Sub-national spending in the broader political economy of Timor-

Leste

Saku AkmeemanaWorld Bank

2

Growth in Capital Spending

3November 30, 2012

Surge in oil revenues … flowing through to national spending

0

500

1000

1500

2000

2500

2004 2005 2006 2007 2008 2009

Taxes Royalties and profit oil Interest (net of management fee)

-1000000

0

1000000

2000000

3000000

4000000

5000000

6000000

2006 2007 2008 2009

Net Assets Transfers to State Budget

2

4

Sub-National Investment Instruments annual budget allocations - and some perspective

2009 2010 2011 2012 -

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

70,000,000

31,856,000

44,300,000 51,746,000

1,660,000

2,776,892

3,500,000

6,296,000

THE TWO INSTRUMENTS

DOLL

ARS

DDP

PRLDP

2009 2010 2011 20120

200

400

600

800

1000

1200

1400

1600

1800

603.6

758.7

1306

1674.1

209.3 253.7

717.6

958.2

71.734.6 47.8 58

AGAINST TOTAL & INVESTMENT SPENDING

MILL

ION

S DO

LLAR

S

SNINV.

ALLINV.

ALL

Surge in public spending

Priority: opening up Budget Execution to kick start economy, direct benefits to political / social constituencies, and send ‘credible signals’ of change:

Expanded:– Public Sector Employment: rapid increases in the wage bill– Social protection schemes: market subsidies; pensions, cash transfers, payments to IDPs etc. – Goods and services spending: consumables, facilities, equipment.

Created executive shortcuts & delegated discretions: - Delegated procurement to line ministries- Increased discretionary thresholds- Administrative orders to facilitate procurement

In particular, on Capital Spending• Rapid, high profile commitments on ‘national flag’ infrastructure projects: sea/air ports, national

power and transmission projects, equity ventures in petroleum.

• De-concentrated spending for ‘business populism’: both line departments, and delegating investment decisions to private sector (advent of Referendum Package, then followed by PDDI and PDD II).

Study on subnational spendingWhat we did: Comparative review Aggregate data analysis of available databases (MoF, NDA, MSA) Detailed study of schemes

(4 districts) Baucau, Ermera, Bobonaro and Ainaro (+ 8 sub-Districts),

• 22 Projects thoroughly surveyed (comparative range)

Forward-looking and purpose oriented reporting• Wide ranging consultations (district and sub-district

administration & line departments, sucos, contractors, users, NGOs. Sector ministries, MSA

7

Comparison of PDL and PDD systems across five dimensions of quality

• Technical efficiency (time, cost, quality), overall and at project level

• Correspondence with Development and Geographical Equity

• Business promotion (entrepreneurs)• Jobs (durability, number, equity)• Political inclusion, governance and accountability

(centre / local, coalition, opposition)

November 30, 2012

Context circa 2008

Private sector stagnatingOil revenue burgeoningOn-set of commodity crisisNo off-budget rents or distribution systemsBudget execution constipated Poverty & inequality uptick

Fragile electoral coalition Political fluidityDiverse, disaffected populaceInternally displaced peopleMilitary/police tensionsHigh public expectation on oil & peace dividend.

Perceived constraints = many, but: • Sound/acclaimed fiscal architecture (Petroleum Fund), but • Formal PFM systems unable to rapidly spend and direct revenue for ‘security, justice, jobs’

9November 30, 2012

Basic spending efficiency: positive

7

77.33%

99.51%95.01%

70.10%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

2009 PacoteReferendum

2010 PDD 2011 PDD1 andPDD2

2012 PDD1 andPDD2

Budgeted Actual Execution District Development

10

Geographic equity – have per capita district allocations been roughly consistent? = highly variable

November 30, 2012

11

Do poorer districts get more spending? DDP I+II FYs 2011 & 2012 combined

Oecusse

Liquica

Covalima

Bobonaro

Ermera

Dili

Aileu Manatuto

ManufahiAinaro

Viqueque

LautemBaucau

Total 0.0 - 19.920.0 - 39.940.0 - 59.960.0 - 79.980.0 - 100.0Missing Value

$99

$ 70

$88$129

$53

$112

$170

$137

$52 $ 132$41

$103

$ 108

November 30, 2012

12

How did systems perform on: Delivery time, quality, useability of assets, disputes?

November 30, 2012

13

Impact on local employment - general findings

• All unskilled workers local; semi-skilled sometimes local; skilled from Dili or foreign

• Practice of rotation of local workers to share wage benefits (role of Suco chief)

• Roughly coinciding with dry season & agricultural under-employment

• Overall employment impact modest • But depends greatly on type of infrastructure

November 30, 2012

14

Spending on jobs depends greatly on the type of project.

Number on any day

Person days

Imputed Labour

Cost

% Project

Cost

Number on any day

Person days

Imputed Labour

Cost

% Project Cost

Bore water supply to MAP Compound5 3 253 759$ 2.2% 2 101 809$ 2.4%

Secondary school 8 6 1,152 3,456$ 1.6% 2 288 2,304$ 1.0%

Electoral office CNE building 8 6 624 1,872$ 2.4% 2 156 1,248$ 1.6%

Maliana Market 32 30 6,967 20,901$ 9.4% 2 435 3,483$ 1.6%

Village Irrigation Channel Ramaskara Raeboudas8 4 631 1,893$ 10.5% 4 315 2,523$ 14.0%

Village water supply 6 5 473 1,419$ 7.1% 1 79 631$ 3.2%

Animal quarantine building 35 25 4,620 13,860$ 11.7% 10 1,320 10,560$ 8.9%

River bank erosion protection gabion wall23 20 2,031 6,092$ 27.9% 3 265 2,119$ 9.7%

Youth Centre 6 4 473 1,419$ 5.7% 2 158 1,262$ 5.0%

Electoral office CNE building 8 6 624 1,872$ 2.3% 2 156 1,248$ 1.6%

Village water supply 22 20 1,716 5,148$ 3.4% 2 156 1,248$ 0.8%

Green house 12 5 2,222 6,665$ 3.8% 7 1,296 10,368$ 5.9%

Water supply to green house 8 7 1,255 3,765$ 8.0% 1 157 1,255$ 2.7%

Erosion site protection to agriculture building13 12 2,496 7,488$ 13.1% 1 192 1,536$ 2.7%

Irrigation scheme 40 40 5,760 17,280$ 22.1% - - - -

Dormitory for health dept. staff23 16 1728 5,184$ 2.2% 8 864.00 6,912$ 2.9%Irrigation scheme 22 18 1,169 3,507$ 9.2% 4 213 1,701$ 4.5%

Ossuario 11 7 720 2,160$ 1.1% 4 412 3,296$ 1.6%Aldeia community centre 10 8 384 1,152$ 10.2% 2 96 768$ 5.1%

Total/Mean 300 ##### 104,739$ 6.6% 6,563 52,503$ 3.3%

UNSKILLED SEMI/SKILLED

Total

November 30, 2012

15

Order of magnitude of job impact across the country

DDP FY 2012 = $ 56.5 million. Labor/job impact less than regional comparators

18,500 unskilled work-days provided in each sub-District:

– e.g. 165 p x 100 days; 370 p x 50 days; 740 p x 25 days (depends on sharing arrangements)

– i.e. c. 10% of average sub-District labour force (7,500 p) would benefit each year

November 30, 2012

16

Quality: promotion of local contractors

• DDP has achieved impressive spread (315 contractors engaged in FY 2011)

• x 3 expansion in # contractors (68% are post 2009)– evidence of role of PR in capitalisation of some– some real, but some more “fronts”

• Some upward progression, but limited by – Category D “ceiling”– Political connection required to get from C to D

• No sign of major expansion in contractor capacity– but networking, asset sharing, diversification is a positive adaptation to the ‘rules of the market’

• DDP procurement procedures constrain: problems need addressing; chance now to promote contractor consolidation November 30, 2012

17

Impact on governance, inclusion, stability

• Transparency: unclear and changing PDD rules probably fed uncertainty, perhaps cynicism.

• Inclusion: – Participation in planning has triple pay-off: voice

benefits, investment efficiency, dispute pre-emption– Little evidence of “elite capture” of assets– Contracting benefits also widely spread, under PDD

but also PDL– Modest job opportunities, but made widely available

• Disputation: the rate of project & contractor disputes under PDD is worrisome

November 30, 2012

18

Did PRF/DDP outperform LDP?

• PR and DDP short cut procedures were introduced to i) expedite spending, ii) increase job and contractor impact.

No significant differences found in • Rate of execution / spending project completion• Contracts equally widely spread• Consistency with national priorities much the sameWere these systems the best way to fund contractor

capitalization and capacity? • Yes, given banks not working properly

November 30, 2012

19

Main messages

• The PKF/PDD was a smart move to unblock the system, stimulate the private sector, consolidate the peace, etc. (possibly a ‘New Deal’ exemplar)

• Three years on, while the results are lumpy, this policy objective has been largely achieved.

• Now it is time to normalise/stabilise the system, – Improve district allocations; introduce open tendering, decentralise

payments; invest in technical supervision for better results (‘assets’ and disputes); introduce simple ‘district performance measures’

• Largely, this is what PDID Decree Jan ’12 intends– The study offers detailed practical advice on priorities immediately

relevant to PDID Task Groups

November 30, 2012

20

Key recommendations1. Promote the power of ex ante District budget allocation

– Will get better matching with poverty/needs, improved planning, transparency and performance

2. Marry current prequalification arrangements with competitive tendering– Will get cost savings, better contractor performance, enhance legitimacy of

process

3. Beware of false economies on technical staff– Sort out NDA/LM responsibilities on certification/payment– Get more technical staff in LM in districts– Allow small % of grants to be used for technical support

4. Sort out the treasury function – District treasuries, banking payments– Revert to local payments, with IFMIS, big cost, time and legitimacy gains

November 30, 2012