Sustainable wage bill practices

Sustainable wage bill practices Maintaining fiscal discipline under pressure St. LuciaNovember 2-3, 2009 Nick Manning Manager Public Sector & Governance Unit Latin America and the Caribbean

Summary Part 1: Maybe there is a problem When to worry Headcount data are weak Fiscal data are suggestive The environment is tough –and getting tougher Part 2: What are the choices? Choosing the target Numbers Policy Organizations Part 3: Distinctive challenges Small economies Public sector employment as social policy Part 4: Speculations Increase the awareness Consider traditional remedies Install “speed governors” Part 5: Conclusion

Part 1: Maybe there is a problem When to worry Headcount data are weak Fiscal data are suggestive The environment is tough – and getting tougher

1. When to worry No simple metrics for reviewing the sustainability of the wage bill. The goal is a level of pay consistent with the operation of a motivated and professional public service at a scale the country can afford on a sustained financing basis. Comparisons with GDP and population are useful only as guides to judgment.

1. When to worry (cont.) • Public sector wage bill as % of total general government expenditures • As a rule of thumb, can be concerning when this ratio rises over 25% • Average government wages compared to per capita GDP • Indicator of whether government employees are under or over-paid in comparison to the prevailing standard of living. • Number of government employees as % of total population (or, better, % of total employment) • If an "employer of last resort", governments take on large numbers of public servants in the lowest grades on meager wages. • Recruitment growth rate • Compare to growth in GDP, revenue or population

2. Headcount data in OECS are weak Data on number of government employees difficult to obtain: • HRM systems not fully developed, • Data may exclude employment in public bodies, and information on non established and contracted personnel.

2. But some indicators are available at the aggregate level Source: World Bank staff calculations

3. Fiscal data are suggestive Commonwealth Caribbeanstates are averagespenders Source: IMF Government Financial Statistics and World Bank’s World Development Indicators.

3. But wage bill is higher than comparators Average wage bill in the Commonwealth Caribbean has been higher than the average for small states. Some countries present considerable increases in the last year… Size of Government and Wage Bill in Small States (percent of GDP; average 2000-2004) Evolution of Personnel Expenditures in Grenada 2006-2008[1] (Millions of EC$) Source: Medina and Ota (2008) [1]A retroactive salary increase of EC$ 21.9 million, owed since 2007, was disbursed in 2008

3. Some signs of an increase – and certainly no reductions Source: IMF (2009), Central Bank of Barbados (2009), Ministry of Finance of Grenada (2009)

3. Proportionate to revenues, the wage bill is high * Similar Small States include: Bahrain, Barbados, Belize, Bhutan, Cape Verde, Cyprus, Fiji, Guyana, Jamaica, Lesotho, Luxembourg, Malta, Samoa, San Marino, Seychelles and Swaziland. Source: IMF (2009), Central Bank of Grenada (2009), World Development Indicators (2008)

3. Higher than some comparators Source: IMF (2009), Central Bank of Barbados (2009), Ministry of Finance of Grenada (2009), World Development Indicators (2008)

3. The result is lower non-salary expenditures Source: IMF (2009), Central Bank of Barbados (2009), Ministry of Finance of Grenada (2009), World Development Indicators (2008)

4. The environment is tough and getting tougher Most OECS economies into recession in 2009, without any fiscal space; Recovery in 2010 will be slow, and not significant until 2011. Source: Economist Intelligence Unit (September, 2009)

4. The environment is tough and getting tougher (contd.) Full recovery in key sectors not expected to arrive before 2011 Earnings from the tourism sector, the region’s main source of employment and foreign exchange, is expected to fall dramatically in 2009-2010. In those countries that do not rely heavily on tourism, such as St Vincent and the Grenadines and Dominica, growth will be held back by the uncertain future of the banana industry. Source: Economist Intelligence Unit (September, 2009)

Part 2: What are the choices? Choosing the target Numbers Policy Organizations Pay

1. Focusing on staff numbers • Remove ghosts and double-dippers, and fraudulently appointed staff or staff with forged qualifications • Likely rather few in the OECS • Retire over-age staff (working pensioners) • Review/rationalize lower grade/support staff • Politically tough, and not big numbers • Furloughs • One-off measure, and may need to be repeated in future years • Recruitment freeze • Obvious consequence of uneven vacancies • Attrition (retirement, resignation, death) is generally around 3-5% per year which represents a significant saving and attracts less political attention than formal retrenchment strategies.

2. Focusing on policy • Span of OECS public sector functions matches those of larger countries • mandate is wide in relation to capacity • problems in aggressive devolution to the private sector • local private sector is weak, consisting mostly of small, family owned, risk averse, under-capitalized trading firms. • Limited entrepreneurial and management skills. • Private banks arguably reluctant to lend to businesses • A major driver is the history of private sector dependency on the government • attracting foreign direct investment to offset the weaknesses of the local private sector have been successful in tourism and offshore financial services • investments in other sectors have been more difficult to attract due to the small size of the local economy; high cost structure; vulnerability to natural disasters; deficiencies in the regulatory framework

2. Focusing on policy (cont.) • Two broad options for restraining policy ambitions • Expenditure reviews (owned by Ministry of Finance) • (alias “Strategic Policy Reviews” – Australia; “Strategic Programme Reviews – Canada; “Interdepartmental Policy Reviews – the Netherlands; “Spending Reviews” – UK) • Functional reviews (owned by the sector ministry or Finance) • Track record of both is mixed – but occasionally impressive. • Both rely on assessments that are led from outside of the units under review, with terms of reference set independently and extensive use of external experts.

3. Focusing on organizations • Process simplification/reengineering, IT investments, citizen service centers) • consolidation of ministries and departments • functional reviews of ministries and reorganization • elimination/merging of single-issue ministries and associated overhead costs • reducing mid-level management ranks through reorganization and broadening spans of control • administrative function consolidation

4. Focusing on pay • Review/rationalize allowances • Payroll audits • Wage reduction • Difficult politically – but it has been done • Typically, downsizing via severance payments or via attrition • Common problems include: • The lack of a systematic basis for establishing salary scales in the civil service relative to those in the public enterprise (and statutory body) and the private sector • Persistent fiscal pressure on governments, which works against the establishment of systematic manpower planning and pay • Resistance by civil servants to comprehensive reform packages and to merit-based pay • Political resistance to reforms because of concerns about higher costs or increased independence of the civil service

Part 3: Distinctive challenges Small communities Public sector employment as social policy

1. Small communities – many intricate connections SBE: When I need a decision or action from government that has a bearing on my company’s Business, I approach __________. Source: WB OECS Institutional and capacity review, 2001

2. Public sector employment as social policy Commonwealth Caribbeangovernmentshavetraditionallyacted as theemployer of last resort (World Bank Technical Paper #259) Politicalexpectations of manypeoplethatthestatewillalwaysact as anemployer of last resort Recent IMF mission to the OECS stressed that “with very high public debt, OECS governments have little fiscal leeway to maintain their role of employer of last resort” and needed to develop well-targeted social policies instead (IMF Country Report No. 09/175, June 2009).

Part 4: Speculations Increase the awareness Traditional remedies have some short term logic Install “speed governors”

1. Increase the awareness • Small countries are different: likelylargergovernment role. • Limitedmanpower and lack of economies of scaleincreasetheinfrastructurecosts of publicgoods and services • Hardertocontractoutthedelivery of publicservices. • However, thewagebill can crowdoutotheroperatingexpenditure, and consequently, efficiencymaydrop. • Thereis a needtoexplainthissituationtothepublic and theworkforce – thekeyistopresentit as a multi-dimensional problem: • Staffing numbers • Policy ambitions • Organizational inefficiencies • Pay and allowances

2. Traditional remedies have some short term logic Recruitment freezes have had a bad press – but not a bad plan Negotiating wage and allowance freezes with unions through social partnerships may help in the short and medium term Minimize new contracted or non-established personnel, allowing for special exemptions to be cleared by highest political authority

3. Install “speed governors” • Set binding rules that gradually drive down overheads: • Limit the proportion of General Government Expenditure on salaries • Develop league tables showing administrative overheads between comparable organizations • Set automatic productivity cuts (alias “efficiency dividends

Part 5: Conclusion • The evidence is hazy but suggestive - maybe there is a growing problem concerning sustainability of the wage bill • The economic environment is getting more challenging • There are a range of approaches for constraining the wage bill • But let’s not dismiss the distinctive challenges of small economies with a long history of public sector employment • It’s worth thinking about: • Getting the message out to the public – emphasize that this is a multi-dimensional problem • Resorting to traditional temporary remedies • Installing “speed governors”

Sustainable wage bill practices