Transcript PRESENTATION -

Republic of Serbia
Fiscal Council
2015 – 2017 FISCAL STRATEGY ASSESSMENT AND
SIGNIFICANCE OF PUBLIC INVESTMENTS FOR
ECONOMIC GROWTH
11 February 2015
Fiscal Strategy: painful, though adequate measures
• A demanding multi-year plan for public finances recovery and public
sector reforms
– It shows Government’s clear intention to start addressing accumulated problems in public
finances
– It envisages difficult and painful cuts (reforms and discharging employees in public
companies, administration, health care and education systems, as well as wage and
pension freeze, restructuring process completion etc.)
– Major professional, political, but social challenges as well
• Fiscal Council finds that savings measures are adequate
– Due to the magnitude of the problem, there is no actual alternative to severe savings
measures
– No resolute deficit reduction would mean explosion of public debt and certain fiscal
crisis: deep GDP decline, strong Dinar weakening and high inflation
• Basis for concluding a three-year arrangement with IMF
– Significantly improves the prospects for the entire programme success
2
Ambitious multi-year plan – implies risks
• Fiscal consolidation will have to include 2018 as well: a four-year
plan instead of a three-year one is necessary
– Fiscal deficit reduction to 3.8% of GDP is not enough for public debt stabilization by
2017
– Additional deficit reduction by 1 p.p. of GDP in 2018 is necessary
• Two crucial reform blocks carry the greatest risks
– Public and state-owned companies: putting the operation of Srbijagas, EPS, Železnice
in order, resolving the fate of Železara Smederevo, Petrochemical Complex
– Public (budget) sector: reduction of employees number along with all-encompassing
reforms
– Deadlines are short (couple of months), but precise plans are still not in place
•
Sharp reversal in fiscal policy, while economy is in recession
– Unfavourable macroeconomic environment significantly aggravates necessary
implementation of fiscal consolidation
– Macroeconomic policy measures are necessary for economic growth incentive
3
Public investments are
the best antirecessionary measure
• Serbia’s economy has been in recession since 2014 – economic
activity decline by app. 1.7%
– Savings measures will have a temporary negative effect on economic growth and will
deepen the current recession
– Prolonged and uncontrolled recession can endanger fiscal consolidation
• Government investments in infrastructure may alleviate negative
effect of consolidation on the economic growth
– In a short-term, the effect of public investments on economic growth (fiscal
multiplier) is at least twice bigger than other forms of government spending
• Negative effect on economic growth due to a deficit/spending reduction by 2 p.p. of GDP
can be offset by increasing investments by 1 p.p. of GDP
– In a medium-term, the improvement of road and railroad infrastructure as well as of
energy capacities will create conditions for a faster economic growth
4
Poor infrastructure condition
requires an investment growth
• General state of infrastructure is alarmingly poor - Serbia is among the
worst rated countries in international rating lists
– According to overall infrastructure quality, Serbia is ranked as 111st out of a total of 148
countries – the worst in the region
– By road quality it is 114th (only Romania is rated worse in the region)
• Budget allocations for public investments are undoubtedly low – only
2.5% of GDP in 2014
– They need to be doubled – public investments in the comparable countries of Central and
East Europe amount to more than 4% of GDP at an average
• Adequate projects and financing sources exist
– The projects to improve infrastructure quality exist (eg. road and railroad Corridor 10)
– Financing for infrastructure projects has been ensured on preferential terms– loans by the
World Bank, EIB, EBRD with log repayment period and low interest rate
5
Public investment growth is justified
even at the cost of a slightly higher deficit
• Public investments can be increased in 2015 by 1 p.p. of GDP
through more efficient implementation of current projects
– Fiscal Strategy plans only 0.5 p.p. increase, which is not enough
– An important stimulus for domestic economic activity
• Ideally, the room for somewhat bigger growth of investments should
be found in the planned budget framework
– By reducing other, less productive expenditures, like subsidies
• If this is not possible, even a smaller deficit reduction would be
acceptable if the reason was a stronger investment growth
– Due to a strong positive effect on the economic growth, the increase in capital
expenditures will affect the deficit less as compared to all other public expenditures
– New borrowings are not necessary for financing an additional increase in public
investments – the funds have already been approved
6
Public and state-owned companies:
The need for significant reforms
• Resolving the accumulated problems of public and state-owned
companies is a key reform move for the Government – we support
that
– This will not yield the biggest savings; however, if their operations are not put under
control in 2015, a complete cave-in of public finances is possible
– Much more important – reform should ensure that public companies be the boosters of
economic growth
• Instead of being loss-makers and social institutions
• Resolving the status of companies under restructuring = eliminating
the “parasite sector”
– Many companies with no perspective, however, have been draining huge funds from the
economy and budget for years
• There are chances for this to end
– First concrete steps are visible: liquidation of 188 companies under restructuring, changes in the
EPS, privatization of Železara Smederevo?
7
Public and state-owned companies:
Complex problems, yet short deadlines
• The Government has implicitly committed to addressing the biggest
problems already in the first half of 2015 – very uncertain
– No budget funds for the Srbijagas in 2015 means resolving the fate of the
biggest gas debtors even by mid year (Železara, Petrohemija, Azotara, MSK)
– Železara Smederevo is a problem per se - facing closing without Esmark?
– Lower subsidies for the Železnice in the budget - is this sustainable without a
plan for employee discharging and rationalization of services?
– There is a real danger for the EPS’ losses to be transferred to the government –
the biggest problems must be resolved without delay (redundant employees,
poor collection, low price etc.)
• Detailed plans are still not in place, whilst the first deadlines have
already been breached – February?
8
Decrease in the number of employees without
detailed plans is a big risk
• Fiscal Strategy envisages successive decreases in the budget sector
employment of 5% per year by 2017
– According to the plan, in three years the health care and education systems, as well as
state and local administration, should have 15% less employees (app. 75.000)
• Such a big decrease in the number of employees cannot be achieved
by natural outflow only – neither this would be desirable
– Natural outflow through retirement of employees with a limited filling in the vacant
posts can only ensure one half of the planned employment decrease
– This is also an uncontrollable process – both the redundant employees and the ones
that are necessary retire
– Detailed plans, detailed sector analyses and discharging criteria are crucial for a
successful rationalization of the number of employees – those are still not in place
• Employment rationalization must be accompanied by fundamental reforms
of the biggest government systems – health care and education
–
Risks are substantial—detailed reform plans are needed which would ensure that the quality of services is at
least maintained in these sectors despite the smaller number of employees
9
Risks are substantial, yet
there are no contingency measures
• Public companies reform and employment rationalization carry
numerous challenges – savings might be lower than planned
– The implementation is challenging both politically and professionally – delays are
possible and it can jeopardize the entire fiscal consolidation
• The Government must have contingency measures prepared upfront,
to become automatically effective if fiscal goals are not achieved
– The credibility of the programme would be stepped-up with the investors and creditors
– the Government would guarantee reaching the basic fiscal goals
– Presenting contingency measures in the Fiscal Strategy would make a timely public
debate possible, while the ad hoc solutions would be avoided
• A stringent, and a de facto four-year, fiscal consolidation programme
is not possible without the IMF arrangement
– Systematic monitoring of the implementation of measures would significantly lower the
risk of “skidding”, giving up and failure of the programme. Only the IMF arrangement
can provide for the international credibility of the programme - an increasing debt for
at least three more years is not credible for the creditors
10
Public debt stabilization
Additional measures and deficit reduction below 3% of GDP in 2018
11
Government’s assumptions
• Real Dinar appreciation
– This is optimistic (key difference)
– FC assumes unchanged real exchange rate
• GDP growth-0.5%, 1.5% and 2% during 2015-2017
– GDP is realistic for 2015, overrated for 2016 (0%)
– Growth of 2% in 2017 is possible only with investment increase
• Moderate interest rates increase
– Adequate projection
• Possible additional risks
– A more significant increase in interest rates, protracted recession,
realistic Dinar depreciation
12
Public debt management
• A 2 billion Dollar debt converted to Euro in 2003
– Dollar depreciation 25%
– Exchange rate loss ~ 300 million Euro
• Since 2011 we have been borrowing through Dollar
Eurobonds, without insurance against FX risk
– Dollar appreciated over 10% during 2014
– Public debt increased by 500 million Euro
– Interest expenditures in 2015 increased ~ 8 billion Dinars
• Conclusion: Serbia has no consistent borrowing
strategy
– FX losses are unnecessarily endured
13
Serbia is lagging behind in infrastructure
investments
Relative to comparable countries,
Serbia has the lowest level of public
investments (2.5% against 4.5% of
GDP)
Public investments in Serbia are
decreasing, both relative to GDP
and the total public expenditures
(2005-2014, %)
14
The current state of infrastructure does not
allow for postponing the investments
(Source: World Economic Forum)
• Serbia is the worst in the region by infrastructure (111st position out of 148;
Slovenia is the 34th and Croatia the 44th)
• Since 2008 an average of 30 km of highway has been constructed per year
(50 km in Croatia). Only 10 km was constructed in 2012
• Average train speed is 40 km/h (55% of the tracks are from the 19th century)
15
The funds are available but not withdrawn
in mill. EUR
Area
Roads
Railroads
Energy sector
Other
Financier
EIB
EBRD
World Bank
Azerbaijan
EXIM
EIB
EBRD
Kuwait
Russia
EIB
EBRD
World Bank
EXIM
KfW
EIB
World Bank
KfW
Approved loan
amount
Withdrawn amount
Remaining
869
330
355
300
429
80
295
25,8
758
64,5
302,5
21
231
205
515
60
138
4.979
170,8
110,3
97,5
153
158
66,2
54,2
0
13
22,4
70,8
8
135
48
158,9
0,0
28
1.294
698,2
219,7
257,5
147
271
13,8
240,9
25,8
745
42,1
231,7
13
96
157
356,1
60
110
3.685
Source: Fiscal Council analysis
• App. 5 billion Euro has been approved for current infrastructure projects of the
government and public companies, out of which 3.7 billion Euro remains not
withdrawn (11% of GDP)
16
Most unwithdrawn loans are in the road
infrastructure sector
• If new, certain loans are also included (EXIM bank loan for Kostolac), another 500 million
will be received in 2015; With Belgrade-Budapest railroad, UAE…the numbers grow
further
• On average 20% of the planned (budgeted) investments are not executed each year
• Important: a decrease in public investments is not part of the targeted savings, it is a
consequence of non-executed plans
• Our estimate is that the value of the currently delayed projects amounts to over 1 billion
Euro
• Due to delays in withdrawing approved funds for infrastructure, Serbia pays yearly
17
penalties of app. 4 million Euro
Realistic increase in public investments in
2015 is app. 1% of GDP
in mill. EUR
Area
Roads
Railroads
Energy sector
Other
Approved loan
amount
Remaining
Maximum increase
in 2015
% of GDP
2.283
1.159
824
713
4.979
1.593
1.025
539
526
3.683
313
251
138
117
819
0,95%
0,76%
0,42%
0,35%
2,48%
Source: Fiscal Council analysis
•
•
An increase of 1% (1.5% with public companies) is only possible along
with a significant increase in investing efficiency
If all planned infrastructure projects were implemented in time (hardly
achievable), the increase in budget investments in 2015 would amount to
1.3% of GDP (2.5% with public companies)
18
A possible increase in investments in roads
is app. 313 million
in EUR m
Area
EIB
EIB
EIB
EIB
EIB
EIB
EBRD
EBRD
EBRD
WB
WB
Azerbejan
EXIM
EXIM
Project
Belgrade Bypass A
Corridor X E75
Belgrade Bypass B
Corridor X E80
Sava bridge
Road rehabilitation and safety
Road rehabilitation and safety
Belgrade Bypass
Corridor X
Corridor X
Road rehabilitation and safety
Highway Е763 (Ljig-Preljina)
Bridge Zemun-Borca
Highway Е763 (Obrenovac-Ljig)
App. Date
Approved amount
Used
Available
Oct-07
Oct-09
Sep-10
Nov-10
Nov-10
Nov-13
Nov-13
Jul-02
Sep-09
Jul-09
Apr-13
Apr-12
Apr-10
Aug-13
60
314
40
265
90
100
100
80
150
275
80
300
180
249
2.283
28
39,8
21
75,1
7
0
0
68,8
41,5
97,5
0
153
124
34
690
32
274,2
19
190
83
100
100
11,2
108,5
177,5
80
147
56
215
1.593
Source: Fiscal Council Analysis
•
•
•
•
•
Corridor 10: with current deadlines the increase of app. 130 million Euro (750 available);
Corridor 11: assuming the same dynamics in the sections the work on which is underway;
uncertain launching of the new ones;
Projects for road reconstruction and safety: execution estimate is app. 56 million Euro in
2015 (project launching);
The Sava bridge: remaining 83 million Euro must be used in 2015 due to withdrawal
deadline; there was no execution in 2014;
Belgrade bypasses: expected increase of 44 million Euro
19
Investments in the railroads may increase by
app. 251 million
in mill. EUR
Financier
EIB
EBRD
EBRD
EBRD
Kuwait
Russia
Russia
Russia
Russia
Russia
Russia
Project
Railroad reconstruction 2а
Trains
Railways of Serbia - CorridorX
Rehabilitaion and modernisation Corridor X
Prokop rail. station
Annexe 1 - Belgrade-Pancevo railroad
Аnnexe 2 - Corridor X modernization
Аnnexe 3 - Stara Pazova - Novi Sad railroad
Аnnexe 4 - Belgrade - Vrbnica (Bar) railroad
Belgrade - Novi Sad railroad
Metrovagonmas trains
Approval date
Dec-06
May-09
Sep-10
Jan-12
Dec-12
Nov-12
Nov-12
Nov-12
Nov-12
Nov-12
Nov-12
Approved loan
amount
80
100
100
95
25,8
64
64
316
200
34
80
1.159
Withdrawn
amount
66
31
22,3
0,95
0
6*
7*
0
0
0
0
133
Remaining
13,8
69,1
77,7
94,05
25,8
58
57
316
200
34
80
1.025
* estimates based on the monthly report of the Public Debt Department (December 2014)
Source: Fiscal Council analysis
•
•
•
•
•
The second railroad track of the Pancevo bridge to Pancevo town section and
reconstruction of a section of the Corridor 10 track (112 km) : 44 million Euro in 2015
The beginning of the works on the Stara Pazova-Novi Sad railroad track and the
reconstruction of the Belgrade-Vrbnica (Bar) railroad track : 170 million in 2015
The Prokop railroad station: 26 million
The purchase of the railroad vehicles: increase of 11 million (from two loans)
It is not certain if the reconstruction of the railroad Corridor 10 will begin in 2015–
project is being redone, while the elaboration of technical documentation is progressing
slowly
20
131 million in the energy sector
in EUR m
Area
Project
App. Date
Approved amount
Used
Available
24,5
40
40
150
80
32,5
21
118
87
11
15
46
70
74
15
824
22,4
0
1,6
50
18,7
0,5
8
118
17**
0
0
40,2
6,7
1,15
0
285
2,1
40
38,4
100
61,3
32
13
0
70**
11
15
5,8
63,3
72,85
15
539
502*
0
502
EIB
EIB
EBRD
EBRD
EBRD
EBRD
WB
EXIM
EXIM
EXIM
EXIM
KfW
KfW
KfW
KfW
EMS network upgrade
EPS electric meters
EPS electric meters
Srbijagas; liq and gas storage
Kolubara
Small hidroplants
Reg. development of Bor
Phase 1 - Kostolac B1 B2
Phase 1 - Kostolac desulphuring
Phase 1 - Kostolac port
Phase 1 - Kostolac railways
Envir. Protection
Zvornik hidroplant
Kolubara - coal homogenization
En. Eff. In public buildings
Jun-09
Nov-10
Sep-10
Feb-10
Jul-11
Dec-11
Jun-07
Dec-11
Dec-11
Dec-11
Dec-11
Dec-07
Okt-10
Okt-12
Nov-14
EXIM
EXIM
Phase 2 - Kostolac B3
Phase 2 - Drmno
Nov-13
Nov-13
1.326
285
* Funds are expected even though not approved yet (State budgets both for 2014 and 2015 include guarantees for it).
** Estimation based on project commencement and the expected completion dates
Source: Fiscal Council Analysis
•
•
•
•
•
•
•
1.041
Long postponed purchase of the electricity meters – 78 million Euro
HPP Zvornik: a dispute with the bidder is resolved, 9 million increase
Construction of 32 small hydro power plants – 11 million
Kostolac TPP (terminals and railroad infrastructure)– 13 million
Kostolac Desulphurization factory – 53 million
Kolubara coal homogenization improvement – 18 million
Kostolac: the 1st phase completion decreases investments by 59 million (the 2nd phase
launching may increase by 100 million)
21
Another 125 million in other areas
in mill. EUR
Financier
Project
Approval date
Approved amount
EIB
EIB
EIB
EIB
EIB
EIB
EIB
EIB
World Bank
KfW
KfW & EU
KfW
KfW & EU
KfW
KfW & EU
Municipal and regional infrastructure
Municipal infrastructure
Watersupply (Nis, Novi Sad)
Clinical centers A
Clinical centers B
Public sector - research and development
Modernization of public schools
Renovation of Judicial buildings
Emergency flood reconstruction
Municipal water supply system (phase 1)
Municipal water supply system (phase 1) - donation
Municipal water supply system (phase 2)
Municipal water supply system (phase2) - donation
Wastewater management
Wastewater management - donation
Dec-08
Jun-09
Jun-04
Dec-06
Dec-08
Mar-10
Jun-10
Oct-11
Oct-14
Jun-05
2007
2008
2008
2009
2009
50
25
25
80
70
200
50
15
60
25
23,5
17,5
11
46
14,8
713
Withdrawn
amount
49,5
0
7,7
18,5
0
70,3
12,9
0
0
10,7
12,2
2,3
2,9
0
0
187
Remaining
0,5
25
17,3
61,5
70
129,8
37,1
15
60
14,3
11,3
15,2
8,1
46
15
526
Source: Fiscal Council analysis
•
•
•
Investment works in the flood damage recovery– 60 million
Belgrade, Novi Sad, Kragujevac clinical centers– 40 million
Municipal water supply improvement - 25 million
22
Reasons for low public investments
•
There are failures at all levels and at all stages of implementation
– From the ministries, over state-owned companies in charge of organizing the performance of
infrastructure works, designers, to contracting companies
•
Ill-defined responsibilities even at the level of ministries, lack of coordination and
cooperation
– The Žeželj bridge or the Pancevo water supply, for example,
•
•
The capacities of the government bodies and companies in charge of infrastructure
managing and exploitation are insufficient for selecting, implementing, supervising
and evaluating undertaken investments
Adequate feasibility studies are lacking, while a project selection decision is often
based on the political influence
– Priority selection is often guided by the reasons other than the needs of society
– Large projects are being announced without their profitability being verified by adequate studies. For
some of them not even the exact role of and expense of the government is clear
– Administrative hindrances stand in place of a substantial profitability analysis
•
Frequent delays, as well as numerous errors in the technical documentation and
financial calculations are obvious in the project elaborations
– According to the assessment of the Ministry of Construction, Transport and Infrastructure , the
damage caused by the “low quality projects” in the area of roads and transportation safety is
estimated to 100 million Euro
•
Inefficient issuing of construction and utilization permits, as well as expropriation
process
23
Recommendations
• Public investments should be institutionalized as a priority
• Responsibility for public investments must be firmly and hierarchically
established, starting from the Government level:
– A dedicated operational sector for execution of capital investments, like the ones in UK or
Australia
• Ministries and ministers must be held accountable before the Government, and
thus act as direct as agents securing efficient investments
• A three-year plan of public investments should be made, accompanied by more
detailed annual plans
– Capital expenditures in the Budget and Fiscal Strategy are not accounted properly (there is only
a declarative support for their increase)
• Ministry of Finance must have more saying in early stages of project
development, and accordingly its capacities must be strengthened
• Concessions (transport), other PPPs and private investments (energy) should be
utilized where appropriate
• Special attention must be paid on characteristics of individual projects, namely on
the agreed financial and construction/execution terms
– Imports of goods and services (even labor force) decrease benefits for the local economy
24