CONFIDENTIAL

Report No.: 19664 JO

The Hashemite Kingdom of Jordan Public Sector Review

Executive Summary and Main Report

CONFIDENTIAL

September 22,1999

Social and Economic Development Group Middle East and North Africa Region

ThIS document has a restncted dIstnbution and may be used by recipients only in the performance of theIr official dutIes. Its contents may not otherwIse be dIsclosed wIthout World Bank authonzation.

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CBJ CIP DEF

GBD GDP GST GUYS

ICOR IDE CO

JEPCO

nPA

JTC MoSD MTEF

CURRENCY EQUIVALENTS

Currency unit: Jordanian Dinar (JD) = 1,000 fils Exchange Rate: September 1999: JD 0.71 per US Dollar

WEIGHTS AND MEASURES

The metric system is used throughout this report.

ABBREVIATIONS AND ACRONYMS

Central Bank of Jordan NEPCO commumty infrastructure proJect Development and Employment NAF Fund NGO General Budget Department O&M gross domestic product OECD general sales tax General Umon of Voluntary PEM Societies PSR incremental capital output ratio PSRL Irbld Dlstnct Electnclty RJ Company Ltd. RMB Jordaman Electnc Power SPP Company Ltd TESP Jordan InstItute ofPubhc AdnurustratIon UNRWA Jordan TelecommurucatlOns MllllStry of SOCial Development USAID MedIUm term expenditure framework WAJ

FISCAL YEAR

January 1 - December 31

ChIef EconomIst: Country Director: Team Leader:

John Page Inder K. Sud Christian E. Petersen

National Electric Power Company National Aid Fund Nongovernmental OrgarnzatlOn OperatIOns and Mamtenance OrgaruzatlOn for Economic Co-operatIOn and Development pubhc expenditure management pubhc sector review Pubhc sector reform loan Royal Jordaruan Alrlmes Road Maintenance Board Social ProdUCtlVlty Program Trammg and employment subSIdy program Umted Nations Rehefand Works Agency U.S. Agency for InternatIOnal Development Water Authority of Jordan

The Hashemite Kingdom of Jordan Public Sector Review

Table of Contents

Preface .......................................................................................................................................................... i

Executive Summary ................................................................................................................................... iii

Matrix of Recommendations .................................................................................................................... ix

Chapter 1: The Need for Public Sector Reform in Jordan ..................................................................... 1

1.1 RatIonale .............................................................................................................................. 1 1.2 The Jordanian Economy: A BnefHistory ............................................................................ 3 1.3 The Economy In 1998 ............................................................................................................ 4 1.4 The Ongomg MacroeconomIC Program for 1999 ................................................................ 4

Chapter 2: Role of The Public Sector ....................................................................................................... 7

2.1 StrategIc Pnority SettIng ....................................................................................................... 7 2.2 Education ............................................................................................................................... 9

2.2.1 HIgher EducatIon .............................................................................................. 10 2.2.2 Secondary Education ........................................................................................... 13 2.2.3 Monitonng and EvaluatIOn .................................................................................. 15 2.2.4 RecommendatIons .......................................................................................... 15

2.3 Health ................................................................................................................................... 15 2.3.1 Inadequate Information ........................................................................................ 18 2.3.2 RecommendatIons ...................................................................................... 19

2.4 ElectncIty ............................................................................................................................. 19 2.4.1 NEPCO's financial situation ............................................................................... 19 2.4.2 RecommendatIons ............................................................................................... 20

2.5 Water .................................................................................................................................... 20 2.5.1 WAJandNA ..................................................................................................... 20 2.5.2 RecommendatIons ............................................................................................... 22

2.6 Road Transport .................................................................................................................... 23 2.6.1 Investment and MaIntenance .............................................................................. 24 2.6.2 TruckIng .............................................................................................................. 25 2.6.3 Safety ................................................................................................................... 25 2.6.4 RecommendatIons ............................................................................ ... . ............ 25

2.7 PrivatizatIon of Other Pubhc Agencies ................................................................................ 26 2.7.1 Completed TransactIons ...................................................................................... 26 2.7.2 ContInuIng Program ............................................................................................ 26 2.7.3 Recommendations .............................................................................................. 27

Chapter 3: Social Protection and Government Welfare Employment ................................................ 29

3.1 Recent Trends in Poverty ..................................................................................................... 30 3.2 Evaluation of the Social Safety Net ..................................................................................... 32 3.3 Separatmg Welfare from PublIc Sector Employment.. ........................................................ 36

3.3.1 Mam PrincIples of Handhng Labor RedundanCIes .............................................. 37 3.3.2 Labor Market Analysis ........................................................................................ 38 3.3.3 Recommendabons ................................................................................................ 41

Chapter 4: Towards a Medium-Term Expenditure Framework and Performance Budgeting ........ 43

4.1 Aggregate Fiscal DiscIplme ................................................................................................. 43 4.1.1 1999 Improvements ............................................................................................. 44 4.1.2 StrategIes for Further Improvement.. ................................................................... 45

4.2 Strategic Pnontlzation of Expenditures ............................................................................... 48 4.2.1 Performance Budgeting ....................................................................................... 48 4.2.2 A More Comprehensive Budget .......................................................................... 50

4.3 Encouragmg OperatIOnal EfficIency .................................................... '" ............................. 51 4.4 Other General Issues ............................................................................................................ 51 4.5 Recommendations ................................................................................................................ 52

Chapter 5: Towards an Agenda for Civil Service Reform ..................................................................... 53

5.1 ObservatIons ....................................................................................................................... 53 5.2 PublIc AdminIstratIon Reform and ServIces DelIvery ......................................................... 54

5.2.1 Too many people and too low salaries ................................................................. 54 5.2.2 Reform Agenda .................................................................................................... 56 5.2.3 Restructunng and Re-engmeenng the Bureaucracy ............................................ 57 5.2.4 Zero-base ReVIew of Laws and RegulatIons ....................................................... 57 5.2.5 RtghtslZlng Public AdmInIstratIon ....................................................................... 59 5.2.6 Personnel Management Reforms - From Patronage to Performance .................. 59

5.3 Transparency and AccountabIlIty ........................................................................................ 61 5.3.1 Increasmg Institutional AccountabIlIty ................................................................ 62 5.3.2 Fmancial Accountability ...................................................................................... 62 5.3.3 Improving Government Procurement Procedures ............................................... 63 5.3.4 Improvmg Probity in the CIvil ServIce ................................................................ 63

5.4 Pubhc CommunIcations ....................................................................................................... 64 5.5 InstItutIonal Anchor for Reform ImplementatIOn ................................................................ 65 5.6 The Proposed Bank Program for Jordan .............................................................................. 65

Statistical Annex

PREFACE

This report is a collaborative venture between the Government of Jordan and the World Ban1e It presents the key findings and recommendations of a public sector review mission of the World Bank that visited Jordan during the Fall of 1998 and Spring of 1999. Throughout their stay in Jordan the Bank team had very productive discussions with Jordanian authorities, who also provided valuable information and data. The team gratefully acknowledges the support from the Government of Jordan.

The report was jointly managed by Shantayanan Devarajan, Christian Petersen and Vinaya Swaroop. Other contributors to the report were Geoffrey Bergen, Mark Gersovitz, Sudhee Sen Gupta, Jeffrey Hammer, Martin Rama, Beatrice Renzi, Edgar Saravia, Radwan Shaban, David Shand and John Wetter.

The peer reviewers were Ishac Diwan, Jamil Jreisat, Nick Manning and Michael Walton.

Monali Chowdhurie-Aziz, Giulio De Tommaso, Franc;ois Lacasse, and Elizabeth Ruppert made valuable contributions to the report. Dina Abu Ghaida provided expert research assistance. Alexandra Sperling and Hedy Sladovich aptly managed the production of the report.

This report consists of an Executive Summary, a Matrix of Recommendations, the Main Report, and a Statistical Appendix. Part of the information in the report is based on six background papers, which are available upon request.

11

Hashemite Kingdom of Jordan Public Sector Review

EXECUTIVE SUMMARY

In the eight years since the economic disruptions of the Gulf War, the Government of Jordan stabilized the economy and undertook an ambitious program of economic and financial reforms. The economy responded with an impressive performance during the first half of the 1990s--average annual gross domestic product (GDP) growth of 8 percent, inflation in single digits--only to start slowing down in 1996 and come to a grinding halt in 1998. As a result, unemployment, poverty and income inequality have increased. Several external and internal factors contributed to the slowdown. The hiatus in the Middle East peace process, closure of Iraqi markets and recession in East Asia all played a role. Domestically, perhaps linked to the external events, the pace of reform slackened. Internal political uncertainty weakened the Government's efforts for most of the last two years, leading to inaction in important areas of reform such as privatization and the passage of business laws. Reversing progress made earlier, the fiscal stance deteriorated during this period, with the fiscal deficit in 1998 exceeding 10 percent ofGDP.

His Majesty King Abdullah has made the restoration of economic growth and the reduction of poverty the priorities of the new government appointed in March 1999. While the pace of structural reforms has picked up, the new government faces an additional challenge: it needs to cut the budget deficit by 2 percent per annum for the next three years, while protecting and increasing the living standards of the poor. Higher growth with lower budget deficits may come through efficiency gains in the public sector.

Many observers feel that the only way to meet this challenge is to reform Jordan's bloated and ineffective public sector. Despite spending 40 percent of GDP, and employing 40 percent of the labor force, the Government of Jordan is a poor provider of public services according to service delivery surveys. Centralized and cumbersome procedures inordinately delay investment approvals and licensing agreements in the private sector. A poorly-paid civil service lacks a performance culture with routine decisions pushed up, often to Cabinet level. Until recently, the Government spent 1.7 percent of GDP on an untargeted cash subsidy. Public expenditures on some instances lack a clear strategic focus: despite evidence of an oversupply of hospital beds, the government is building four new hospitals; rich UnIversity students receive large government subsidies; and public enterprises losses consume 0.7 percent of GDP a year. In water-scarce Amman, the Water Authority of Jordan loses 55 percent of the water from poor maintenance, theft and inefficient bill collection.

III

In his letter to the newly appointed Prime Minister, His Majesty King Abdullah articulated his vision of the public sector in Jordan:

"A public administration which can achieve objectives at less cost and in shorter time is a wise and efficient adminzstration ...... This administration should be free of the ills of exploitation, favouritism, and manzpulatzon ..... . Public administration requires restructuring to prevent any overlapping of duty and duality ..... .It also requires modernisation of all procedures with the purpose of simplifying and facilitating people's access to services without extra effort and cost." (His Majesty King Abdullah's Letter of DeSignation to the new Prime Minister Abdul Rawouf Al Rawabdeh, Jordan Times, March 6, 1999.)

This report is a contribution towards implementing His Majesty's vision for the public sector in Jordan. It proposes a program of public-sector refonn aimed at improving the government's ability to deliver necessary public services under an ever-tightening budget constraint. The report first addresses the issue of the appropriate role of government in different sectors of the economy--education, health, infrastructure and social protection. What is the economic rationale--either in tenns of market failure or social equity--for government intervention? Where there is a rationale, what is the best instrument? The ongoing effort to privatize key infrastructure services in Jordan is an important outcome of such a priority-setting exercise. Second, the report raises these questions with respect to social protection, pov1erty issues, and public sector employment as a social safety net. Next, the report examines the budget process in Jordan, identifies weaknesses in the current system, and proposes refonns. to institutionalize strategic priority setting and promote a perfonnance culture in the public sector. Finally, the report addresses the issue of civil service refonn, and proposes an agenda for enhancing service delivery, transparency, accountability, and communications.

Strategic Priority Setting

Strategic priority s.etting--defining the role of the State for the 21 st Century--requires asking three fundamental questions: (1) what is the rationale for public intervention? (2) what is the right instrument? and (3) what are the fiscal costs?

What is the rationale for public intervention? The premise should be that the private sector take the lead, unless there are compelling reasons for government intervention. The two possible rationales for government intervention are market failure (externalities, public goods) and social equity (including equal access to basic goods and services). A large number of public expenditures traditionally fail this test.

What is the right instrument? Just because there is a rationale for public involvement in an area, it does not mean that the public sector should provide the service. Many services (maintenance, printing, etc.) can be outsourced to the private sector. When the rationale is an externality, then the same objective may be achieved by a public subsidy, with the private or nongovernmental sector providing the service. In other areas, regulatory agencies may be independent government institutions funded directly through SUbscriptions or user fees.

IV

What are the fiscal costs? Among those programs where there is a rationale for public intervention, and where public provision is the appropriate instrument, the government needs to decide which have the highest priority, given the overall budget constraint. This is a decisIOn typically undertaken at the cabinet or parliamentary level. The technical analysis that is provided by budgetary reforms (see below) can equip decision-makers with the information needed to evaluate these tradeoffs.

This three-part framework is applied to the following components of public expenditure in Jordan:

Education. The principal allocational issue in education is the JD 50 million spent each year on higher education in Jordan. Since the rationale for a market failure in higher education is weak (most benefits are private), this spending is seemingly justified on equity grounds: poor but qualified students should not be denied a university education because they cannot afford the tuition. However, all the evidence seems to indicate that the beneficiaries of this subsidy are wealthier st~dents. The report finds that almost 40 percent of the public subsidy to universities in Jordan go to the richest quintile, while less than 10 percent goes to the poorest. The reason is that more wealthy students qualify for admission to the university system (apparently because they can afford to go to the better private secondary schools). Finally, to the extent that university education is plagued by a credit market failure (students in general lack loan collateral), the solution is a student loan program, not an across-the-board subsidy.

Health. In contrast with education, Jordan's public expenditure in health is largely appropriate, at least as can be discerned with the data available. The coverage of traditional public health services, such as water, sanitation, immunization and pest control is generally quite high. Where health care is concerned, the critical issue is the interaction between public and private services. Jordan has an active private sector in health, and the government may not be making full use of this sector in its own decision-making. For instance, large savings may be realized by locating public health centers where there are no private facilities, rather than attempting to duplicate services. In particular, instead of building new hospitals, the government could make use of the excess capacity in private hospitals at lower cost.

Infrastructure. As noted earlier, Jordan's infrastructure sector is gradually being privatized, or incorporating private-sector management into its operation. The corporatization of the National Electric Power Company exemplifies this transition. In the two years since its restructuring (like that of many developing countries), NEPCO turned in profits of JD 27 million, lowering costs and loss rates while providing nearly universal coverage (and a subsidy to low­income users). Meanwhile, the water sector in Jordan remains a difficult issue, not least because of the 55 percent loss rate as well as the large debts and the continuing subsidy requirements of the Water Authority of Jordan. The problem here appears to be not one of inappropriate public expenditures but rather one of Incentives to be cost-efficient. Putting W AJ on a sound financial footing is a critical need both for reducing the fiscal deficit and for Water conservation. The recent signing of a management contract for the Greater Amman area is a step in the right direction, and-if it yields favorable results-should be emulated elsewhere in the Kingdom. Finally, road infrastructure in Jordan is plagued with problems similar to those of other developing countries-poor maintenance, road safety-as well as some specific problems

v

associated with trucking regulation. Again, the government is addressing these by, for example, setting up a Road Maintenance Board, consisting of users as well as the government, to create incentives for spending on road maintenance.

Social Protection

The rationale for public intervention in social protection is clear; the problem is with the instruments. Until recently, generalized food subsidies and public-sector employment were used as part of the social safety-net in Jordan. The size of the civil service has exploded in the last 15 years, with successive governments using the public sector as a "safety net" for the growing numbers of unemployed.

These are extremely ineffective ways of alleviating poverty. Now the food subsidy has been eliminated. It is time that public-sector employment stops serving as a instrument of social protection. Of course, such reform could have serious political repercussions. Yet, in recent privatization transactions the Government has been remarkably successful in dealing with redundancy. These kind of issues are best undertaken with a menu-based, self-selecting system of compensation for those being retrenched. Chapter 3 proposes a menu of options for managing the labor issue involved with restructuring ofthe civil service in Jordan.

Two instruments that are effective as social protection devices are targeted cash transfers and micro-credit programs. Between 1992 and 1997, measured poverty in Jordan declined while public spending on social protection increased. This already seems to indicate that the overall level of spending on poverty related programs is not inadequate. Total spending (1.5 percent of GDP) is over twice the poverty gap in Jordan. In other words, if only half this spending went directly to the poor in Jordan, poverty could be eliminated. Clearly, therefore, there is potential to do more with the same level of public spending. In light of the decision to eliminate the cash subsidy in January 1999, the report finds that the overall spending on social protection in Jordan need not increase. Rather, the government could devote its efforts to improving the targeting and managerial efficiency of the National Aid Fund (NAF), while making further use of NGOs and other informal mechanisms to develop the safety net.

Budget Reform

Even if these expenditure reallocations were made to Jordan's public sector, the overall performance of the public sector is unlikely to improve. The reason is that the system of public expenditure management has many weaknesses:

• It is input-focused. • It has a one-year time horizon only. • It is less than transparent. • There is no effective monitoring of expenditure during the year. • Budget responsibilities are fragmented across several organizations.

While the 1999 Budget Law goes a long way in addressing some of these shortcomings, In the medium-run, Jordan should adopt a Medium-Term Expenditure Framework (MTEF)

VI

which among other things, will permit the government to approach a more results-based public expenditure system. This is consistent with the government's own strategy of developing (with GTZ) a Master Plan for budget management. In the short-run, many aspects of the MTEF can be incorporated into the current budgetary process. For instance, combining the current and capital account, so the medium-term consequences of investment spending can be assessed, could be introduced next year. In addition, an MTEF for certain pilot ministries (e.g., education) could be introduced this year.

Civil Service Reform

Linked both to the issue of growth and fiscal management is the long-standing question of the quality of service and size of public administration. There is widespread perception that the performance of the public sector has deteriorated over the last several years to a point where it has become a constraint to private investment. It is viewed increasingly by private investors-­foreign and domestic--as slow and cumbersome with little incentive for action. Outmoded laws and procedures, low salary scales, perceptions of nepotism and lack of clear processes for hiring and promotion--all contribute to low performance.

Addressing public-administration reform requires a three-pronged approach. First, a zero-based review of the government's laws and procedures needs to be undertaken. Each rule and regulation must be justified on merits. Second, a thorough review of the civil service's incentive structure, recruitment procedures and personnel management system will inform the design of a civil-service reform. Finally, to improve service delivery, the government needs to address the twin problems of transparency and accountability in the public sector.

Implementation

"Jordan is currently passing through a new phase with significant aims only attainable through dialogue between the government and all concerned stakeholders." HE Dr. Abdur­Ra 'uf S. Rawabdeh, Prime Minister, in Jordan Times, March 21, 1999

Perhaps the most important element in implementing the public-sector reform strategy is communications. The government lacks a coherent strategy to communicate its efforts at pubIic­sector reform within itself, as well as to the general public. Global experience with public communication has repeatedly demonstrated that successful implementation of reform programs depends on the government's ability to obtain public and parliamentary support. Public skepticism about the benefits of economic reforms, workers' uncertainty, and reluctance on the part of domestic and foreign investors to participate in the process may result from lack of credibility and effective communications with key audiences, rather than from the details of the reform program itself. In Jordan, economic reforms, and privatization in particular, have frequently been misunderstood and misinterpreted in the media and in public discourse, and resulting opposition has impeded the fulfillment of their aims. Strengthening the research and analytical capacity available to parliamentarians may help, and an independent Economic Policy Institute could foster a healthy dialogue. But the critical elements of a successful communication effort are continuous professional opinion research and creation of consensus building mechanisms to engage in constructive two-way communications.

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World Bank Support

The World Bank can support these reforms through knowledge and financial assistance. In a sense, public sector reform in Jordan has been ongoing for a decade. Since 1994, the Bank through the ERDL program has supported these reforms. At the center of the proposed new Country Assistance Strategy (CAS) of the Bank is a series of Public Sector Reform Loans (pSRLs). The objective of this follow-up to the ERDLs is the achievement of His Majesty's vision of a modem, effective, efficient, transparent and service-oriented public administration. The Bank brings to the partnership decades of cross-country experience with public-sector reform, a somewhat objective view, as well as funding.

It would be important to anchor the implementation of the wide-ranging reform program. As done in other countries, the reform may be guarded against shifting priorities by a Public Service Reform Law. The implementation itself could be coordinated by an Executive Public Sector Reform Unit under the Prime Ministry, and the inter-ministerial mandate of this unit could be secured in the Law or by-law.

The central driving force of the public sector reform would be a focus on output (senrice delivery) and outcomes in terms of increased living standards and citizens' welfare. A desirable strategy would be to complement the PSRLs by carrying out periodic Comprehensive Development Reviews (CDRs), which could start this year in priority sectors such as social protection, education, health, and water. This would help to set priorities and to evaluate progress on a well-informed basis.

The medium- to long-run objective is for the public sector in Jordan to undertake the multiple roles of (a) a skillful facilitator of private-sector-Ied economic growth; (b) an effective enforcer of property rights and private contracts; (c) an efficient and impartial regulator of private sector activities to protect consumers from anti-competitive and fraudulent business practices and (d) the protector of the most vulnerable group-the poor. The PSRLs would support this objective.

VlIl

MATRIX OF RECOMMENDATIONS

Area of Intervention Issue Recommendation Macroeconomic Large budget deficIt. Implement IMF program. Framework Low growth.

Accelerate implementation of structural reforms.

Education SubsIdy on higher education is Increase fees In public higher educatIOn. in fact a subsIdy to the rich.

The budgetary drain of the Expand funds for tuition subsIdies based on subsidy hmits entry to hIgher famIly Income. educatlon for the poor.

Introduce a student loan program for univerSIty educatIOn.

Accelerate expansion of secondary education. Health Inadequate InformatIon base Expand data collection and analytic capacIty to

for investment deCIsions. use health sector InfOrmatIOn In pohcy formulatIOn. Data should Include: (1) populatIOn-based surveys determInIng health status, servIce utIhzatIOn, expendItures on health and theIr socioeconomIc correlates; and (ii) prOVIder-based surveys, partIcularly of prIvate medIcal care-gIvers, determIning, mter

- aha, market prIces, servIce coverage, capaCIty and finanCIng.

Perceived over-capacIty. GIVen the surplus of hospItal beds, new constructIon should be postponed unttl needs can be better assessed.

Electricity Slow pnvatIzatIon process. Proceed WIth restructunng NEPCO. Implement regulatory board for eleCtrICIty.

Water IneffiCIent servIce proviSIOn Extend management contracts. and water leakage.

Revise tanffs to reflects costs. FInanCIal losses and Government budget drain. Investment program to manage water demand.

Consider one-time debt restructuring. Road Transport Under-fundIng of Implement Road MaIntenance Board

maintenance. (& MTEF).

Over-capaCIty In truckIng ReVIse axle-load-based tanffs to reflect road fleet. damage.

Implement "Goods Transport Law."

Poor road safety. Locate Traffic Safety Program in a body reportIng dIrectly to Pnme MInIster.

IX

Area of Intervention Issue Recommendation Privatization A successful privatIzation Continue pnvatIzation program: RJ, lTC, Llght

strategy and ImplementatIon, Rail System, Power, companIes in the TIC needs certam key elements. portfoho. These mclude: (1) commItment; Expand program: (li) mstitutional capaclty; Postal servlces, silos agribusmess, ports, etc. (iii) appropnate transaction desIgn; Implement a comprehensive commUnIcatIons (lV) essentIal supporting and pubhc mformatIOn program for acttvIttes; pnvattzation. (v) a clear tImetable; (Vl) post pnvatIzatIOn Obtain a pubhc reaffirmatIOn of the measures. commItment to the program, the list of the

major transacttons with timelmes, and the role and mandate of EPU.

Develop and approve labor transitIOn program consistent with recommendatIons for overall soclal devel~ment.

Social InconSIstent informatIon on De-politicize mformatton and reach consensus Development level of poverty. on level of poverty and unemployment based

on scientIfic statIstIcal methodology.

Poverty assistance needs wider Ahgn financial and admmistratlve outreach and coverage WIth responsibihty for NAF under a single rapId response tIme and authonty; clarify NAF's mlSSlon; strengthen effectIve service dehvery. NAF's administrative capaclty; streamhne

procedures.

Strengthen trammg of social workers.

Reconslder DEF's mIcro-credit program agamst better functionmg alternattves.

Introduce safety net measures aImed specifically at mItIgating negattve shocks. Accelerate lmplementatIOn of SPP.

PerceIVed over-staffing of Create or ldenttfy a UnIt in charge of public sector. Issue of movmg redundancy issues. people to pnvate sector Jobs should be addressed m Freeze recruitment, especlally at the bottom. systematic and consistent manner. Introduce a menu of targeted but voluntary

separatIOn optIOns.

Make pubhc sector penSIOns portable.

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Area of Intervention Issue Recommendation Budget Reform Past fiscal slippage. Continue to implement the program supported

by the IMF.

Lack of a comprehensive Ensure integratlOn of capital and current budget. expendItures mto a single budgetary process;

extend budget coverage to autonomous -

agencIes.

Current budget system IS based Prepare for implementation of a MedIUm Term on mcremental approach, and Expenditure Framework (MTEF) to commence one-year tIme honzon. with pIloting m at least one key sector

( education).

Budget focus is on mputs Move to implement a system of performance instead of outputs WIth lImIted budgetmg, as set out in the master plan focus on performance Issues. prepared by the expert group. Make a start in

the preparatIOn of the 2000 Budget, by requesting prelImmary informatIon on outputs and outcomes, and allocate resources to start implementatlOn of masterplan.

Commence functlOnal or strategIc reVIews m each sector/mmIstry to determme strategIc obJectIves.

ReVIew and amend relevant legIslatIon to enable reforms.

Lack of budget monitonng Strengthen the role and staffing of the General capacIty. Budget Department.

FmanCIal audIt--mamly ex- Ensure mdependence and Improve professlOnal ante-mvolves consIderable staffing of the General Audit Bureau. Re-onent duplIcatIon of checking, lacks the Bureau's work to ex-post based audItIng, independence and professlOnal includmg adequacy of finanCIal reportmg standards.

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Area of Intervention Issue Recommendation Civil Service Excess demand for public Align pubhc sector pay and benefits WIth the Reform sector jobs. market.

Much more informatIon and EstablIsh a process of strategic reVIews to analYSIS IS needed to develop a IdentIfy opportumtIes for restructuring, re-strategIC plan and VISIOn for engmeenng, outsourcing and decentrahzmg Improving pubbc services, pubhc sector functions, processes and staff for while reducmg costs. effectIve pohcy makIng and service dehvery.

Current legal framework, Conduct zero-base review of all relevant laws, mmistenal rules and regulatIons, and instructIons governing mstructions governmg mImstries and pubbc administration at large. busmess processes are not condUCIve for service delivery and efficiency.

Government orgamzatIOn IS Ahgn organizatIonal development and designed more for control than restructunng programs for government for service dehvery. mImstnes and departments WIth their servIce

objectIves.

Lack of delegatIon and focus Devolve non-core functIons to local on core government functIons. governments, to the pnvate sector, or to

autonomous pubhc organizatIons.

Weak performance- Improve efficiency of serVIce delivery in core management control. areas of ministry actiVIty.

SelectIon and promotIOn Strengthen human resources and structure standards and practIces for staffing levels to meet the mmIstries' personnel are unclear. objectives.

PerceIved Idle capacity and "RIghtsIze" the civil servIce by adjustmg incompetence. staffing levels and competencies to new pubhc

sector requirements.

Weak connectIon between Introduce performance-based human resource mdIvIdual performance and management systems for the CIvil servIce rewards. (through installatIon of performance

measurement methods, design of new performance evaluatIon, pay and gradmg, and career advancement systems).

Managerial skIlls and abIhty to Strengthen the cahber of cross-government make deCISIons are sometImes senior government staff (through development lackmg. of a Semor Executive ServIce cadre groomed

for CIvIl service leadership posts).

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Area of Issue Recommendation Intervention Civil Service Lack of transparency and Increase mstItutIOnal and financIal Reform accountablhty accountabihty, by strengthenmg formal (cont.) instItutional structures.

Improve government procurement procedures to enhance both efficIency and transparency.

Increase probity among CIVIl servants.

PerceIved lack of public Improve access to, and use of, pubhc understanding and trust. mformatIon by mdividual citIzens and by CIvIl Public opmIOn mformation society, mcludmg Improved responsIveness and watchdog functIOns are by Government in provldmg thIS access. not utIlIzed effecttvely. Lack of organized lIstenmg Involve Civil SOCIety m Improvmg servIce and response to public dehvery and transparency. concerns.

Implementation Frequent turnover m senior Issue PublIc ServIce Reform Law that government can affect delineates reform objecttves, ttmelInes, and contmUIty and commitment to mandates. reform.

Anchor implementatIon EstablIsh ExecutIve Pubhc Sector Reform responSIbilitIes. Umt under Pnme Mlmstry, that reports to an

mter-mmlstenal Higher CouncIl for PublIc Sector Reform.

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Chapter 1: THE NEED FOR PUBLIC SECTOR REFORM IN JORDAN

1.1 Rationale

1.1 Jordan is currently somewhat in a crisis situation. After three years of slow growth, the economy may be looking forward to another three years of negative per capita income growth. This slowdown would make the lower income levels of the society more vulnerable, and may threaten social cohesion. While the private sector is showing a few signs of resumption of growth, the public sector has to curb expenditures and increase tax revenues in order to bring the budget deficit from over 10 percent of GDP in 1998 to a more sustainable level of 3-4 percent during the next three years.

1.2 Jordan has a fairly large public sector. It accounts for roughly 40 percent of employment in the country and its spending is over 40 percent of GDP. The growth of the public sector in Jordan started in the early seventies when the country was receiving generous grants from the wealthy oil producing countries. With supplemental aid from western countries, Jordan was able to build and upgrade its infrastructure and adopt ambitious social welfare programs. The public sector continued to expand throughout the eighties to administer new programs and projects. A major acceleration in public sector employment, particularly in the central government, took place in the nineties. The public sector in Jordan today can be characterized as the preferred employer for less skilled workers with major overstaffing at the lower levels. In recent years, it has been creating jobs-particularly at lower levels-to absorb the excess supply of labor, thereby acting as a welfare program for relatively unskilled Jordanians.

1.3 The large size of the public sector in Jordan, is by no means unique. This is more of a rule than an exception in developing countries. Nevertheless, within the MENA region, only Egypt has more public workers relative to the popUlation. A more important question relates to the performance of the public sector: Are Jordanian taxpayers getting value for their money from the public sector? On this issue a consensus seems to be emerging that a major constraint on growth and poverty alleviation in Jordan has been the publIc sector. Although the government spends over 40 percent of GDP, many public services are poorly provided. Centralized procedures result in inordinate delays for investment approvals and licensing agreements for the private sector. A poorly-paid civil service lacks a performance culture. Until recently, the government spent 1.7 percent of GDP on an untargeted cash subsidy scheme. Despite an oversupply of beds in private hospitals, the government is building four new hospitals. Rich university students receive large government subsidies. In water-scarce Amman, the Water Authority loses 55 percent of the water due to poor maintenance, theft and inefficient bill collection. In July 1998, a sudden decline in water quality caused major dissatisfaction.

1.4 How can the public sector improve its performance and be an effective partner to the private sector in putting the country back on a sustainable high growth path? What can it do to ensure that the poor in Jordan will participate, contribute to and benefit from development? In his letter to the newly appointed Prime Minister, His Majesty King Abdullah articulated his vision of the public sector in Jordan:

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"A public administration which can achieve objectives at less cost and in shorter time is a wise and efficient administration ...... This administration should be free of the ills of exploitation, favouritism, and manipulation ...... Public administration requires restructuring to prevent any overlapping of duty and duality ...... It also requires modernisation of all procedures with the purpose of simplifying and facilitating people's access to services without extra effort and cost." (His Majesty King Abdullah's Letter of Designation to the new Prime Minister Abdul Rawouf Al Rawabdeh, Jordan Times, March 6, 1999.)

1.5 This report, which reviews the state of the public sector in Jordan and proposes a program of public-sector reform, is part of an effort to implement His Majesty's vision. The following paragraphs answer some important questions about this review.

• Why a public sector review (PSR) in Jordan now? As mentioned above, while 1he Government of Jordan has undertaken a number of policy reforms including trade and financial sector reforms, it has not addressed many of the structural weaknesses of the public sector (see Chapter 2). The public sector has not been very successful either in promoting private-sector development or in alleviating poverty. While public-sector reform is always politically difficult, the recent crises as well as a new government have made it possible. In order to embark on such a program, a thorough review of the current situation, as well as a long-term agenda of action are essential.

• Why should the World Bank undertake such a review? This review, like the reform program that follows, is a- collaborative venture between the Government of Jordan and the World Banle The Bank brings to the partnership decades of cross-country experience with pubJic­sector reform and a somewhat objective view. The Government of Jordan naturally has deep knowledge of the country as well as the sensitivity to the local culture and politics. It is hoped that the combination will lead to a thoughtful and successful public-sector reform program in Jordan.

• What does thzs public sector review cover and what will it accomplish? This report discusses a medium- to long-run strategy for the public sector in Jordan to undertake the multiple roles of (a) a skillful facilitator of private-sector-Ied economic growth; (b) an effective enforcer of property rights and private contracts; (c) an efficient and impartial regulator of private sector activities to protect consumers from anticompetitive and fraudulent business practices and (d) the protector of the most vulnerable group-the poor. It first reviews and appraises the public sector performance in Jordan, and then outlines a strategy that could be used as an input to the policy making process. The section below discusses the Jordanian macro-economy which sets the aggregate constraint within which the public sector can operate. Chapter 2 outlines a framework for analyzing the performance of the public sector and applies i1 to specific sectors: education, health, infrastructure, and private sector development. Chapte:r 3 focuses on social development and the poor within the context of low growth, fiscal restraint and public sector reform. Several cross-cutting themes-budgetary management and institutions, civil service reform and transparency-are taken up in Chapters 4 and 5. This

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review also indicates areas where more exploratory work needs to be done to guide the public sector reform agenda. Last but not least, this review will underpin the World Bank's Country Assistance Strategy (CAS) to Jordan, which could take the form of a series of Public Sector Reform Loans (see Chapter 5).

• Who is the main audience of the P SR? The main audience of this report is the Government of Jordan. The findings and recommendations of this report would be helpful to the government in carrying out its public sector reform. To ensure that this kind of a review is not a one-shot exercise, a desirable strategy would be to complement this review by carrying out more focused annual public sector reviews in the future. The World Bank can assist the Government of Jordan in this effort. Moreover, to increase their impact, these annual reviews could coincide with the annual budget cycle and provide a vital input to the Government of Jordan's budgetary decision-making process. The information contained in the PSR is also useful in making an assessment of the Bank's overall lending program. If Jordan's public expenditure program is satisfactory and is executed well, then the development impact of the Bank's lending-indeed of the entire donor assistance-is likely to be positive. In this context, the PSR would help other donors-both bilateral and multilateral-in improving their understanding of public sector issues in Jordan. It could serve as an input to the donor community when it reviews its aid strategy.

1.2 The Jordanian Economy: A Brief History

1.6 Fifteen years of economic boom in Jordan ended in the mid-eighties with the fall of the price of oil and subsequent declines in workers' remittances (primarily from the Gulf), external financial assistance, and exports. Average annual growth during 1983-89 was under one percent. By 1989, Jordan's inability to meet its external obligations precipitated a crisis which led to an IMF-supported stabilization program and a major Paris Club debt rescheduling. With the advent of the Gulf crisis in 1990, Jordan faced further disruptions of aid and trade, and the return of 300,000 Jordanians from the Gulf area. These factors contributed in pushing the unemployment rate in the country to about 20 percent.

1.7 Responding to the crisis with the help of external partners-the International Monetary Fund, the World Bank and a few bilateral donors-Jordan made resolute stabilization and adjustment efforts. The government pursued an ambitious reform agenda in order to stabilize the economy, improve efficiency, and broaden the role of the private sector. Fueled primarily by a major inflow of savings from Gulf returnees, external debt relief and new concessional aid, real GDP rebounded in 1992 with a growth rate of 16 percent. Annual growth stabilized around seven percent during 1993-95. Inflation hovered around three percent and the fiscal deficit (excluding grants) fell sharply from 18 percent of GDP in 1990-91, to 5.3 percent of GDP in 1995. The external current account deficit (excluding grants) also declined from 18 percent of GDP in 1993 to 8.8 percent in 1995. External debt to GDP ratio fell from a high of 175 percent in 1991 to 103 percent during this period, thanks to discrete debt buy-back operations and write­offs by western creditors.

1.8 In the last several years, however, the pace of economic activity has lost momentum as the construction boom that followed the Gulf war ran its course and Jordan continued to face impediments to trade with neighboring countries. Real GDP growth in 1996 slowed down to 1

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percent and was followed by 1.3 percent in 1997. The Asian crisis hurt exports of potash ,md fertilizers, while construction activity and agricultural production fell even further. In 1998, Jordan was also affected by the sharp drop in international oil prices-which led to a weakening of the regional economy and a marked decline in remittances from expatriate workers-and by regional tensions over Iraq.

1.3 The Economy in 1998

1.9 Real GDP grew at a rate of 0.6 percent in 1998. Other indicators suggest that unemployment and poverty have risen, and income inequality worsened. The depressed level of economic activity was particularly pronounced in agriculture and construction (though there have recently been indications that the decline in construction may begin to bottom out). Consumer price inflation was very low during 1998, at only 0.5 percent, reflecting depressed domestic demand and declining international commodity prices.

1.10 The falling growth had an impact on government accounts too. The budget deficit (before grants) rose in 1998 to 10.7 percent of GDP, as government expenditure increased substantially while revenues increased marginally. On the expenditure side, there was an increase in capital outlays and in several categories of current expenditure, including transfers to decentralized agencies and public enterprises. The rise in recorded spending also reflected a broadening of the coverage of the expenditures to include outlays that were previously off budget, amounting to more than 1 percent of GDP. On the revenue side, collections from customs duties improved, partly reflecting administrative improvements and reductions in exemptions. Income tax and non-GST domestic indirect taxes, however, declined because of the slowdown in economic activity. The large budget deficit of 1998 was reflected, among other things, in substantial net domestic borrowing of the government, which amounted to nearly 6 percent of GDP.

1.11 Monetary developments in 1998 were dominated by fluctuations in demand for the Jordanian Dinar and the government's heavy recourse to domestic bank financing. In response to the loss in international reserves, from US$1.7 billion at end-1997 to less than US$1.2 billion (4 months of imports) at end-1998, the Central Bank of Jordan acted decisively to raise interest rates to support the exchange rate and maintain international reserves. The benchmark interest rate on the Central Bank's certificates of deposits (CDs) was increased from about 6.5 percent in the spring of 1998 to more than 10 percent in August.

1.4 The Ongoing Macroeconomic Program for 1999

1.12 In the 1999 Budget (and the supplementary budget law), the government has set a target to reduce the deficit (excluding grants) to 7.9 percent of GDP. Revenue has been projected to increase by the equivalent of about 2 percent of GDP while expenditure is to be reduced 1.4 percentage points of GDP. The revenue target is supported by an increase in the general sales tax (GST), from 10 percent to 13 percent, concurrently with a reduction in GST exemptions. (These changes became effective in July). Measures are being adopted to strengthen the collection of the income tax and the GST. The yield from these measures, however, will be partially offset by a reduction in the maximum customs tariff rate-from 40 to 35 percent-and the lowering of tariffs on industrial inputs to 10 percent. The targeted reduction in expenditure will be achieved mainly through the elimination of the food cash transfers, and

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cuts in current transfers to public enterprises (see the next paragraph) and capital expenditure. Following the elimination of the food cash transfer, the price of standard bread was lowered by 25 percent, largely reflecting the fall in the international price of wheat, but still involving a small subsidy; the government has committed to support this lower price for a period not exceeding one year.

1.13 Starting from this year, the government has made a requirement that public sector enterprises should have fully financed budget plans. In 1998, the consolidated overall deficit of the four major public sector enterprises-the Water Authority (W AJ), the National Electric Power Company (NEPCO), Royal Jordanian (RJ), and the Jordan Telecommunications Corporation (JTC)-was equivalent to about 1.4 percent ofGDP. Such a requirement is likely to lead to a strengthening of the operations of the W AJ with improved tariff collection and recovery of overdue payments. The operational improvements in the other entities related to their restructuring and privatization efforts would also contribute to containing the combined overall balance.

1.14 The monetary program of the Central Bank of Jordan (CBJ) is designed over time to restore a safer level of official international reserves while maintaining low inflation. To this end, the program is based on a rate of broad money growth broadly in line with that of nominal GDP. The reduction in the budget deficit and greater financial discipline in the rest of the public sector are expected to leave adequate room for an expansion in credit to the private sector, while allowing a necessary buildup in international reserves. Interest rate policy will continue to be dictated by the dual objective of keeping within credit ceilings and rebuilding international reserves, while preserving the stability of the exchange rate.

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Chapter 2: ROLE OF THE PUBLIC SECTOR

2.1 Strategic Priority Setting

2.1 Jordan's public sector is afflicted wIth two general problems. First, allocation of public resources appears to be non-optimal, both across and within sectors, relative to the government's objectives of growth and poverty alleviation. Second, there are very few incentives for perfonnance in the public sector. These problems are not unique to Jordan and can be found in the public sectors of almost every country.

2.2 It is important to note, however, that the two problems cannot be separated. The reason why public resources are misallocated is that the budgetary process in Jordan does not pennit an evaluation of the various components of public expenditure in tenns of their rationale for public intervention. Rather, as described later in Chapter 4, the process of budgetary decision-making is input-focused. Little or no infonnation is provided on the outputs or outcomes of expenditure decisions, so that effective prioritization is not possible. Moreover, even if public expenditures were appropriately prioritized in Jordan, it is unlikely they will lead to effective outcomes because of the weak incentives for perfonnance in the public sector. This is why public expenditures should be evaluated in tenns of the appropriate instrument to address a given public-sector rationale. Often, subsidizing or contracting out to the private or non-governmental sector can lead to better or more cost-effective outcomes than public provision.

2.3 This chapter deals mainly with the first problem, which we call strategic priority setting. The issue of incentives in the public sector is addressed in Chapters 4 and 5. The issue of resource allocation is addressed by examining the functional composition of the public sector, and in this context also the government's strategy of privatization. The Government of Jordan, recognizing the limited rationale for continued public intervention in productive activities and infrastructure provision, embarked in 1996 on a wide ranging privatization program to include road, rail and air transport, electricity, telecommunications and industry. After substantial initial progress, uncertainty regarding political support resulted in a slowdown. Recently, the configuration for privatization has improved.

2.4 Strategic priority setting involves improving the allocation of resources among and within sectors, such as health, education and infrastructure. While there is no unique, or optimal allocation of public resources, applying simple principles can help to boil down the decisions to the essential ones, thereby pennitting decisionmakers to focus on a few, crucial tradeoffs. Evaluating the public expenditure program proceeds by asking three questions (see Figure 2.1): (1) What is the rationale for public intervention? (2) What is the right instrument? (3) What are the fiscal costs? Each of the three questions is discussed in tum.

2.5 What is the rationale for public interventlOn? Each program-which would ideally combine current and capital expenditures-is scrutinized for whether there is a rationale for government intervention in that area. The two possible rationales are market failure (externalities, public goods) and social equity (including access to basic goods and services). A large number of public expenditures fail this test. For example, in the health sector governments frequently overspend on "private" goods such as clinical services, and underspend on public

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goods. Research has shown that in Malaysia, an increase in the number of public doctors in a district had no effect on infant mortality-because they were crowding out the private doctors­whereas increases in safe water and sanitation, a public good, had a substantial effect. Another example comes from fertilizer subsidy in India. The largest item in the Indian government's agriculture budget is a fertilizer subsidy. When the fertilizer was introduced forty years ago, there was a rationale in terms of the information externalities associated with farmers' adopting the new technology. That externality has vanished, but the fertilizer subsidy lives on.

2.6 The Government of Jordan has applied this question in privatizing several public enterprises, such as the Cement Corporation, Royal Jordanian Airlines, etc., for which there is no rationale for public-sector intervention. At the same time, it appears that the same question is not being asked in the social sectors, such as health and education (see the respective sections below).

Figure 2.1 Decision Tree for Evaluating Public Programs

I

No rationale

I TelecommUnicat,ons

Electnclty Hotels Alrlme

Outsourcing

J Government BUlldmg Mgt Community Development

What is the rationale for publiC Intervention? Market failure (extemalilies, public good)

Redlstnbulion

There IS a ralionale (e g , externality m pflmary educatIon)

I What IS the nght Instrument?

I SubSidy

I ClInical Health

Schoof vouchers

I Regulation

I Insurance

Secuntles and Exchange ElectffClty

I

Public prOViSion

I Pnmary EducatIon

Safety Nets Secunty (mternal & external)

I What are the fiscal costs?

(tradeoffs based on costs)

2.7 What is the right instrument? Just because there is a rationale for public involvement in an area, it does not follow that the public sector should provide the service. If the rationale is an externality (such as with primary education, for example), the same objective could be achieved by a public subsidy, with the private or nongovernmental sector providing the service. This is the reasoning behind various schemes, such as school vouchers, that seek to improve outcomes in sectors where there is a justification for government intervention.

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2.8 Jordan has been applying this question in at least three areas:

• The Ministry of Public Works contracts out almost all of its building services. The design and construction of all public buildings are done by the private sector, although financed (through contracts) from the government.

• The Water Authority of Jordan has recently signed a management contract with a private company for managing water in the Greater Amman area.

• The Ministry of Social Development works with nongovernmental organizations and local voluntary associations in implementing its assistance programs for the needy.

2.9 The reason why many governments choose to contract out services is that the private sector, under performance contracts, may have greater incentives for cost-efficiency than the civil service. Experience has shown that this is typically the case when the output can be easily specified and monitored (as in the case of buildings). To the extent that the public sector in Jordan suffers from poor incentives for cost-efficiency, contracting out more public services may be beneficial. Clearly, this will entail some job losses and opposition (see Chapter 3). This perspective, that government provision is not the only solution, is important when one recognizes the possibility of government failure (i.e., the government is not always efficient when carrying out its intervention).

2.10 What are the fiscal costs? Among those programs where there is a rationale for public intervention, and where public provision is the appropriate instrument, the government needs to decide which have the highest priority. This is essentially a political decision, and is typically undertaken at the levels of the cabinet and parliament. Yet, experience has shown that technical analysis can contribute to this process by providing decisionmakers with the information they need to evaluate the unavoidable tradeoffs. Although it is often difficult, if not impossible, to quantify the benefits, the fiscal costs (both current and future) can be quantified. The latter information can be used by policy makers to make judgements on program expansion vs. contraction vs. elimination (or introduction). In Jordan, the adoption of the medium-term expenditure framework (MTEF) will permit policymakers to see the total fiscal costs of different programs, permitting a more systematic comparison of competing uses for public resources (see Chapter 4).

2.11 The following sections of the chapter discuss strategic priority setting in three key areas: education, health and infrastructure. The discussion of each section is concluded by a set of recommendations.

2.2 Education

2.12 The budget figures for higher and basic education in Jordan for the last five years are presented in Table 2.1. It indicates that there has been a noticeable trend in the direction of basic education, a trend that this report will argue is a good thing. With the exception of the dip in spending on both levels in 1997, the trend is stable. What makes the stability of higher education spending notable is the fact that the major source of funding, in accounting terms, was changed

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in 1998 yet spending levels still hover around ro50 million. The funding change was the de­linking of the higher education budget from the revenue from customs. The stability of the total budget indicates that the earmarking of funds either made little difference or was compensated by varying the shares of custom revenue going to higher education.

Table 2.1 Education Budgets (m mIllions JD)

Year Basic education Higher education Percentage - higher

1994 183 48.0 20.8 1995 205 50.5 19.8 1996 225 51.4 18.6 1997 218 39.9 15.5 1998 248 49.6 16.7 Source: Budget Law, Budget Department, various fiscal years.

2.2.1 Higher Education

2.13 The outstanding questions in Jordanian education, that involve serious market failures and have significant budgetary implications, are in the area of higher education. The quality of education is always a concern but does not appear to be primarily a problem of money and should be addressed within the sector. That higher education raises the critical issues is unusual for countries at Jordan's level of income where significant gaps in basic education are common. The fact that it is higher education that poses the most difficult problems for the country is a tribute to the priorities that have driven the sector to date.

2.14 In order to understand the way in which government expenditure can best improve the functioning of the higher education sector, it is necessary to assess what might go wrong with a completely free private market. While this perspective may seem odd in the context of higher education in Jordan since private universities have only been allowed for the past decade, it establishes an important benchmark against which to test the efficiency and equity of government spending and is consistent with the arguments for public provision made at the beginning of this chapter. For primary education, there are good reasons for public support. While only rarely measured, there are important externalities associated with primary education in terms of a better functioning labor force, adoption of new techniques in agriculture and, to varying degrees of consensus, the creation of a sense of civic obligation and nationhood. Further, since poor people usually have more children than rich, the benefits of free or subsidized primary education are very progressively distributed. The story for higher education is different.

2.15 First of all, university education is a private good. It is excludable (one can charge for it and keep non-payers out) and rival (it cannot accommodate new users without further cost). Further, there are few if any externalities from the education per se. Its benefits accrue almost exclusively to the student and his family. The principal benefits are higher earnings and the consumption value of the knowledge itself. That education leads to much higher earnings can be shown in many ways. Figure 2.2 shows the percentage of Jordanians in each decile of wealth category by the fraction who have a bachelor's degree or higher. Clearly there are great gains to a college education.

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Figure 2.2: College Education by Wealth Category in Jordan, 1996

en 0 3 't:J ftI II)

C o 25 .c 0 't:J ;; '0 IV o 2 .c u II) ::s en 't:J ::s II)

0.15 0 II) .c C) - .!! 0 1 0 '0 c u 0 .c 1:: ~ 0.05 0 ~ a.. e 0 c..

2 3 4 5 6 7 8 9 10

Deciles of wealth

Source: CalculatIOns based on FAFO survey.

2.16 On the face of it, it is not clear why there is any public provision of higher education. Market failures of the sector are specific to credit conditions and to research activities (whether in academia or not) and not associated with attendance of students per se. Credit markets fail because there is no collateral associated with education loans. There are no physical assets to attach. Research will be underfunded in free markets since the results of research will be publicly available and the benefits will not be entirely captured by an investor. Both of these failures can be handled in more direct ways-either by intervention in the credit market or the direct provision of loans for the first problem, and by direct support for research activities for the second. If universities or other organizations need students to conduct research they can, of course, pay students themselves as need arises rather than as a blanket subsidy to all students. On efficiency grounds, subsidized tuition is not a good policy.

2.17 The main argument against subsidies to university students, however, is on equity grounds. Such subsidies disproportionately benefit the better-off segments of society (figure 2.3). How is it that a policy that intentionally targets particularly disadvantaged groups and which allows institutions to give tuition reductions to needy students can generate a distribution of benefits so skewed to the rich? It is not that the direct subsidies are mistargeted since it is true that the poor pay somewhat less for university education than others. However, the price differential is small compared to the implicit subsidy-the charging of all students a fee very much less than the cost of providing the education. It is the attendance pattern of universities that determines the amount of the overall subsidy going to each group. While the per-student subsidy might be a bit higher for the poor (though this is not at all certain since a higher fraction of rich children undoubtedly go into the relatively expensive-to-provide fields of medicine and engineering and the difference in fees may not cover the difference in costs) the absolute numbers of students from higher income groups more than compensate.

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Figure 2.3: Percentage of Public Subsidy to Universities Received by per Capita Consumption Quintile

45

40

35

30

25

20

15

10

5

o Hl

-.-----

-

2 3 4

Qulntlles: poor to rich

Source: CalculatIons based on SOClOeCOnOnllC survey.

---

--~

-~

5

2.18 The essential reason for the difference in attendance is not the financial barrier but the barrier set up by the allotment of placement by entrance test scores. While seemingly "fair" the rationing of the market by test scores guarantees that the relatively privileged will reap the lion's share of the subsidy. It is a universal feature of education systems that school performance is very heavily influenced by student background. Parental interest and guidance, resources and experiences helpful for learning, nutrition and a host of other determinants correlated with income contribute to test scores. To what extent does society feel that further subsidy to this natural bias is warranted on grounds of "fairness"?

2.19 What are the options for public finance to promote the interests of the relatively poor­even in the area of increased access to higher education? The most direct way is to charge full tuition in public institutions but institute a student loan program. Student loans could be made available for use in any accredited institution of higher education, public or private. A major advantage of this policy is that net costs to government could be very small. The only costs are likely to be due to higher-than-standard default rates or to the increased administrative costs of attempting to collect repayments-the very reasons why there is an insufficient private market for these loans in the first place. A second advantage is that it directly addresses the original market failure and therefore has fewer unintended consequences. The third advantage is that it removes the basic inequity of transferring money to the relatively rich.

2.20 Does access to such loans necessarily improve the access to higher education of the poor? Under current conditions in which the total number of public university places depend on a fixed higher education budget, cut-off test scores correspond to that number of places, and public subsidies cannot be used in the private sector, the answer is: no, this will not necessarily improve matters for the poor. Those who qualified for university in the first place will simply be subject to full cost recovery where they originally got the education for free and there' are no further places in the system as a whole. The poors' only benefit in this case would be their reduced tax payments for services they do not enjoy.

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2.21 However, if the loans can be used in the private sector, the availability of financing through student loans can significantly expand access to higher education. First of all, the restriction of the currently high cutoff for admission to higher education would be relaxed. While admission is, in principle, allowed with a score of 70 percent or higher on entrance examinations, current allocations only allow students with scores above 88 percent to attend. If the 70 percent figure is in any way related to a belief in the ability of a student to benefit from higher education, increased attendance is an important goal. The cutoff admission score will fall since more students who could benefit from a university education would then be able to afford to attend due to the availability of loans and the private sector. The current situation allows quite wealthy children to get around the high cut-off test since they can afford to pay private fees. The switch to a loan and freer market in education would increase attendance of the poor to the extent that poor students feel they can benefit from a higher education in the private sector- subject to a bit of second guessing on governments' part in the establishment of fixed, overall minimum test scores. The distributional benefits of raising fees can be enhanced if a program of need-based scholarships is implemented that either replace or supplement the system of reserved seats for underprivileged groups.

2.22 Student loans do not have to be administered directly by the public sector. They can be encouraged through regulation, subsidies or guarantees to private financial institutions. The savings to be achieved if the baseline tuition is considered 100 percent of costs rather than the current 20-25 percent are substantial.

2.23 Political implications for raising university tuition are severe. Current plans are for a phased-in increase of tuition payments for newly entering students, protecting the subsidy to those who are currently in university. This is probably a sensible response to a political reality but should not go under the guise of an efficient or equitable policy.

2.24 An essential feature for the expansion of higher education under a loan program is to adopt an even-handed treatment of the public and private sectors. The private sector's growth over the past decade has been tremendous and there is reason to believe that the supply elasticity of the private sector is quite high. Its ability to absorb increased demand is likely very good.

2.25 A further benefit of a private sector that is allowed to compete on equal footing with the public is that such competition often brings about improvements in quality. Responsiveness to the purchasing power of consumers (students in this case) paying real money is a severe disciplinary device in many sectors of the economy. Allowing competition would provide information on the value for money that students place on different institutions. This can complement administrative attempts to improve quality such as those in the higher education reform program currently underway. This program is designed with specific policies for improving quality in public universities.

2.2.2 Secolldary Educatioll

2.26 In the Jordanian context, the main benefits of expanding secondary education are related to correcting the inequities of the higher education system. It is the remaining scope for expansion of secondary education that is the unfinished business of the education sector.

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2.27 Enrollments show substantial improvement from 1990-1995. However, secondary school enrollments are not spread evenly across the population. Figure 2.4 shows enrollment rates by decile of family wealth estimated on the basis of the F AFO survey.

Figure 2.4: Estimated Enrollment Rates for Secondary Education

... 1 4 s::

II>

.E 1 2 e r-

s:: II> 1- f-' ~ '" en o 8 "0 II> s:: ... 0 I! 0.6 u

'--f-, ,

I-- - I- I- f-

'I-- - f- I-- - - I- i-II> en "0 .!!

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'" o 2 :S l- I- - I- I-- - - - 1-

en 0 W

2 3 4 5 6 7 8 9 10

Wealth of household (deciles)

Source: CalculatIOns based on F AFO survey

2.28 For everyone in the seventh decile or over, enrollments are pretty much universal. It is only in the bottom two deciles that there is substantial room for improvement with rates down around 60 percent. The average progressivity of the provision of secondary education is not all that good-richer people benefit from subsidies to secondary education more than poor. However, given the virtually universal enrollment of the relatively wealthy, the next person to enter secondary school, the marginal entrant, is almost certainly a poor person. Any expansion of coverage of the system will benefit the poor.

2.29 The policy implications of a subsidy pattern like that in figure 2.4 would generally be that an increase in fees would be relatively progressive and an increase in coverage would also be relatively progressive. Given that there are quite a few poor children in secondary education, though, and given the link between secondary enrollments and the public subsidy in higher education, the emphasis should be on the expansion of the system rather than the recovery of costs.

2.30 To reinforce the argument for the expansion of the secondary system the impact of expanded secondary education on the probability of a student from a poor family attending university can be estimated. The data from the F AFO study can be manipulated to show that while relatively wealthy children are more likely to progress to higher education after completing their secondary schooling, about a quarter of poor children could be eligible for higher education if given the opportunity to attend secondary school. A 30 percentage point increase in secondary enrollment rates combined with a 25 percent chance of qualifying for higher education could increase the number of poor children in university by as much as 7 or 8 percent even without other changes in the system.

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2.2.3 Monitoring and Evaluation

2.31 On the broader issue of quality, maintenance and improvement of quality in education requires continuous monitoring and innovation. As with secondary education, problems of quality improvement are primarily those of educational policy, curriculum, training and evaluation within the sector. They are best dealt with from an educator's perspective rather than from the perspective of the national budget. However, the demands of national policy to evaluate the effect of public expenditure and policy change are relevant. All line ministries should have in place the ability to measure and evaluate their activities in terms of real outcomes of importance to the country. Does increased spending on, say, teacher training, translate into better student performance? Will the consolidation of rural schools yield better outcomes in terms of resources spent? Will it impose higher costs on the students who will have to travel more or live away from home? Will distance learning be an adequate substitute for current practice? These are questions which will arise continuously in the planning and formation of education policy and require a strong data collection and analysis effort to translate information into policy.

2.32 In Jordan's case, the National Center for Educational Research and Development serves this function quite well for basic and secondary education. Their capacity to do research quality evaluative work is quite high and they should be encouraged to expand their actIvities to cover more questions of educational policy, particularly on the socioeconomic background of students. The same capacity does not appear to be in place for higher education. Gaps in basic information concerning student characteristics, labor market impacts of educational resources, relations of student performance and predictors of success such as entrance test scores do not appear to be analyzed or used to guide policy. This absence of data is even more pronounced in the health sector, to which we now tum.

2.2.4 Recommendations

• Increase fees in public higher education as much as possible given political realities.

• Expand funds for tuition subsidies based on family income.

• Prepare to introduce a student loan program for university education. A study group should be convened to determine, inter alia, appropriate administrative structures, modes of delivery (guarantees to private banks or directly through government agencies) and mechanisms for repayment enforcement.

• Continue expansion of secondary education.

2.3 Health

2.33 The justification for government intervention in health is quite strong. The sector is characterized by several distinctive market failures that have large costs in terms of welfare and that should guide the choice of public interventions and priorities in spending. Similarly, the public sector can, with appropriate policies, disproportionately improve the health and well­being of the poor. A standard accounting of the main market failures in the sector would include the following problems of relevance to Jordan. First are externalities associated with infectious diseases and their control and WIth the dissemination of information, particularly of preventive health measures. Second is the general inadequacy of insurance markets to deal with unpredictable and expensive health problems. Third are problems associated with the divergence of interests between medical practitioners and their patients in basic care.

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2.34 This section deals briefly with each of these issues. While the general justification for health expenditures is well established, two factors limit the amount that can be helpfully discussed in a cross-sectoral report such as this. First, many of the problems of the sector appear to be essentially internal to the sector, do not require major changes in funding vis a vis the other categories of spending and are best handled in sector work (of which there are several recent examples, mentioned below). Public expenditure on health is about 4 percent of GDP-well within the range that countries at Jordan's level of income typically spend. Further, on top of public expenditure, private expenditures are estimated to be about as large, bringing total expenditure up to around 8 percent of GDP-rather on the higher end of expenditure on the sector. The issue is not one of insufficient funds. Another major problem internal to the seGtor appears to be one of management. Complaints about quality in public facilities that are not due to inadequate funding are likely the result of the incentives facing public servants-the solution to which requires more study and a strategic approach as described in Chapter 5.

2.35 The second factor limiting this analysis is the dearth of data relevant to decision making. Little or nothing is known of the determinants of demand for medical care, of the nature of the private sector supply of care, of the income distributional characteristics of those receiving services, or data that would allow the determination of the health status effects of any public program. A high priority should be placed on procedures for data collection and analysis in support of sectoral policy.

2.36 Infectious disease. The standard market failure concerning health in countries of 10rd.m's income level is the existence of externalities associated with infectious disease. Jordan has done a remarkable job in reducing the incidence of these diseases. Not coincidentally, coverage of traditional public health services-water and sanitation, immunizations and vector (pest) control-is generally quite high. However, the coverage is not quite complete and from both an equity and efficiency point of view, further action and expenditure are warranted.

2.37 For example, while the great majority of households have access to good sources of water and sanitation services, about 40 percent of the poorest decile of the country do not have toilets. About a quarter rely on various questionable sources of water such as surface water (streams or ponds) or wells. Analogous to the case of secondary education, the only people remaining who do not have such services are the very poor. Therefore, any expansion of services to approach universality will necessarily be very progressive.

2.38 Whether the lack of such facilities is a major determinant of health is more difficult to assess due to the absence of information on the health status of different income groups. The importance of improving the information base for policy decisions will be emphasized below. However, the analysis in the Appendix! shows that those governorates with lower coverage of safe water and sanitation do have higher incidence of diarrhea reported in their health centers. If those currently uncovered cannot be reached by public infrastructure, greater health education efforts on ways to maintain hygiene in areas of scarce water is needed. On both efficiency grounds (information is a public good and sanitation facilities have strong external effects) and

The Appendix With analytIcal background papers IS available upon request.

16

on equity grounds (those remaining uncovered are the poorest) the "unfinished agenda" of traditional public health measures against infectious disease is a pressing concern.

2.39 A relative reduction in deaths attributable to infectious disease implies, as its converse, a growing proportion of deaths from non-communicable diseases such as cardio-vascular disease and cancer. These are the main causes of death in richer countries and will grow in importance in Jordan. By itself, this fact does not necessarily imply much in the way of public expenditure, since treatment for such conditions is a private good. However, there are two consequences for public spending. First, increased efforts on public information campaigns directed at the promotion of healthy lifestyles may be justified on the grounds that such information is a public good. What the need for this type of information is or how effective programs in addressing it are is not well known and requires better information and research. Second, the wide possible choice of treatments for some of these diseases (control of hypertension for example) may exacerbate the problem of insurance.

2.40 Insurance markets. A universal problem of the sector is the inherent inadequacy of private insurance markets for health. For several well-known reasons private markets will not provide adequate levels of insurance and, indeed, in most developing countries, barely exist at all. The basic reasons are adverse selection and moral hazard. Adverse selection refers to the fact that people may know their potential need for medical care better than an insurer would. Therefore, for any insurance premium, those with the worst health will likely demand insurance. This drives up the cost of providing insurance and, hence, premia. At higher premia, more of the relatively healthy choose not to take insurance pushing costs up further. It is possible for the entire market to disappear as a result of this process.

2.41 Moral hazard refers to the tendency to use more of a service (or to fail to try to avoid needing the service) due to the fact that it is insured. If neither the patient nor the doctor needs to worry about the cost of treatment, there is no incentive to limit it. This leads to excessive costs of the system and further limits the coverage that people would be willing to pay for with more judicious use of medical care.

2.42 While the causes of the problem are well-known, the solutions are not. Balancing the problems of universal coverage with incentives for appropriate treatment (both good care and controlled cost) is not easy as recent debates in the developed world, particularly the U.S., have illustrated. A brief overview would not do justice to an issue as complex as this. A detailed description of the problem and a set of recommendations is provided in the World Bank report Hashemite Kingdom ofJordan: Health Sector Study (1998).

2.43 Two points concerning the interaction of the insurance market failures and public expenditures may be made in the absence of a complete analysis. First, as with most countries that have not (or cannot) directly institute a universal system of health insurance, Jordan's principal solution to the problem of covering catastrophic medical costs has been the direct provision of free (or nearly so) hospital services. The point can be made that Jordan does have a universal system in that everyone is entitled to use public facilities, either for free or, for those not covered by any formal program, at a nominal fee. The problem then becomes that of efficiently running public facilities. That public hospitals are in need of improved management

17

appears to be a generally agreed position. How to improve the management of the system is also a much broader subject than can be examined here. See World Bank (1998), op. cit.

2.44 Second, the increasing problem of non-communicable disease is likely to increase the urgency of dealing with the complex of issues related to insurance. One characteristic of these diseases is that there is a variety of ways of treating them with greatly varying costs. The potential for moral hazard is therefore greater and the pressures for cost increases are higher as well.

2.45 Basic Care. Public concern for the provision of basic care should be driven by how well the system serves the needs of the poor and how it adds to the efficiency of the health care market. On the distributional impact: what data is available indicates that the poor do benefit disproportionately from the use of public facilities (see Appendix). Even so, as much as 25 percent of the poorest quintile of the population use the private sector for their first consultation with a health provider.

2.46 As far as the effect of public provision on the efficiency of the system, very little can be stated with confidence. That the private sector is large is not in dispute but its very size raises the issue of the interaction between the sectors. Evidence is presented in the Appendix that would indicate substantial substitution between public and private providers. But what kind of treatment is given in the private sector or whether the substitution lowers or raises the impact of the public sector on health (lowers if the private sector is of relatively good quality, raises it if bad) cannot be determined.

2.3.1 Inadequate information

2.47 The lack of relevant information on many aspects of the health system is a problem. In order to assess how well a public policy is doing, there must be a system in place to regularly monitor the inputs of the system (expenses, personnel, materials, etc.), the use of alternative services and the ultimate outcomes of the policy that are of public interest such as health status of the population, satisfaction with services provided and the degree of security provided by adequate insurance cover. Not only should these aspects of policy be monitored but the information should be organized in such a way as to be able to answer basic questions about the effect of policy-will the expansion of public facilities in a given area increase the outcomes of interest or will they substitute for facilities (public or private) already there? Will a given change in financing arrangements such as an increase in a co-payment (the amount that must be paid at the time a service is given-as distinct from the amount paid for by an insurance system) lead to unacceptable reductions in the use of service or will it save money that can be used more effectively in expanding coverage or increasing quality? These are critical issues that efficient management of the health system need to be able to address. Without a system that collects and uses information on a regular basis, it is not possible to tell whether money is being spent well or on the appropriate items. None of the substantive issues discussed here admit of clear answers largely because the information base is insufficient to provide them.

2.48 Another example of a pressing problem whose answer requires better information is. the hospital sector. There appears to be a marked oversupply of hospital beds in the private sector. If this last point is just a temporary phenomenon due to miscalculation on the part of some private

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investors, it is not a serious problem and may offer some short-term opportunities to improve public services through contracting out. If there is a systematic reason for this oversupply - some permanent feature of the private sector or of some unintended consequence of policies facing them - more rides on a better understanding of the phenomenon.

2.3.2 Recommendations

• Expand data collection and analytic capacity to use such information in policy formulation. Data should include:

(a) population-based surveys determining health status, service utilization, expenditures on health and their socioeconomic correlates; and

(b) provider-based surveys, particularly of private medical care-givers, determining, inter alia, market prices, service coverage, capacity and financing.

• Given the surplus of hospital beds, new construction should be postponed until needs can be better assessed.

• Increase coverage of sanitation, especially to the 40 percent of the poorest deciles who lack toilets.

• Intensify public information campaign on hygiene in water-scarce areas.

2.4 Electricity

2.49 The Jordan Electricity Authority (JEA) provided electricity in Jordan until August 1996 when it was corporatized and a new corporate entity, the National Electricity Power Company (NEPCO), was created. The legal and natural successor to JEA and wholly owned by the Government of Jordan, NEPCO is responsible for electricity generation and transmission in Jordan. Together with two private companies, the Jordanian Electric Power Company Ltd. (JEPCO) and Irbid District Electricity Company Ltd. (IDECO), NEPCO distributes electricity to all of Jordan's consumers. At the end of 1997, nearly 99.7 percent of the Kingdom's population (98.8 percent in the rural area) had access to electricity. While NEPCO is responsible for distributing electricity in southern Jordan (l00,000 consumers at the end of 1997), JEPCO (482,000 consumers) and IDECO supply power in the central and northern parts of the country.

2.50 In 1997, the government decided to restructure NEPCO further into three or more companies to manage generation, transmission, and distribution, respectively. While electricity generation and distribution is being privatized, transmission will remain under the control of NEPCO, which is to remain wholly owned by the Government of Jordan.

2.4.1 NEPCO'sjinancial situation

2.51 Incorporatization of NEPCO has made electricity service a profitable venture. NEPCO's income statements for the years 1996 and 1997 reflect net profits (net of operating expenses including depreciation and interest charges) of the order JD million 21.9 and 26.8, respectively. Moreover, in its 1997 balance sheet, the company also made a provision for income tax of the order JD 2.8 million. (For some reason, the tax authorities did not collect the tax.) The finanCIal turnaround in service provision have been achieved by a combination of measures:

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• The average non fuel cost per kWh of electricity sold declined from Fils 11.34 (1996) to 10.62 (1997) or nearly 6 percent;

• Total system losses-generation, transmission and distribution-have been restricted to around 15 percent;

• In the process of restructuring, nearly 400 employees were retrenched and a new merit-based compensation system was adopted;

• A new electricity tariff structure was put into place as of May 1, 1996. The new structure subsidizes electricity consumption for agricultural purposes (water pumping for irrigation, livestock, poultry and bird farms) but heavily taxes commercial consumers (including hotels). Domestic and industrial consumers are taxed slightly. The tariff structure incorporates a subsidy for low-end domestic consumers--presumably, the poor.

2.4.2 Recommendations

• Ensure that income taxes are collected from NEPCO.

• Proceed with the restructuring of NEPCO-privatization of generation and distribution--so that further efficiency gains can be made.

• Implement the proposal to set up an independent regulatory board for electricity, reporting to the Cabinet.

• Regularly examine and revise (as appropriate) the electricity tariff.

• Proceed with necessary internal reforms to register gains in efficiency (for example, enforcing and revising, as appropriate, the newly instituted merit-based compensation system).

2.5 Water2

2.52 Water is a scarce commodity in Jordan. Its current use exceeds renewable supply (at conventional prices). The difference is being made up by the unsustainable practice of overdrawing highland aquifers. With an increasing population, annual available water resources per capita are projected to fall by nearly half-from 170 to 91 cubic meters. Agriculture accounts for nearly 70 percent of the use; municipal and industrial usage are 27 and 3 percent, respectively. There are major year-round shortages in municipal and industrial water supply affecting a majority of the population. Inefficiencies in water distribution has exacerbated the situation with falling consumer confidence and willingness to pay for the services.

2.5.1 WAJ and JVA

2.53 The Water Authority of Jordan (W AJ) provides urban services and the Jordan Valley Authority (JV A) is responsible for irrigation in the Jordan valley. WAJ, a public sector enterprise, has two main functions: (a) providing piped water and sewerage services; and (b)

For detail on the water sector, see the Water Sector ReView, World Bank (1997)

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managing the water resources of the country. JV A is also a public agency. Like some other public sector enterprises in Jordan, both these agencies are beset with service delivery problems. The problems can be classified as follows:

• Inefficient service provision. The water scarcity problem in Jordan is compounded by major inefficiencies in service delivery. Nearly 55 percent of water provided by W AJ is lost for a variety of reasons including theft and leakage from a poorly maintained system. Similarly, over 45 percent of irrigation water provided by JV A is lost or unaccounted for mainly due to inaccurate metering, theft, and the agency's use of surplus water for flushing salt-build-up from the soil profile. Both agencies have management problems.

• Intermittent water supply. Water scarcity has led to the practice of rationing. Most communities in the country get rotating supplies and intermittent service provision for almost 8 months in the year. For some communities during the summer months, water is available only twice a week.

• Un targeted subsidies. Scarcity has made water an expensive commodity. Moreover, for municipal and industrial usage, water needs to be extracted from deep boreholes in the highlands or pumped from the Jordan valley. The resultant lift-roughly 1,350 meters­contributes to the high unit cost. The average cost for municipal and industrial supplies to the consumer is 0.78 JD per cubic meter. The long-run marginal cost of irrigation water in the Jordan Valley is estimated at 0.221 JD per cubic meter. The average water tariff, however, is low. It is well below what is charged in industrial countries that have similar cost structure. As a result, water for all uses-municipal, industrial and irrigation-is heavily subsidized. The difference between cost and average tariff-charged for each service-represents an annual government subsidy of over JD 50 million. A frequent justification for the subsidy given by the Government of Jordan is that its citizens, unlike those of industrialized countries, cannot afford to pay the high cost of water.

• Water sector agencies are not finanCially vwble. Revenues from water sales do not even cover operations and maintenance (O&M) costs. The annual budget of N A has averaged JD 16 million in recent years of which nearly JD 4 million is for recurrent expenses. JV A's revenues cover only JD 0.75 million. W AJ has been a loss making entity from its inception and Its annual deficit (net of depreciation and interest charges) alone exceeds 1 percent of GDP. Even after an increase in water tariff, the total revenue of WAJ in 1997 was JD 49.4 million-an increase of 7 percent from the previous year. The total expenditure, however, also increased by 7 percent from the previous year (JD 53.1 million) leading to a deficit of JD 3.8 million. If one takes into account the depreciation and interest charges, the deficit increases to JD 56.1 million. As a result, W AJ is rapidly approaching insolvency.

2.54 Even though water is a basic human need, there is no reason to believe it needs to be subsidized particularly in a non-targeted way. Moreover, given that water resources are extremely scarce (at the current cost of extraction) in Jordan and the cost of pumping from ground sources is high, the threshold of tolerance for any man-made inefficiency (e.g., leakage and theft) has to be minimal. The facts indicate that policy and institutional changes can improve WAJ's service operation. The agency is overstaffed, revenue collection is low due to improper enforcement, and water leakage is partly due to a lack of proper maintenance of the water pipes. Both water agencies in Jordan are substantially over-staffed but lack equipment and adequately

21

qualified personnel. Cost recovery is low due to service inefficiencies (mainly high losses resulting from unaccounted-for-water) and inadequate tariffs, which until October 1997 did not even cover operation and maintenance costs. Irrigation water provision is also quite inefficient when compared with other developing countries. Jordan's rate of recovery of O&M costs in irrigation is among the lowest in the world. Its 1988-94 cost recovery average of 18 percent compares to an average of 70 percent in Morocco and the Philippines, and up to 100 percent in those areas in Mexico, Colombia and Turkey where management has been decentralized to user groups. Jordanian farmers play virtually no role in the management of the irrigation system. In sum, neither public agency for water is being run on commercial principles in Jordan.

2.55 Faced with these problems in the water sector, the Government of Jordan has started the process of reform albeit at a slow pace. Responding to the need for institutional restructuring, it has formulated proposals for major reforms. Supported by international donors, W AJ has recently signed a four-year performance-based management contract with a private operator to improve water and wastewater services in Amman. This is expected to allow W AJ to increase its efficiency through better procurement of water, improvement in cost recovery and better utilization of staff Improved efficiency of the distribution system through leakage management, network rehabilitation and a program of meter repair and replacement, is expected to reduce losses due to unaccounted-for-water by at least 25 percentage points. Moreover, the privatization of management is also expected to lead to a retrenchment of staff and the released resources would be used to introduce a system of performance-based rewards.

2.5.2 Recommendations

• In view of the existing inefficient service provision, appropriate steps should be taken to correct the problem, particularly to plug the leaks, stop theft and better revenue collection. The management contract by W AJ is a welcome step in this direction.

• The Government of Jordan should give the signal-as soon as possible-that like any modern public utility, W AJ needs to be run on commercial principles. In this context, annual water tariff revisions for all types of water usage-municipal, industrial and irrigation-is needed.

• An investment program is needed to (a) develop any remaining economically exploitable water resources for increasing municipal and industrial water supply and (b) manage water demand.

• Water tariffs need to be revised to reflect cost. Increasing tariffs to cover cost is only fair if the concerned service is being provided as efficiently as possible. Perhaps, a decision to move towards corporatization, along the lines ofNEPCO, is needed.

• If appropriate, a one-time debt restructuring of W AJ could be considered. However, this needs to be done only after necessary steps have been taken to reduce the cost of water provision by plugging the leaks and enforcing tariff collection. If implemented properly, the management contract should be able to improve efficiency.

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2.6 Road Transport

2.56 Inasmuch as, in Jordan, the lion's share of transport-passenger or freight, domestic or foreign-goes through the road sector, most of the problems in transport have to do with roads. Issues in rail and air transport, concerning mainly the privatization of the Aqaba Railway Corporation and Royal Jordanian Airlines, are treated in section 2.7.

2.57 Jordan has a relatively well-developed network of roads. It has 5,000 krn of main and secondary roads, 2,100 krn of village roads and 1,600 krn of agricultural roads. Every village in the country is connected to a road. Currently, there is no pressing need to build new roads with the possible exception of a ring road around Amman (see below). There are, however, three important public policy problems facing the road transport sector:

• UnderJundzng of maintenance expenditures. As in many other developing countries, Jordan suffers from inadequate preservation of the road network. The estimated backlog of JD 35 million in deferred maintenance now has to be classified as "rehabilitation." Jordan spends an average of JD 10 million a year in maintenance, whereas JD 31 million is needed to keep the network in stable condition. The low budget allocation is a result of inadequate planning, the separation of the current and capital budgets, donor focus on new roads, and lack of accountability of the Ministry of Public Works and Housing's Road Department to road users.

• A bloated, unprofitable and costly trucking fleet. Jordan's trucking fleet, which expanded during the Iran-Iraq war of the 1980s, has been severely underutilized since the war ended and especially since the embargo on Iraq was introduced. Truckers have lost most of their business and most of them are facing major financial crisis. Eighty percent of the trucking fleet is now more than 15 years old, affecting traffic safety and quality of service. About eighty percent of trucks in Jordan are privately owned. There are two main public companies-jointly managed by Iraq and Syria, respectively-that account for the remaining trucking fleet. The powerful truckers union UCOLT has kept trucking tariffs high, resulting in overcapacity, high costs and low profitability. Trucking tariff between the Port of Aqaba and Amman is regulated at the rate of 10 JD per ton by the government. Furthermore, the truckers union has resisted attempts at paying the full share of road maintenance expenditures, especially the axle-load-based tariffs associated with heavy vehicles.

• Traffic safety. The fatality rate on Jordanian roads is about 18 deaths per 10,000 vehicles, half of which are pedestrians. In 1996, Jordan recorded 33,784 road accidents, half of which involved injuries, and in which 552 people were killed. The material losses for 1996 were estimated to be $100 million, over 1 percent of GDP. The problem has partly to do with high and rising traffic density in urban areas, leading to several "black spots" in the road network, especially in the Greater Amman area. But it is also due to fragmented responsibilities and inadequate coordination among ministries and departments responsible for driver training, vehicle inspection, traffic laws and regulations, traffic controls and public awareness.

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2.6.1 Investment and Maintenance

2.58 As roads are nonexcludable public goods, there is a rationale for public intervention in their provision.3 However, as noted above, Jordan's road network is in general quite adequate, so new public investments are not the highest priority. The one exception may be the proposed investment project to construct a ring road around Amman, because there has been increasing congestion in the Amman-Zarqa area, brought on not just by urban growth but also by the fact that commercial traffic in regional markets pass through Amman. The project is computed to have an economic rate of return of almost 33 percent, and a financial rate of return of 26 percent. But the government should consider this project in light of alternative uses of its financial resources, including increased resources devoted to maintenance expenditures.

2.59 The problem of underfunding of maintenance expenditures is largely due to the incentives created by the budgetary process and the system of public service delivery. As discussed in Chapter 4, a solution to the incentive problem in the budgetary system is to introduce a medium­term expenditure framework (MTEF). In an MTEF, road maintenance expenditures will be considered alongside investment expenditures (as well as other current and capital expenditures). No longer will it be tempting to reduce maintenance expenditures during periods of budgetary stringency because the benefits of these expenditures are not readily apparent. Over time the benefits of maintenance expenditures will be reflected in lower vehicle operating costs.

2.60 A related issue in the underfunding of road maintenance expenditure is the lack of accountability of the Road Department to road users. Theory and international experience suggest that the lack of accountability problem can be addressed in two ways. First, by levying road user charges. When people are charged for services, they begin to demand quality services and the provider is compelled to supply higher-quality services. In the road sector, a combination of a fuel surcharge, annual license fees, vehicle-weight-related fees and road tolls can play the role of user charges. Ideally, these should be set to reflect the marginal cost that the user imposes on the economy. For instance, heavy trucks should pay a higher fee because they inflict greater damage to the road. At present, the Government of Jordan levies only some of these fees, and does not charge a higher fee for heavy trucks. Despite the political obstacles to raising these fees, they should be implemented, especially since they are an integral component to addressing the most pressing problem in the road sector, namely, maintenance expenditures.

2.61 The second way of addressing accountability to road users is to set up a road maintenance board (RMB), consisting of public and private sector representatives (the. latter being mainly road users) which can administer the funds collected by the user fees. Thus, the user fee is collected into a road fund, whose allocation across different types of maintenance expenditun~s is decided on by the RMB. By earmarking funds collected by user charges into a road fund, maintenance expenditures are protected from cutbacks during periods of budget stringency. This approach, however, entails a cost since we cannot be sure that the marginal maintenance expenditure is more valuable than the other expenditure that has to be cut to meet a fiscal target. The experience with road funds, though mixed, points to the fact that the improved service delivery arising from the increased accountability may outweigh these costs. In Jordan on July

To the extent that entry into a road can be controlled (e.g., by tollbooths), the pOSSibilIty of pnvate provIsion mcreases.

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29, 1997, the Council of Ministers set up a consultative committee to draft legislation for a road fund and a road maintenance board. Although initially financed by existing user charges, the road fund could eventually cover all road maintenance expenditures by a system of road user charges that reflect costs. The road fund was part of the Tarawneh government's platform when it was seeking a vote of confidence from Parliament. Several deputies spoke in its favor, and the government received the vote of confidence. The draft law is currently with the Council of Ministers.

2.6.2 Trucking

2.62 Trucking is a private good, and there is no prima facie case for subsidizing these services. Government intervention in this area is warranted only in the form of a regulator. Moreover, there is a case for taxing trucks to the extent that they inflict greater road damage than other vehicles. Presently in Jordan there are no customs duties or other charges on imported trucks; annual license fees are very low; and diesel fuel is sold at or below border prices, i.e., there is no fuel surcharge. In short, there is a strong case for raising the charges on trucks in Jordan. In addition, the regulations governing trucking tariffs seem to keep these rates higher than would prevail under free-market conditions. The power exercised by the truckers union, UCOLT, as well as the strategic importance of this industry has made reforms difficult. Moreover, the current state of low trucking business-due to the Iraq crisis as well as recession in J ordan­makes it politically somewhat difficult to introduce reform measures. Nonetheless given the high cost and low profitability of the fleet, not to mention the threats to road safety from aging vehicles, attempts to rationalize the regulation of this industry should be given a priority. In this context, the "Goods Transport Law" should be drafted and implemented to reflect the considerations outlined here.

2.6.3 Safety

2.63 Finally, road safety is a classic example of an externality; reckless drivers inflict a cost on others without paying for it. Governments throughout the world intervene to reduce road accidents. In Jordan, the government's approach is not as effective as it could be. In addition to eliminating the black spots in Amman, the government should attempt to coordinate the various aspects of traffic safety-driver lIcensing, vehicle inspection, traffic laws and traffic control­under a single body. The current proposal to locate the Traffic Safety Program under a special purpose body, the Higher Council for Traffic Safety which reports directly to the Prime Minister, is an important step in that direction.

2.6.4 Recommendations

• Axle-load-based tariffs should be revised so that trucks can compensate (in a fair manner) for the damage inflicted on roads.

• The proposal to locate the Traffic Safety Program under a special purpose body, the Higher Council for Traffic Safety which reports directly to the Prime Minister, needs to be implemented.

• The MTEF should be applied to the road sector so that among other things, the bias against maintenance expenditure is removed; and

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• The drafting of the "Goods Transport Law" should be completed and the law should be implemented in a timely manner.

2.7 Privatization of Other Public Agencies

2.64 Historically, public intervention has been significant in Jordan's infrastructure as well as other productive activities. The results of Jordan's privatization efforts so far have been mixed. Some transactions have been successfully completed and some others like Royal Jordanian Airlines, are proceeding well. There have also been other transactions, such as in power .md telecommunications, that had until recently not progressed sufficiently but are now receiving greater priority under the renewed program. Details of specific transactions are provided below.

2.7.1 Completed Transactiolls

• Jordan Cementfactories (JCF): 33% sold to Lafarge. Proceeds of$102 million deposited in the Central Bank. EPU played the major role in this effort.

• Public Transportation Corporation (PTC): Contracts signed with 3 local operators for 10-year concessions to operate 4 route packages. New private buses with improved senrice levels, already in operation on several routes. Remaining new operators to fully implement service by September 30, 1999. PTA regulator appointed. PTA law to be enacted and PTA established by second half of 1999. Liquidation ofPTC is underway.

• Aqaba Railway Corporation (ARC): An agreement was signed with a pnvate consortium, to upgrade and operate the railway and build 2 extensions, one to Eshidiya (22.5 Km.) and the other to Wadi II (17 Km.). Expected investment $110 Million with JD20 Million down.

• Ma-in Spa: A 30-year concession agreement for management of the spa complex, signed with ACCOR and a local investor group.

• Other Enterprises: Some of the other HC portfolio companies have also been divested, including shares in Jordan Himeh Mineral (34.6% to a local investor), Jordan Vegetable Oil Company (40% to a local investor) and shares in 19 companies in which the state owned less than 5% (through the Amman Financial Market). A management contract has also been concluded for the Jordan Poultry Processing and Marketing Company. More recently, HC's shares in three more companies have been sold. These are the Petra Transport & Tourism Company, Jordan Dairies and the Export and Finance Bank.

2.7.2 Contb,uing Program

• Royal Jordanian Airlznes (RJ): In this privatization transaction, the RJ mother company will be restructured and transferred into a holding company and an operating subsidiary. The holding company will retain mainly the support activities of the airline while the operating subsidiary will be established with a strategic partner to run the core operations. This privatization is scheduled for overall completion in early 2000.

• Light Rail Systems Project (LRS): To construct and operate on a BOT basis, a light rail system between Amman and Zarqa. Estimated investment JD 60 Million.

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• Jordan Telecom Company (JTC): Sale to strategic partner suspended in November 1998. The Government has since renewed its privatization efforts. A second telecom license has been awarded to JTC subsidiary Petra Telecom. The Government has since decided on a transaction structure with an operating partner (40%) as opposed to strategic partner, and with distributions to employees and local investors to follow and has ruled out private placement or IPO as unfeasible without the credibility of an operating partner.

2. 7.3 Recommendations

2.65 A successful privatization strategy and implementation, needs certain key elements. These include: (i) commitment; (ii) institutional capacity; (iii) appropriate transaction design; (iv) essential supporting activities; (v) a clear timetable; (vi) post privatization measures etc. While many of these elements are already in place in Jordan, key steps of the privatization program over the next three years are:

• Continue privatization program: RJ, JTC, Light Rail System, Power, companies in the JIC portfolio.

• Expand program: Postal services, silos agribusiness, ports, etc.

• Implement a comprehensive communications and public information program for privatization.

• Obtain a public reaffirmation of the commitment to the program, the list of the major transactions with timelines, and the role and mandate ofEPU.

• Develop and approve labor transition program consistent with recommendations for overall social development.

27

28

Chapter 3: SOCIAL PROTECTION AND GOVERNMENT WELFARE EMPLOYMENT

3.1 Poverty alleviation is an important area in which it is critical to apply the evaluation process summarized in the previous chapter (see Figure 2.1), namely to ask whether there is a rationale for public intervention and which instrument is appropriate to for the intervention. There is little disagreement on the rationale for public intervention here. The protection of the most vulnerable group - the poor - has been one of the primary roles of the government in Jordan. This role has increasingly become a central one, as clearly articulated in the designation letter ofH.M. King Abdullah to the new government in March 1999. Moreover, the 1999-2003 Five-Year Plan identifies the reduction of poverty as one of its central objectives.

3.2 Much of the debate related to social protection policy in Jordan revolves around the appropriate instrument for protecting the poor, the effectiveness of various instruments, and the related comparative fiscal costs of these instruments. The four major instruments that have been used to help the poor are: (i) welfare employment in the public sector; (ii) food and water subsidies; (iii) targeted cash transfers; and (iv) micro-credit programs. This chapter is divided into three sections, the first provides an overview of recent trends in poverty, the second evaluates the effectiveness of the last three programs that are visible focused on helping the poor. The link between employment and poverty alleviation is discussed in the third section, WhICh also provides a framework for de-linking the welfare from employment aspects of civil service.

3.3 In principle, general food and water subsidies and welfare public sector employment are relatively bad instruments to achieve the goal of poverty alleviation. There is a substantial leakage in the programs, as they benefit both the poor and non-poor alike. As a result, whatever poverty alleviation that they achieve comes at a very high cost to the budget. More fundamentally, using these instruments for poverty alleviation sends the wrong signals about the rationale for the role of the public sector; leading some to believe that it is the government responsibility to be a provider of subsidized food and water and a provider of civil service long­term jobs for those who are unable or unwilling to take private sector jobs. Discontinued use of these instruments could then be misinterpreted as a government failure in fulfilling its functions and as breach of a social contract between the government and the popUlation. In addition, to the extent that public sector employment is used as a tool for poverty alleviation, it has the additional negative impact on the performance of the civil service and public enterprises, and may hinder the employability of the poor in the private sector.

3.4 Jordan has been successful in reforming many aspects of the welfare state, in such a way that the government programs clearly fit within the rationale of public intervention to help the poor, with as little leakage to other classes as possible. As part of this reform process, food subsidies to the whole population have been gradually phased out and then eliminated, while increasing funds are allocated to the cash assistance program of the poor that is implemented by the National Aid Fund (NAF). This may serve as a model to address the mis-allocations and budgetary costs of the water subsidy, see section 2.5 above. From the poverty alleviation perspective, the success of this better targeting is visible in the fact that the number of poor people has not increased between 1992 and 1997, during which many of the food subsidies were phased out, with the fraction of popUlation below the poverty line actually declining between these two years.

29

3.5 Despite recent successes, the challenge to Jordan in poverty alleviation remains substantial. Poverty rates are still fairly high by the historical standards that Jordan is accustomed to. Declines in per capita incomes over the 1996-199 period must have increased the incidence of poverty from the rates measured for 1997. Performance of the social safety net can be improved to generate much greater poverty alleviation with the existing allocated funds. The re£::>rm process of the public sector that Jordan is embarking on may also entail short-run increases on the demand for social protection, specially if extensive down-sizing of the public sector takes place in a short time period.

3.1 Recent Trends in Poverty

3.6 Poverty alleviation and social protection have been key objectives of Jordan's economic policy during the past decade. In the wake of negative macroeconomic shocks in the late 1980s, the government launched programs to address both existing and emerging vulnerable popUlation groups. Between 1986 and 1992, the poverty headcount index rose from 3 percent to l4.9 percent of the population, and the poverty gap index rose from 0.3 to 3.7 percent.4 Deteriorating living standards provided the impetus to increase government involvement in the area of social protection. The principal safety net measures include the National Aid Fund (NAF), established in 1986 to provide cash transfers to those with no source of income, the Development and Employment Fund (DEF) , introduced in 1989 to provide subsidized credit to the poor and unemployed, and the Zakat Fund, set up in 1988 as a mechanism to mobilize and channel private contributions to the needy.

3.7 Household Income and Expenditure Surveys were conducted by Jordan's Department of Statistics in 1992 and 1997, covering 7,614 households in 1992 and 5,972 households in 1997 in four rounds throughout the survey year, and collecting detailed data on household consumption patterns of hundreds of commodities. The analysis presented here compares per capita consumption expenditure in these two survey years. 5 Average annual per capita expenditure declined by about 7 percent in real terms during this period, and real GDP per capita fell to a similar extent (5 percent)6. The cumulative distribution functions of per capita expenditure, shown in figure 3.1 shifted between 1992 and 1997, denoting a decline in the incidence and severity of poverty.

3.8 The two curves in the above figure cross at a per capita expenditure level of JD 491 (in 1997 prices), at roughly 40 percent of the population. Therefore, for any poverty line below JD 491 per capita per year (JD 41 per month), the share of the popUlation who are poor declined between 1992 and 1997. Moreover, reasonable measures of the poverty line in Jordan are far below the annual per capita level of JD 491. For example, the Social Productivity Program team set the poverty line for 1996 at JD 248 per year in per capita expenditure, equivalent to JD 255 per year in 1997, or about JD 21 per month. Bank estimates put the 1992 per capita poverty line

4

6

World Bank (1994) Poverty Assessment, Report No. 12675-10.

Two other welfare measured were considered: per capita consumption, and per capita consumption Imputmg the consumptIon of durable goods. These measures of welfare generate slIghtly lower poverty, but the overall pattern of poverty reduction between 1992 and 1997 IS mvanant to the measure used.

PopulatIon mcreased dramatically, as about 300,000 expatriates returned from the Gulf

30

at JD 261/year, equivalent to JD 314/year in 1997 prices, or about JD 26/month. Without loss of generality, the remainder of this section uses a poverty line of JD 314 per capita per year.

Figure 3.1 Cumulative Distribution Functions

CUmulatJve DIstribution Functions. 1992 and 1997

1 19jN

.8

.6

.4

--~

/7 / /

.2 /

~ {

~ o o 100 200313.5 491 600 800 1000 1200 1400

Per capita Expenditure In 1997 Dinars

3.9 The incidence of poverty declined from 14.4 percent of the population in 1992 to 11. 7 percent in 1997 (see table 3.1). In absolute numbers, an estimated 542 thousand out of 3.8 million people were poor in 1992, compared to 538 thousand out of a total population of 4.6 million in 1997. If the poverty incidence had remained at its 1992 level, an additional 125 thousand people would have been poor. Lower poverty incidence was also accompanied by improvements in the depth of poverty; the poverty gap index (which measures the average gap below the poverty line for the population) declined from 3.6 percent in 1992 to 2.5 percent in 1997. In fact, the total amount of money needed to close the poverty gap (i.e., to bring every poor person up to the poverty line) fell from 1.4 percent to 1.1 percent of total expenditure, concurrent with a decline in average expenditure. The combined effect of reducing the numbers and severity of poverty lowered the poverty gap by 29 percent, from JD 51.7 million to JD 36.6 million. The improvement in the measures of poverty can be attributed to increases in government transfer and reduction of overall inequality. 7

Table 3.1: Incidence and Severity of Poverty in Jordan, 1992 and 1997

Poverty Indicator 1992 1997 Headcount index (percent of popUlation) 14.42 11.70 Poverty gap index (percent of poverty line for population) 3.58 2.54 Total poverty gaps as percent of total expenditure 1.37 1.05

Source: Based on Income and Expenditure Surveys of 1992 and 1997, and a poverty line of JD 313.5 per capita per year III 1997 pnces, eqUivalent to JD 261 III 1992 pnces.

A separate forthcomlllg technIcal report of the World Bank details the analysIs of the changes III poverty and distributIOn between the two years.

31

3.10 The recession that generated a decline in living standards in 1998 and 1999 must have increased the measures of poverty. If the per capita expenditure distribution is held constant at the 1997 levels, then the projected headcount index of poverty would reach 12.9 percent in 1998 and 13.6 percent in 1999 in response to the decline in the standards of living. This has generated an increased demand for social assistance. For example, the number of new applicants for assistance from the United Nations Relief and Works Agency (UNRWA) through the Special Hardship Cases rose to 2,808 families in 1997 and 2,935 families in 1998, compared to a high of 3,143 families in 1994 and the subsequent decline to 2,404 families in 1996. And the total amount of Zakat-based voluntary transfers to needy households documented by the Zakat Fund amounted to JD 3.9 million in each of 1995, 1996, and 1997, but rose to JD 4.4 million in 1998. Although this increase may reflect other factors, it is nevertheless suggestive of a worsening trend in poverty.

3.2 Evaluation of the Social Safety Net

3.11 In Jordan, the rapid growth in various components of the social safety net over the past decade has helped to meet the needs of vulnerable population groups. These programs have been effective in reducing poverty. This section argues that Jordan does not necessarily need to spend more to fight poverty. Instead, better results could be achieved by improving the efficiency of the existing programs.

3.12 The social safety net has evolved over the past two decades. Government support initially took the form of universal subsidies on foodstuffs such as wheat, sugar, rice, barley, milk, meat, sorghum, and maize, administered by the Ministry of Supplies. Expenditure on food subsidies reached an unsustainable JD 102 million in 1990, equivalent to 3.9 percent of GDP. Because subsidies were untargeted, the whole population benefited, and higher income groups derived greater benefit in absolute terms, given the higher consumption levels of the rich. These subsidies were gradually removed, initially replaced with food coupons available to everyone, and subsequently replaced by general cash transfers which became means-tested (i.e., subject to an income ceiling of JD 500 per household). In January 1999, these cash transfers were eliminated altogether except for NAF beneficiaries.

3.13 To compensate for the losses incurred by the poor following the elimination of the food subsidies, the government rapidly expanded its targeted cash assistance program for chronically poor households. Administered by NAF, this program provides monthly cash assistance to unemployable poor households lacking a source of income. The number of household beneficiaries increased from 8 thousand in 1987 to 33 thousand in 1997, with cash disbursements increasing from JD 2.0 million in 1987 to JD 13.7 million in 1997 (see figure 3.2). The number of households receiving recurrent cash assistance from NAF is expected to reach 45 thousand in 1999, with a budget allocation of JD 16.5 million. NAF also provides micro-credit loans, wage subsidies, and assistance to the handicapped poor, and beneficiaries receive the cash equivalent of the bread subsidy that was discontinued for all other households.

32

Figure 3.2: NAF Beneficiaries and Cash Assistance

50000 18

45000 16

40000 14

35000 12 .,

c

~ 10

i Q ~ c

"

'" "0 30000 "0 .<:

" '" " 25000 .. = 8 ;.

G '" "0 C

6 " ...

... .. .; 20000 z

No of Households

15000

Cash Assistance (JO Millions) 4 10000

5000 2

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Years

3.14 Based on the 1992 and 1997 Income and Expenditure Surveys, the average annual per capita transfer from the government was JD 1.39 and JD 22.48 in 1992 and 1997, respectively (in 1997 prices). The low level of transfers in 1992 'had a negligible impact on poverty, with a pre-transfer headcount index of 14.5 percent and a post-transfer headcount index of 14.4 percent, and a total change in the poverty gap equal to JD 0.87 million. In 1997, by contrast, the pre­transfer headcount index was ·14.6 percent while the post-transfer headcount index was 11.7 percent, with government transfers effectively responsible for moving 132,000 people above the poverty line. Indeed, if the government transfers were not changed between 1992 and 1997, then the reduction in poverty would not have been observed. This suggests the importance of government transfers to households in reducing the incidence of poverty.

3.15 Yet, the 1997 pre-transfer poverty gap was JD 52 million while the post-transfer poverty gap was JD 36.6 million. Despite total NAF transfers equal to JD 14 million and general cash transfers equal to JD 72 million in 1997, the poverty gap was reduced by only JD 15.4 million, illustrating the high cost of general subsidies in delivering aid to the poor, and the scope of improving the performance of the government transfer program.

3.16 Current public sector spending on social protection can hardly be judged to be , inadequate. The 1999 budget allocation for social welfare work in Jordan amounts to JD 82 million, or about 1.5 percent of GDP. While items such as general food subsidies declined, targeted support increased. A key component in the government's new poverty alleviation strategy is the set of activities that form the Social Productivity Program (SPP), to which some JD 4 million was allocated in the second half of 1998. The program is expected to be much larger in 1999, with a total budget of JD 32 million. The main components of the program

33

include supplemental support for NAF, community infrastructure projects (CIP) in poor communities, and training and employment subsidy programs (TESP). The level of public commitment to and government spending on social protection compares favorably to experience in neighboring countries. Figure 3.3 shows that Jordan's spending on cash and in-kind assistance as a share of GDP exceeds other countries in the region.

c.. 0 C ... 0

if. '" '" OIl r:: -0 r::

'" 0-CIl

o

Figure 3.3: Social Assistance in MENA Countries

I 8

I 6 l'i

r-I 4 I 2 I 2 I

f--

o 8 o 7 1-

o 6 - o 5 - - o 4 r-o 4

o 2

0

- - r-- -

-11 o 2 - - r-- - o I

n I I ~ Q. ] r:: r:: 0 ~ r::

'" 0 y '" '" >- "2 r:: y C E OIl OIl '" e ::;:: w .s: .D :;:J '" '" 0 .... >-...J 2:

Source: "SoCIal ProtectIon in the MIddle East and North AfrIca,"

MNSHD, forthcoming. FIgure for Jordan IS from own analYSIS.

3.17 It is important to note that Jordan's public spending on the poor is carried out in the context of a network of active NGOs. Major NGO activities are conducted through the General Union of Voluntary Societies (GUYS) and its community-based societies, UNRWA, and the Zakat Fund, which supervises the activities of numerous local Zakat committees. Total assistance provided by these three broad organizations in 1998 is estimated at JD 10 million (UNRWA transferred JD 3.3 million to 10,000 families with 35,000 individuals; the Zakat Fund and its local committees documented a transfer of JD 4.4 million; and about JD 2 million was transferred by GUYS and its local societies to the needy). Furthermore, Jordanian society is characterized by a strong informal social safety net consisting of relatives, neighbors, and friends, rooted in the Arabic and Islamic tradition of strong "social solidarity" (Takaful Ijtima'i). According to the 1997 Income and Expenditure Survey, transfers from abroad (remittances) actually exceeded government transfers by over 2 percent on average, while interhousehold private transfers represented an additional 40 percent of government transfers, such that combined private interhousehold transfers amounted to 143 percent of government transfers.

3.18 While poverty declined between 1992 and 1997, low-income households face a continued risk of negative economic shocks. Jordan has been affected by numerous shocks, including droughts, fall-out from the Arab-Israeli conflict, oil price shocks, the deep devaluation of the late 1980s, and the aftermath of the 1990/1991 Gulf War. As a result of these combined shocks, there is a large concentration of low-income people clustered around the poverty line, suggesting a high degree of vulnerability to exogenous shocks. For an across-the-board 20 percent reduction in expenditures and incomes, for example, poverty would roughly double. Whereas the existing social safety net protects those identified as permanently poor, it does not have the flexibility to respond quickly to negative economic shocks. In view of the large popUlation at

34

risk of falling below the poverty line, mechanisms could be introduced to meet this need, such as a public works program that is community-based, produces local public goods (e.g., planting trees), and offers low wages to minimize the negative impact on the labor market. By providmg an element of msurance to low-income people, this type of program would also encourage risk­taking behavior that may lead to higher incomes in the long run.

3.19 The following policy recommendations are proposed to increase the impact of existing programs:

• Streamline procedures. Service delivery surveys conducted by Jordan Institute of Public Administration to assess NAF's effectiveness indicate a poor service record primarily with respect to complicated and difficult procedures.

• Align financial and administrative responsibility for NAF under a single authority. Accountability for NAF operations is not transparent. Although NAF is supposed to be financially autonomous, it has organizational links to the Ministry of Social Development (using its offices and staff), and the Minister of Social Development is chairman of the NAF Board. By transforming NAF into a department within the MoSD and providing the Minister with greater flexibility to allocate resources for poverty alleviation, the Minister could be held directly accountable for NAF's functions and the broader goal of poverty alleviation. Alternatively, NAF could be granted greater administrative autonomy, with its new management directly accountable for operations.

• Clarify NAF's mission. Resolving NAF's organizational ambiguity could help to clarify its primary mISSIOn. Whereas the MoSD is responsible for poverty alleviation, NAF has evolved into a welfare agency that also provides subsidized credit, wage subsidies, and services to the handicapped. Some 28 percent ofNAF's 1999 budget is allocated for services other that direct cash assistance, and many of these functions overlap with activities carried out by the MoSD and by the Development and Employment Fund. Streamlining NAF to focus on cash transfers and assigning broader responsibility for the poverty alleviation agenda to the MoSD could improve the effectiveness of the safety net.

• Strengthen NAF's administrative capacity and increase traming of social workers. The internal administrative capacity of NAP is fairly weak (partly a result of the preceding factors), and requires strengthening. NAF needs an operational information system and greater monitoring and follow-up of beneficiaries to ensure continued eligibility. Improving the system's administration could reduce the long waiting periods faced by applicants eligible for benefits.

• Reconsider the Development and Employment Fund's micro-credit program. DEF provides subsidized credit to enable poor, low-income or unemployed people to partICIpate in productive activities. The credit provided by DEF is heavily subsidized, requires collateral, has a low repayment record, and often is diverted to consumption purposes. By requiring collateral, the poorest potential borrowers are still denied access to credit, suggesting that the program fails to correct this market failure. Several other micro-credit schemes exist, offered by the MoSD and NAF for example, and US AID has a major ongoing initiative to train and empower NGOs to provide micro-credit according to best-practice models (i.e., without collateral, based on group lending, and ensuring the long-term financial sustainability of the program). Although encouraging poor households to start projects with high risk/return is an

35

important function, this may be more effectively accomplished by providing some type of guarantee (as with student loans, see section 2.2.1 above).

• Introduce safety net measures aimed specifically to mitigate negative shocks. Temporary, self-targeted programs such as public works schemes could provide transitional support to groups at risk of falling below the poverty line in the event of negative economic shoeks. Programs could be introduced on a pilot basis through the community infrastructure project of the SPP.

3.3 Separating Welfare from Public Sector Employment

3.20 As discussed in para. 3.3 above, using welfare employment in the public sector is a poor instrument for the purpose of poverty alleviation. Yet, public sector employment in Jordan has expanded substantially in recent years, and currently represents 38 percent of the labor force (based on the 1997 Household Income and Expenditure Survey). 8 This figure is high by international standards, and is likely to reflect substantial labor redundancies. Public seetor employment accelerated during the 1990s, particularly in the central government (see figure 3.4). Much of this growth has been associated with recruitment for low-productivity jobs such as drivers, photocopiers, typists, and coffee servers, for example, all in the 4th level of Jordan's administrative service, and often hired without clearance from the Civil Service Commission. In effect, the public sector created jobs to absorb the excess supply of labor, thereby acting as a welfare program for relatively unskilled Jordanians. De-linking the poverty alleviation and welfare from the performance aspect of public sector employment lies at the heart of public sector reform.

8

Figure 3.4: Government Employment

Government Employment

200

180 7'-160

'" 140 "'" c '" 120 '" ::l 0

~ 100

/

-.L - ~ 80

60 -",

40

Source Statisllcal Yearbook, Department of StatlStlCS, Amman

The public sector is defmed to include central and local government, the armed forces, senu-mdependent government orgaruzatIOns, and nuxed governmental and prIvate institutIOns.

36

3.21 Efforts to improve the performance and efficiency of the public sector-such as outsourcing of cleaning and maintenance services-are likely to identify potential redundancies. Duplications identified by the proposed functional reviews (see Chapters 2 and 5) will also lead to redundancies. Moreover, as state-owned enterprises and parastatals are perceived to be over­staffed, their privatization may be preceded by, or lead to, a reduction in employment levels. Social and political constraints limit the ability of the government to reduce employment levels, however, especially in an environment of high unemployment. Alternative job sources, such as the domestic private sector or nearby Gulf countries, appear to be inadequate to meet the existing demand for jobs by Jordanian workers. In this context, cutting public sector jobs risks popular criticism as a violation of the social contract. The potential social and political implications suggest that any viable strategy to address over-staffing must take these constraints into consideration. In the short-run, cutting public sector jobs is also expected to increase the demand for social protection. Severance packages that redundant workers accept may also permit some of them to start their own micro-enterprises.

3.22 The comprehensive nature of the reform effort suggested by Jordanian decision-makers implies that many public sector units are likely to be restructured or privatized in the coming years. A consistent and comprehensive approach to this restructuring is needed. This is especially important given that differential treatment of the over-staffing problem across units could be perceived as unfair and could undermine the reform process. For example, if some redundant workers receive overly generous assistance, then other workers will not settle for less, regardless of their actual losses in case of separation, thereby raising the total costs of public sector reform. In the extreme, such a shift from over-staffing to over-spending does not improve economic efficiency

3.3.1 Main Principles of Handling Labor Redundancies

3.23 The design and implementation of a program to deal with over-staffing in the Jordanian public sector should be guided by the following main principles:

•

•

9

No involuntary separations. Social and political considerations preclude the use of layoffs and other mandatory separation mechanisms, and low attrition rates from the public sector (less than 3 percent per year) will not permit substantial reduction of employment in the medium term. Programs must therefore create incentives for public sector workers to leave their jobs voluntarily, such as through severance pay, early retirement, micro-enterprise support or training, either in combination or offered as a "menu" of options.

Target redundant workers only. To avoid an outflow of the most productive workers when voluntary separation packages are offered, packages should be given only to workers who are redundant. Whereas identifying the optimal level and composition of the work force may be straightforward, in some cases the difference between "good" and "bad" workers is unobservable. An appropriately designed menu of separation packages and new contracts could induce self-selection, WIth good workers opting for new contracts and bad workers opting for separation packages. 9

See Doh-Shm Jeon and Jean-Jacques Laffont "The EffiCIent Mechamsm for Downslzmg the PublIc Sector", World Bank EconomIc RevIew, 13(1), p. 67-88, January 1999.

37

• Avoid over-compensation. Providing "golden handshakes" to redundant public sector workers is neither equitable nor effective in alleviating poverty. Jordanian households headed by a public sector worker are not among the poorest in Jordan (see table 3.2), and international experience suggests that poverty rates of public sector workers remain low even after separation. To ensure fairness and minimize waste, the total cost of the packages offered should not be (much) higher than the present value of the expected loss in earnings and benefits as a result of job separation.

• Allow choice between cash and training. Setting up support services such as training, job placement, counseling, and wage subsidies makes sense, but experience in other countries indicates that some of these services are costly, ineffective, and shunned by workers. For a given value of the total separation package, each worker should freely choose whether to take cash or to use some or all of it to "buy" support services. The cash option minimizes potential waste and creates incentives for providers to design useful support services.

• Ex ante evaluation of gazns. Reducing public sector employment may not increase efficiency, for example if weak recruitment policies lead to massive hires following voluntary separations, or in small communities with few job opportunities. The costs .md benefits of reducing public sector employment must be weighed against leaving the public sector untouched.

3.3.2 Labor Market Analysis

3.24 At roughly 10 percent of the labor force, the unemployment rate in Jordan is high by international standards, and it is popularly perceived to be twice the reported rate. Although this does not necessarily preclude a reduction in public sector employment, it may reduce the value of a downsizing program by making public sector workers reluctant to leave their jobs, thus increasing the amount of resources needed to buy them off. Moreover, a low re-employment probability reduces the productivity gains from reallocating labor away from the public sector. When these factors are taken together, the returns to reducing public sector employment could in fact be negative.

3.25 It is important to note that high unemployment does not necessarily imply an inefficient private labor market. As shown in table 3.2, unemployment affected only 34 out of 5,962 household heads in the 1997 survey sample (equivalent to half of one percent). Most of the other unemployed respondents were secondary household members. The contrast between low unemployment rates among bread-winners and much higher rates for other household members suggests that unemployment to some extent reflects a choice. This is supported by the large component of unskilled migrant workers employed in Jordan who hold menial jobs considered unattractive to Jordanians. About 150,000 foreign workers are registered with the Ministry of Labor; there may be at least as many not registered. Current proposals to restrict the number of foreign workers would raise the price of unskilled labor, making some jobs that are currently performed by foreigners attractive to Jordanians. On the other hand, higher labor costs would affect the competitiveness of some sectors (e.g. agriculture), and immigration controls could trigger retaliation by foreign countries that host significant numbers of Jordanian workers. In any case, the large number of foreign workers provides evidence that certain private sector jobs are not scarce.

38

Table 3.2: Poverty and Unemployment by Status of Household Head Status of House/wid Head

Private Publzc sector sector Self-

employee employee employed Employer Unemployed Inactive Total Unweighted frequency 1471 1921 813 241 34 1482 5962 Poverty rate" 14.7 % 9.4 % 9.9% 4.1 % 36.5 % 13.3 % 11.7 % Unemployment rateb 11.1 % 8.4 % 8.5 % 7.3 % 63.7 % 26.1 % 13.5 %

a. Percentage of the households wIth a consumption per capIta below the poverty Ime. b. Percentage of the labor force partIcIpants who are unemployed.

Note: Unemployment status IS self-reported, and may dIffer from ILO-based defmltlon. Unemployment and poverty rates are weIghted and calculated for all adult mdividuals, classIfied by status oftherr household head.

Source Based on analysis of 1997 Household Income and ExpendIture Survey using a poverty Ime of JD 313.5 per capita per year.

3.26 The absence of serious regulatory constraints on the private labor market also suggests that it operates fairly efficiently and that private sector wages may well reflect the equilibrium price of labor. Although Labor Law no. 8 of 1996 authorizes the government to set a minimum wage, the responsible commission has only recently set the minimum wage at a monthly rate of JD 80, with exceptions for agricultural workers and maids. Non-wage costs are moderate by international standards, with social security contributions by employers and employees amounting to 15 percent of salary. Firms with fewer than five employees may choose not to enroll. Workers covered by social security are not entitled to any compensation in case of job loss, and private employers report that they face no administrative obstacle to reducing their work force. Finally, the organized labor movement is weak.

3.27 The combination of high unemployment and substantial wage flexibility has practical implications for designing separation packages. Some separated workers are likely to remain unemployed by choice because their reservation wage exceeds the prevailing private sector wage. As a result, the true loss associated with job separation would in fact be overstated by the public/private wage gap, suggesting that packages based on the observed wage gap will tend to over-compensate, rather than under-compensate, separated workers.

3.28 Whereas public sector pay and benefits are higher on average compared to the private sector, the extent of the gap may vary substantially from worker to worker. Other things equal, less educated workers, women, and those living in districts with few Job opportunities tend to incur greater losses in case of job separation. And those who are denied more years of high pay and high benefits lose more compared to those with many years of work experience. Predicting the extent of the loss from separation based on observable characteristics such as education, gender, district of residence, and the number of years to retirement is key to designing a fair and cost-effective employment reduction strategy. If a uniform level of assistance was offered to all redundant workers, it would under-compensate some, and over-compensate others. In a context of voluntary separations, only the latter would accept to leave their jobs. But their windfall gain would in tum be perceived as unfair and would increase the overall cost of reducing

39

employment. As such, a uniform assistance package (say, the equivalent of 2 years of salary) would not be a cost-effective mechanism to buy off all the desired workers.

3.29 Designing appropriately priced packages requires information on individual characteristics. While data on the number of years to retirement is readily available for each redundant worker, the associated reduction in earnings needs to be estimated. This can be done using individual records from an appropriate household survey to compare the average compensation for people with similar characteristics (e.g., age, gender, education) inside and outside the public sector. Comparisons of this sort are usually made for the "average" individual in the sample, and lead to an estimate of the "average" public sector wage premium, which may be positive or negative. 10

However, because pay is more compressed in the public sector, an accurate measure of earnings losses needs to be carried out for workers with different individual characteristics. Measuring the loss in intangible benefits such as job security or lower effort proves more difficult. It is possible, however, to infer this loss from those associated with the most disadvantaged group in the public sector. If workers with a specific age, education, and gender profile appear to earn, say, 20 percent less in the public sector than out of it, then they must value job security, lower effort and other intangibles more than (or at least the same as) this 20 percent pay gap. This information, in turn, can be used to "scale up" the observed cash earnings in the public sector by roughly 20 percent. I I An analysis along these lines could be implemented for Jordan, using data from the Household Income and Expenditure survey of 1997, with the results used to calculate the value of the separation packages to be offered to each redundant public sector worker, given his or her characteristics. For redundant workers eligible for early retirement, the value of the separation package needs to be compared to the actuarial cost of additional pension, such that the least expensive alternative is chosen.

3.30 In view of the fact that creating large-scale trammg and redeployment services or reforming existing services represents a long-term endeavor, public sector reform should not be delayed until the ideal redeployment services are in place. This is especially true for the privatization of state-owned enterprises; delays may entail substantial costs to society in terms of economic efficiency. A more balanced approach would make use of existing redeployment services while promoting additional, smaller-scale efforts through linking each downsizing episode to a tender for training and redeployment services that is open to government agencies as well as private providers and NGOs. Interested parties would propose services (e.g., a training course) and quote a price, and redundant workers would individually decide whether to "buy" any of these services using some or all of their separation package. The charges for these services would be deducted from the individual packages, and the government would monitor service delivery and pay providers. Several existing programs offered by the Government of Jordan could be mobilized to assist separated public sector employees. The most important of these programs in operation are: (i) vocational training; (ii) micro-credit schemes; and (iii) wage subsidies. There are, however, some important weaknesses that need to be addressed.

10

II

For the case of Jordan, see the 1994 Poverty Assessment produced by the World Banle

Tills approach IS developed In detaIl by RagUl Assaad: "Matchmg Severance Payments to Workers Losses: an ApplIcation to the EgyptIan PublIc Sector", World Bank Economic ReView, 13(1), p. 117-154, January 1999.

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3.3.3 RecommendatiollS

3.31 In preparation for a rightsizing in public sector employment, analysis of individual records from household surveys is necessary to predict losses from job separation for workers with different characteristics, in order to design appropriate separation packages that avoid over­compensating or under-compensating redundant public sector workers. Other preparatory steps are more difficult to implement because they require modification of existing legislation or entrenched government practices. The following policy recommendations are central to an effective public sector downsizing strategy:

• Create or identify a unit in charge. Inconsistent employment reduction efforts in different parts of the public sector risk undermining the reform process, for example through a perceived lack of fairness through variable treatment, or an excessively decentralized approach that results in the misuse of public funds, with "golden handshakes" used for political patronage. Key technical inputs (e.g., assessing the extent of labor redundancies and losses from job separation, designing a "menu" of options to be offered to public sector workers, setting up redeployment support services, and evaluating the overall costs and benefits of employment restructuring) should be provided by a central unit. This unit should rank "above" the ministries and departments to be restructured, have the authority to oppose employment reduction plans, and not be limited in scope with respect to the occupations or levels to be handled, particularly employees in the 4th level.

• Freeze recruitment, especially at the bottom. In 1997, roughly 4,000 workers joined the government, with more than ten percent filling new positions. Whereas the recruitment of teachers and health personnel may be justified, hiring workers into the 4th level is not. An effective recruitment freeze at this level and gradual suppression of existing positions as civil servants retire or quit would signal the government's commitment to correct over-staffing, and would dispel fears that reductions in public sector employment will be followed by new recruitment.

• Make public sector pensions portable. The loss of pension entitlement represents a major disincentive for "classified" civil servants to leave the public sector. This obstacle could be removed by compensating "classified" civil servants for this loss in the event of separation, or by recognizing years of service as years of contribution to social security, with the treasury making the corresponding transfer of resources to the Social Security Corporation. Current efforts to harmonize the old-age security benefits for "classified" and "contractual" civil servants should be assessed with caution, and enrollment of civil servants into the social security system should be preserved while the current pension system should be gradually phased out.

• Introduce separation packages. The 1998 civil service by-law should be amended to allow voluntary separation packages for redundant public sector workers, and should specify which government agency will oversee and authorize packages to be offered. Whereas voluntary separation packages can increase public sector efficiency, they risk becoming a pure transfer allocated as a political favor, much the same as public sector jobs. The central technical unit charged with managing the public sector reform program should provide guidelines on the package amounts in line with worker characteristics, and should retain responsibility for clearing packages to avoid the departure of valued civil servants. It should also assess the ex-ante returns to large reductions in public sector employment before granting clearance.

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Finally, civil servants who accept voluntary separation packages should be banned from public sector jobs for many years in order to avoid the "revolving door" syndrome, with exceptions requiring a high level of clearance.

• Maintain labor market flexibility. The economic cost and social disruption associated with reductions in public sector employment are minimized when job opportunities exist outside the public sector. In spite of high unemployment, the Jordanian labor market is characterized by substantial flexibility which is conducive to job creation in the long run. Attempts to undermine this flexibility should therefore be resisted.

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Chapter 4: TOWARDS A MEDIUM-TERM EXPENDITURE FRAMEWORK AND

PERFORMANCE BUDGETING

4.1 The discussion of the last two chapters has mainly been on public expenditure allocations in Jordan, and how they may be improved. Equally important for effective and efficient public service delivery are: (i) the processes that give rise to these allocations; and (ii) the set of incentives facing public sector employees. This chapter and the next chapter on civil service reform address these issues.

4.2 Despite some recent reforms, Jordan's public expenditure management system has many weaknesses:

• It is input-focussed; • It has only a one-year time horizon; • It lacks in transparency; • There is less than effective monitoring of expenditure during the year; and • Overall budget responsibilities are fragmented across several organizations.

4.3 This chapter describes how these features make it difficult for Jordan to achieve the three goals-discussed at the beginning of Chapter 2-of aggregate fiscal discipline, strategic priority setting and cost efficiency in the public sector budgetary process. It also proposes some changes to the system-short- as well as medium-term-to improve public expenditure management as well as the performance of the public sector as a whole.

4.1 Aggregate Fiscal Discipline

4.4 Two problems of controlling public expenditures in Jordan' are: (i) unplanned' or unsustainable growth of expenditure between years; and (ii) over-expenditure within the budget year resulting from a failure to observe aggregate budget limits or limits for individual ministries or programs. Moreover, there are significant variations in individual items of expenditure compared with budget allocations.

4.5 The first problem is compounded by lack of a forward looking budget process. Budget planning is on a one-year basis and typically, future expenditure implications of current policies are not considered and compared with likely available resources. With support of the IMF, the Government is committed to a medium-term fiscal program under which the budget deficit will not exceed 7.9 percent of GDP (before external grants) in the year 1999 and will be progressively reduced to 4 percent in 2001. Achieving this could be facilitated by the development of a medium term expenditure framework (MTEF), as discussed below.

4.6 Jordan's over-expenditures within the year reflect a number of problems:

• Unrealistic budget expenditure estzmates. In the past there has been some acceptance of expenditure items which are known to be unrealistic at budget preparation time, on the basis that the issue will be resolved later in the year. This is illustrated by the considerable number of transfers between budget items during the year.

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• Availabzlzty of additional funds. Compounding this problem has been the ability of some ministries to obtain additional funds from the Ministry of Finance during the year by way 0 f advances which are not regularized or required to be repaid, at least until the following year or even later.

• Arrears. The ability of ministries to incur commitments beyond their budget allocation has led to the accumulation of expenditure arrears (although the actual amount is not known with accuracy) and the need to introduce a system of "cash rationing" governing payments administered by the Cash Management area of the Ministry of Finance.

• Off-bUdget items. At budget preparation time the General Budget Department (GBD) may not have been aware of certain necessary budget expenditures including off-budget accounts or off-budget institutions such as public enterprises. Yet, when these arise during the year the Budget is presented with the bill.

4.7 Perhaps the most fundamental institutional problem has been the weak budget monitoring capacity. There has been no clear organizational arrangement for monitoring total expenditure. The budget reporting system is less than adequate to provide timely and accurate information with the same coverage and in the same format as the Budget. The lack of timely information is compounded by the delay in reconciling bank accounts, given that some appropriations (e.g., to Ministry of Defense and to most autonomous institutions) are paid by monthly transfer to ministry or institution bank accounts, which may be held in private banks. The Ministry of Finance does not necessarily have access to information on spending from and balances of such accounts. This lessens the ability to centrally monitor expenditure, and to assess the financial position of autonomous organizations requesting funding from the Budget.

4.8 To address this problem, the Government has recently established a fiscal monitoring unit o( eight staff attached to the Office of the Minister of Finance, which will monitor expenditure and reconcile it with Budget estimates. This unit includes representatives of the Accounting Department and the Cash Management Unit of the Ministry of Finance, but curiously not of the General Budget Department. There would seem to be a strong argument for budget monitoring to be the responsibility of the same organizational unit responsible for preparing the Budget, namely the GBD.

4.1.1 1999 Improvements

4.9 The Government of Jordan has made improvements to the process for the 1999 Budget, which will alleviate some of these problems.

• The 1999 Budget Law explicitly requires that no expenditure be undertaken beyond that provided in the Budget. Access to advances, as occurred in the past, is not permitted and a supplementary allocation is required for any expenditure in excess of the original allocation.

• The GBD now has improved information concerning the financial position and budgetary impact of off-budget accounts and institutions, including public enterprises, and intends to establish a separate monitoring unit. Key non-budget accounts or institutions are National Aid Fund, Health Fund, Universities, Water Authority, JTC, Royal Jordanian and the Electricity Authority.

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4.1.2 Strategies for Further Improvement

4.10 A medium-term expenditure framework (MTEF), consistent with the fiscal program adopted by the Government, is important in restraining the growth of expenditures in the medium term. This framework should cover both recurrent and capital expenditures. Indeed its development will require identifying the recurrent expenditure implications (such as staffing and future maintenance) arising from existing or proposed capital proj ects.

4.11 Based on the medium-term fiscal strategy (the target deficit level) an indicative limit is set for aggregate expenditure for the next say, 3 to 5 years. This requires both the commitment to targets by the government and adequate macroeconomic forecasting capacity. To ensure that this limit will be achieved in practice, it also needs to be broken down to the level of sectors/ministries, and major expenditure programs, thus giving an indication to line-ministries of the likely budget allocation they will need to manage within for future years. The establishment of medium-term expenditure limits for ministries may also discourage totally unaffordable requests from ministries in their budget proposals, which currently waste considerable time in the budget preparation process.

4.12 The determination of such "top down" limits may inevitably involve some degree of arbitrariness, in the absence of adequate information about the policies governing existing expenditure by ministries and their effectiveness. Functional or strategic reviews (see Chapter 5) of individual sectors/ministries should be undertaken at the same time, to inform the process of fixing the ceilings. However the MTEF approach could be implemented even in the absence of such reviews.

4.13 It would be useful to commence the process with a pilot MTEF at the sectoral level, using public expenditures, in an area such as education, which already uses a forward look in the budget process. This would also tie in with the development of the proposed performance budgeting system (see discussion below). However piloting an MTEF in only one or two sectors requires care. It is difficult to determine medium term sectoral allocations for one or two sectors in isolation from other sectors; in effect this would lead to priority setting and strategic resource allocation without all sectors or priorities being considered. It is important to be neither too generous nor too tough in setting medium-term expenditure allocations, simply because they are the first sectors being considered. A more desirable comprehensive MTEF may be feasible, but of course requires considerable commitment of resources.

4.14 One issue in the development of an MTEF for Jordan is the uncertainty about future external grants. Such potential uncertainty makes an MTEF more relevant, since it emphasizes development of realistic assumptions and specification in advance of what expenditure changes might be implemented if revenues received were more or less than those anticipated (high-and low-case scenarios).

4.15 A more comprehensive budget to ensure that all likely budget demands of off-budget institutions such as public enterprises are fully considered at budget preparation time is crucial. This requires that GBD, and through it the Budget Coordinating Committee of Cabinet, have full information concerning the financial position and intended activities of all off-budget institutions. In the past, GBD has received requests for additional funding of public enterprises

45

that have been unable to repay loans. However, for 1999 all necessary budget provision for the payment of public enterprise debts has been identified, reflecting the improved infonnation provision referred to above.

4.16 Following a recent IMF mission, the Government is committed to review the budget classification and coverage of autonomous agencies. Some infonnation on the financial position of public enterprises (and thus their likely budget requirements for the ensuing year) is currently available to GBD. The problem appears partly to be lack of capacity within GBD to analyze this infonnation. GBD's intention to establish a unit to undertake this analysis and monitoring should be implemented as soon as possible.

4.17 Contingency appropriation. The budget currently contains a small contingency appropriation (less than four million JD) intended for expenditure caused by natural disasters and similar occurrences. In the past, for other urgent or unforeseen expenditures ministries have applied to the Minister of Finance for access to a Trust Account. There has been no limit on the amount which could be approved, no specific criteria for its use, no GBD involvement in reviewing such requests (they were decided directly by the Minister of Finance), nor was there any subsequent reporting to Parliament of how this allocation was used. As this arrangement has ceased with the 1999 Budget, consideration should be given to instituting a realistic but strict contingency reserve.

4.18 It is important that this appropriation not be used as a general "top up" fund for additional expenditures which could and should be met by expenditure reallocations within ministries. Ministries must receive a clear message that amounts underestimated or overlooked at budget preparation time must be met from within their previous allocation-there is no "second chance." To embed this allocation culture within the budget process it is important that ministries have the power to reallocate expenditures within certain limits, e.g., within an overall figure for administrative expenses. Such reallocations are common now, but require the fonnal approval of GBD. To encourage ministries to take greater responsibility for their own budgets it would be preferable to give this power to ministries themselves, subject to reporting the changes to GBD.

4.19 To ensure the proper use of the contingency reserve it should be administered by the Minister of Finance according to clear criteria established in the Budget law, and its use should be reported to and retrospectively approved by the Parliament. An amount of around 2-3 percent of total expenditures may be appropriate.

4.20 Regular review of the budget progress in relation to targets on a continuing basis through the year is important. But as mentioned above there are major limitations on budget monitoring. The role of the Accounting Directorate, apart from approving and making payments of accounts, has been limited to preparing the historical financial statements, which differ from the Budget in their coverage and classification. In any case these accounts are not completed until some considerable time after the year-end and may not be available in audited fonn until a year later. While the Accounting Directorate has considerable infonnation on actual expenditures this infonnation is not generally available to GBD. The net result is that there is no systematic

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infonnation available to GBD for budget monitoring except spending reports (supplied in paper fonn) by individual ministries.

4.21 As mentioned earlier the Government has recently created a Budget Monitoring Unit attached to the Office of the Minister of Finance and staffed from the Accounting Department and the Cash Management Unit of the Ministry of Finance, but excluding GBD. There is a strong case for the budget monitoring role to be located within the organization responsible for its preparation, and also for any changes which must be made to it during the year, namely GBD, rather than an ad hoc group attached to the Minister.

4.22 Currently GBD lacks adequate resources to monitor expenditure progress-let alone to properly review expenditure requests at budget preparation time. There are less than 20 budget examiners to cover the whole of government (although a small increase in these numbers has been approved) and not all appear to have the necessary professional skills and training. At present GBD attempts some monitoring but its main role has been preparing the budget and dealing with the expenditure changes that may be requested during the year. In addition, budget officers are allocated to work on a particular ministry or group of ministries, and there is inadequate attention to aggregate expenditure issues.

4.23 In the medium-tenn it would be sensible to merge the Accounting Department with GBD and expand its role to providing relevant infonnation on expenditure progress, as well as its continuing role in preparing the aggregate annual financial statements. This would strengthen expendIture monitoring and create a stronger central budget office.

4.24 Considerable resources are allocated to "pre-audit" of payments, to ensure that the Budget Law has been complied with. Apart from each ministry's financial controllers (who report to the Accounting Department of the Ministry of Finance), and internal auditors in each ministry, there is the Audit Bureau-the latter having around 550 staff. There is thus considerable duplication of checking and many signatures are required before a payment can be made. However none of these units has any explicit role in monitoring expenditure progress in relation to budget. The level of resources devoted to such checking should be reduced, and additional emphasis placed on overall expenditure monitoring. There is a need for more comprehensive reform of the General Audit Bureau, as discussed further below.

4.25 A particular difficulty in following up expenditures in relation to budget, reflects the lack of infonnation about autonomous institutions and public enterprises. An autonomous institution may request and receive approval for an item of expenditure. However it will not be known by GBD whether this amount has been fully spent on this, used for another purpose, or added to the organization's financial reserves. This situation is compounded by the use of private sector auditors and by the use of private banks, as discussed earlier.

4.26 Finally, it may be desirable to submit a revised budget after six months of the year have elapsed. This revised budget would indicate what changes are necessary to previously appropriated expenditures and explain the differing revenues in relation to budget figures and any other necessary reallocations of expenditures.

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4.27 Effective monitoring of the budget. Part of the effective monitoring of budget implementation is assuring that arrears are not accumulating, because of commitments in excess of the budget allocation. This is primarily a task for the financial controller in each ministry, and the ministry'S internal auditor. Approval of the payment of accounts is carried out by the cash management unit of the Ministry of Finance. Approval of payments may be delayed if there is insufficient cash available, as has frequently been the case. Whatever the reason, delays in making payments lead to expenditure arrears. This has fallen mainly on suppliers (salaries are understandably given first priority), who will increase their prices to allow for such costs. Decisions as to which payments are to be made has rested with the cash management unit of the Ministry of Finance. The recent IMF mission identified the need for improved systems of commitment control and payments, and these should be implemented at an early date.

4.2 Strategic Prioritization of Expenditures

4.28 The present budgeting process has major limitations III the effective prioritization of expenditures.

• There is little or no information on the outputs and outcomes of individual public expenditures.

• There is little capacity in GBD to analyze expenditure requests.

• There are limits on the comprehensiveness of the Budget, specifically the consideration of off-budget accounts and institutions.

• There is a lack of integration of capital project consideration (undertaken by the Ministry of Planning) with the annual budget administered by GBD.

4.2.1 Performance Budgeting

4.29 On the first issue above, work has been under way for the past three years on the development of a performance budgeting system. This is a potentially important tool in improving the prioritization of budget expenditures-as well as improving operational efficiency. The budget dialogue within ministries and subsequently between the Budget Office and ministries and in the Cabinet Budget Coordinating Committee will be based on anticipated or actual outputs or outcomes of expenditures, and their total costs. When fully developed it would link budget allocations with agreed levels of outputs or outcomes, as set out in budget performance agreements. Performance and accountability of the public sector would be improved through a requirement to measure and report on levels of performance, as compared with targets, and one directly related to the civil service reform agenda described in the next chapter.

4.30 A major study of the applicability of performance budgeting in Jordan, including preconditions for its introduction was initially undertaken by the UNDP and subsequent technical assistance has been provided through the German aid agency GTZ. However, there has so far been little useful result from this project, reflecting some lack of understanding and ownership of the concepts and proposals involved, and the complexity of some of the issues. Both problems are compounded by lack of capacity in the GBD and in the budget or financial units of individual ministries.

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4.31 To get this project back on track and to set some future directions, an expert group with Bank involvement and consultation with the GBD, has proposed a master plan for the future development of performance budgeting. This master plan outlines the scope of the initiative, the benefits which should accrue through its adoption, the desirable sequence of different parts of the reform (to ensure that various preconditions are achieved), the suggested management arrangements for the overall program, and a realistic timetable for implementation (up to five years). It provides for a staged but comprehensive approach, stressing ownership by individual ministries but overall direction by the GBD.

4.32 But there are important pre-conditions for successfully implementing such an approach, which will require time to develop and implement. Many of these are identified in the master plan. The importance of the Cabinet providing realistic strategic objectives within which ministries can develop their own strategic plan is emphasized as a pre-condition. Like-wise, pre­conditions are the upgrading of management information systems and the need for collaboration between budgeting, planning, accounting and aUditing units or institutions, throughout the government.

4.33 In addition, it is important that performance budgeting not be seen simply as a question of measuring performance. Rather performance must have consequences, requiring a performance management regime under which, managers are both "made" to manage for performance, but also have sufficient autonomy or flexibility so that they are "allowed" to manage.

4.34 This master plan will need to be considered and adopted by the Minister of Finance, if the project is to succeed. It will then need support from the highest levels-Cabinet and the Crown. Successful performance budgeting also requires a well-developed policy and review function at the heart of the government. The Cabinet should consider policies and priorities based on information on the expected or actual performance of different programs, including their total long-term costs, and provide realistic strategic goals within which ministries can develop their own strategic plans. (This would also be part of the development of a comprehensive MTEF, as discussed in paragraph 4.13 above.) This central policy function is currently not that well developed in Jordan. Indeed, most of the Cabinet agenda appears to consist of detailed administrative issues instead of strategic priority setting.

4.35 It will also be important for the Government to have a clear understanding of what performance budgeting can and cannot do. In particular the adoption of a performance budgeting approach will not of itself improve public sector performance. On the contrary it will raise difficult choices to be addressed by the Cabinet for implementation.

4.36 Appropriate external technical assistance, while preserving GBD ownership and management of the overall performance budgeting project, will also be needed. Also important will be strengthening the analytical capacity of the GBD and the budget/finance units in each ministry, or creating them where they do not currently exist. An appropriate legal framework for the introduction of performance budgeting, desirably as part of an overall new law for public sector management in Jordan (see section 5.2 below) is also important.

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4.37 The introduction ofperfonnance budgeting in key ministries such as education and health, . links well with the functional review and public expenditure recommendations in Chapter 2, and the introduction of the MTEF. Such reviews are necessary to establish and monitor objectives, priorities and policies for each organization - a precondition to perfonnance budgeting.

4.38 A start should be made with the perfonnance budgeting approach in preparing the 2000 budget. The Budget Circular should seek appropriate infonnation on outputs or outcomes and funding should be allocated to start implementation. In considering the quality of the resulting budget dialogue, allowance must be made for this being an early stage in the development of the perfonnance budgeting approach.

4.2.2 A More Comprehellsive Budget

4.39 Strategic prioritization is obviously difficult if not all expenditure proposals are considered together at the same time, within the same overall budget constraint and the same policy guidelines.

4.40 In addition to off-budget accounts and off-budget institutions discussed above, an equally significant issue is the lack of integration between decisions on capital expenditure and the overall budget. At present capital expenditure proposals, which are largely financed by fore:ign donors are reviewed by the Ministry of Planning (MOP), which approves the related external financing arrangements on behalf of the government. There appears to be a system of project evaluation or cost-benefit analysis undertaken by MOP, but it is not clear what strategic priorities this evaluation is based on. Such capital expenditure proposals are submitted to the Cabinet for approval without the involvement of or discussion with GBD. As a result the priorities reflected in it may not be consistent with those implicit in the overall budget (and MTEF). They may also reflect donor priorities rather than Jordanian priorities and needs.

4.41 This arrangement creates problems for the managing the overall budget, in two ways. First, approved capital projects may be only partly financed by external donors. The MOP therefore requests an allocation for Jordan's share of these capital costs in its current budget request. As the government is already committed to these projects, GBD has no option but to allocate the funds in the budget-with no explicit consideration having been given to their relative priorities compared with other budget requests. Second, there may be related recurrent expenditure arising from a project (e.g., necessary staffing and other operating costs for a new facility) which are not considered by MOP. These emerge only in subsequent years when the relevant ministry submits its current request. Again GBD has no alternative but to agree to this funding, without consideration of its priority in relation to other recurrent expenditure.

4.42 To improve expenditure prioritization it is therefore important that the approval of capital expenditures should be fully integrated into overall budget preparation. In the short tenn there should be discussions between GBD and the Ministry of Planning, with any differences in priorities being resolved by the Budget Coordinating Committee of Cabinet.

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4.3 Encouraging Operational Efficiency

4.43 The present budgeting system does little to encourage cost efficiency. It is based on inputs rather than on outputs. The introduction of performance agreements through the budget process, if accompanied by appropriate incentives for performance management, may improve operational efficiency

4.44 While the present budget system appears to provide reasonable budgetary flexibility to managers, there is room for improvement. They may reallocate funds between operational expenditure items with the approval of GBD-which is almost always given, but not between salaries and operating expenditures. This limitation should be reviewed as it may discourage ministries pursuing opportunities for efficiency improvements. Of course, such a strategy will succeed only if the government has a good policy for managing civil service-the subject of Chapter 5.

4.45 A major deficiency of the existing system is that in many ministries large portions of the budget are held centrally, and not devolved to regions or operational units. For example the Ministry of Health decides allocations of major equipment and medical supplies to public hospitals, which must bid for their requirements. This may mean that some central purchases are either unnecessary or unsuitable. There is little incentive for public hospitals to manage their costs under such an arrangement. The Ministry of Education controls all teacher salaries centrally. This creates no incentive for the twelve regional directorates to properly manage their own salary costs. Internal budgetary devolution should be pursued by GBD and the ministries themselves.

4.4 Other General Issues

4.46 Making the above changes will require upgrading the capacity of GBD. At present it is staffed by only around 20 budget examiners, with varying professional qualifications. It appears short of economic and financial evaluation capacity. It should be a priority to improve this capacity, which will require both more and better skilled staff.

4.4 7 The present system reflects a certain lack of transparency and accountability, concernmg the Budget results. As mentioned, there is almost no publicly available, comprehensible and timely information on expenditures in relation to budget. There is even less information on what the results of expenditures may have been-in either output or outcome terms-although some diverse information may be available in the annual reports of ministries and autonomous organizations. Adoption of the reforms discussed above and in Chapter 5 would lead to a significant improvement in budget transparency and accountability.

4.48 The Jordanian authorities have undertaken to carry out a self-assessment of their fiscal transparency based on the recent IMF Code of Fiscal Transparency, and to make the results pUblic. This may be a useful catalyst for improving not only external reporting, but, also the internal information systems on which such reporting must be based.

4.49 There is also a need to upgrade the existing audit function to ensure that it adds value to expenditure control and transparency. As mentioned above an extensive pre-audit function is

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carried out by the General Audit Bureau, the financial controller in each ministry, and each ministry's internal audit unit. But these audit functions need to focus more on ex-post audit, reviewing budget implementation and systems to improve expenditure monitoring, and on assisting the improvement of financial reporting. This will require an upgrading of the professional skills of the Audit Bureau. It is also important to safeguard the independence of the Bureau by changing the current provisions under which the Head of the Bureau is appointed by the Cabinet. This appointment should be made by Parliament or the Crown.

4.5 Recommendations

• Continue to implement the program supported by the IMF.

• Ensure integration of capital and current expenditures into a single budgetary process; extend budget coverage to autonomous agencies.

• Prepare for implementation of a Medium Term Expenditure Framework (MTEF) to commence with piloting in at least one (education) key sectors.

• Move to implement a system of performance budgeting, as set out in the master plan prepared by the expert group. Make a start in the preparation of the 2000 Budget, by requesting preliminary information on outputs and outcomes.

• Commence functional or strategic reviews in each sector/ministry to determine strategic objectives.

• Review and amend relevant legislation to enable reforms.

• Strengthen the role and staffing of General Budget Department.

• Ensure independence and improve professional staffing of the General Audit Bureau. Re­orient the Bureau's work to ex-post based aUditing, including adequacy of financial reporting.

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Chapter 5: TOWARDS AN AGENDA FOR CIVIL SERVICE REFORM

5.1 Observations

5.1 Up to now, this report has concentrated on two aspects of public-sector refonn in Jordan: strategic priority setting or redefining the role of the state; and budgetary processes and management. Improving public-sector perfonnance in Jordan, however, will require more than rationalizing resource allocation, and strengthening public expenditure management through perfonnance-based budgeting (although these are extremely vital components). It will entail a major overhaul of Jordan's civil service, which currently suffers from antiquated, cumbersome and control-oriented procedures; is too costly; and lacks an incentive structure based on perfonnance, accountability and citizen-responsiveness. This chapter focuses on approaches to improve service delivery and strengthen transparency and accountability.12 Next, the chapter proposes a plan for implementing the public-sector refonn agenda, including the possible role of. World Bank assistance.

5.2 Several key problems are linked to civil service under-perfonnance. First, the role, organization, and processes of government are in need of serious overhaul. Central government administration delivers directly various services that in other countries are privatized, localized, or spun off to a non-core, more flexible government sphere. Business processes in some government offices are antiquated, cumbersome, and control-oriented. Administrative practices are inefficient and often without access to leading-edge technologies and approaches that could streamline implementation. Such practices emphasize adherence to internal controls, often at the expense of better service to citizens. Moreover, government structures operate as independent entities with minimal capacity for cross-sectoral or agency coordination and little staff mobility.

5.3 Second, per unit of output, the civil service is costly. Manpower levels are relatively high in relation to population and total employment. Spending on goods and services has been crowded out over the last several years by personnel costs, hampering the ability of civil servants to deliver results. Despite high levels of aggregate expenditures on wages, individual compensation for civil servants-at higher skill levels - is low relatIve to private sector labor markets. Thus, recruitment and retention of quality staff is increasingly difficult.

5.4 Third, the current incentives structure does not further professlonal performance, accountability and citizen-responsiveness among civil servants. Systems for perfonnance evaluation are under-designed and un-enforced, and remuneration and career advancement are only weakly linked to job-related qualifications or results. Political criteria and nepotism reportedly figure prominently in civil service appointments and decision making, from the higher levels down to unusually low levels of the bureaucracy. Civil service probity has been called into question.

12 The approach has benefited from lessons of recent Bank supported reforms III Thailand and other countries.

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5.2 Public Administration Reform and Services Delivery

5.2.1 Too many people and too low salaries

5.5 About 350,000 employees work in the public sector as a whole. 13 Public seetor employment growth accelerated during the 1990s, particularly in the central government as many 4th level servants were hired without clearance from the Civil Service Commission. In effect, the public sector created jobs to absorb the excess supply of labor, thereby acting as a welfare program for relatively unskilled Jordanians. Yet, some 300,000 foreign workers are employed by the private sector. As argued on Chapter 3, these inefficiencies should be addressed. The growth potential is clearly with the private sector.

5.6 As of 1997, Civilian General Government made up 5.71 % of popUlation. In the MENA and North Africa Region, barring the Gulf States, only Egypt has a higher ratio of public employment per capita (Figure 5.1).

Figure 5.1: International Comparison Government Employment.

7~----------------------------------------------------~

§ 6+-------;--r------------------------------------------~ ;: ~ 5 -/-----l :::::I

g.4 Q,

'0 3 C 2 GI

~ 1 GI

~ O+-~~~~~~~~~~~~~~~~~~----T_~~~~~ A1!J311C1 EWpt ..b"dan I'vb'occo T ul1Isia Yerren Av~ Aver~

rvEN'\ V\b1d

I 0 Centra G:Nemrrent • Nl1 Central 0 EOucatioo 0 Health I Source An Interna/lonal Survey o/Government Employment and Wages, World Bank 1997 For Jordan Department O/StatIS/les. /997

5.7 Wages and Salaries of the Central Government sector in 1997 (Figure 5.2) amounted to 7.1% of Gross Domestic Product. This level is above worldwide average (5.4%) but below the level of most neighboring countries.

5.8 Given the large number of civil servants, the relatively low level of the wage bill raises questions about the adequacy of salaries for civil servants. Anecdotal reporting and some analytic accounts suggest that salaries remain compressed. The ratio of top to bottom employees of the civil service was very flat in 1994 (4.3: 1), well below the international noml of approximately 11: 1 and has likely not improved since. Anecdotal accounts further suggests that despite all the intangible rewards of civil service, the best and brightest managers are leaving the

\3 The public sector IS defined to mclude central and local government, the anned forces, senu-independent government orgaruzatlOns, and nuxed governmental and prIvate mstItutlOns.

54

civil service, pomtmg out to a situation of overall discontent within the Jordanian Public Administration.

Figure 5.2: International Comparison Government Wages.

Ci.

12

10

8

§ 6 -C>

~ 4

2

o

--

r--

I-- -

I-- -

Algeria

r--

r--I-

r-- r--l- I--- - I--

- l- I- I-- I- '-

- I--- l- I-- I- -

Egypt Jordan Lebanon TuniSIa Yerren MENA Region

r--

I-

I--

Wood

5.9 Yet, public sector jobs remain highly prized in Jordan for most of the population for both concrete and intangible reasons, as evidenced by the disproportionate number of applicants in response to job announcements. Public sector pay is higher than in the private sector, especially for lower skilled jobs. Although civil service salaries have essentially been frozen since 1988, total compensation has increased, thanks to a variety of allowances (e.g., cost of living, hardship, responsibility) which currently amount to 70 percent or more of the basic salary. Sectoral guilds for engineers and accountants, for example, have created "technical" allowances for their members, and pay is even higher in state-owned enterprises, where over-time and bonuses are common. Non-wage features such as a shorter working day (6 hours instead of 8) and lower income tax rate (2.5 percent instead of 5 percent) also widen the pay gap with the private sector. Other benefits associated with public sector jobs are harder to measure but no less real, such as job security, prestige, and lower effort levels. Old-age security is a more tangible benefit, with "classified" civil servants entitled to pensions after 20 years of service (15 years for women). Although "classified" civil servants contribute 8.75 percent of their basic salary towards a pension, the pay-as-you-go pension system is not financially viable, indicating an implicit transfer of treasury resources to finance civil servant pensions.

5.10 In 1997, a reform of the civil service law was introduced to make public sector jobs less attractive. All new recruitment required fixed-term contract appointments and lower benefits, with contract renewal dependent on individual performance. The pension system was replaced by enrollment with social security under terms identical to private sector workers, and other benefits were reduced as well. As of 1998, almost a third of the civil service falls under this contractual regime, including all workers in the 4th level. In practice, however, contracts have been renewed almost automatically, giving contractual workers the same job security enjoyed by "classified" civil servants.

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5.2.2 Reform Agenda

Agenda: Public Administration and Service Delivery Reform

Establish a process of strategic reviews to identify opportunities for restructuring, re­engineering, outsourcing and decentralizing public sector functions, processes and staff for effective policy making and service delivery.

Align organizational development and restructuring programs for government ministries and departments with their service objectives.

Devolve non-core functions to local governments, to the private sector, or to autonomous public organizations.

Improve efficiency of service delivery in core areas of ministry activity.

Strengthen human resources and structure staffing levels to meet the ministries' objectives.

"Rightsize" the civil service by adjusting staffing levels and competencies to new public sector requirements.

Introduce performance-based human resource management systems for the civil service (through installation of performance measurement methods, design of new performancl~ evaluation, pay and grading, and career advancement systems).

Strengthen the caliber of cross-government senior government decision makers through development of a Senior Executive Service cadre groomed for civil service leadership posts.

5.11 Delivering better services in a cost effective and equitable way should be a key objective. This requires enhancing the access, timeliness and quality of public services through outsourcing, restructuring or decentralizing activities and being more responsive to clients. Administrative renewal involves modernizing the role, organization, and processes of key line ministries to enhance their performance in delivering services. More efficient use of public resources requires streamlining procedures, eliminating duplicative structures, devolving to local governments or outsourcing activities inappropriate for government involvement to the private sector.

5.12 Several inter-related measures are proposed to achieve these reform goals. The first strategy involves restructuring and re-engineering of the bureaucracy. Second, this will likely include rightsizing of both functions and staff through various mechanisms. Third, it entail s an overhaul of personnel management systems.

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5.2.3 Restructuring and Re-engineering the Bureaucracy

5.13 To improve the efficiency of the civil service and ultimately the performance of the public sector, the Government must re-evaluate the role of the state and provide an overarching vision of the direction for reform. Such a vision would include functional, organizational, and procedural elements: what would the public sector do; how would these functions be structured and organized within government; and what would the processes and accountabilities look like throughout the government sector? Such decisions naturally lead to further choices about allocation of financial and human resources to perform those activities within the state's purview. This type of fundamental review of the state's role, functions and processes must occur at the macro- as well as micro-organizational level (the macro-level was discussed in Chapter 1). A cross-governmental view will allow policymakers to assess appropriateness or redundancy of organization and function for the state as a whole. It would also be a first step towards redefining the roles of the central agencies to take on roles as regulators of Government services, ensuring adequate service delivery by the agencies.

5.14 An Institutional Review (IR) would help to select strategic areas where wider gains are achievable in a visible way and relatively quickly. It would prioritize where reform is needed the most and identify where reform is most likely to succeed. The IR would scrutinize performance in delivering services, quality of policy and administrative guidelines as well as responsiveness and accountability. It would link observed performance with the underlying institutional structure. The IR would help to establish the link between performance budgeting, transparency with a focus on accountability and the necessity of civil service reform. The IR would seek to identify those areas of the public sector where informal rules no longer bolster formal rules, but may have completely supplanted them - and to assist in judgements concerning an appropriate institutional response. The reVIew in its fullest form would examine the enforceability of regulations concerning budget preparation, expenditure control, revenue-raising, accounting and compliance auditing, recruitment and promotion, career management and pay determination, staff conduct rules, personal accountability, records management, enforcement of compliance with legislation and procurement. As discussed in Chapter 4, improving the level, relevance and quality of services delivered necessitates a focus on monitoring performance and requires increased transparency as well as accountability. The surveys would facilitate this, would map the situation as it stands currently, as well as monitor the progress of the reforms.

5.2.4 Zero-base Review of Laws and Regulations

5.15 The Government has recently made considerable progress with the modernization of several important business laws according to international standards. These efforts support a wide-ranging program for private sector development, including export development, financial sector reform, and privatization. However, the enabling character of this new legal framework for the private sector may not become fully effective without change in public service delivery, ability, and attitude.

5.16 For the reform program to succeed, a thorough review and analysis should be made of all existing legislation that may be a hindrance, with regard to their coherence and compatibilIty with the reform program objectives. This would lead to the drafting and adoption of required amendments. This includes review and possibly amendments to:

57

• Civil Service Law, by-laws and regulations;

• Budget Organic Law;

• Budget Law;

• Financial by-law;

• Supply Law;

• Bid Law; Government Works and Supplies Regulations;

• Arbitration Law;

• Auditing Law.

5.17 The review should expand beyond these laws to regulations, rules and instructions governing each ministry and public administration at large. It should:

• assess the continued relevance of departmental rules, procedures and processes; • identify those that are no longer considered necessary or desirable in public interest and

advise on their abolition or modification; • suggest -where appropriate-new rules or procedures to replace the old.

5.18 The review could take a 'zero-base' approach-z.e. the starting assumption will be that the existing rule zs unnecessary and then each rule or regulatzon wzll have to be justified on merits. In carrying out the study, public aspirations for speed and simplicity in regulation should be balanced with legitimate state regulatory roles.

5.19 Expanded Use and improved governance frameworks for autonomous public organizations. An important option for alternative service delivery mechanisms consists in the possible spinning off of functions and staff to autonomous public organizations. Successful experiences in this field, notably in Sweden, France and Canada, involved models derived from public enterprise governance comprising clear performance criteria, solid distinctions between commercial missions and public service ones as well a large degree of autonomy for managers coupled with simple but unavoidable accountability relationships to or contracts with core government departments. This framework has been found useful in organizations as diverse as railways and hospitals. As well, variants of the UK Executive Agencies have successfully been adapted in a host of other countries, for programs ranging from customs to information systems management and road maintenance. Such varied successes offer Jordan a substantial array of techniques to chose from according to its preferences and traditions, thereby facilItating and speeding up improvements in governance.

5.20 A general governance framework could be developed that would serve as a guide throughout government. It should identify scope of business; performance objectives; relationship with parent ministry; relationship with budget; reporting requirements; delegations for personnel, finance, procurement, individual and organizational incentives etc. Also it would provide guidelines for setting up initial balance sheets, accounting policies, borrowing rights, pricing polices, residual government guarantees, dividends and taxation, efficiency targets,

58

evaluation; accountabilities to legislature and civil society; and the Audit Bureaus' responsibilities.

5.2.5 Rightsizing Public Administration

5.21 One significant product of the ministerial review process will be proposals for "rightsizing" the civil service according to the newly defined tasks and staffing requirements. Depending upon the model chosen by government, outsourcing, autonomous public organizations, and ministerial abolition or consolidation may all result in staffing shifts or reductions. Engineering of new, computerized business processes may also change the nature of demand for staff. These individual organizational analyses will be essential to fine-tuning staffing allocations. Should the government select a devolved managerial model, many of the personnel changes may well be undertaken at the initiative of individual managers to whom human resource decisions would be assigned.

5.22 Redundancy programs. Pending such decisions, however, it may make sense to undertake more global analysis of rightsizing options. Such analysis would involve constructing a basic model of the future civil service. For example, assuming wage bill neutrality, five years hence, the civil service will require which types of cadres with what skill and age profiles, and, in light of civil service reservation wages in the overall labor market context, at what cost? Redundancy plans, including the numbers and types of staff to be separated, as well as the appropriate mechanisms (as elaborated in Chapter 3) and their short and long term costs should be carefully evaluated in light of the reform objectives.

5.2.6 Personnel Management Reforms - From Patrollage to Performallce

5.23 Solutions to the difficult issues of employment and pay require well-developed policy capabilities and staff planning capacity. These in tum, depend on a modem, well-functioning computerized personnel management system which can access information on personnel for policy purposes and manage information for routine administrative and financial purposes. Such capacity could be improved in Jordan and improvements in technology and training of personnel management staff in the center and line ministries can have very important impact.

Recruitment procedures

5.24 Recruitment procedures should be improved to ensure the entrance of highly motivated and qualified civil servants. Merit-based recruitment is an essential pre-condition for developing a professional civil service. Where non-merit (nepotistic) considerations tend to affect the recruitment process, a reassessment of such system to refocus recruitment on purely merit-based criteria could improve the performance of the system as a whole.

Organizational Incentive Structures

5.25 Reorienting the Jordan civil service toward performance will reqUIre a shift in both organizational as well as individual incentives. On an organizational basis, performance measurement should be refined and adapted to individual departmental conditions but also be coherent with a cross-government approach. In order for performance-based promotion to be effective, it needs to be based on a sound performance assessment system as the basis for career advancement. In this respect, the Government could build and update the analysis and work

59

already undertaken by donors, such as UNDP and GTZ. It is important to the creation of a performing and motivated civil service that the evaluation and performance system be improved to ensure that particular characteristics which are important for a particular job be taken into consideration, not just the employee characteristics.

Individual Incentive Structures

5.26 Appropriate individual incentives are an integral component of a well-performing civil service. Line ministries will find it difficult to meet performance objectives if their personnel are not adequately motivated. A number of changes should be effected. Key reforms could include revised administrative guidelines and a restructured pay and grading system with increased simplicity, flexibility and transparency. Based on an accurate private-public pay comparator survey, the new system could be referenced to (though not equated with) targeted benchmark jobs in the private sector to ensure cadre retention. An enforceable performance evaluation system linked to career advancement and training opportunities should be introduced. Clear job descriptions linked to a corresponding training scheme for acquiring the necessary skills should be an important part of a modernized human resource management to build capacity in the Jordanian Government.

Devolution of Authorzty

5.27 Changes in incentive structures should be introduced in the context of greater managerial flexibility and discretion. This involves greater devolution of decision-making authority to line managers, including personnel decisions and control over resources. The degree of change in incentive structures must be considered from a system-wide basis in order to structure incentives properly. However radical the changes, the degree to which individual (or team) performance is to be emphasized through these personnel management system reforms must be linked directly to those performance management shifts that take place at the organizational and budgetary level. In tum, both micro- and macro-organizational changes would be reinforced by reforms of the financial management system.

Senior Executive Service

5.28 The thrust of the above reforms would be to substitute performance for automaticity in civil service management. Personnel management reforms will also seek to insulate the recruitment and career system of civil servants from undue political pressure undermining their professionalism. One potentially important reform to achieve these is the introduction of a Senior Executive Service (SES) with professional and managerial training to ensure that candidates for top civil service positions are appropriately screened for professional merit and are selected on a transparent, competitive basis. The design of such a system must be carefully considered, as SES applications in many countries have faced severe implementation difficulties. Nonetheless, in theory, the SES provides the opportunity to shield higher level appointments from the most blatant political interference, to establish a new channel for external, lateral recruitment into the civil service, and to build a cross-government corps of motivated, well­remunerated civil servant decision makers. This might contribute as well to enhanced inter­ministerial cooperation, by breaking down barriers among segregated, compartmentalized departments and agencies.

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Training

5.29 Training is an essential component of a successful reform program, to ensure on the one hand that employees have the skills to perform effectively in a reformed, performance-oriented administration, and on the other hand, to provide impetus for the communication and mainstreaming of reform objectives. The Jordanian Institute of Public Administration has demonstrated itself a capable entity in providing training with limited resources and has offered managers at various levels of the public sector with training on various managerial and organizational techniques. However, to increase the likelihood of success of the proposed reform program, future training activities should be linked with specific reform objectives. Special attention would be devoted in this context to the adoption of a course curriculum that is consistent with the reform agenda and that provides the civil servant training that they themselves deem relevant to their work. Moreover, universities could be mobilized to promote new know-how in the area of Administrative Reform and the involvement of these institutions will facilitate a public discussion of the reform's objectives and the mainstreaming of the Government's Public Sector Reform Agenda

5.3 Transparency and Accountability

5.30 The overall strategy for civil service reform should strengthen and invigorate the process of change to a transparent and accountable system of governance. Specific objectives are: (i) increased institutional accountability, through the strengthening of formal institutional structures; (ii) lmproved access to, and use of, public informatIOn by individual citizens and by civil society, including improved responsiveness by the Government in providing this access. (iii) increasing probity in the Civil Service. Complementary activities involve improved government procurement procedures to enhance both efficiency and transparency; involving civil society in pr.omoting transparency.

Agenda: Accountability and Transparency

Increase institutional accountability, by strengthening formal institutional structures.

Improve government procurement procedures to enhance both efficiency and transparency.

Increase probity among civil servants.

Improve access to, and use of, public information by individual citizens and by civil society, including improved responsiveness by Government in providing this access.

Involve Civil Society in improving transparency.

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5.3.1 Increasing Institutional Accountability

5.31 An effective reform strategy would require multiple mechanisms to insure accountability, i.e. the ability to monitor and enforce rules - within the public sector, between public and private parties and among private parties. The internal mechanisms of accounting and audit, procurement, personnel and the functioning of the judiciary are essential in this respect. A review of accountability in public institutions would look into the procedural basis of government administration in order to increase transparency and discourage corruption. It would assess whether financial and audit control systems, personnel oversight, judicial, and other contract enforcement systems are adequate in terms both of incentives and of the availability of the human and financial resources needed to discharge their functions effectively.

5.32 Five distinct elements could make up the strategy (as in Tunisia) to insure the change to a strong institutional framework and that no backsliding occurs.

• First, a regulatory streamlining should be carried out (as mentioned above): each ministry should downsize the paperwork and regulations affecting citizens (from passport to building and driving permits or family allowances). Each remaining regulation should be justified :md, when possible, harmonized with those of other ministries (standard formats and terminologies).

• Second, each ministry could install in each important location a greeting office ("Citizen's bureau") where all the retained obligations imposed on the citizen are posted with a clear indication that nothing else can be demanded and where specialized personnel is responsible for guiding and assisting citizens. Those bureaus would be attached directly to the respective ministers; they should report to a central office located with the Prime Ministry who transmits unsolved cases and observations to the Higher Council.

• Third, an Ombudsman Office could be created to receive complaints on administrative arbitrariness and unjustly causes of injury; it reports to the Parliament (or the Crown).

• Fourth, a surveillance system involving government agents posing as citizens would make regular checks on how the administration deals with request (as in Japan).

• Fifth, surveys of citizen/consumers on satisfaction, levels of services and knowledge of their rights and obligations should be conducted regularly; often NGOs also collaborate in showing ordinary citizens how to deal with the administration.

5.3.2 Financial Accountability

5.33 It is proposed to undertake an Assessment of Financial Accountability at both the public and private sectors. As regarding the public sector, the review examines the basic financial regulations and practices in budgeting and accounting and the control and audit of public funds at the central Government, the local and municipal authorities and public sector institutions. In the private sector, the assessment looks into the laws and regulations dealing with the publication and disclosure of financial information and aUditing requirements at different sectors and levels of economic activities, including the accounting and auditing practices. At both levels the Assessment examines the practices from an accountability perspective, focusing not only on

62

legislation and regulations, but on practices and staffing and mechanism of internal control and audit. It also examines the development of the accounting and auditing professions and practices and education and training in both disciplines. The objective of the assessment is to pinpoint the weak practices and develop plans of action to help address them within a comprehensive transparency framework.

5.3.3 Improving Government Procurement Procedures

5.34 Public procurement in Jordan is currently governed by a set of regulations and instructions issued by the Council of Ministers and administered by the General Supply Department (GSD) for procurement of goods and supplies and by the General Tenders Directorate (GTD) for the procurement of civil works and services. The regulations apply to the central government; autonomous government corporations and municipal authorities generally follow the same regulations. Although the system appears to be transparent, understood and uniformly applied, there are several major limitations. As an initial step forward in the modernization of public procurement in Jordan, the following improvements should be considered:

• Uniform, comprehensive legislation is needed to provide a coherent legal framework for the procurement system and to place procurement policy at a higher juridical level than the current regulations;

• The legislation should establish the key principles and procedures to govern all public procurement in Jordan;

• Such legislation should establish a clear basis for separation of regulatory and administrative functions; and

• Such legislation should provide the legal basis to establish an organizational authority that can assume policy and regulatory responsibilities, including the responsibility for review, oversight and management of the system. Such an authority would not be involved in the administrative implementation of the procurement process and would be well placed to issue fair and unbiased decisions with regard to complaints against the proper implementation of the procurement process.

5.3.4 Improvillg Probity ill the Civil Service

5.35 Coupled with the Institutional Reviews, an anti-corruption diagnostic should be carried out aiming at identifying activities and agencies where corruption and nepotism is concentrated. The objective is to call attention to institutional shortcomings, and not to point the finger at individuals. This could also provide information on the fiscal effects of corruption including how much revenue is lost to mismanagement and how much new or additional taxes, businesses and consumers are willing to pay in order to be free of corruption. It would also provide information regarding the disincentives to investment including foreign direct investment that results from possible misgovernance, as well as data on the extra costs of doing business due to corruption and its effect on competitiveness of domestic enterprises in the international market. The results will establish a baseline against which the successes and failures of reform can later be measured. In addition it will provide information about how and why possible misgovernance disproportionately may hurt the poor.

5.36 Information Technology plays an integral role in enhancing public sector transparency. Much of the current administration is done manually, with corresponding levels of inefficiency,

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lack of transparency, limited management information and controls and hence opportunity for corruption and nepotism. Automating human resource and financial management functions will allow central agencies to devolve and decentralize more of their current responsibilities to service delivery agencies, while simultaneously providing the levels of management information necessary to maintain higher-level control of public sector spending. However, any meaningful devolution is predicated upon an adequate flow of information required to enable central agencies to perform their overall monitoring functions. Similarly, information technology must be enhanced in order to implement new accounting models (whether accrual-based accounting or running-cost regimes) to grant government organizations greater freedom to manage their resources. IT plays two functions in enhancing transparency-it gathers management information that provides confidence to central bodies to decentralize and devolve functions, while ensuring that decentralized/devolved activities are operated to common standards. An integrated IT approach that supports the financial and human resource operations of Government is a crucial step in allowing the central departments to decentralize and devolve authority. Using common instead of fragmented IT systems for each Ministry will allow the required level of regulatory control and avoid non-transparent inconsistencies.

5.4 Public Communications

5.37 As experience in many developing countries clearly shows, the government of Jordan would benefit from a communications program that aims to build understanding and national consensus on key public sector reform issues via more systematic and better coordinated public information and education, as well as dialogue with specific interest groups such as civil servants, parliamentarians, business people, the media and academics. Some countries such as Costa Rica have managed to involve large cross-section of the citizens in public discussions of every step of public sector reforms. In so doing not only a lot of misperceptions were put to rest but the drive and enthusiasm required to pursue such a difficult task over many years were maintained and strengthened. This would prevent the kind of situation that has arisen in the past in some countries including Jordan where, public sector reforms, including privatization, have been misunderstood and misinterpreted in the media and in public discourse, and resulting opposition has often impeded the fulfillment of their aims. While a number of education and outreach initiatives on economic reforms have been adopted by individual government agencies, these remain somewhat ad hoc and have had limited impact.

5.38 In line with the cross-sectoral scope of the Government's reform agenda the proposed communications strategy would aim to establish consensus building mechanisms as well as public understanding and awareness on the need for and benefits of public sector reform, including privatization, legislative, financial and budgetary reforms. Lack of public understanding and access to accurate information about decisions and processes quickly translate into fear, confusion and high level of resistance to change, fed by particular groups anxious to protect their interests. On the contrary, keeping the public and key stakeholders informed about the process and the results being achieved builds momentum and ownership of the reform effort, which is critical in sustaining commitment to reforms on the part of policy makers, civil servants and society at large.

5.39 The program would increase citizen awareness of their rights vis-a-vis the public sector, from efficient service delivery to integrity and transparency in governance. Citizens' confidence

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and image of the public sector is weak in Jordan due to perceived inadequate perfonnance, a lack of responsiveness and accountability of public institutions. Communications can help in instilling a "customer" focus in government by establishing feedback mechanisms that give citizens a voice in service delivery evaluations.

5.40 It should ensure transparency in civil service refonn and human resource management through open dissemination of infonnation on procedures and packages as well as through two­way communications mechanisms and participation of all stakeholders. The communications program would help to reduce mmecessary social tensions and ensuring a smooth process implementation by establishing a constructive dialogue with labor unions and civil servants, in order to minimize uncertainty and manage expectations in a realistic fashion.

5.41 Finally the communications program would promote transparency in governance, integrity in public sector activities, as well as a culture of compliance and professional ethics across public institutions. The program contributes to these goals by serving as a behavior­change tool in creating incentives for transparent and compliant behavior and in raising awareness within parliament, the media and NGOs about their role in monitoring transparency and engaging civil society in the fight against corruption. Further, communications serves as a management tool in facilitating public consensus and coalition building around these highly political and socially sensitive issues.

5.5 Institutional Anchor for Reform Implementation

5.42 The wide-ranging public refonn program will take several years to implement. To guard against changing priorities it may be prudent to establish a Public Service Refonn Law, which would clearly stipulate the mandate to implement the refonns and the time frame for completion. Just like a Privatization Law may only contain a list of companies to be privatized and associated time-lines, the Public Service Refonn Law should be kept simple and focus on a list of time­bound goals (outputs). Implementation issues (inputs) should be left for line ministries to work out afterwards in a more decentralized fashion.

5.43 Overall responsibility for the coordination and progress of the public sector reform program could lie with an inter-ministerial Higher Council for Public Sector Refonn, chaired by the Deputy Prime Minister. The Council could be comprised of the ministers and heads of the key agencies supported under the reform program. The day-to-day coordination of the program and the related technical assistance could be carried out by a high-level Executive Public Sector Refonn Unit in the Prime Minister's Office, to which staff from the implementing agencies are seconded. This organizational arrangement would mirror (and benefit from) the experience of the Executive Privatization Unit. However, it is important to incorporate within the unit the ability to conduct strategic two-way communication with civil servant and other stakeholder organizations; consumer groups, NGOs and other users of public services; the press; Parliament; and civil society at large.

5.6 The Proposed Bank Program for Jordan

5.44 At the center of the proposed new Country Assistance Strategy (CAS) of the Bank is a series of Public Sector Refonn Loans (PSRLs). The objective of this follow-on to the ERDLs is

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the achievement of His Majesty's VISlOn of a modem, effective, efficient, and fair public administration.

5.45 The PSRLs are a series of single-tranche prior action loans that provide support to Jordan's development program over a three- to five-year period, based on a mutually agreed program of public resource management and reform. The loans are disbursed in the form of budget.ary support on a predictable and substantial basis. Through the PSRLs, the Kingdom can address cross-cutting issues, such as budgetary procedures, decentralization and public employm~:nt, while also improving allocation and public-service delivery in individual sectors, which all would go hand in hand with an emphasis on greater transparency and public understanding.

5.46 The medium- to long-run objective is for the public sector in Jordan to undertake the mUltiple roles of (a) a skillful facilitator of private-sector-Ied economic growth; (b) an effective enforcer of property rights and private contracts; (c) an efficient and impartial regulator of private sector activities to protect consumers from anti-competitive and fraudulent business practices and (d) the protector of the most vulnerable group-the poor. The PSRLs would support this objective.

5.47 Interventions should be preceded by institutional assessments of administrative systems and analyses of labor market trends in addition to budget scenarios. Adequate time should be allowed for implementation of participatory processes employed to nurture reform constituencies in government, the private sector, and civil society. An overview of the proposed medium-tenn program is provided in figure 5.3:

Figure 5.3: Overview of Public Sector Reform Areas

Role of State I Cost Efficiency and Budget L-.-____________ ~

~ MTEF I q Performance Budgeting I

Social Development

Education

Health

Private Sector Dev.

Local Government

Civil Service

Institutional Framework

Service Delivery

Training

I Salary and Pension

Mobility

Transparency

Legal Framework

JudiCiary

Anti-Corruption

Accountability

i Public CommunicallOn I CIVil Society

5.48 The central driving force of the public sector reform would be a focus on output (service delivery) and outcomes in terms of increased living standards and citizens' welfare. A desirable strategy would be to complement the PSRLs by carrying out periodic Comprehensive Development Reviews (CDRs) for the economy as a whole. These could be started in priority sectors such as Education, Health, Social Development, and Water. This would help to set priorities and evaluate progress on a well-informed basis.

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5.49 The World Bank can assist the Government in this effort. Moreover, to increase their impact, these annual reviews could coincide with the annual budget cycle and provide a vital input to the Government's budgetary decision-making process. The information contained in these reviews is also useful in making an assessment of the Bank's overall lending program. If Jordan's public reform program is satisfactory and is executed well, then the development impact of the Bank's lending-indeed of the entire donor assistance-is likely to be positive. In this context, the annual reviews and the PSRLs would help other donors-both bilateral and multilateral-in improving their understanding of public sector issues in Jordan. It could serve as an input to the donor community when it reviews its aid strategies.

5.50 In a sense, public sector reform in Jordan has been ongoing for a decade. Since 1994, these reforms have been supported by the Bank through the ERDL program. The PSRLs should be seen as a continuation of this successful program. Within the ERDL program itself reforms are at various stages of implementation. The PSRLs and associated technical assistance programs would lend full support to completion of these activities, and at the same time through fundamental and systemic reform address the obstacles to growth and equity that are caused by the public administration.

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Jordan at a glance POVERTY and SOCIAL

1998 Population, mid-year (ml/ltons) GNP per capita (Atlas method, US$) GNP (Atlas method, US$ billions)

Average annual growth, 1992-98

Population (%) Labor force (%)

Most recent estimate (latest year available, 1992-98)

Poverty (% of popu/atlOn below national poverly line) Urban populallon (% of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutntlon (% of children under 5) Access to safe water (% of populatIOn) IIhteracy (% of population age 15+) Gross pnmary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1977

GOP (US$ billions)

Gross domesllc Investment/GOP Exports of goods and services/GOP Gross domestic savings/GOP Gross national savings/GOP

Current account balance/GOP Interest paymentslGOP Total debt/GOP Total debt service/exports Present value of debt/GOP Present value of debt/exports

(average annual growth) GOP GNP per capita Exports of goods and services

STRUCTURE of the ECONOMY

(% of GOP) Agriculture Industry

Manufactunng Services

Private consumption General government consumption Imports of goods and services

21 41 1 338 -97 327

-04 09

390

1977-87 1988-98

77 34 84

45 04 80

1977

91 245 108 665

821 277 846

Jordan

46 1,520

69

33 45

73 71 29 10 98 13 94 94 95

1987

65 233 342 -22 144

-54 42

96.9 240

1997

13 -24 15

1987

7.3 239 114 688

756 266 598

1977 -87 1988-98 (average annual growth) Agnculture Industry

ManufactUring Services

Private consumption General government consumption Gross domesllc Investment Imports of goods and services Gross national product

Note 1998 data are prehmlnary estimates

75 -02 87 67 49 78 74 35

90 77 27 73 74

45 52 67 82 51

M. East Lower-& North mlddle-

Africa income

285 2,050

586

22 30

58 67 49 14 81 38 96

103 89

1997

70

267 512 36

271

04 37

1064 114 969

1234

908 1,710 1,557

1 1 15

58 68 38

75 14

103 105 100

1998

74

250 492 38

251

01 33

1043 00

1998 1999-03

22 05 62

1997

3.5 260 140 705

698 266 743

1997

-150 13 45 2.5

34 76

-103 08 0.4

40 1 1 37

1998

30 257 138 713

695 267 703

1998

-75 00 15 13

52 57 1 0 85 33

Development diamond·

Statistical Annex Page 1 of7

9/22/99

Life expectancy

GNP per capita

Gross pnmary

enrollment

Access to safe water

-Jordan

Lower-middle-income group

Economic ratios·

Oomesllc Savings

Trade

Investment

Indebtedness

--Jordan

Lower-middle-income group

Growth rates of output and Investment ('!o)

:~~ 40

20

o~~~~~~~--~~ .20 93 94 95-......~~ 98

--GOI ~GOP

Growth rates of exports and Imports (%)

--Exports ~Imports

• The diamonds show four key Indicators In the country (In bold) compared With Its Income-group average If data are missing, the diamond Will be Incomplete

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer pnces ImpliCit GDP deflator

Government finance (% of GOP, Includes current grants) Current revenue Current budget balance Overall surplus/deficit

TRADE

(US$ millions) Total exports (fob)

Phosphates Other minerals Manufactures

Total Imports (Clf)

Food Fuel and energy Capital goods

Export pnce Index (1995=100) Import pnce Index (1995=100) Terms of trade (1995=100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net Income Net current transfers

Current account balance

FinanCing Items (net) Changes In net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, locaIAJS$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows OffiCial grants OffiCial creditors Pnvate creditors Foreign direct Investment Portfolio eqUity

World Bank program Commitments Disbursements Pnnclpal repayments Net flows Interest payments Net transfers

Development EconomiCS

1977

145 160

391

-109

1977

249 63

58 1,380

231 131 559

89 92 97

1977

732 1,668 -936

928

-8

204 -196

724 03

1977

802

48

62

267 125 105

9

9

8

1987

-02 -08

298 26

-90

1987

933 100 180 353

2,705 460 440 481

79 100 79

1987

2,226 3,698

-1,472

-221 1,343

-349

194 155

872 03

1987

6,319 427

80

775 57

2

504 124 350

38 97 28 69 31 38

1997

30 37

328 27

-31

1997

1,834 256 190 757

4,102 761 528 916

104 114

91

1997

3,572 5,186

-1,613

-209 1,851

29

675 -704

1,962 07

1997

7,423 749 65

623 116

2

293 258 -32 180 181

62 94 71 23 47

-24

1998

31 37

322 02

-69

1998

1,810 241 197 772

3,839 751 355 832

99 104 95

1998

3,636 5,200

-1,565

-138 1,712

9

251 -260

1,409 07

1998

7,715 721

63

599 110

2

239 30 94

216

5 36 66

-30 46

-76

Inflation (%)

Statistical Annex Page 2 of7

Jordan

-GOP deflator -<>--CPI

Export and import levels (USS millions)

5,000

',000

3000

2,000

1,000

o Exports • Imports

Current account balance to GOP ratio (%)

o+r-,+r~~--~--~--~==~---·2 112 97 98 .. -II

·8 ·10

·12

·1' ·16

·16

Composition of total debt, 1998 (USS millions)

E 4,058

A· IBRO E . Bilateral B . IDA 0 - Other multilateral F • Private C - IMF G . Short·term

9/22199

Jordan - Selected Indicators Table Base-case (most likely) proJectton

Part A: Main Macro Aggregates Annual growtll rates, calculated from cOllstant19 price data

GDP (mp) per capita Total consumption per capIta

GDP at market pnces Total consumption

Pnvate consumption Gross domestic Investment (GOI)

Gross dom fixed mvestment (GDF1)

Exports (GNFS) of whIch Goods

Imports (GNFS) of whIch Goods

Savings-ill vestment balances, as percell/age ofGDP Gross DomestIc Investment

of whIch Government Investment

ForeIgn savings Gross national savings

Government savings Non government savings

Gross domestIc savings

Otller GDP mflatlon Annual average exchange rate (LCUIUSS) Index real average exchange rate ( = I 00)

Terms of trade Index (=100) Incremental capltal-output ratIo (GOI based) Import elastICIty WIth respect to GDP Money growth

Part B: Government Finance Indicators Percelltage ofGDP Total revenues. of whIch

Tax revenues Total expendItures. of whIch

ConsumptIon Deficlt( -)/Surplus(+)

Fmanclng ForeIgn Monetary sector Other domestIc

Otller Total DebtlGDPmp Total Interest paymentsffax revenues

Part C: Debt & Liquidity Indicators

Total DOD and TDS DOD (USS millions)

DOD / GDPmp ratio TDS CUSS millions) TDS / exports (XGS) rallo Total gross reserves (months' Imports G&S)

Part D: External Financing Plan (USS, milliolls)

Officl3l capItal grants Pnvate mvestment (net) Net Long ternl borrOWing excllMF Adjustments to scheduled debt servIce All other capItal flows

FinanCing Requirements (lncIIMF) of whIch current account defiCIt

1994

35% -1.6%

76% 2.3%

-06% -2.5% 20%

90% 119% -3.2% -1.0%

342% 6.5%

66% 276% 85%

191%

103%

23% 0.699

93.1 104 6

5.2 -013 80%

335% 164% 309% 174% 26%

-26% 0.4%

-23% -07%

1294% 338%

7708.3 1268%

564.3 136%

18

00 260

·3058

4478 3995

Actual

1995

05% -21%

3.9% 1.2%

-1.3% 2.8%

-3.8%

184% 10.1% 84% 18%

34.1% 7.3%

3.9% 30.1%

96% 20.6%

12.2%

34% 0701

886 1100

92 047

6.6%

35.5% 166% 332% 180% 24%

-24% 41%

-25% -40%

1193% 327%

8111.2 1246%

614 I 127%

17

00 404

-218

5364 2566

1996

-18% 0.3%

10% 31% 41%

-13 8% -74%

6.4% -54% 0.1%

-01%

30.7% 77%

33% 27.4% 43%

231%

5.4%

22% 0.709 930

1027 346

-005 0.3%

350% 17.8% 385% 214% -35%

3.5% 47%

-24% 12%

121.6% 327%

80695 1214%

656.2 123%

21

00 588

-84.5

3454 2220

1997

-15% 16%

13% 4.5% 34%

-10.3% ·67%

15% 55% 08%

-27%

267% 58%

-04% 271%

2.7% 245%

36%

37% 0709 1000 100.0 236

-210 78%

328% 161% 359% 18.1% ·3.1%

31% -0.1% -1.2% 44%

1111% 298%

7423.0 1064%

6230 114%

42

00 3609

·2258 00

539.5 674.6 -293

Estimate

1998

-06% 24%

22% 5.3% 52% 10% 07%

62% 32% 85% 27%

250% 62%

·01% 251% 02%

249%

38%

37% 0709 107.9 lOS 0

121 122

80%

322% 164% 391% 192% -6.9%

69% 37% 3.2% 00%

1117% 279%

7714.5 1043%

5990 109%

30

00 3100 2685

00 -3280 2505

-92

Statistical Annex Page 3 of7

1999

-16% -28%

12% -01% 31%

10.7% 107%

21% 36% 3.4% 32%

271% 57%

-0.6% 27.7% 43%

234%

56%

1.8% 0709 109 I lOS 0 220 267

8.0%

354% 176% 384% 16.7% -30%

30% 4.3%

-1.3% 00%

1115% 37.7%

80165 1053%

8382 149%

39

00 730

3220 0.0

680 463.0 -443

Projection

2000

03% -29%

32% -02% 13%

11.5% 115%

3.5% -42% 2.3% 24%

290% 5.8%

14% 276% 37%

239%

79%

46% 0709 1124 1030

90 075

79%

340% 185% 366% 164% -27%

27% 41%

·14% 00%

1059% 37.7%

83145 1011%

9064 154%

45

00 1150 332.0

00 65.0

5120 1153

2001

I 0"/0 0.1%

3.9% 3.0% 35% 4.1% 4.1%

3.3% 41% 25% 31%

291% 59%

21% 270%

4.2% 228%

8.5%

30% 0709 112 9 102.3

8.0 0.80

70%

336% 19.0% 35.6% 16.2% -20%

20% 22%

-0.1% 00%

1010% 359%

8445.3 960% 1002.8 162%

47

0.0 2000 1838

00 550

4388 1806

2002

15% 0.6%

44% 34% 33% 44% 4.4%

38% 47% 28% 3.6%

291% 63%

15% 276%

5.5% 22.1%

9.2%

25% 0709 1129 1019

7.1 0.82

7.0%

346% 192% 357% 16.1% -1.1%

11% 03% 08% 0.0%

95.5% 34.5%

8391.9 891% 11932 18.1%

4.8

00 2550 216

0.0 500

3266 1430

Statistical Armex Page 4 of7

Jordan - Key Economic Indicators

Actual EstImate Projected Indicator 1994 1995 1996 1997 1998 1999 2000 2001 2002

National accounts (as % GDP at current market prices)

Gross domestIc product 100% 100% 100% 100% 100% 100% 100% 100% 100%

Agriculture " 4.5% 3.7% 3.4% 2.9% 2.5% 1.9% 2.0% 2.0% 2.1%

Industry" 24.6% 24.8% 22.3% 22.2% 21.5% 22.2% 22.5% 23.0% 23.4%

Services • 54.4% 56.4% 59.6% 60.2% 59.9% 58.5% 58.1% 57.7% 57.3%

Total Consumption 89.6% 87.7% 94.6% 96.4% 96.1% 94.4% 92.0% 91.5% 90.8% Gross domestic fixed 32.8% 30.5% 29.5% 26.7% 25.0% 27.1% 29.0% 29.0% 29.0% investment

Government mvestment 6.4% 7.2% 7.7% 5.8% 6.2% 56% 5.7% 5.8% 6.2% Pnvate mvestment 277% 26.8% 23% 20.9% 18.7% 21.4% 23.2% 23.1% 22.7%

(includes mcrease 10

stocks)

Exports (GNFS)b 49.2% 53.4% 55.1% 51.2% 49.1% 486% 47.3% 46.8% 46.4% Imports (GNFS) 73.1% 75.3% 80.3% 74.3% 70.3% 70.1% 68.4% 67.3% 66.3%

Gross domestic savings 10.3% 12.2% 5.4% 359% 3.83% 5.59% 7.92% 8.48% 9.18%

Gross natIOnal savmgsC 232% 268% 284% 271% 25.1% 276% 27.6% 270% 27.5%

Memorandum items Gross domestlc product 6077 6508 6645 6976 7393 7616 8222 8799 9415 (US$ mllhon at current prices) Gross national product per 1480 1540 1520 1490 1520 1560 1600 1660 1790 capita (US$, Atlas method)

Real annual growth rates (%, calculated from 1985 pnces)

Gross domestic product at 7.6% 39% 1.0% 1.3% 2.2% 1.2% 3.2% 3.9% 4.4% market pnces Gross Domestic Income 58% 28% -3.6% 1.1% 4.2% 1.4% 2.4% 3.7% 4.3%

Real annual per capita growth rates (%, calculated from 1985 pnces)

Gross domestic product at 35% 05% -18% -15% -06% -1.6% 03% 10% 1.5% market pnces Total consumption -16% -21% 03% 16% 24% -2.8% -2.9% 0.1% 06% Pnvate consumption -44% -4.5% 1.2% 0.5% 2.3% 0.2% -1.5% 0.7% 04%

(Coll/lllued)

Statistical Annex Page 5 of7

Jordan - Key Economic Indicators (Continued)

Actual Estlmate Projected Indicator 1994 1995 1996 1997 1998 1999 2000 2001 2002

Balance of Payments (US$m)

Exports (GNFS)b 2985 3480 3663 3572 3636 3705 3895 4120 4374 Merchandise FOB 1424 1771 1817 1836 1810 1856 1964 2092 2235

Imports (GNFS)b 4395 4902 5261 5186 5200 5343 5630 5930 6248 Merchandise FOB 3002 3286 3815 3647 3414 3485 3694 3922 4164

Resource balance -1410 -1422 -1597 -1613 -1565 -1638 -1734 -1810 -1873 Net current transfers 1326 1444 1676 1851 1712 1864 1810 1829 1938 (including offiCial current transfers)

Current account balance -400 -257 -222 29 9 44 -115 -181 -143 (after offiCIal capItal grants)

Net private foreign direct 0 0 0 361 310 73 115 200 255 Investment Long-term loans (net) -306 -22 -84 -226 269 322 332 184 22

OffiCial 110 502 393 258 239 218 238 103 116 Pnvate -416 -524 -477 -484 30 104 94 81 -94

Other capital (net, Including 754 558 430 539 -328 68 65 55 50 errors and omissIons)

Change in reservesd -48 -280 -123 -704 -260 -507 -397 -258 -184

Memorandum Items Resource balance (% of -23.2% -21.9% -24.0% -231% -21.2% -21.5% -21.1% -20.6% -19.9% GDP at current market prices) Real annual growth rates ( 1985 prices)

Merchandise exports 119% 101% -54% 5.5% 32% 36% 4.2% 41% 47% (FOB)

Pnmary -0.6% 199% -10.2% 0.4% 0.5% 84% 44% 52% 5.9% Manufactures 1.9% -13.2% 5.2% 174% 60% -0.3% 47% 3.5% 40%

Merchandise imports -10% 1.8% -01% -2.7% 27% 32% 24% 31% 36% (CIF)

Public finance (as % of GDP at current

market prices)" Current revenues 334% 35.5% 35.0% 327% 32.2% 353% 339% 33.5% 34.6% Current expenditures 24.9% 25.9% 307% 301% 319% 31.0% 30.2% 294% 29.1%

(Continued)

Statistical Annex Page 6 of7

Jordan - Key Economic Indicators (Continued)

Actual Estimate Projected Indicator 1994 1995 1996 1997 1998 1999 2000 2001 2002

Current account surplus (+) 8.5% 9.5% 4.2% 2.6% 0.2% 4.2% 3.7% 4.1% 5.4% or deficit ( -) Capital expenditure 5.9% 7.2% 7.7% 5.7% 7.0% 7.3% 6.4% 6.2% 6.5% Foreign financing 0.3% 4.0% 4.6% -0.% 3.7% 4.3% 4.1% 2.1% 0.2%

Monetary indicators M2/GDP (at current market 114.0% 113.1% 109.8% 112.7% 114.9% 120.4% 120.4% 120.4% 120.4% prices) Growth ofM2 (%) 8.0% 6.5% 0.2% 7.7% 8.0% 7.9% 7.9% 7.0% 7.0% Private sector credit growth / 100% 101% 105% 268% 79.% 112% 109% 96% 86.% total credit growth (%)

Price indices( 1985 =100) Merchandise export price 85.4 96.4 104.5 100.0 95.7 94.7 96.1 98.3 100.3 index Merchandise Import price 81 6 87.6 101.8 100.0 91.2 90.2 93.3 96.1 98.5 index Merchandise terms of trade 104.6 110.0 102.7 100.0 105.0 105.0 103.0 102.3 101.9 index Real exchange rate 93.1 88.6 93.0 100.0 107.9 109.1 112.4 112.9 112.9

(US$/LCU)f Real Interest rates Consumer price Index 3.6% 2.3% 6.5% 3.0% 31% 1.5% 5.1% 2.9% 2.4% (% growth rate) GDP deflator 2.3% 3.4% 2.2% 3.7% 3.7% 1.8% 4.6% 3.0% 2.5% (% growth rate)

a. If GDP components are estimated at factor cost, a footnoote indicating this fact should be added. b. "GNFS" denotes "goods and nonfactor services." c. Includes net unreqUited transfers excluding official capital grants. d. Includes use of IMF resources. e. Should Indicate the level of the government to which the data refer. f. "LCU" denotes "local currency units." An Increase in US$/LCU denotes appreciation.

Statistical Annex Page 70f7

Jordan - Key Exposure Indicators

Actual Estimate Projected Indicator 1994 1995 1996 1997 1998 1999 2000

Total debt outstanding and 7708 8111 8070 7423 7715 8017 8315

disbursed (TDO) (US$m)'

Net dIsbursements (US$m)" -13 457 331 337 292 302 298

Total debt service (TDS) 564 614 656 623 599 838 906 (US$m)"

Debt and debt service indIcators

(%)

TDOIXGSb 185.7 167.6 151.7 135.6 140.6 142.8 1413

TDO/GDP 126.8 124.6 121.4 106.4 1043 105.3 101.1

TDS/XGS 13.6 12.7 12.3 11.4 10.9 14.9 15.4

ConcessionallTDO 39.8 42.1 43.6 46.7 474 48.3 48.7

IBRD exposure indicators (%)

IBRD DS/pubhc DS 19.5 22.3 20.6 20.0 19.8 15.4 14.5

Preferred credItor DS/public 380 35.4 36.4 389 39.3 34.6 36.9

DS(%)"

IBRD DS/XGS 2.5 2.6 2.4 2.1 2.0 2.3 2.2

IBRD TDO (US$m)d 635 736 777 749 721 790 856

Of whIch present value of

guarantees (US$m)

Share ofIBRD portfolio (%)

IDA TDO (US$m)d 71 69 67 65 63 60 57

IFC (US$m)

Loans

EqUIty and quasI-eqUIty Ic

MIGA

MIGA guarantees (US$m)

a. Includes pubhc and publicly guaranteed debt, pnvate nonguaranteed, use of IMF credIts and net short­

term capItal.

b. "XGS" denotes exports of goods and servIces, including workers' renuttances.

c. Preferred creditors are defined as IBRD, IDA, the regIonal multIlateral development banks, the IMF, and the

Bank for InternatIOnal Settlements.

d. Includes present value of guarantees.

e. Includes equIty and quasI-eqUIty types of both loan and equIty instruments.

2001

8445

131

1003

136.0

96.0

16.2

48.9

14.9

38.4

2.4

885

54

2002

8392

-53

1193

127.6

89.1

18.1

49.8

13.3

36.7

2.4

948

51

CONFIDENTIAL R0poviNo.: Type: SR

19664 JO