Socialist people's Libyan Arab Jamahiriya : a public expenditure review (Vol. 2 of 3) : Main report

Report No. : 45019-LY Socialist People’s Libyan Arab Jamahiriya A Public Expenditure Review (In Three Volumes) Volume II: Main Report 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 ABBREVIATIONS ABC Activity based costing GPCHE General People’s Committee for AMR Automatic Meter Reading Health and Environment BCM Billion cubic meters GPCHE General Peoples’ Committee for Higher BPC Basic Public Congresses Education Bpd Barrels per day GPCMP General People’s Council for Manpower CAPEX Capital expenditures GPCP General Peoples’ Committee for Planning CBL Central Bank of Libya GPCPF General Peoples’ Committee for CCGT Combined Cycle Gas Turbine Planning and Finance CERA Cambridge Energy Research Associates GPCT General People’s Committee for CFL Compact fluorescent lamp Transport (Ministry of Transport) CMM Collection management and metering GSC General service company CPI Consumer price index GWA General Water Authority DBO Design-build-operate GWh Gigawatt Hour DPAT Territorial divisions in charge of HALE Healthy life expectancy planned investments HC Hydrocarbon DSM Demand-side management HDI Human development index ECA Energy conservation agreements HFO Heavy Fuel Oil EPA Effective project approval HIB Housing and Infrastructure Board FAO UN Food and Agriculture HUC Housing and Utility Corporation Organization HIV Human immunodeficiency virus GBHCP General Body for Health Care Planning HUGC Housing and Utilities General Corporation GCHU General Corporation for Housing IBT Increasing block tariff and Utilities IEA International Association for the GCP General Counsel for Planning Evaluation of Educational Achievement GDP Gross domestic product IMF International Monetary Fund GEA General Environment Authority IMR Infant mortality rate GECOL General Electricity Company of Libya IPP Independent power projects GER Gross enrollment rate / gross IT Information technology enrollment ratio Km Kilometer GFS Government Financial Statistics Km2 Square kilometer GMMR Great Man Made River KV Kilovolt GMMRA Great Man Made River Authority kWh Kilowatt-hour GNI Gross national income l/c/d Liters consumed daily GoL Government of Libya LD Libyan dinar GPCA General People Committee of LFO Light Fuel Oil Agriculture L/km Liters per kilometer GPC General People’s Committee LRAIC Long run average incremental cost GPCEWG General People Committee for LRMC Long-run marginal cost Electricity, Water, and Gas M2 Square meters GPCGE General Peoples’ Committee for General Mbpd Million barrels per day Education MCM Million cubic meters GPCF General People’s Committee for Finance MENA Middle East and North Africa MIC Middle-income country PPPs Public-private partnerships MLD Millions of Libyan Dinars PSP Private sector participation MMBTU Million British Thermal Units RBA Roads and Bridge Authority MTEF Medium-term expenditure framework RR Required revenue MW Megawatts RUC Road user charges MWEG Ministry of Electricity, Water and Gas SDR Special Drawing Rights NCP National Counsel for Planning SEC Secondary Education Certificate NCEP National Centre for Education Planning Shaabiats Municipalities NDPs National Development Plans SMEs Small and medium enterprises NHGDP Non-hydrocarbon gross domestic SRMCs Short-run marginal costs product TCF Trillion cubic feet NHPB Non-hydrocarbon primary fiscal balance TDS Total dissolved solids NOC National Oil Company TIMSS Trends in International Mathematics NPC National Planning Council and Science Study NPV Net present value TOU Time-of-Use (tariff) NWC National Water Company TVET Technical and vocational education NWWC National Water and Wastewater and training Company U5MR Under-5 mortality rate OECD Organization for Economic Co- UfW Unaccounted for water operation and Development UN United Nations O&M Operations and maintenance UNAIDS United Nations Joint Programme on OPEX Operational expenditures HIV/AIDS ORF Oil Reserve Fund UNDP United Nations Development Programme Pb Per barrel UNESCO United Nations Educational, PBC Performance based contracting Scientific and Cultural Organization PCSC Programme Complémentaire de UNICEF United Nations Children’s Fund Soutien à la Croissance Vpd Vehicles per day PER Public expenditure review WDI World Development Indicators PHC Primary health care WEG Water, electricity, and gas PIMS Public investment management system WHO World Health Organization PIP Public investment plan WHOSIS World Health Organization PISA Program for International Statistical Information System Management in Higher Education WSS Water supply and sanitation PMO General Peoples Committee or WSSP Water Study and Strategy Proposal–2025 Prime Minister’s Office WTO World Trade Organization PPA Power purchase agreements WWW Water and waste water PPA Preliminary project approval Vice President: Shamshad Akhtar Country Director: Mats Karlsson Sector Director: Ritva S. Reinikka Sector Manager: Farrukh Iqbal Lead Economist and Task Team Leader: José R. López-Cálix  SOCIALIST PEOPLE’S LIBYAN ARAB JAMAHIRIYA PUBLIC EXPENDITURE REVIEW Table of Contents CHAPTER 1. INTRODUCTION ................................................................................................... 1 I. The Recent Economic Cycles of Libya...................................................................................1 II. The Country’s Social Achievements ......................................................................................4 III. Why a Public Expenditure Review?.......................................................................................4 IV. The Unique Institutional Features Surrounding the Accountability of Public Investment Management in Libya..............................................................................................................5 V. The Scope and Content of the Public Expenditure Review .................................................8 VI. The Recent Performance of Public Investment.....................................................................9 CHAPTER 2. OVERALL FISCAL DEVELOPMENTS AND SUSTAINABILITY ............................... 18 I. Macroeconomic Background ................................................................................................18 II. Fiscal Trends From 1990 Through 2007..............................................................................20 III. Fiscal Sustainability Analysis ...............................................................................................21 IV. Dealing with Methodological Limitations............................................................................28 V. Policy Recommendations ......................................................................................................29 CHAPTER 3: THE CONTRIBUTION OF CIVIL SERVICE REFORM TO FISCAL SUSTAINABILITY31 I. Introduction............................................................................................................................31 II. The Size the Libyan Public Administration and its Macroeconomic Implications ........32 III. Compensation Policies and their Implications for the Wage Bill......................................35 IV. The Civil Service Reform (2006-present) ............................................................................36 V. Pay Reform.............................................................................................................................41 VI. Handling of the Retrenched Employees...............................................................................44 VII. Policy Recommendations ......................................................................................................46 CHAPTER 4: MODERNIZING THE PUBLIC INVESTMENT MANAGEMENT SYSTEM IN LIBYA 49 I. Public Investment Trends .....................................................................................................49 II. The Link between Public Investment and Growth.............................................................53 III. Assessing the Budget Cycle of Public Investment...............................................................54 IV. Policy Recommendations ......................................................................................................63 V. The Challenge of Budget Unification ...................................................................................70 CHAPTER 5: BALANCING EFFICIENCY AND QUALITY OF EDUCATION IN LIBYA ................. 74 I. Introduction............................................................................................................................74 II. The Performance of the Education Sector ..........................................................................75 III. The Institutional Framework and its Accountability .........................................................80 IV. Overall Public Expenditure Patterns...................................................................................81 V. Searching for Quality: The Efficiency of the Education Sector ........................................87 VI. Policy Recommendations ......................................................................................................95 CHAPTER 6: IMPROVING HEALTH SERVICES FOR ALL IN LIBYA ....................................... 102 I. Introduction..........................................................................................................................102 II. The Performance of the Health Sector ..............................................................................103 III. The Institutional Framework and its Accountability .......................................................106 IV. Overall Public Expenditure Patterns.................................................................................111 V. Searching for Quality: The Efficiency of the Health Sector ............................................117 VI. Policy Recommendations ....................................................................................................118 CHAPTER 7. INCREASING THE EFFICIENCY OF THE POWER SECTOR IN LIBYA ................. 123 I. Introduction..........................................................................................................................123 II. The Performance of the Power Sector ...............................................................................127 III. The Institutional Framework and Its Accountability.......................................................131 IV. Overall Public Expenditure Patterns.................................................................................136 VI. Searching for Quality: The Efficiency of the Power Sector .............................................142 VII. Policy Recommendations ....................................................................................................146 CHAPTER 8. REBALANCING ROAD MAINTENANCE AND NETWORK DEVELOPMENT ........ 155 I. Introduction..........................................................................................................................155 II. The Performance of the Road Sector.................................................................................156 III. The Institutional Framework and Its Accountability.......................................................158 IV. Overall Public Expenditure Patterns.................................................................................163 V. Searching for Quality: The Efficiency of the Roads Sector .............................................168 VI. Policy Recommendations ....................................................................................................170 CHAPTER 9: MAKING WATER USE EFFICIENT AND SUSTAINABLE ................................... 173 I. Introduction..........................................................................................................................173 II. The Performance of the Water Sector ...............................................................................173 III. The Institutional Framework and its Accountability .......................................................180 IV. Overall Public Expenditure Patterns.................................................................................182 V. Searching for Quality: The Efficiency of the Water Sector .............................................187 VI. Policy Recommendations ....................................................................................................191 CHAPTER 10. SETTING PRIORITIES IN THE 2008–12 PUBLIC INVESTMENT PLAN: THE SHIFT OF PUBLIC INVESTMENT TOWARD PRODUCTIVE ACTIVITIES ........................ 195 I. Introduction..........................................................................................................................195 II. The Status of the Pipeline of Public Projects at the End of 2007 ....................................197 III. The Move toward Productive Activities: Key Features of the 2008–12 PIP ..................198 IV. Main Factors Strengthening the Technical Efficiency of Public Investments ...............203 V. Guidelines for the Intrasectoral Selection of Public Projects ..........................................206 VI. Guidelines for Intersectoral Prioritization of Public Projects .........................................217 REFERENCES ......................................................................................................................... 223 Chapter 1. Introduction I. The Recent Economic Cycles of Libya 1.1 In a historic context, the present macroeconomic stance of the Socialist People’s Libyan Arab Jamahiriya is solid and remarkable. The recent economic cycles have mainly been determined by fluctuations in oil prices and, somehow, by political events.1 Since 1990, three major periods can be distinguished: 1990–98, 1999–2005, and 2005 onward (Figure 1.1). • During the 1990–98 stagflation period, low and steady oil prices averaged below US$20/barrel and had a significant impact on the economy. The country suffered the initial impact of the embargo and faced two severe recessions, one in 1990 and another in 1995, when the rate of economic growth reached -20.2 percent and -12.5 percent (-18.6 percent for non-hydrocarbon GDP), respectively. Inflation was high—in the double digits—and was clearly affected by persistent fiscal imbalances, especially during 1992–94. Inflation only decreased by the end of this period, once fiscal balances turned into a surplus. After 1995, both the fiscal balance and capital expenditure trends were closely correlated with the price of oil, which is typical for an oil-dependent economy. • During the 1999–2005 decentralization period, the economy recovered and started to accelerate. This was boosted by the end of the embargo in 2003, and by the initial stage of the oil windfall: oil prices hit US$25/barrel in 2003. The year of the end of the embargo, economic growth reached double digits, mostly reflecting a catch-up effect. Inflation rates were negative, on average, which is consistent with successive fiscal surpluses (except for 2001) in close correlation with oil price fluctuations. The unification of the Libyan dinar (between February 1999 and January 2002) also contributed to the deflation process (especially through the ensuing reduction in exchange rate spreads). In parallel, a short-lived period of political decentralization took place, which led to an increased investment by the Shaabiats: capital expenditure ratios to GDP reached successive double digits since 2002, with a parenthesis in 2003, thus becoming markedly procyclical and, indirectly, a key determinant of growth. • During the 2006–08 recentralization period, the economy was clearly favored by the deepening of the oil windfall. Strong economic performance accompanied the process of political recentralization. High and successive GDP growth rates reached 6 to 7 percent. Non-hydrocarbon GDP rates (for simplicity referred as “non-oil