Report No.48620-YF Report No. 48620-YF Serbia Doing More with Less Addressing the Fiscal Crisis by Increasing Public Disclosure AuthorizedPublic Disclosure Authorized Public Sector Productivity June 16, 2009 Poverty Reduction and Economic Management Unit South East Europe Country Unit Europe and Central Asia Region Serbia withLess DoingMore Public Disclosure AuthorizedPublic Disclosure Authorized Public Disclosure AuthorizedPublic Disclosure Authorized Document of the World Bank Public Disclosure AuthorizedPublic Disclosure Authorized FOREWORD This report is based on the findings of a series of missions to Serbia between December 2008 and May 2009. The report was prepared by William Dillinger (Task Manager) with the assistance of Lazar Sestovic, Marina Wes and Ron Hood. Sectoral chapters were contributed by Anita Schwarz, Daniel Dulitzky, Ana Djordjevic, Juan Diego Alonso, Ivana Aleksic, Boryana Gotcheva, Sanja Madzarevic-Suj ster, Carolina Monsalve and Martin Humphreys. The peer reviewers were Debbie Wetzel and Ardo Hansson. The report was produced with the participation of a wide range of Serbian -counterparts. These included officials and staff of the Ministries of Finance, Health, Education, Labor, Economy, and Infrastructure, and the Health Insurance Fund, Public Enterprise Roads of Serbia and the Pension Fund. Comments from the International Monetary Fund (IMF) are also gratefully acknowledged. Serbia: Doing More with Less Addressing the Fiscal Crisis By Increasing Public Sector Productivity Executive Summary ......................................................................................................... 1 Introduction ......................................................................................................................... 4 Recent Economic Trends ................................................................................................. 4 The IMF Standby Arrangements ..................................................................................... 5 The Existing Distribution of Public Expenditure ............................................................ 7 Pensions ............................................................................................................................... 9 The Serbian Pension System ........................................................................................... 9 Directions for Reform.................................................................................................... 14 Health................................................................................................................................. 19 The Serbian Health Care System ................................................................................... 20 Directions for Reform.................................................................................................... 27 Education., ........................................................................................................................ -30 The Serbian Education System ...................................................................................... 31 Directions for Reform.................................................................................................... 36 Social Assistance ...................... ........................................................................................ 44 Serbia’s System of Social Assistance ............................................................................ 44 Directions for Reform.................................................................................................... 48 Enterprise Subsidies .......................................................................................................... 52 Agricultural Subsidies ................................................................................................... 53 Subsidies to State Enterprises ........................................................................................ 54 Roads ................................................................................................................................ -56 The Serbian Roads Sector .............................................................................................. 57 Directions for Reform .................................................................................................... 62 Railways ............................................................................................................................ 71 Directions for Reform .................................................................................................... 78 Summing up ....................................................................................................................... 83 Tables Table 1: Key Economic Indicator....................................................................... 4 Table 2: Beds per 100. 000 Population................................................................. 24 Table 3: Physicians per 100. 000 Population.......................................................... 25 Table 4: Utilization of DZ Space. in percent of total square meters ............................... 28 Table 5: Serbia’s Basic Education System: Main Indicators., ..................................... 32 Table 6: Trends in Education Expenditure. 2005-2008 .............................................. 33 Table 7: PISA Results for Serbia and a Selection of Countries. 2003 and 2006 ................. 34 Table 8: Current Regulations on Class Size, by Level of Education..................... 39 Table 9: Spending on Non-Contributory Social Assistance and Child Benefits and Services in Serbia. 2005-2009 (RSD mn) ................................................... 45 Table 10: Spending on Social Protection in Serbia and EU New Member States ................ 48 Table 1 1: Sources of Financing of Cash Maternity Benefits in the EU Member States., ....... 50 Table 12: Spending by Types of Veteran Benefits in 2009 .......................................... 51 Table 13: PEPS: Trends in Source and Uses of Funds, Nominal RSD, mn., ...................... 60 Table 14: Cumulative Maintenance Backlog and Annual Expenditure Needs ..................... 62 Table 15: Estimated Cost to Budget for Corridor X in Three Scenarios. 2009-2014 ............. 64 Table 16: Cross Country Comparison of Toll Rates. 2008 .......................................... 68 Table 17: Annual Vehicle Registration Fees. 2007 ................................................... 68 Table 18: International Indicators of Railway Productivity, 2007 .................................. 73 Table 19: Infrastructure and Rolling Stock Maintenance in 2006-2007 ........................... 74 Table 20: InternationalComparison of Average Revenue per Traffic Unit ........................ 76 Table 2 1: Summary of Measures and Fiscal Consequences......................................... 84 Figures Figure 1: Composition of Consolidated Central Government (Expenditure 2008) .................. 7 Figure 2: Changes in Central Government Program Funding. 2007.2009 ........................ 8 Figure 3: Benefit Rates for Full Career Old Age Workers Retiring at Age 65 ................... 12 Figure 4: Percentage of Population > 65 ............................................................... 13 Figure 5: Distribution of Beneficiaries by Age in Employee Pension Fund. 2007 ............... 13 Figure 6: Projected Trends in Pension Expenditures ................................................ 14 Figure 7: Ceilings on Early Retirement in High Income Countries ................................ 16 Figure 8: Reduction in Benefit per Year of Early Retirement in High Income Countries....................................................................................... 16 Figure 9: Age of Retirement in OECD Countries .................................................... 17 Figure 10: Life Expectancy at Birth in EU and Serbia ................................................ 21 Figure 1 1: Death Rates in EU and Serbia ............................................................... 22 Figure 12: Trends in Spending of MoH and HIF (constant RSD mn of 2008) .................... 22 Figure 13: Trends in HIF Spending by Function (constant RSD ths of 2008) ..................... 23 Figure 14: HIF Spending by Category (planned 2009) ................................................ 23 Figure 15: Bed Occupancy Rates (2007) ................................................................ 25 Figure 16: Avg . Length of Stay for Selected Treatments in Different Locations................. 26 Figure 17: Capacity Utilization in Primary Health Care Facilities ................................. 27 Figure 18: Public Expenditure as Percent of GDP: Serbia and European Countries ............ 33 Figure 19: Trends in Monthly Education Salaries (RSD) ............................................ 36 Figure 20: Evolution of the number of student and classes in Primary Education............... 37 Figure 2 1: Evolution of the number of students and classes in Secondary Education............ 37 Figure 22: Evolution of the average class size, by level of education .............................. 37 Figure 23: Trends in Major Subsidy Programs ........................................................ 53 Figure 24: Condition of the Main and Regional Road Network, 2008 ............................. 58 Figure 25: Trends in Injuries and Fatalities ...........................................................