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In the last decade the economic growth was accompanied by: Severe macroeconomic imbalances

Romania: 2008 – 2010 Reform implementation and sustainability - learning from experience Andreea Vass-Paul Counselor to Prime Minister, Government of Romania. For understanding and correcting the current economic situation, the grasping of it’s real causes is mandatory.

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In the last decade the economic growth was accompanied by: Severe macroeconomic imbalances

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  1. Romania: 2008 – 2010Reform implementation and sustainability - learning from experience Andreea Vass-PaulCounselor to Prime Minister, Government of Romania

  2. For understanding and correcting the current economic situation, the grasping of it’s real causes is mandatory In the last decade the economic growth was accompanied by: • Severe macroeconomic imbalances • Unsolved and postponed structural issues • Inappropriate economic policies • Financial unsustenabile social policies • Unfavorableprivatization for the state and for the Romanians • Costly and prodigal bugetary aparatus • Bureaucracy • Corruption

  3. In 2008, the Government faced 2 major opponents: A. The Economic Crises,accompanied by a highpublic deficit (even in 2008, the year with the biggest economic growth) that lead the EU Commission to trigger the excessive deficit procedure. B. An unreformed state with consistent unjustified debts: • 7 normative acts which approved wage increasesin 2008 for magistrates, registrars, policemen, military staff, prison officers, civil servants and contractual personnel, health personnel, university professors and personnel in primary and secondary education; • 2 increases of pensions: increase of the pension point by 7,4%in January 2008 ((581,3 RON) and by another 20% in October 2008 (697,5 RON).

  4. A. Adjusting the public deficit 2008 – 2011

  5. B1. Evolution of the number of public personnel: 2008 -2011

  6. B2. The reduction of the gaps between public and privat average gross earnings 2008 - 2011 Public Total Economy Privat

  7. B3.Adjusting the public expenditure: 2008 vs. 2011 Personnel Expenditure Social Assistance Investment Expenditure

  8. Major measures taken by the Government in order to reform the state: Economic recovery The reform of the fiscal framework The reform of the Public Administration The reform of public sector’s employees payment The reform of the Public Pension System The reform of the Labor Legislation The reform of the Education Law The reform of the Health System The reform of the Social Dialog The reform of the Social Assistance The reform of the Judicial System

  9. 1. Economic recovery

  10. Romanian GDP Quarterly Growth Forecast: 2010 - 2012 4-4,5% 1,5 - 2% -1,3 Source: National Forecast Commission, april 2010

  11. Government's vision in dealing with economic and financial crisis • A. Responsible attitudegrounded on two premises: avoiding indebtedness of the nation and avoiding major economic slippages. • B. Measures for reducing the budget deficit and for the recovery of public finances through a major effort of the Government, out of which: • Two-thirds focused on improving and reducing public expenditure ; • One third focused on increasing revenues. • C. Measures for relaunching healthy economic growth and on the long run,at times of major accumulated macroeconomic imbalances which limited the fiscal space necessary for triggering economic recovery. 11

  12. A. Avoiding major economic slippages The general budget deficit would have been close to 10% of GDP in 2009 and to 14% of GDP in 2010 and 2011, in the absence of the austerity measures taken by the Government:

  13. B. Measures to reduce the budgetary deficit B. Measures to reduce the public expenditures

  14. B. Measures to reduce the budgetary deficit B. Measures to increase the budgetary revenues

  15. C. Measures to boost economic growth C.1. Measures to save jobs and boost the absorption of unemployed • Regulating technical unemployment through the exemption from paying the social security contributions and social insurance for the employer, for a period not exceeding three months. The employee will receive 75% of the base salary for his job. Beneficiaries: 548,999 persons employed and 13,459 employers up to 31stDecember 2010. • Exemption from paying the social security contributions for companies that hire unemployed people. Beneficiaries:6072 persons employed and 3625 employers up to 31st December 2010. C.2. Fostering public and private investment • Increasing the budgetary allocations for public investment: from 6.3% of GDP in 2008, to 7.1% of GDP in 2009, 6.6% of GDP in 2010 and 6.5% of GDP in 2011 (from 33.8 billion RON in 2010, to 35.2 billion RON for 2011). • The implementation of the Public-Private Partnership Law (PPP)

  16. C. Measures to boost economic growth C.3. Diminishing the fiscal and administrative burden for companies in difficulty • Compensation of the VAT to be paid with the VAT to be reimbursed - development of a unified computer selection system of VAT returns from the national database, keeping to the principle that “the oldest return goes first”. • Improvement of the payback procedure of the VAT • Reglementation of the possibility that forced execution can be suspended or delayed -applyed in case the taxpayer has an application for refund/reimbursement on the way or submits one and the amount requested is equal to or greater than the fiscal claim because of which the execution started. • Reduction of the level of interest rate due for tax debts to the state budget, social security budget, not paid on time from the actual 0,05% (18,25% annually) to 0,04% for each day of delay (14,6% annually). For budgetary debts owed to local governments, the interest rate was reduced from 3% to 2% for each month of delay.

  17. C. Measures to boost economic growth C.4.Fostering private investment through state aid • Supporting large investment projects through state aid scheme for projects over 5 mil. euro that employ at least 50 people. Beneficiaries: 10 investment projects worth 711,7 mil. Euro in 2010, creating 4767new jobs. The state aid approved was 214.5 mil. Euro. • Supporting SMEs’ investment projects through the “de minimis” state aid scheme Beneficiaries: the projects of 905 SMEs were approved during 2008-2010. The total amount paid was 202 million RON. • Supporting microenterprises investment projects, active for less than 2 years (The “START” Program). Beneficiaries: 658 people have applied online with 240 projects in 2010. 71 contracts have been concluded. The absorption rate is 100%. For 2011, we have allotted a budget of 10 mil.RON, almost 30% higher than in 2010. • The Program to encourage the establishment and development of microenterprises by young entrepreneurs, started in 2011 Beneficiaries: Up to 4th May 2011, 3438 companies were recorded at the ONRC, out of which 2100 of them are currently already registered.

  18. C. Measures to boost economic growth C.4.Fostering private investment through state aid • Supporting business incubators Beneficiaries: 49 business incubators - The program is implemented by UNDP in Romania, in partnership with AIPPIMM and local authorities from target areas. The Government allocated 2.9 million lei for 2010 and 6.15 million lei,a double budget,for 2011. • Supporting women's entrepreneurship development through the multi-annual national program during 2005-2012 from small and medium enterprises sector. Beneficiaries: 826 ladies have applied online and 232 ladies followed the entrepreneurial training course in 2010. Absorption rate is 100%. C.5. Fostering private investment through state guarantees • Supporting SMEs through the FNGCIMM Beneficiaries: 9000 guarantees, worth over 650 mil.Euro in 2010. The Fund granting activity lead to the creation and maintenance of over 195.000 jobs in 2010.

  19. C. Measures to boost economic growth C.5. Fostering private investment through state guarantees • Providing government guarantees of 80% of the loan for beneficiaries of projects financed from structural funds in priority areas for the Romanian economy, for maximum 4 years Beneficiaries: FNGCIMM issued guarantees that amount to approx. 19 mil. RON in 2010 for the implementation of investment projects of about 450 mil. RON. Total ceiling of guarantees that may be issued in 2011 amounts to 300 million Euros. • Helping SMEs through the Fondul Roman de Contragarantare (FRC) Beneficiaries: FRC issued in 2010 1860indemnities,totaling 371.6 mil. RON for funding projects of 1.401 million RON, for 1.630 SMEs, employing over 45,350 employees. • Supporting market traders and services through the development and modernization program Beneficiaries: 5 million RON were allotted for this program in 2010 - 1793 companies have applied 188 projects online, out of which 117 contracts were concluded. For 2011, the budget allotted is 7 million RON, 40% higher.

  20. C. Measures to boost economic growth C.6. “Prima casa” Program Beneficiaries: Over 34,633 guarantees worth 1416.6 million Euros were granted since the beginning of the “Prima Casa“ Program up to 31st December 2010. In 2010, the guarantee ceiling was raised to 70,000 Euros for new dwellings and remained at 60,000 Euros for old dwellings. The budget allotted for this year is 200 million Euros. Through this program approx. 33,000 dwellings will be traded, approx. 500 companies will be supported and about 10,500 jobswill be saved. C.7. “Rabla” Program Beneficiaries: 189,193 cars taken from collectors, 61,532 new cars purchased, out of which 25,298 Romanian Car. Total funds allotted: 722 million RON at th end of January. C.8. „Primul siloz” Program Beneficiaries: since the beginning of the program in 2009, 164 certificates of deposit were issued. Currently, 52 certificates remained in circulation, guaranteed by the administrator of the scheme, the Fund of the Rural Credit Guarantee, of the amounts allocated by the Ministry of Agriculture and Rural Development.

  21. C. Measures to boost economic growth C.9. Measures to accelerate the absorptionof Eu funds The granting of financial facilities to the beneficiaries: • Doubling the maximum pre-financing quota, from 15 to 30% of the eligible value of the financing contact; • Providing pre-financing also to the private beneficiaries which enjoy state support, up to 35% of the grant’s value; • Enhancing the flexibility of the eligibility criterion with respect to the lack of debt towards the public budgets; • Introducing the possibility to pledge/to mortgage assets relevant for the project; • Introducing the option, for the private beneficiaries, to open project accounts not only to the State Treasury, but also to commercial banks; • Discarding the obligation for the micro-enterprises to provide the co-financing of the European projects in the form of their own contribution to the eligible costs (in the POR); • Providing the financial resources from beneficiaries that are institutions of the central public administration by means of granting, through the public budget, of the full project value; • The approval of the Support Program for the beneficiaries of the projects in priority Romanian economic fields; • The speed up of the bidding procedures, by modifying the legislation concerning the acquisitions. The simplification of the guides for the applicants: • Some documents are no longer required when the project is submitted; • Some documents are replaced with an affidavit of the applicant; • Copies „according to the original” are accepted, instead of legal copies; • A “Summary of the project” is no longer required; • The list of the requested documents is highlighted when the financing contract is about to be signed; • The obligations of the beneficiary are clearly stated after the signing of the contract. Absorption rate: total payments to beneficiaries: 2.37 billion Euro, representing 11,74% from the allocation from 2007 to 2013. In the period 1 January to 30 April 2011, payments have increased by a third compared with the situation at 31.12.2010.

  22. Economic impact of the taken decisions • Collected budgetary revenues in GDP reached in 2010the highest level in the last 20 years (33% of GDP) • Budgetary deficit is under control • As compared to 7,3% in 2009, the budget was elaborated in 2011 in order to reduce the deficit to 4,4%, and in 2012 to less than 3% of GDP. • Current account deficit is less than half • It is currently 4,3% of GDP, as compared to 11,6% of GDP in 2008; • Vulnerability caused by the large short-term debt was corrected • In 2010: 18,7 bn. Euros, as compared to more than 22 bn. Euros irresponsibly engaged in 2008; • The share of short-term debt in total debt decreased from 49,3% in 2008 to 35,2% in 2010; • Medium inflation is decreasing • From 7,85% in 2008 to 6% in 2010 and we are forecasting a level of 5,1% in 2011; • Credit recovery is taking place through the major cost reduction • Monetary policy rate decreased form 10,25% in 2008 to 6,25% at the moment. 22

  23. Better economic results in 2011 as compared to 2010 • In 2010, exports recorded their highest level in the whole history of Romania. • The total value of37,25 bn. Euros in 2010 euro exceeded with more than 3,5 bn. Eurosin 2008; trade deficit in 2010 halved as compared with 2008. • In the first two months of the year, goods export was 2 bn. Euros higher than the same period of 2010, which is 41% higher; trade balance (FOB-FOB) a fost practically zero; • Good speed for foreign direct investment (FDI) • FDIs increased more than 2 times in the first two months of 2011 as compared to the same period of last year, totalling 294 mil. Euros. • In the first three months of 2011, industrial production and tourism recorded growth over 10%, as compared to the same period of 2010. • The activity in constructions partially recovered in March 2011 and the contraction in this sector slowered in the first three months to -4,4%. • In February, the volume of construction works was 7,5% higher than the level recorded in January 2011 and slowly below that in February 2010 (-0,7%); • For the first time from June 2009, the real estate sector records growth of activities. In the “residential building” sector the raise was of 12% in February 2011 as compared to February 2010. In March 2011 as compared to March 2010, the number of authorisations issued for residential buildings decreased by only 3%. 23

  24. Romania has real chances to come out of recession • Romanian industry remains a pillar of economic growth: • Industrial production grew by 5,5 % in 2010 as compared to 2009 and by 11,4% in the first three months of 2011, as compared to the same period of last year; • The productivity of work is increasing considerably in this sector, by 17% in 2010 compared to 2009 and by 30% compared to 2008; • The turnover in industry grew by 24,3% in the first three months of 2011; new industrial ordersincreased by 26,4% in the first three months of 2011; • The unemployment rate is stabilising this year at the level recorded in 2008 • After an increase from 5,8% in 2008 to 8,36% in March 2010, the unemployment rate started decreasing every month, to 5,92% at the end of March 2011, a similar level to the one recorded before the economic crisis; • The number of people receiving redundancy payments has diminished by 43,7 thousand people in February 2011 compared to December 2011, which means that the number of people who got employed exceeded the number of people who were laid off, as a result of better economic activity; • In the first two months of 2011 a number of 47 thousand people got employed; for the whole year 2011 we are estimating a number of 338 thousand people. 24

  25. 2. Fiscal framework reform • Fiscal-budgetary responsibility law 69/2010 represents a turning point in public finances and establishes the principles, objectives and priorities of the multiannual budgetary and fiscal policy: • introducing expenditure ceilings • reducing the number of budget adjustments • eliminating the risk of populist decisions on election campaigns and setting the Council Tax etc. • The main objective is to gradually reduce the budget deficit to 3% in 2012. • These reforms aim at reducing the tax burden: • Reduction of fiscal and para-fiscal tarrifs, from 491 in 2008 to 263 actually; • Simplification and unification of fiscal declaration starting with 2011, and their online payment; • Elimination of minimum tax starting with October 2010; • No taxation for reinvested profits; • Maintaining a flat tax rate of 16%. • Public funds are primarily directed to investments; • Debt by the central and local authorities to economic agents halved.

  26. Recent changing of the accounting law • 2 specific objectives: • reducing costs to firms preparing the financial statements; • reduce bureaucracy in financial administration. • We introduce a simplified accounting system for small businesses that meet two conditions: their both assets and turnover are less than 35,000 euros: • These companies will prepare two financial statements instead of five; • These companies do not make half the balance, but balance each year; • Balance sheet and profit will be drawn in simplified accounting system with a small number of components and a plan of 50 accounts instead of 400 accounts; • Accounting documents can be signed by people with higher economic studies, not only by expert accountants, based on civil convention. • 349 000 companies are benefiting from these measures, namely 57% of active companies on the market.

  27. Structure of budgetary revenues during2008 – 2011(%GDP)

  28. Structureof public expenditureduring 2008 – 2011(%GDP)

  29. 3. Public apparatus and government agencies reform • Imposing personnel norms in central and local public authority, the public apparatus was reduced from 1,398,757 persons in December 2008 to 1,256,609 people in March 2011. • 141 governmental agencies were abolished, merged or restructured • E-government in order to eliminate bureaucracy: • Development of National Platform E-ROMANIA and National Electronic System (SEN) • Electronic Single Point of Contact - sets out the online interaction between public institutions in Romania and service providers • Results: savings of around 3 billion RON in 2010 as a result of the development of transparent procedures for electronic procurement SEAP

  30. 4. Reform of the public sector employees’ payment • The Unitary Payment System Law regulates the payment of all categories of personnel paid from public funds, unlike the previous period when this remuneration was comprised in 39 Laws. • Expected results: • Ratio between basic minimum salary and maximum level of wage among public sector employees is 1 to 15, approaching best European practices; • Harmonization of payment system for the public sector employees take into account the importance, the responsibilities and the complexity of the activity and the required level of education for the activity; • It is being created a new hierarchy of basic salaries, between different fields of activity and in the same field, depending on the complexity and the importance of the activity; • Wage increases necessary for achieving this objective take into account the macroeconomic indicators and the evolution of social indicators; • Compliance with the salary bill of 39 billion RON for 2011.

  31. 5. The public pension reform • Under the legislation adopted in the pension system: • It is ensured the financial sustainability of the pension system on the medium and long term; • The contributiveness principle is enforced in the public pension system; • The retirement laws which do not respect the contributiveness principle were abolished and special pensions were recalculated; • It was established a minimum social pension of 350 RON; • Cumulating pension incomes with salary incomes is prohibited for those with pension incomes higher than the average gross salary in the economy; • Reduction of the number of early retirements; • More severe criteria are implemented for granting disability pensions; • Starting with 1st January 2011, working groups I and II are entitled to grants, this means 1.541.000 pensioners; the budgetary effort amounts to 403 million Euros in 2011. • In 2012, pensions will increase by 100% inflation rate, plus 50% of the real growth of average gross earnings for the previous year.

  32. 6. The reform of Labor Legislation • A new Labor Code was implemented. Mainly, it aims at the • increasing the flexibility of the work relationships; • adapting the work relationships to the dynamics of the labor market; • maintaining the Code’s regulations in line with the European legislation; • discouraging the illegal employment by adopting tougher sanctions; • establishment of performance as criterion in the labor contracts and in the work relationships.

  33. 7. The Reform of the Educational System • By implementing the National Education Law, the Romanian educational system was fundamentally reformed. The main modifications concern: • The rethinking of the role of the early education; • The assuring the quality of the public primary and secondary education system; • The re-configuration of the National Curricula; • The implementation of a Educational Portfolio; • The implementation of the financing per student principle – the granting of public money will became transparent and will respect the strategic educational targets, according to thefinancing follows the student principle; • The implementation of the School after School Program; • The support of the children and of the young capable of high performances; • The granting of an equal access to study in the universities; • The typologisation and classification of universities and the implementation of a proper methodology for the hierarchisation of the programs of study; • The redefinition of the PhD – introducing two types of PhD, the Scientific and the Professional one.

  34. 8. The Reform of the Health System • The implemented measures aim at: • The decentralization of the health system and the increase of the degree of participation of the local authorities in the management of the hospitals – of the 435 public hospitals subordinated to the Ministry of Health, 370 were transferred to the local public authorities. • The restructuration of the hospital system; • The introduction of a national health card; • The implementation of the copayment mechanism, except for the social vulnerable groups or for those with a small income; • The control of the expenditure on medicines; the increase of the patients’ access to modern treatments, on accessible costs, by introducing a new policy of medicine prices control and by introducing new technologies; • Increasing the collection basis for the health insurances, by addressing the pension revenues of more than 74 RON; • The development of public-private partnerships, and the attracting of the business environment in the development of integrated sanitary systems; • The starting of the process of introducing standards at all the levels of the Romanian health system and of a system that warrantees the quality of the medical services.

  35. 9. The Reform of the Social Dialogue • The Government decided to promote the Social Dialogue Law by assuming responsibility, according to art. 114 of the Romanian Constitution. • The Social Dialogue Law completes the Labor Code: • it reforms the way the trade unions, the patron’s unions, the Economic and Social Council are organized; • adapts to Romania’s present needs the rules that concern the collective work contracts and the solving of labor conflicts.

  36. 10. The Reform of the Social Assistance • Objectives: • The orientation of the social assistance programs according to the value of the family venues and the restructuration of the circa 200 national and local social benefits; • The consolidation of the guaranteed minimum income program, of the aid for the payment of the heat invoices and of family allowance in a new single frame;the finalization of the decentralization of the social services in the field of domestic violence, in order to increase of the local authorities’ liability degree, and to ensure the necessary financial resources; the development of the support services responsible with the integration of the Roma families in the society; • The ensuring of the socio-economic equilibrium of the families living in an urban and rural space, of the elderly, of the disable and of their families; • The rethinking of the legal and institutional framework concerning the protection of the mothers, the increase of the birth rate, the diminution of child abandon and the diminution of the domestic violence phenomenon, the increase of the quality of the children’s life in difficult environments and the respect of the minimum quality standards in all the special services dedicated to children in need; • The rethinking of the social protection measures for the families with special needs and the increase of the degree of dynamism of the active measures of the family solidarity; the increase of the active participation of the civil society and the sustainable development of the partnership in the favor of family development and protection.

  37. 11. The Reform of the Judicial System • Four new codes were implemented – the Civil Code, the Criminal Code, the Civil Procedure Code and the Criminal Procedure Code – in order to restore the judicial system’s credibility, by enhancing the transparency, by simplifying the legal framework and by improving the accessibility degree. • The positive aspects of these reforms are already visible in the reports issued by the Cooperation and Verification Mechanism. The Law of the Small Reform of the Judicial System was also adopted (Law 202/2010). • Expected results: • the speeding up of the trials; • the simplification of the procedures; • the diminishing of the costs; • the improving of the quality of the act of justice by enhancing the accountability and the specialization of both judges and prosecutors; • a more effective delimitation of the material competence, the unification of the jurisprudence and the transformation of the act of justice into a predictable process; • the adjustment to normal limits of the sanctioning treatment; • the development of the business environment, both by the revision of contract regulation and by inclusion of distinct regulation of contracts specific to the banking sector.

  38. Short and Medium Term Plans • The Pursuit of the Health System Reform • The solving of the arrears’ issue • The prioritization of the multi-annual strategic investments and the absorption of the European funds • Performance in the public companies

  39. 1. Further reform of the Health System • Establishing indicative ceilings for quarterly contracts regarding services developed with hospitals and doctors and creating incentives for doctors who meet the indicative ceilings. • Establishing the care package provided by the government in order to eliminate the coverage for non-essential costly medical services. • Revising the formula for National Health Insurance House by introducing a system where "money follows the patient“. • Revising the list of compensated and free drugs approved by Government Decision no. 720/2008, for amendment and transfer to generic drugs, where possible. • Controlling the pharmaceutical costs for the most expensive drugs for 2012, by applying strict protocols for the use of drugs and by the new modality of electronic prescriptions for the Unified Informational Integrated System, in compliance with strict procedures.

  40. 2. Solving the problem of arrears • Implementing the action plan and the improved mechanism for the control of commitments and measures enforcement by the end of April 2011, in order to eliminate the existing arrears and to prevent accumulation of new ones, both at general budget and public enterprises. • A better control of arrears at local authorities level, by setting an indicative target. • Integration between the accounting system and the Treasury system of payments (September 2011).

  41. 3. Prioritization of multi-annual strategic investments and EU funds absorbtion • Creating a database / a list of primary public investment projects to ensure funding over the next 3-5 years, by a working group under the authority of the Prime Minister. • Improving monitoring and evaluation of investment projects to the central authorities, in particular by improving the database on equity investments managed by the Minister of Public Finances, which will include information on state of the projects, such as delays in implementation or cost overruns. • Implementing the Government’ Action Plan in order to accelerate the absorption of EU funds. • Capital public expenditure reorientation towards a gradual shift from investments financed entirely from domestic sources to investments financed by EU funds; ensuring about 4.0% of GDP for capital expenditures to meet investments financed by EU funds, including external loans,in 2012.

  42. 4. Establishing performance criteria in the state-owned enterprises • Implementation of a comprehensive strategy to reform the state-owned enterprises governance; • Introduction of an improved reporting system for the state-owned enterprises already included in the ESA definition of the general budget, and for those which might be reclassified and included in the general budget by Eurostat in 2011 and 2012; • Prevention of new arrears and losses for the companies reclassified by Eurostat, as part of the general budget, and for those which might be reclassified in 2011 and 2012; • Elaboration of strategic action plans for main companies (especially those in energy and transport) until the end of May 2011 and for all the others until the end of July 2011; • For main privatisations, until the end of August 2011 there will be named the consultant for these transactions, more exactly a famous international company; the proposals will be sent by the end of 2011 and the auctions will be organized by mid 2012; • In order to solve the governance related problems, we will elaborate (in consultation with the World Bank) and we will adopt the necessary legislation required to improve the governance of these companies; we will introduce the compulsory external, independent and regular audit activity at these companies and the financial control will be transferred from the ministries to the Ministry of Public Finances by the end of September 2011. 42

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