“Spend better, not more” says a new World Bank report on the financing of health and education services

Kyiv, February 25, 2008. - The World Bank today issued a new economic report on Ukraine’s public finances entitled “Improving Intergovernmental Fiscal Relations and Public Health and Education Expenditure Policy”.  The Report concludes that Ukraine does not need to spend more on public education and health care, but it does need to spend more efficiently to improve the performance and quality of public services. While Ukraine has more doctors and teachers per capita than any OECD country its education and health outcomes nonetheless lag far behind. The report argues that resources could be found for quality improving investments by strengthening the spending autonomy of local governments and thereby their incentives to refocus public services on the demand of citizens.

The report highlights the growing fiscal pressures arising from large investments needs at the local level (estimated at some USD 29 billion over the next decade), a worrying demographic profile, and the need to modernize public services. The report also shows that up to 1 percent of GDP annually in education and 0.6 percent of GDP in healthcare could be saved and invested in quality improvements if current inefficiencies are addressed. A key source of inefficiency, according to the report, is the rigid budget formation process for health and education. This is driven by standard input norms that prevent local authorities from reallocating resources in line with changing demand.

“The existing inefficiencies are perpetuated by regulations and incentives present in the budgeting, financing, and administrative mechanisms governing local governments and health and education services” explains Pablo Saavedra, Economist with the World Bank and lead author of the Report. “Despite their large role in public spending for health and education services, the ability of local governments to reallocate resources within sectors to achieve greater efficiency and improve quality is quite limited”, adds Saavedra.

In this situation, the report argues that additional budget resources are not the solution. In particular, the current health insurance reforms under discussion, which also focus on raising additional sources of financing for the health sector, would simply raise the tax burden for citizens, impose high administrative costs, but fail to address the underlying causes of current inefficiencies and low quality services. Priority reform efforts instead need to focus on eliminating spending rigidities tied to maintaining existing service networks and providing greater incentives and capabilities to local governments to spend in ways that meet demand. The report emphasizes that this should be done in ways that protect the poor and are mindful of the social consequences of optimizing school and health facilities and reducing staffing levels.

“Teachers, nurses and doctors deserve to work in a quality environment.”, says Martin Raiser, Economic Advisor with the World Bank. “This will require many to adjust how they work and operate but the rewards in terms of better working conditions and greater satisfaction of students, parents and patients will be large”, believes Raiser.

The World Bank supports improvements in health and education services through its portfolio of investment loans and through the Development Policy Loan program. Total commitments in support of health and education were US$ 147 million at the end of 2007. On February 2, 2008, the World Bank and Ukraine signed a loan agreement over USD 300 million for the second Development Policy Loan, which outlines a prioritized program of reforms to inter-governmental fiscal relations and health and education service delivery. 

Selected recommendations of the Report

• Strengthen the rayon and city level as the core local government, including by moving all health and education functions from village level to rayons and city level.
• Arrange for small towns, villages, and settlements to keep other current local functions and their current political representation.
• Promote the consolidation of third tier local governments through incentives, not by decree while avoiding creating a new local government below the rayon level with significant expenditure responsibilities.
• Revise and eliminate the “norms” contained in the Ministry of Education and Ministry of Health orders that dictate parameters on local budgets formation and create inflexibility. 
• Allow rayons and cities more freedom to plan and allocate (and re-allocate) their own staffing and resources.
• Mainstream mergers of schools and health care facilities and give rayons and cities expediency to do so. 
• Legislate and implement a property tax with a proper fiscal cadastre.
• Eliminate low revenue yield taxes and simplify local taxes to reduce administrative and compliance costs.
• Streamline the equalization formula, including by eliminating unnecessary factors and ill-designed incentives.
• Establish in the budget code a capital transfer/subvention that is stable and criteria based.
• Improve the framework local government borrowing in line with good international practice.
• Through the elimination of “norms” allow optimization of all staffing positions in health and education, including non-teaching positions  and technical positions in health. Also restructure “norms” to allow more efficient teachers’ hours workload 
• Improve controls over out-of pocket payments in health care and education to reduce inequalities
•  Target assistance to the poor by spending more on rayon hospitals (which the poor attend the most) and by channeling resources for prescription drugs to these hospitals if fiscal saving can be made.