Public Expenditure WorkEmphasizing Substance & Ensuring Impact

Public Expenditure Analysis & Management Training Course

World BankJanuary 14, 2004Washington, DC

Vinaya Swaroop, Lead EconomistSouth Asia PREM

Objective of this Presentation

To share information on…

• How to do relevant (to the client) public expenditure

work and ensure its impact on government policies?

• An example: the Maharashtra Economic and Fiscal

Study, undertaken by the Bank together with the

Government of Maharashtra.

Maharashtra: Fiscal and Economic Study

Rationale: Why this study?

• To respond to a GoM request to provide an

objective view of the state’s finances.

• To find out whether Maharashtra can provide

enough resources to finance & maintain

ongoing (and upcoming) World Bank projects.

Work Program was two-fold…

• Providing technical assistance to the client on

public budget issues – Client’s interest, and

• Producing a formal report; analytical work to

underpin our lending program – Internal Bank

requirement.

Substance of the work was important, but equally important was the process…

• Setting the stage…In Oct.’01, a jointly organized one-day workshop to (a) exchange information; and (b) decide on the contents of the study.

• Main mission…Information collecting and sharing mission in Dec.’01; TA through several workshops.

• Assisting the client…Presentation made to the Cabinet in Feb.’02 and input provided for the budget.

• Internal requirement…July’02 – report discussion and finalization.

• State-wide dissemination…Four workshops in Oct.’02.

Two main questions analyzed…

1. What is the state of government finances in

Maharashtra?

2. How effective, efficient and equitable has public

service delivery been in a few key areas

(education, health, irrigation, power, select

agencies)?

Main findings

1. A fiscal crisis is brewing; faced with increasing public spending and declining revenues, the State is finding it increasingly difficult to meet its financial obligations.

2. A lot of taxpayers’ money is spent on power, water, cotton and sugar. Much of resources spent in these areas are fiscally unsustainable and/or unproductive, and very few benefits are reaching the poor.

3. Service delivery, however, has improved in a few select agencies—district collectorates & municipalities—where reforms have been undertaken.

An example of our approach:

How we analyzed a particular sub-topic, and

More importantly, how we presented the

findings to the client.

Subsidies and Opportunities Forgone:Three Questions

1. How much is the government subsidy to power,

cotton and irrigation?

2. Who benefits from this spending?

3. What are the opportunities foregone (that is to

say, what other activities could have been

financed from these funds)?

Power (1): MSEB (the state utility)is incurring huge financial losses

Sharp increase in power purchase costs in 1999-00 & 2000-01

Low tariffs Poor recovery of

bills High T&D losses Inability to invest

Profit/Loss of MSEB (Rs.crore)

87.97 36.65 21.05

-280

-1681

-2468

-539

-3000

-2500

-2000

-1500

-1000

-500

0

500

1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 01-02LE

Power (2): Pattern of Cross Subsidies

Nine out of ten MSEB

customers are

subsidized

Actual cost of supply to

agriculture is higher than

the average

Increasing number of

industrial consumers are

looking for alternative

sources of power

Cost and Price of Power (Electricity), 2000-01

3.4

2.9

4.0

0.9

2.3

4.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Cost ofPower

Avg. RetailTariff

Commercial Industrial Residential Agriculture

Rs. p

er kW

h

__________________________________________________________________

Power Subsidies (3): Who are the beneficiaries?

Subsidy primarily accrues to farmers with pump-sets

Rich farmers growing cash crops, mainly sugar, are the prime beneficiaries

Electricity Usage by Farmers

020406080

100120140160180

Total Farmers Farmers withPumpsets

Cash Crop Farmers

in la

khs

22 lakhs (13%)

170 lakhs (100%)

5.5 lakhs (3%)

Irrigation & Non-Irrigation Water

While cost recovery has improved, there is still a big shortfall

The shortfall would look much worse if interest payments are included. In 2001-02, the budgeted interest is Rs. 1,200 crores

Irrigation: Recovery of O&M cost through user charges

431

379

433

490

82113

173195

0

100

200

300

400

500

600

1997-98 1998-99 1999-00 2000-01

Rs.

in c

rore

s

19% 30% 40% 40%

Canal Irrigation: Who are the beneficiaries?

Seventy percent of canal irrigation benefits accrue to farmers with average farm holding of > 2 ha

Ten percent of canal irrigation benefits accrue to farmers with average farm holding of < 1 ha

Source: NSS 48th round

Canal Irrigated Area -- Distribution by Farm Size

28

2024

10

37

05

10152025303540

<.5 .6--1.0 1.1--2.0 2.1--4.0 4.1--10 >10

Farm Holdings (in hectares)

Per

cent D

istribu

tion

Forgone Opportunities

Subsidies & Other Spending (Per Beneficiary), 2000-01

4615

1487

151

9250

0

2000

4000

6000

8000

10000

Pow er Subsidy toFarmers w ith Pump-

sets

Primary EducationSpending

Cotton Subsidy Total HealthSpending

Rup

ees

Impact of our work…

I. FY’03 Budget: Major Policy Announcements

“…Government is fully committed to implementing the reforms set

out in the MTFRP and to achieve the fiscal targets set therein…

Government proposes to introduce the Fiscal Responsibility Bill in

the Legislature soon.”

A White Paper outlining GoM’s strategy (with clear milestones) for

power sector reform to be published by June 2002. In particular,

“responses will be invited to the suggestions relating to unbundling,

privatization of distribution and rationalization of tariff.”

FY’03 Budget: Major Policy Announcements (contd.)

“the State Government will procure cotton at the central

government’s minimum support price and also permit the

Cotton Corporation of India and others to purchase cotton in the

State.”

“…No financial support to new commercial units in the

cooperative sector…New entrants in the sugar and spinning mill

sectors to take over the ailing units rather than set up new units

in the state.”

II. Actions taken since the FY’02-03 Budget announcement…

• A draft Fiscal Responsibility legislation has been prepared.

• A White Paper on power sector reforms has been prepared and approved by the Cabinet after extensive stakeholder consultation.

• The monopoly element of the Cotton Procurement Scheme has been removed and the minimum support price (MSP) of GoM is linked to the MSP of GoI.

In conclusion, reasons for our success…

• First & foremost, listening to the client, that is (a) deciding

the work program in consultation with the client; and (b)

putting the client’s agenda first; then Bank’s own internal

agenda;

• Solid analytical work done by experts;

• Sharing information through frequent seminars &

workshops;

• A well conceived dissemination strategy.