Socialist people's Libyan Arab Jamahiriya : a public expenditure review (Vol. 1 of 3) : Synthesis

Report No.: 45019-LY Socialist People’s Libyan Arab Jamahiriya A Public Expenditure Review (In Three Volumes) Volume I: Synthesis September 30, 2009 Social and Economic Development Group Middle East and North Africa Region Document of the World Bank  CURRENCY EQUIVALENTS (As of September 30, 2009) Local Currency Unit = Libyan Dinar Exchange Rate (1.27 LD per USD) FISCAL YEAR 2009 July 1–June 30 WEIGHT AND MEASURES Metric System ACRONYMS AND ABREVIATIONS ABC Activity-based costing GPCT General People’s Committee for Transport AMR Automatic Meter Reading (Ministry of Transport) BCM Billion cubic meters GSC General Service Company BPC Basic Public Congresses GWA General Water Authority Bpd Barrels per day GWh Gigawatt hour CAPEX Capital expenditures HALE Healthy life expectancy CBL Central Bank of Libya HC Hydrocarbon CCGT Combined Cycle Gas Turbine HDI Human development index CERA Cambridge Energy Research Associates HFO Heavy fuel oil CFL Compact fluorescent lamp HIB Housing and Infrastructure Board CMM Collection management and metering HIV Human immunodeficiency virus CPI Consumer price index HUC Housing and Utility Corporation DBO Design-build-operate HUGC Housing and Utilities General Corporation DPAT Territorial divisions in charge of planned IBT Increasing block tariff investments IEA International Association for the Evaluation of DSM Demand-side management Educational Achievement ECA Energy conservation agreements IMF International Monetary Fund EPA Effective project approval IMR Infant mortality rate FAO UN Food and Agriculture Organization IPP Independent power projects FSA Fiscal sustainability analysis IT Information technology GBHCP General Body for Health Care Planning Km Kilometer GCHU General Corporation for Housing and Utilities Km2 Square kilometer GCP General Counsel for Planning KV Kilovolt GDP Gross domestic product kWh Kilowatt-hour GEA General Environment Authority l/c/d Liters consumed daily GECOL General Electricity Company of Libya LD Libyan dinar GER Gross enrollment rate / gross enrollment ratio L/km Liters per kilometer GFS Government Financial Statistics LFO Light fuel oil GMMR Great Man Made River LRAIC Long run average incremental cost GMMRA Great Man Made River Authority LRMC Long-run marginal cost GNI Gross national income M2 Square meters GoL Government of Libya Mbpd Million barrels per day GPC General People’s Committee MCM Million cubic meters GPCA General People Committee of Agriculture MENA Middle East and North Africa GPCEWG General People Committee of Electricity, Water, MIC Middle-income country and Gas MLD Millions of Libyan dinars GPCF General People’s Committee for Finance MMBTU Million British thermal units GPCHE General People’s Committee for Health and MTEF Medium-term expenditure framework Environment MW Megawatts GPCP General Peoples’ Committee for Planning RBA Roads and Bridge Authority GPCPF GPC for Planning and Finance RR Required revenue MWEG Ministry of Electricity, Water and Gas RUC Road user charges NCP National Counsel for Planning SDR Special Drawing Rights NCEP National Center for Education Planning SEC Secondary Education Certificate NDPs National Development Plans Shaabiat Municipalities (singular: Shaabia) NHGDP Non-hydrocarbon GDP SMEs Small and medium enterprises NHPB Non-hydrocarbon primary fiscal balance SRMCs Short-run marginal costs NOC National Oil Company TCF Trillion cubic feet NPC National Planning Council TDS Total dissolved solids NPV Net present value TIMSS Trends in International Mathematics and Science NWC National Water Company Study NWWC National Water and Wastewater Company TOU Time-of-Use (tariff) O&M Operations and maintenance TVET Technical and Vocational education and training OECD Organisation for Economic Co-operation and U5MR Under-five mortality rate Development UfW Unaccounted for water OPEX Operational expenditures UN United Nations ORF Oil Reserve Fund UNAIDS United Nations Joint Programme on HIV/AIDS Pb Per barrel UNDP United Nations Development Programme PBC Performance-based contracting UNESCO United Nations Educational, Scientific and PCSC Programme Complémentaire de Soutien à la Cultural Organization Croissance UNICEF United Nations Children’s Fund PER Public Expenditure Review Vpd Vehicles per day PHC Primary health care WDI World Development Indicators PIMS Public investment management system WDP Wealth Distribution Program PIP Public Investment Plan WEG Water, electricity, and gas PISA Program for International Management in Higher WHO World Health Organization Education WHOSIS World Health Organization Statistical PMO General Peoples Committee or Prime Minister’s Information System Office WSS Water supply and sanitation PPA Power purchase agreements WSSP Water Study and Strategy Proposal–2025 PPA Preliminary project approval WTO World Trade Organization PPPs Public-private partnerships WWW Water and waste water PSP Private sector participation Vice President: Shamshad Akhtar Country Director: Mats Karlsson Sector Director: Ritva S. Reinikka Sector Manager: Farruk Iqbal Lead Economist and Task Team Leader: José R. López-Cálix TA B L E O F C O N T E N T S A C K N O W L E D G E M E N T S ........................................................................................ III S Y N T H E S I S ......................................................................................................................... 1 MAIN MESSAGES OF THE REPORT ................................................................................................. 7 MESSAGE 1: MAKE PUBLIC EXPENDITURE MORE ACCOUNTABLE .............................................. 8 MESSAGE 2: PRESERVE FISCAL SUSTAINABILITY IN THE MEDIUM TERM................................. 11 MESSAGE 3: ACHIEVE HIGH-QUALITY PUBLIC EXPENDITURE MANAGEMENT ......................... 13 Level 1. Setting an Aggregate Expenditure Ceiling Target .............................................. 14 Level 2. Allocating Resources to Sectoral Priorities Efficiently ...................................... 16 Level 3. Modernizing the Public Investment Management System for an Enhanced Technical Efficiency ......................................................................................................... 16 MESSAGE 4: RAISE SELECTIVENESS WITH A PRO-PRODUCTIVE BIAS IN CHOOSING PUBLIC PROJECTS ...................................................................................................................................... 23 BALANCING THE EFFICIENCY AND QUALITY OF EDUCATION...................................................... 25 IMPROVING HEALTH SERVICES FOR ALL..................................................................................... 27 INCREASING THE EFFICIENCY OF THE POWER SECTOR IN LIBYA............................................... 29 REBALANCING ROAD MAINTENANCE AND NETWORK DEVELOPMENT ...................................... 31 MAKING WATER USE EFFICIENT AND SUSTAINABLE ..................................................................... 33 FINAL REMARKS AND NEXT STEPS ................................................................................................ 35 i ii ACKNOWLEDGEMENTS This review is the result of a significant team effort. As such, it has benefited from an array of invaluable contributions. The review is based primarily on data collected during November 2007 and April 2008 World Bank missions and extensive comments provided by Libyan Authorities during a December 2008 seminar held in Tripoli. The Synthesis Report, Volume I, was prepared by José R. López-Cálix (Task Team Leader), based on contributions from the team and following valuable suggestions from multiple peer reviewers and Bank management. He also wrote Chapters 1, 2, 4, and 10 in the Main Text contained in Volume II, while benefitting from contributions of Jorge Shepherd (fiscal trends), Khalid El Massnaoui (poverty map), Mouloud Mokrane (public investment management), and Olivier Le Ber (intersectoral prioritization) who provided valuable written contributions. Moataz El-Said and Khaled Sakr wrote Chapter 2 on fiscal sustainability. Khalid El Massnaoui wrote Chapter 3 on civil service reform. Hafedh Zaafrane, with contributions from Adriana Figueroa, wrote Chapter 5 on education. Heba Elgazzar wrote chapter 6 on health. Paul Noumba and Mohab Awad Mokhtar Hallouda wrote chapter 7 on power. Terje Wolden, with contributions from Olivier Le Ber, wrote Chapter 8 on roads. Nabil Chaherli and Mohamed Lahouel wrote Chapter 9 on water. Chapter 10 was a truly collective effort with all sector specialists, who provided written inputs. Mats Karlsson, Ritva Reinikka, and Marouane el Abbasi provided priceless guidance and enthusiasm throughout the process (all World Bank). Sheldon Annis and Diane Stamm edited the English version. Bank services edited the Arabic draft version of Volumes I and II. Volume III has the annexes (several contributors) and statistical appendix (prepared by Soumia Driouch and Khalid Alouane with contributions from Bachir Abdaym, Jorge Shepherd, and Khalid El Massnaoui). Salvatore Schiavo-Campo (public investment), Ajay Tandon (health), Caroline Van den Berg (water), Robert Beschel (civil service reform), Ahmed Shawsky (water), Ananda Covindassamy (power), Sajitha Bashir (education), and Henry Kerali (roads) provided precious guidance and multiple suggestions as internal peer reviewers of the draft chapters. Valuable input and suggestions were also received at various stages of the project from Roberta Gatti, Farruq Iqbal, Miria Pigato, Mustapha Nabli, Paola Ridolfi, Philippe de Meneval, Mehdi Benyegoub, and Michel Bellier. The draft report was also reviewed by a Bank quality learning review team, which found it of good quality. Production support at various stages was provided by Soumia Driouch, Khalid Alouane, Sheela Reddi, Angela Hawkins, and Ludmila Melnikova. Marouane El Abassi provided excellent operational support to field research in Tripoli. Warm thanks go to the Libyan counterpart team headed by Dr. Mahmoud Gebril, former Secretary of the Libyan National Planning Council, whose detailed guidance and suggestions were priceless, and Dr. Abdelhafid Mahmud Zlitini, Secretary of the General People’s Committee for Planning and Finance, for its enthusiastic support to the refining of the content and finalization of the work. Many thanks, as well, to the team in charge of providing extensive analytical support, data, and written input to this report, headed by Eng. Khaled El-Ghuel, Under-Secretary of the General People’s Committee for Planning and Finance, whose astute remarks contributed greatly to raising the quality of the report and ensuring that it reflects Libyan reality. Many thanks also to the rest of the counterpart team integrated by Dr. Ahmed Jallala and Ahmed Jehani, extraordinarily supported by Al Mois Ben Mostafa Ben Esmael. The review also benefited from multiple contributions from the following Libyan counterparts: Secretary of the Libyan National Planning Council: Dr. Mahmud Gebril Ibrahim. Secretary of the General People’s Committee for Planning and Finance: Dr. Abdelhafid Mahmud Zlitini. Secretary of the General People’s Committee for Education: Dr.Abdelgader Mohamed Albagdadi. Secretary of the General People’s Committee for Electricity, Water and Gas: Eng. Omran Abukrae. iii Secretary of the General People’s Committee for Transportation: Dr. Mohamed Abuagela Elmabruk. Secretary of the General People Committee for Agriculture, Animal and Marine Wealth: Dr. Abubaker Al Mabruk Al Manssuri. Secretary of the General People Committee for Health and environment: Dr.Mohamed Abuagela Rashed. Secretary of the General People’s Committee for manpower, training and employment: Eng. Maatoug Mohamed Maatoug. Secretary of the General People’s Committee for of Educational Technologies Authorities: Dr. Abulgassem Al Badri. Secretary of the Administration Committee of the General Union of Commerce and Industry Chambers, Jumah Ali Al Usta. Former Secretary of the General People's Committee for Finance: Mohamed Ali El-Huwej. Secretary of Control Center of Private schools, Dr. Idriss Hafid Al Mabruk. Secretary of the General People’s Committee for Firms Privatization and Economic Public Institutions, Dr. Mahmud Ahmed Al Ftessi. Secretary of Administration Committee of the General Company for Gas, Lotfi Abdelkrim Liyass. Secretary of the Administration Committee of the Execution Board of Renewable Energy Eng. Fathi Mohamed Abugrad. Secretary of the Administration Committee for Roads and Bridges Authority Dr. Mohamed Ashtewi Ben Omar. Secretary of Administration Committee of Financial Money Markets, Soleiman Salim Ashahumi. Other participant officials whose contributions are deeply acknowledged include: Rashed Al Ftessi, Ali Abuagela, Omar Khalifa Al Mughrabi, Muftah Soussi Alfuriani, Mohamed Hassein Laiyass, , Nabil Amhemed Al Ganga, Eng. Bashir Al Mehdi A-Jledi, Eng. Ahmed Hamed Arabti, Eng. Hadoud Abdelnabi Hadoud, Eng. Nasser Amar Nasser Ibrahim, El Boueshi Maatoug Ellafi, Mohamed Meihoub, Dr. Fatima Youssef Wafa, Dr. Ali Al Mabrouk Aboukrin, Balam Abdelkader Balnour, Ihab Fathi Almoufti, Mohamed Ali Khalat, Abdllah Miftah Attabouli, Jalal Attahar Arouj, Ahssan Ben Houcine, Dr. Houcine Amine Abou Kadoura Al Amami, Assanoussi Abdelali Al Fadil, Dr. Al Hadi Mohamed Asshiri, Nassr Al Bahloul Salama, Mohamed Khalid El Ghuel, Hazem Mohamed Azzantani, Abdeladim Rajab Ben Attif, Ahmed hamd Arabti, Mostafa Abdellah Al Boussifi, Nassr Amer Nassr Ibrahim, Mohamed Al Hachemi Azouz, Dr. Mohamed Ali, Milad Abdellah Zaid, Dr. Abdelhamid Attahir Al Kamoudi, Ibrahim Salem Falah, Balam Abdelkader Balnour, Al Hadi Mohamed Al Miloudi, Abdenasser Yassine Al Atram, Massoud Omar Salim, Salim Salah Ben Nassir, Adil Bachir Dawa, Jamal Khalifa Al Qaddafi, Ali Mohame Ben Ismail, Mohamed Houcien Alfaar, Farj Ali Al Omari, Ali Abou Ajila Al Qowayrah, Omar Khalifa Al Maghirbi, Dr. Mostafa Mohamed Bou Chaala, Hamam Al Fassi, Amin Abdellah Asharif, Nabil Amhamed Al Kanka, Faraht Omar Ben Kadara World Bank: Jose R.Lopez – Calix, Benedicte Leroy De La Briere, Hebatalla Abdelhamid Elgazzar, Terje Wolden, , Paul Noumba Um, Hafedh Zaafrane, Ritva S. Reinikka, Marouane El Abassi, Khalid El Massnaoui, Olivier P. Le Ber, Mohamed El Hadi Lahouel, Ahmed Jehani, Mohab Awad Mokhtar Hallouda, Mats Karlsson, , Soumia Driouch. Finally, special thanks to Dr. Ali Khuderi Merza, UNDP advisor to the General People’s Committee for Planning and Finance. iv SYNTHESIS 1. Since the lifting in 2003/04 of the United Nations (UN) embargo, and particularly the presentation of the 2008–12 Development Program (DP), the Libyan Arab Jamahiriya has reaffirmed its intention to shift its economic strategy. So far, hydrocarbon wealth has supported living standards and socioeconomic development that compares favorably with other Middle East and North Africa (MENA) and oil-producing countries. On the economic front, strong growth is supported by fiscal and balance-of-payment surpluses. On the social front, a Wealth Distribution Program (WDP) aims to distribute part of the hydrocarbon wealth to the population; however, in a context of declining oil prices, details on the size, form, and other modalities of the program were postponed by the General People’s Congress in its March 2009 meeting. In any case, the country now aims to optimize its public expenditure to create more and better-paid jobs, manage its oil wealth for the long term, fill its severe infrastructure gaps, transfer its oil revenues in ways that improve people’s income, and accelerate its transition to people’s capitalism. 2. Libya’s 2008–12 Development Program is the biggest and most ambitious Public Investment Program (PIP) ever. The PIP included in the 2008–12 Development Program originally projected an unprecedented cost of LD250 billion over 2008–12 (about US$225 billion). However, as a consequence of domestic concerns over absorptive capacity and in the context of falling oil prices, such figure has been revised down, first to LD150 million overall, and more recently to LD100 billion overall (or LD25 billion per year) over 2009–12 (GPCP 2008b). In a context where Libyan public investment rates are among the highest in the world (21 percent of gross domestic product [GDP] in 2007), the PIP projects an annual average investment rate of 20 percent of GDP in the next five years. Among those resources, investments in basic infrastructure represent about two-thirds of the pipeline, which reveals a shift from prioritizing social needs toward the financing of productive activities. 3. Libya has many assets to fulfill its dreams. Libya holds the largest oil reserves in Africa, with proven reserves of 43.7 billion barrels in 2007. Libya also has vast natural gas reserves, estimated at 52.8 trillion cubic feet (TCF), which with new discoveries will probably reach 70 TCF to 100 TCF. Despite falling oil prices since the second-half of 2008, strong prospects for higher oil prices in the medium term and increased production, along with new discoveries, would enable Libya to generate sizable revenues into the future. 4. Supported by hydrocarbon wealth, Libya has reached living standards and socioeconomic development that compares favorably with other MENA and oil-producing countries. According to the 2007 United Nations Development Program’s (UNDP’s) human development index, Libya is ranked 59th among 162 countries. It has universal enrollment in primary education and an adult literacy rate of 91 percent. Secondary school enrollment rose from 21 percent in the 1970s to 105 percent in recent years, and tertiary enrollment has recorded a similar pattern. Life expectancy at birth is 73 years (70 for males and 75 for females), on a par with most middle-income countries. The total fertility rate is 5.2 children per woman of reproductive age, and one-third of the population is below age 15. Infant and under-5 mortality rates are lower than in most MENA countries, at 18 to 19 per 1,000 live births. Access to improved sanitation is 96 percent in both rural and urban areas. There is almost universal access to primary health facilities at the local level, and there are 1.25 physicians and 4.8 nurses per 1,000 people. 5. Strong economic performance has also been shaped by changes in oil revenues and, to a lesser extent, the political cycle, all this in a context where public expenditure has been highly procyclical over almost two decades. Correlation and regression analyses confirm that public expenditure—and 1 more in particular public investment—have been procyclical. During 1990–2007, the correlation coefficient between public investment and growth is moderately high at 0.5. And regression analysis between growth and public investment (in logarithms) finds a high and significant coefficient that reveals that growth elasticity to public investment is above three (actually 3.4), while growth elasticity to public expenditure is 1.1 These findings are not exceptional, but rather a frequent result among developing—and oil-producing—middle-income economies like Libya. In this context, however, implementing a countercyclical fiscal policy—as the country is now proposing to do under falling oil prices—will rather be an innovative, but desirable move. 6. Public expenditure has also been pro-poor. At first sight, Figure 1a, which depicts the crossing of poverty rates (mean consumption per person) and budget expenditure allocations in 2007 (measured in per capita terms) per Shaabia, shows little (if not marginally negative) correlation. However, this picture markedly improves once the main outliers (exceptional cases of Shaabiat—often urban—obtaining above- average high amounts of resources) are excluded. As a result, a second look that excludes outliers, in Figure 1b, shows a clearly positive relationship between poverty rates and budget allocations, thus confirming the pro-poor bias of public outlays. In this way, with a few exceptions (outliers), it can be safely said that in Libya the poorest Shaabiat tend to receive the highest development budget allocations. Figure 1a: Per Capita Investment Allocations and Poverty Rates per Shaabia District acronyms are as follows: BAT = Batnan, DAR = Darana, AKH = Jabal Akhdar, ALM = Al Marj, BEN = Benghazi, AJD = Ajdaya, SIR = Sirt, ALJ = Al Jafrah, ALK = Al Kafra, MUS = Musrata, MAK = Al Markab, TRI = Tripoli, JAF = Jafarah, ALZ=Al Zawia, KHA=Al Negat Al Khams, GHA=Al Jabl Al Gharbi, NAL=Nalut, SAB=Sabha, ALS=Wadi Al Shatie, MER = Merzeg, ALH = Wadi Alhayat, ALW = Al Wahat, and GHT = Ghat. Sources: Bank staff estimates; based on GPCP data. 1 Both correlation and regression estimates are available from the author upon request. 2  Figure 1b: Per Capita Investment Allocations and Poverty Rates per Shaabia (without outliers) 12.000 Per capita public investment in LD TRI ALZ 10.000 BEN MER y = 5,2788x - 369,06 MUS 8.000 ALH R 2 = 0,1022 ALM NAL DAR 6.000 BAT AKH ALJ 4.000 MAK JAF KHA 2.000 ALS AJD 0 800 1.000 1.200 1.400 1.600 Poverty heacount ratio District acronyms are as follows: BAT = Batnan, DAR = Darana, AKH = Jabal Akhdar, ALM = Al Marj, BEN = Benghazi, AJD = Ajdaya, SIR = Sirt, ALJ = Al Jafrah, ALK = Al Kafra, MUS = Musrata, MAK = Al Markab, TRI = Tripoli, JAF = Jafarah, ALZ = Al Zawia, KHA = Al Negat Al Khams, GHA = Al Jabl Al Gharbi, NAL = Nalut, SAB = Sabha, ALS = Wadi Al Shatie, MER = Merzeg, ALH = Wadi Alhayat, ALW = Al Wahat, and GHT = Ghat. Sources: Bank staff estimates; based on GPCP data. 7. However, there is room for improved targeting of public investment. Figure 2 depicts the most recent poverty map for Libya. This presentation updates previous efforts done by Libyan authorities in 2000 for both the 1969 and 1992/93 household surveys to estimate poverty lines at the national and regional level (per Shabia).2 Figure 2 also has the per capita development budget allocations disaggregated per Shaabia. The map ranks Shaabiat per poverty level (for 32 Shaabiat) and per expenditure allocations (for only 22 Shaabiat). Details on the design and estimates of the poverty map are contained in Annex L, Volume III of this report. The map is an extremely powerful analytical tool that indicates that (a) some of the poorest Shaabiat (for example, Mizdah, Ghat, and Sabha Wadi Al Shatli) receive among the highest per capita amounts of budget allocations; (b) some mid-poor Shaabiat also receive budget allocations that roughly correspond to their status; (c) some of the richest Shaabiat receive low budget allocations, another indication of a pro-poor bias (for example, An Nuqat, Al Jfara, and Al Jufrah); but (d) some of the richest Shaabiat receive exceptionally high budget allocations, which reveals room for an enhanced targeting of expenditure allocations (for example, Sirt, Az Zawiyah, Murzuk, and Tarabulus). 2 The title of the two surveys are: Household Budget Survey in Tripoli and Benghazi (1969) and Family Expenditure Survey 1992-93. Authorities also point out that an “estimation was carried out in December 2000 using a similar approach an in this review