries paid through Consolidated Fund Services.

Approximately 8.4% is used for debt servicing and 4.2% is used for refunds of income

taxes, duties and overpayments by customers where they occur. Consolidated Fund

Services comprise about 15% of the 2009 budget. All these payments are required by

statute or contracts and cannot be avoided.

Salaries & Wages

Salaries and Wages ($40,655,100 in 2009) represent approximately 43% of the total

recurrent budget. This is again a fairly constant provision in the budget however in

between 2008 and 2009 the Salaries & Wages subhead increased by over $5,547,176.

Just over $2.20m of this increase was due to the separation of wages expenses from under

other operational expenses lines (in the Communications and Works ministry), in which

they were inappropriately included. Additionally, over $750,000 of the wages and

salaries increase was attributable to the normal increment increase payable annually to

qualified employees. Another major component of this increase was increase in salaries

due to the creation of a new ministry as well as other new posts created based on solid

business cases presented.

Allowances including Travelling, other Benefits, uniform/protective clothing

Allowances are approved entitlements and form part of a public servant’s contract of

employment. These cannot be varied in the short term without mutual consent.

Allowances include market premium, inducement, professional, duty, entertainment,

travel and telephone allowances. The total allowances for 2009 is $6,220,200 or 6.5% of

the total recurrent budget. Reductions in this area will no doubt have an impact on

recruitment, morale and the output of ministries and departments but will also require

changes in the terms of employment.

Rental of Assets

This item is fixed in the short term as it represent rental for government offices and there

are no cheaper alternative available. The total allocation for rent ($1,121,100) is 1.2% of

the recurrent budget for 2009. The ability of GoM to eliminate this cost is linked to the

approval and construction of government accommodation. This figure is substantial and

will repay for the asset over time. The problem with this is that current private sector

buildings may remain idle and may discourage private sector investment initiatives.

Sludge Wagon Operation

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This operation is performed by the Ministry of Communication and Works. The budget

allocated is $450,000 or 0.5% of the recurrent budget. A decision was taken by

Executive Council to transfer this service to Montserrat Utilities Ltd. This is still

awaiting implementation. This is unlikely to decrease the budget given that most of the

buildings that use this service are government owned. This programme remains a need at

this time given that many of the septic tanks were designed for frequent extraction of the

liquid waste. In order to eliminate this service these tanks will have to be reconstructed

to allow seepage through the soil and this may prove costly given the geology of the

north.

Grants and contributions including Insurances

Grants and contributions is an expenditure subhead used to pay membership fees or make

contributions to the budget of institutions in which GoM has a contractual or beneficial

interest. These include CARICOM, OECS, Commonwealth Secretariat, PAHO, CAREC,

and University of the West Indies. The allocation to Grants and Contributions is

$2,958,000 and insurance is $379,500. The allocation for insurance is used to pay mainly

for health care coverage for public servants and insurance for the airport. The combined

sum of these two items represents 3.5% of the budget. GoM options in the medium term

are to reduce its membership in some of these institutions, decrease or eliminate its

obligation to provide health insurance for public servants however insurance is a matter

for negotiation as it is currently a condition of employment. In eliminating this cost

given the inadequacy of local health care services and the increasing cost of overseas

medical care may reduce access to affordable health care to a majority of public servants

unless an appropriate public assistance policy is put in place.

Fees, Rewards and Expenses

The 2009 Budget allocated $1,487,400 or 2% to pay for fees, rewards and expenses. This

subhead is used to pay individuals appointed to a number of Boards and Commissions

established under a variety of Acts for example, Labour Advisory Board, Public Service

Commission, various Appeals Boards, commissions of inquiry, recruitment expenses and

so on. These are in many cases computed based on established rates or as per negotiated

contract. Savings can be made by not appointing people to these boards or by delaying

work that may need to be done at the expense of a reduced level of governance.

Mechanical Spares, Operation of Plant & Workshop and Hotmix Plant

The heads account for approximately $1,226,000 or 2% of the budget and include only

the service elements as personnel costs are paid from the salaries subhead. These

expenditures have a relatively high fixed cost and essential to the infrastructure

development programme but without projects or work these assets can remain idle.

Much of the skills, plant and machinery are available in the private sector however there

is little appetite for developing public private partnerships in this area. Under extreme

budgetary constraints there is scope for changing the management and delivery of this

17

service outside the public sector. Several consultancies have identified these as

candidates for outsourcing. These items however remain fixed because of the need for

these services in our current development context.

Semi -Variable Costs

These are costs that are partly fixed given by virtue of the fact that there is a fixed fee

associated with their use or that they are goods and services that must be procured but

there is a minimum charge. This category of expenditure includes utilities,

communication expenses and subventions.

These areas of expenditure ($12,155,000) represent 13% of the recurrent budget. In the

case of utilities that is, electricity and water, there are fixed charges that cannot be

adjusted. The level of the variable portion of the cost to the budget is firstly a function of

inefficient accommodation resources. There are a number of small detached offices that

require individual air conditioning units, separate meters and cannot be centrally

monitored and managed. This in an area that is likely to see further increases in cost as

fuel prices increase and also if GoM was to attempt to move to full cost recovery in

Montserrat Utilities Ltd. Secondly, but in a limited way these costs are related to the

vigilance of accounting officers to encourage energy saving practices.

The other area of expenditure classified under this category is subventions. The total

subvention included in the 2009 Budget is $7,495,000 or 7% of the recurrent budget. It is

necessary to point out that 52% represents contract related expenses under the MVO

volcanic monitoring arrangements. The Tourist Board receives 19% for its operations.

Golden Years Home for the elderly receives 11% a portion goes to the meals on wheels

programme. The Cultural Centre and the funding of the Montserrat/UK Office account

for 5% of the total subvention. The Land Development Authority and the Montserrat

National Trust receives 3% and 4% is available for Montserrat Water Authority if

required after inspection of their income statement. Finally, 6% goes towards funding the

Montserrat Community College. This item can be varied by taking policy decisions to

close, outsource or change the way these institutions are managed in the medium to long

term.

Variable Expenditure

Variable costs are those which offer a high level of discretion to the Accounting Officer

within a ministry or department to vary or reduce through their own initiative or action.

This category is used to capture the rest of the allocation which represents 14% of the

budget or approximately $13,527,600.

Supplies and Materials

The budget for supplies and materials in the 2009 budget is $2,198,400 or 2.3%. The

Ministry of Health and Community Services allocation accounts for $1,399,000 or 64%

of this amount. The kitchen, pharmacy, laboratory and general medical supplies are the

areas heaviest users of this expenditure line. There may be scope for efficiency savings

18

through outsourcing, changes in procurement practices and stores management but this

would require an independent review of systems and procedures and costing exercise.

Public Welfare Services

Public Welfare Services cover a number of areas including financial payments to the

poor, foster care, overseas medical care, one off support to temporary distressed

individuals and maintenance for refugees or homeless repatriated citizens including other

rental assistance. The budget available in 2009 is $2,758,000 or approximately 3% of the

recurrent budget. This is a high risk area where the liabilities can increase out of control

quickly and where essential care and support can be denied because of resources and

discriminatory policies. Time and care is required to design accessible and appropriate

social welfare systems and affordable package of benefits.

Health Care Promotion

An amount of $1,000,000 was included for health promotion. This is the Garbage

Collection Contract is paid and other programmes aimed at promoting healthy lifestyles

are financed.

Maintenance Services

Maintenance services include all repairs to road and buildings. It includes licensing for

software currently used by GoM and cost for repairing computers. A sum of $680,000

has been allocated for this purpose. The overall budget allocation is $3,643,800 or 4%.

Public works receives $1,150,000 down from $2,620,000 as a consequence of

transferring the wages component to the wages subhead. Given the resources available

and the non approval and implementation of the roads project may mean considerable

idle time.

The remaining $1,813,800 is distributed across ministries and departments. Given the

resource inputs into PWD, there is a case for the centralisation of maintenance services.

This will require discussion and a policy decision or a shift to the provision of the service

to the private sector.

Overseas Travel, Hosting and Entertainment, Training, Culture

The total sum budgeted for these items are $1,851,000 or 2%. The scope for reductions

in this by centralising expenditure, setting overall limits, creating more control hurdles

such as all unfunded travel must be approved in advance by Council.

Printing and Binding, Programme and Production, Advertising

The expenditure lines above accounts for $695,400 or less than 1% of the 2009 Budget.

These expenditures are made for printing of forms, the Gazette, receipts and various

administrative documents and training materials. Programme and Production is used for

19

Radio Montserrat & Government Information Unit therefore little scope for savings is

envisaged.

Key Conclusions:

Public expenditure cannot be reduced without a major change in the structure of

the public services. Over 73% of the budget is fixed. Human, plant and other

resources become idle if variable expenditure is reduced.

Significant changes to expenditure are unlikely without reductions in the services

government provides. In the short term it is likely to be more expensive but in the

medium to long term in areas where there is also a private sector demand for the

service there is likely to be potential economic benefits. Services will have to be

identified, analysis done and implementation plan done.

Capital budget and investment promotion budget enlarged and delivered in a

quicker timeframe;

Institutional arrangements for promoting investments improved and mechanisms

fine-tuned.

20

TABLE XX – COST CLASSIFICATION 2009 Recurrent Budget Detailed Cost Classification

Expenditure Classification EC$ %

Consolidated fund services

Personal Emoluments & Allowances Fixed 1,007,200 1%

Debt Servicing Foreign Fixed 500,000 1%

Debt Servicing Domestic Fixed 360,000 0%

Guarantee Payment Fixed 395,000 0%

Pensions Fixed 12,000,000 13%

Revenue Refund/Other Expenditure Fixed 625,000 1%

Personal Emoluments Fixed 33,512,100 35%

Wages Fixed 7,143,000 8%

Allowances Fixed 3,699,300 4%

Other Benefits Fixed 140,000 0%

Travel Allowances Fixed 1,948,800 2%

International Travel and Subsistence Variable 795,000 1%

Utilities Semi Variable 2,459,600 3%

Communication Expenses Semi Variable 821,000 1%

Supplies and Materials Variable 2,041,200 2%

Purchase of Furniture & Equipment Variable 772,700 1%

Uniform and Protective Clothing Fixed 432,100 0%

Maintenance Services Variable 3,643,800 4%

Rental of Assets Fixed 1,121,100 1%

Visiting Advisor/Volunteers Variable 255,000 0%

Insurance Fixed 379,500 0%

Hosting & Entertainment Semi Variable 125,000 0%

Training Semi Variable 540,000 1%

Advertising Variable 51,500 0%

Printing & Binding Variable 388,900 0%

Investment Promotions Variable 75,000 0%

Grants & Contributions Fixed 2,958,000 3%

Subventions Semi Variable 7,495,000 8%

Fees and Rewards Fixed 1,487,400 2%

Public Welfare Services Variable 2,758,000 3%

Health Care Promotion Variable 1,000,000 1%

Claims Against Government Fixed 100,000 0%

Agricultural/Departmental Activities Variable 487,500 1%

Emergency Expenditure Semi Variable 460,000 0%

Sundry Expenses Variable 494,000 1%

Culture Variable 365,000 0%

Mechanical Spares Fixed 400,000 0%

21

Operation of Hot Mix Plant Fixed 400,000 0%

Operation of Plant & Workshop Fixed 426,000 0%

Programme Production & Promotion Semi Variable 255,000 0%

Minor Works Variable 325,000 0%

Re-saleable Stock Variable 75,000 0%

Sludge Wagon Operation Fixed 500,000 1%

Debt Servicing – Domestic Fixed 2,500 0%

Total Estimated Recurrent Expenditure 95,220,200 100%

Fixed 69,537,000 73%

Semi Variable 12,155,600 13%

Variable 13,527,600 14%

95,220,200

22

Revenue Analysis

In the 2009 budget, GoM committed itself to raising $42,740,200. Local revenues have

increased incrementally from $32,117,476 in 2004 to $40,168,225 (unaudited) in 2008.

This represents a 25% increase in revenues over the period. Using an estimated

population of 5,000 persons, it means that the local revenue generated per capita was

$6,423.49 and rose to $8,033.64 in 2008. In 2009, this will increase further to $8,544.04.

Montserrat has an aging population with 20% over 60 and a similar percentage of school

age. The working population is estimated at approximately 2000 persons means that the

revenue generated per capita falls between $16,000 and $21,000 per working person.

The Department of Labour has also confirmed that based on their survey, the average

monthly salary on Montserrat is $1,011.33. This figure is similar to noted in 1997 by a

DFID sponsored Social Survey where the average salary was then computed to be

$1,000. This at the very least underscores the islands capacity to generate significant

revenue streams without serious hardship given a fairly stagnant economic environment.

Income and Trade taxes

This analysis will include taxes on income and profits, taxes on domestic goods and

services and taxes on international trade and transactions. These heads represent

$32,490,000 or 76% of the local revenues to be generated in 2009. The contribution

made in these heads will be responsive to economic activity and any meaningful

increases in revenue from these heads will depend on the following:

i. Number of capital projects and use of local resources in the implementation of

these projects;

ii. Developments in the private sector including new businesses and public/private

partnerships;

iii. Movement of persons in and out of Montserrat for business or pleasure.

There is some scope for a restructuring of the tax structure that may yield some modest

increases provided the initial resistance has settled. These will include the following:

iv. Lowering the income threshold for tax purposes from $15,000 to the minimum

level stipulated for social welfare purposes that is, $8,000. This will increase the

tax base but will reduce current disposable income.

v. Modify the rate of import duties across goods that have high consumption

volumes;

vi. Minimise the number of general exemptions both at the sector level and for

specific classes of businesses;

The problem here is one of timing because if economic activity is stagnant or declining,

these measures will only cause the economy to contract further and will impact public

revenues negatively.

Licenses, fees, fines, rents, interests

23

The total revenue budgeted from these revenue heads is $4,341,700 or approximately

10% of locally generated revenue. The amounts include all licenses and fees including

drivers and motor vehicle, business licenses, immigration and naturalisation fees, real

estate fees, miscellaneous rental of government assets. The total revenue is derived from

a large number small charges and user fees ranging from less than $1,000 per annum to

almost $1,000,000 per annum in the case of vehicle licenses.

Several ministries/departments have revised some of these fees or are in the process of

doing so – Physical planning, Health etc. Increases in these fees substantially however,

will not lead to any major increases in revenue but it will be a step in the right direction.

ECCB Profit, reimbursements and other revenue

There are some 38 revenue subheads contributing varying amounts to make up a

budgeted amount of $5,908,500 or 14%.

The revenue from the Hotmix Plant and the Operation of Plant and Workshop accounts

for $4,000,000 of this amount. Clearly, where there are no projects or economic activity

these assets will remain idle and will not be able to realise budgeted revenue even though

there is an ongoing recurrent cost to maintain them.

ECCB Profits ($250,000) are made from ‘seignorage revenues are variable and given the

Central Banks involvement in bailouts in the insurance and financial sectors. These

revenues are unlikely to be realised over the next two (2) years.

The remaining amount represents reimbursements from the Port Authority for CDB

Loans paid on its behalf and a number of small receipts from user charges – hospital fees,

navigation charges, plant propagation, stamp sales, proceeds from disposed assets and so

on. It is noteworthy that even with major increases in rates in those areas where

Government of Montserrat has the authority to do so is unlikely to yield more than $0.25

million except for major policy shifts in health care delivery.

24

TABLE XX – PROJECTED INCOME AND EXPENDITURE Income 2009 2010 2011 2012

EC$ m EC$ m EC$ m EC$ m

Taxes on Income and profits 16.9 15.32 16.1

Taxes on Domestic Goods and services 1.28 1.31 1.34

Licences 2.03 2.06 2.07

Taxes on International Trade 14.26 14.25 14.25

Fees, Fines and Permits 1.2 1.2 1.25

Rents, Interest and Dividends 1.1 1.2 1.2

ECCB Profits 0.25 0.25 0.26

Reimbursements 0.05 0.05 0.05

Other Revenue 5.61 5.59 4.66

Total of Local Revenue 42.7 41.23 41.18

Budgetary Aid 52.4 39.52 39.52

Total Revenue 95.22

Expenditure

Consolidated Fund Services 14.89 15.06 15.28

Governor’s Office 0.35 0.35 0.35

Administration 5.79 5.78 5.85

Chief Establishment Officer 1.26 1.26 1.29

Police 6.75 6.74 6.84

Disaster Management 5.14 5.11 4.66

Legal 1.50 1.62 1.64

Magistrates Court 0.15 0.15 0.15

Supreme Court 0.98 0.97 0.97

Legislature 0.8 0.8 0.82

Audit 0.88 0.89 0.92

Chief Ministers Office 2.79 2.83 2.85

MYACTS 3.05 3.04 3.08

Ministry of Finance 4.34 4.31 4.72

Development Unit 1.25 1.28 1.29

Treasury 0.93 0.94 0.96

Customs & Excise 1.19 1.21 1.25

Inland Revenue 0.94 0.96 0.97

Post Office 0.41 0.43 0.44

Agriculture 6.84 7.11 7.2

Communication & Works 11.52 11.49 11.29

Education 8.05 8.54 8.71

Health 15.39 16.05 16.23

Total Expenditure 95.22 96.94 97.79

Development Expenditure

25

APPENDIX III – UPDATE ON KEY POLICY INITIATIVES

D. Governance and Public Service

Public Service Reform

In 2005, Montserrat embraced on a review of its public service. Follow gin this review, it

was concluded that a pubic service reform (PSR) process should be undertaken – and this

commenced in 2006 – although the Public Service Reform Unit (PSRU) was not in

operation until the start of 2007. The objectives of the PSR were to transform the public

service of Montserrat, enabling it effectively to deliver high quality services that respond

to the needs of its customers and which make a major contribution to Montserrat’s

sustained economic and social development.

Key objectives of are:

to develop a flexible results-focused performance culture across the public service

through systems which effectively monitor, measure and encourage performance;

to improve the competence and management of public servants in order to enhance

policy capability and to improve the implementation performance of key parts of the

public service which contribute significantly to the social and economic development;

to support the development of a growing economy, in particular through the

implementation of the Sustainable Development Plan;

to focus available resources on the core functions and policy priorities of Government

and to deliver them efficiently and effectively;

to improve the quality and timeliness of service to all customers, in particular through

ensuring that the public service is more joined up;

To improve planning, resource allocation, monitoring, management and accounting

systems and information provision so that accountability is clear, spending is

transparent and resources are more effectively focused on key development priorities.

The focus has been on improving performance and result focus, increasing

accountability, improving human resource management and competence of staff,

customer service, identification of core function and policy priorities, review of

organisation structures to address gaps and emerging needs, and more effective resource

allocation. Reductions in budget have not been a priority in this process to date.

It is, of course, possible to use the organisation review aspects of a public service reform

process to identify areas for the purposes of budget reduction. Indeed the Resource

Allocation Review (RAR) carried out in 1997 at the height of the volcanic crisis did just

that. However, that was a review with expect terms of reference to seek to reduce

staffing number and costs to the level of budget resources available. It is of interest that

the RAR succeeded in reducing the number of established staff from 801 to 694 and non-

established staff from 413 to 284. The total number of staff therefore reduced from 1214

to 978 (a reduction of 19.4% in numerate making a saving of some 16% on personal

26

emoluments and wages). The areas where significant savings could be made were in

Agriculture and Education (both established and non established staff) and

Communications and Works (where the savings were on non established workers).

Today, the majority of posts which were then deemed ‘non-established’ have been

redesignated as established posts. Two Ministries which bore the briny of staff reduction

have not grown back to their pre RAR levels. It is unlikely that any future review with the

purpose of reducing staff numbers would make a significant impact on staff numbers and

costs, as long as the Montserrat Public Service has to contuse to deliver the functions and

service that it is currently expected to provide.

Although the focus may have been more been on increasing accountability and

performance and improving human resource management, some aspects of the current

PSR process that have potential impact on recurrent budget needs. These include:

Introduction of business planning. This may not – in itself - address recurrent budget

issues, but assists both Head of Department and the MOF if budget cuts need to be

made, though identifying priorities. In future, further refinements need to be made to

the business planning process, through enabling Head of Department to identify the

costs of services delivered, and the on-costs of any development expenditure. This

will further assist in the allocation of budget and in identifying priorities for

investment;

Development of a merged Montserrat Revenue and Customs Service. This provides a

more efficient and effective means of managing the revenue services, including

enabling audit, inspecting and enforcement funding to be strengthened. One of the

objectives is to increase the revenue brought in by the MCRS as a result of its

restructuring. However, this objective needs to be viewed realistically. Early work in

2007 indicated that there was potential to reduce arrears by up to EC$14m and

increase tax take by between EC$2-4m per annum. However, this is entirely

dependent on a change in attitude at the policy and political levels – to a position

where there is willingness across the public service, the polecat realm and wider

society to ensure full compliance with tax regulations – even if it means, for example,

making local businesses bankrupt.

The job evaluation process, undertaken because of continual issues relating to miss-

grading and lack of relativities across the public service, has identified the end for a

larger number of grades (to reflect the increasing technical and professional needs of

the public service). It also indicated that some 50-60% of posts do not need their

grades to be altered. Some 10% are deemed to be over graded, and around 35% of

posts need upgrading (the majority by one grade only). Implementation of this job

evaluation process will require increased budget – the 10-12% who are over graded

will not receive salary cuts. Instead they will remain on their current salary until they

move posts, at which point the new post holder will start on the new grade and salary.

So savings may only be seen over a 5 year period. On the other hand the grade and

commensurate salary increases are likely to be demanded as soon as implementation

27

is competed: a potential budget increase of up to EC$1m direct costs and a further

EC$1m in indirect costs (pensions and social security etc);

Organisation review implementation has been undertaken in a context of static public

expenditure. Even where Heads of Department identify a number of additional new

posts that are required, this is tempered by the resources available. However,

experience over the past two years has indicated that – although there is scope to

remove certain posts through improved efficiency and effectiveness in working, there

is also a demand for a range of new posts – usually at more senior policy or technical

grades, to reflect the demands of a modern public service and of increasingly

sophisticated customers. As a result, organisation reviews at best seek to improve

efficiency and effectiveness through reallocation of existing resources, and at times

require additional resources to implement;

Outsourcing is a potential means to reduce public service numbers, and to manage

costs of delivery of certain non core functions. The organisation review process has

identified some candidates for outsourcing, but there needs to be strong political will

to implement this, given how controversial this process has been in other countries.

Although (given the relatively limited scope of the private sector in Montserrat)

contracts for services are likely to cost the same, or slightly higher than the cost of

delivering them through public servants, there is the added bonus of increased

economic activity and the scope to receive taxes from private sector service

providers.

Several aspects of PSR – for example customer service improvements and some aspects

of Montserrat Customs and Revenue Service implementation – require investment in

technology to gain the maximum benefits. Given the relatively small size of the public

service in Montserrat. It is unlikely that significant job savings will be made to

compensate for the development invest costs: there need to be hundreds of lower level

clerical workers for savings to be readily achieved. The recently approved review of the

Post office and the Montserrat Philatelic Bureau will lead to the winding up of the Bureau

and a restructuring of the Post Office. The services will be merged with savings in

medium term savings in personnel but an added revenue source for the post office.

Investment in the construction of post boxes will improve income for the unit.

Overall, the conclusion of the Montserrat experiment to date of public service reform is

that it is not – in itself – a vehicle for achieving significant cuts to the recurrent budget.

Its main focus is performance improvement and increasing service levels. If significant

changes in terms of restructuring and reducing the public service are require, these need

to be addressed as a separate exercise, led form the policy level.

28

Financial Reforms

The enacting of the new Public Finance (Management and Accountability) Act in 2008

put in place the framework for increased accountability, forward planning and

performance measurement. It requires an appropriate Public Service Act to build in the

proper rewards and sanctions component and a good accessible government online

system to improve transparency. The Act also provides for a change in the financial year

from 1 January to 1 April.

CARTAC will assist Montserrat in developing a macro economic and fiscal management

plan in accordance with the Finance Act for tabling for the 2010 fiscal year.

Social Security and Pensions

The 2005 Actuary’s report on the Social Security Fund indicated that the Fund was

unsustainable and would create liabilities of $176 million by 2050 and therefore a

number of recommendations were suggested. Further, while it was essential that

Government being the largest employer on island become a part of the fund to ensure

support and boost the Fund. This created a liability of $21.4 million owed to the Fund by

GoM. DFID has indicated its willingness to provide the outstanding amount provided

that GoM take steps to make the fund more sustainable.

The main recommendations of the report leading to a more sustainable fund have now

been completed. These were increasing the retirement age of persons qualifying for a

social security pension from 60 to 65 years and to modify the pension accrual rate to

ensure that social security pension accrue more favourable the longer an individual serves

starting from a base of 20% after 10 years instead of 30% and accruing yearly at 1.3%

instead of 1%. The cap remains at 60%.

Amendments to the regulations such as the Social Security (Self Employed Persons) 2009

and the Social Security (Persons Abroad and Voluntary Contribution) 2009 Regulations

implemented with effect from 1 July 2009 will lead to an expansion of the membership of

the Social Security Fund. This will help to build up the fund from sources that may not

be resident on island but nonetheless qualify for a Social Security pension having worked

and contributed to the fund in a previous period.

There is also a set of amendments seeks to make the benefits more realistic taking into

account cost of living indices given that they were introduced in 1986 or shortly

thereafter. Clearly, the adjustments could not reflect the combined inflation over that

period but rather represents a ‘guesstimate’ based affordability. These are reflected in the

Social Security (Benefit) (Amendment) Regulations 2009, the Employment Injury

(Amendment) Regulations 2009 and the Social Security (Adjustment of Benefit) (Pension

Increase) Regulations.

29

The final amendment, Social Security Contributions (Amendment) Regulations 2009,

seeks to adjust the ceiling of the Insured Earnings of an individual’s salary. This is the

base on which the pension is calculated. This is critical given that the intention of

Government is to merge the Civil Service Pension with the Social Security Scheme to

provide a single state pension regime.

These amendments were the recommendation of the Actuary in his 2005 report. It is now

time for another Actuarial Evaluation and DFID may wish to consider funding this work.

Nevertheless, these amendments and regulations will go a long way towards making the

Social Security Fund more sustainable.

30

Civil Service Pensions

Montserrat has an aging population with over 20% of the population over 50 years and a

similar percentage is below working age. These are significant numbers in a population

of approximately 5000 persons. In addition, individuals are living longer with the average

life expectancy about 78 years. With the current retirement age at 55 years and 50 in the

case of police officers, GoM must make provisions to pay pensions for a minimum of 28

year after retirement. This fact is placing increasing pressure on the public sector budget.

Consequently, as early as 2003, Government of Montserrat discussed this problem and

advised that steps must be taken to address it. At the time, the Civil Servants became

members of the Social Security Scheme it was advised that this matter should be

addressed. Considerable work was done in this area but there has been greater focus on

resolving this matter over the last two years.

At this point, GoM with the support of CARTAC has reviewed the civil service pension

scheme and has agreed to most of the recommendations and others have been left for

actuarial evaluation and costing. There are several critical decisions that have been taken

that would in the long term significantly limit GoM’s pension liability and in a systematic

way evolve into a more affordable pension scheme.

The first major decision is to increase the retirement age from 55 to 60 years from 1

January 2010, and thereafter the retirement age will be increased over a period of 10

years to 65. This will be consistent with the pensionable age of 65 which has already

been included in the Social Security Legislation.

The second major decision is for the Civil Service pension to become a supplementary

pension with a cap not less than 85%. Given that Social Security pension is capped at

60%, the supplementary pension provided by GoM in this case will be approximately

25%. The maximum pension limit in the civil service scheme is currently 66 2/3% of

annual salary. The supplementary pension combined with the Social Security pension

provides a reasonable pension for the individual but reduces the pension burden

significantly (66 2/3% - 25%). It is however for this reason that the insured earning in

the SS Scheme must be increased so that the social security portion of the pension

becomes equitable for the higher paid civil servants.

The third major decision is that new entrants will only join the Social Security Scheme

which means that at some point in the future, the civil service pension scheme will end as

it will have no one that qualifies. When these three decisions are implemented the public

pension scheme will at least be far more affordable and sustainable that it is currently.

There are several outstanding matters which are critical to implementing these policy

decisions:

31

i. New Pensions Bill must be drafted to include the Police Force using the

Anguilla model as the base. CARTAC has agreed in principle (see email

5/06/09 from Michel Marion).

ii. There is a need to employ an Actuary to design the details of the scheme

but it may need further inputs in costing the new scheme. CARTAC has

agreed in principle.

Financial Sector Regulation including TIEAs

The GoM has made a commitment to comply with international standards in relation to

the regulation of financial services, anti-money laundering, anti-terrorism financing and

in more recent times comply with directives aimed at eliminating ‘harmful’ tax practices.

This has been done both with the encouragement and/or insistence of HMG.

The implication of this is that new institutions such as Financial Intelligence Unit,

Reporting Authority for suspicious transactions have been established with considerable

resource implications. Bilateral agreements have or will be signed that must be

implemented and which are enforceable and costly systems including technology are

being adopted which require resources and expertise hitherto were not required.

In November, Montserrat will undergo a mutual evaluation of its financial sector based

on methodologies prescribed by the Financial Action Task Force. It is likely to require

serious inputs in several areas to reach the compliance level required even though there is

an adverse cost/benefit ratio and the resources are not available locally to pay for the

necessary improvements.

This poses substantial regulatory risks to GoM that may in the end become contingent

liabilities for HMG. There is some need for dialogue and a coordinated approach to

financial services regulation that does not place undue burden on a territory’s budget

because it will not be sustainable. It is noteworthy that economies like Montserrat are

dominated by one or two sectors and are susceptible to exogenous shocks that could

overwhelm them in a short space of time.