1 Public sector reforms Manuel Hinds Madagascar, June

2 The strategy Freeing the public sector from tasks that the private sector could do to allow it to focus on social development Improving the efficiency of the government Facilitating the interface between the government and the private sector

3 Freeing the private sector Carrying out tasks that the private sector can do encumbers the work of the government… Investments go into the fiscal deficit Management problems And also encumbers the work of the state- owned enterprises… Can invest only what the fiscal deficit allows Subject to the rigid government controls This is the worst of both worlds

4 One basic principle in El Salvador: not monopolies The first objective of privatizations was to improve the efficiency of the services… Thus, they had to be carried out only after creating competitive markets Three laws opened telecommunications, electricity and pensions to competition Then the privatizations took place

5 The results in telecom The process was managed from without the telecom company Now there are: 9 companies in fixed lines 4 in cell phones 15 international call carriers More than 50 companies of value added The number of phones more than tripled in 4 years

6 The results in electricity Managed by the institution that controlled electricity supply Results were not that good Privatization was left half-baked The state-owned enterprise kept the monopoly of generation through contracts with private generators Thus, only distribution was privatized… The lack of competition in generation has kept prices high The lesson: never trust the liberalization of a sector to the institution that would be dismantled in the process

7 The results in pensions There are two companies managing pension funds The savings of the future pensioners are going up fast

8 Improving the efficiency of the government Revising procedures in all areas The EDUCO program to increase the efficiency of education The transformation of the Ministry of Public Works From 16,000 workers to 450

9 The fiscal impact The sale of telecom and electricity generated revenues, which were used to: Repay debts Create a fund to provide resources to social projects with the interests The most beneficial impact, however, was transferring the responsibility for investment in those sectors to the private sector The pension reform causes fiscal pressures

10 The cash pressure of the pension reforms The pension reform generates a fiscal pressure because: Some workers are too old to go into the new system… All the contributions go to the new system… While the government institutions have to keep on paying the old pensions and that of those that did not go into the new system and are retiring today

11 The fiscal adjustment While these reforms were implemented, the fiscal deficit was reduced to an average of 1.7% of GDP from 1995 to 2000 In 2001, there were two earthquakes that caused severe damages to the countrys infrastructure. The reconstruction increased the deficit to 3.4% of GDP Once the reconstruction is finished, the deficit can go back to its previous levels because the difference is strictly in reconstruction investment