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This is partially a reflection of the existing imbalance in remuneration among the federal HQbased civil servants, civil servants working in deconcentrated units of federal bodies, and subnational civil servants. Currently, in 60 percent of regions, salaries of regional servants are higher than those of federal deconcentrated units; in 45 percent of regions, salaries of regional servants are higher than the salaries of HQ-based federal civil servants (see HSE, 2004, for more information). Hence, the ratio of the compensation between these categories (currently favoring subnational employees) should be reversed to reflect relative labor market prices36.

This policy may also be considered as part of the proposed decompression agenda, since it suggests that as a result of the reform the compression ratio in the federal executive branch (including deconcentrated units) would become significantly higher.

2.53 It is worth noting that the future nominal levels of cash compensation in the civilian public sector should vary from region to region, depending on the local price level as well as on some other factors, while our scenarios suggest only the national average estimates for a potential cash compensation for different employment categories.

2.54 Attrition. Scenarios entailing implementation of the administrative reform component assume some reduction in both core government administration employment, as well as in employment in the civilian public sector.

2.55 As far as the core government administration employment is concerned, for the purpose of this Chapter it is assumed that attrition would take place only in the executive branch of the core government administration. Since the detailed structure of management Schiavo-Campo et al. (1997), p. 44.

The on-going debates on tax reform in Russia also include some proposals on decreasing the rate for Unified Social Tax up to 10 p.p., but no final decision has been taken so far on this issue.

Source: Schiavo-Campo et al. (1997). An International Statistical Survey of Government Employment and Wages, p. 7; staff calculations for Russia (based on the Roskomstat data).

bodies within the core government administration has not been determined yet, it is especially difficult to make projections for a possible attrition rate. Moreover, the Wagner Law claiming that public administration employment tends to grow with economic growth also may play a role in determining future trends in staffing levels in the core government administration in Russia. The attrition rates proposed in the Chapter are more conservative than the latest announcement made by the top government officials on the expected 30 percent cuts in the number of civil servants because it is not clear whether these expected reductions refer to HQbased federal executive civil servants or to the whole federal executive civil service.

Moreover, given the low current staffing levels in the HQ part of the executive service, we are concerned that a 30 percent cut for this component of the public administration may be excessive. Our analysis of the dynamics of core government administration employment in 1994-2002 (see Section A) also suggests that subnational executive civil service and local self-government may accommodate higher attrition than federal executive authorities. These attrition rates are used here only as preliminary benchmarks for the analysis. More accurate forecasting of future attrition rates would require much more detailed research of the current employment rates, costing out the separate executive functions and analyzing broad statistical data on regional variations in actual employment.

2.56 The specific attrition rates that have been used for simulations are presented in Annex 2.5 and briefly summarized below. Employment adjustments for the education sector were calculated based on the difference between the students/teacher ratio in Russia and in middleincome OECD countries. The target level was either estimated as an average between middleincome and OECD countries levels or as the one approaching the OECD countries level, depending on the current indicators for Russia and the feasibility of the quick changes in the staffing levels. Depending on the sub-sector, possible attrition rates in the education sector were estimated in the range of 10.526.9 percent of the 2001 employment levels (see Table 2.8). For later years, demographic projections on the number of students were also taken into account.

Table 2.8: Attrition Rates Expected in the Education Sector, Current ratio of Benchmark ratio of Expected Attrition Sub-Sector* students/teacher students/teachers Rate (%) Higher Education 11.4 15.6 26.General Education 11.5 15 23.Vocational Education 10.2 11.4 10.* For other sub-sectors of the education sector a general 10 percent reduction rate used for all other civilian public sector employment was applied.

Source: Poletaev et al., (2003), and staff calculations.

2.57 Future employment adjustments for the health sector were estimated based on the ratio of doctors and paramedical staff per 100,000 of population in Russia as compared to the same indicator in OECD countries. Given considerable cross-country variance of this indicator as well as the comparatively high ratio in Russia, it is assumed that in the medium to long term the number of health sector employees can be reduced by 20 percent.

2.58 There is little if any information on a potential for staff reduction in the rest of the civilian public service. For the purposes of this Chapter it was assumed that this reduction would account for 10 percent.

2.59 At the same time, for the scenarios that do not assume any administrative reform actions, it was assumed that the actual employment in core government administration may in fact grow, given that in 2001 about 5.6 percent of positions in the government administration were vacant and some of these are likely to be filled in after the salary increase. In 2001 the difference between the share of vacant positions in subnational service (which is considered relatively more attractive given local market opportunities) and federal civil service accounts for about 2 percentage points. At the same time, in the process of reforms the requirement of public servants qualifications will increase significantly, and as a result some of the positions may remain vacant. Hence, for the purpose of simulations, it was assumed that the salary increases would lead to an increase in employment of 2 percent, if not accompanied by a separate effort to cut staffing. The same assumption was applied to the civilian public sector employment.

2.60 Expenditures Related to Staff Attrition. For scenarios that assume employment cuts, additional expenditures related to one-time separation costs in core government administration have been calculated based on the current legislation (i.e., Labor Code, legislation on civil service). These costs were estimated under the assumption that the redundant civil and municipal servants are paid an equivalent of their four-months pay37, while the other civilian sector employees are paid an equivalent of their two-months pay.

2.61 Verification. Even a superficial cross-country comparison shows significant variation of the employment numbers in different layers of the core government administration and civilian public sector at large. Although there are significant methodological limitations to the actual application of international comparative data, it was helpful to use cross-country comparisons of various employment ratios, such as shares of core government administration employment, civilian public sector employment, and employment in health and education sectors in the total population, as monitoring indicators for reform progress.

2.62 Non-Wage Expenditures on Core Government Administration. Modernization of public service and implementation of the full-scale HR management reform would call for increased financing of non-wage expenditures on core government administration, especially those on equipment, communication and other services, and training. The UK data for running costs (used as a benchmark) shows that the average ratio of non-wage expenditures accounts for 3340 percent of total expenditures on government administration38, while in Russia in 2001 this ratio (for federal budget only) accounted for about 38 percent (36 percent in 2003).

This shows that the current share of non-wage expenditures in Russia appears to be in line with international practice. It is anticipated that a full-scale implementation of the comprehensive civil service reform package would sustain this ratio at the level of 25percent (depending on the reform scenario). In other words, we assume that the share of non The relatively low levels of this ratio in the OECD countries are due to smaller skill differentials between the central government employees and the rest of working population. Hence, for Russia a higher ratio than the one for OECD (probably the one approaching the level of middle-income LAC countries) could be expected. Cross country comparisons should, however, be used with caution since e.g. in many countries paramilitary personnel is considered as a part of the central government, while this report separates police service from the core government administration.

This assumption suggests a completely different approach to compensation for the deconcentrated federal executive bodies that in effect creates a significant pay gap between HQ-based staff and those employed in the territorial branches of the same government entity. Implementation of this approach would call for (i) continuous monitoring of regional labor market prices throughout the country, and (ii) imposing strict limitations on employment growth in the Headquarters of federal executive bodies.

wage costs in total budget expenditures on core government administration would be either sustained or would somewhat decline primarily owing to an opportunity for considerable savings associated with more efficient use of existing office space (and associated decline in maintenance and utility costs). In addition, the possibility of reallocating some of the core government administration staff and subsequent renting of government real estate could bring about additional fiscal gains.

2.63 It should be noted that non-wage expenditures in civilian public sector employment are highly sector-specific. Identification of appropriate benchmarks would require a separate research of the current status of civilian public sector financing and the need for further development. This research goes beyond the scope of this analysis although we acknowledge the importance of non-wage expenditures in the civilian public sector as a parameter of civil service reform in Russia.

E. CIVIL SERVICE REFORM SCENARIOS 2.64 Fiscal implications of the civil service reform depend upon a large number of factors.

For the purpose of this Chapter, the following parameters were used to identify the possible reform scenarios and estimate their fiscal implications:

Macroeconomic scenarios (three sets of indicators based on the change in the share of real wages in GDP);

Extent of pay reform implementation, measured as the amount of the residual public-private compensation gap:

Radical pay reform (by the end of the reform period, i.e., by 2010, the residual public-private compensation gap would not exceed 50 percent, i.e., average compensation in core government administration would amount to two thirds (66 percent) of the average compensation in the private sector. Minimum pay increase in core government administration is 30 percent.

Moderate pay reform (by the end of the reform, the residual public-private compensation gap would not exceed 100 percent, i.e., average compensation in core government administration would amount to half (50 percent) of the average compensation in the private sector). Minimum pay increase in core government administration is 20 percent.

Pay reform pace. Three variants were used for simulation: high, medium, and low.

The differences in pace across pay reform scenarios are presented in Table 2.below. For consistency, it was assumed that the pace of administrative reform (measured as the share of number of staff cuts in the total attrition planned within the specific scenario) is identical to the pace of pay reform (measured as the share of the public-private compensation gap closed since the beginning of the reform in the total gap to be closed within the specific scenario).

Table 2.9: Assumption on Pay Reform Pace, Measured as a Share of the Overall Planned Gap Covered, % 2004 2005 2006 2007 2008 2009 Low-paced reforms (1) 15 30 45 60 75 90 Medium-paced reforms (2) 20 40 60 80 100 100 High-paced reforms (3) 35 70 100 100 100 100 Administrative reform implementation and the extent of results in attrition as keys of fiscally measurable impact. Specific attrition rates for core government administration are presented in Annex 2.5. Given the political sensitivity of the issue, as well as the comparatively low share of core government administration in the total population of the country, the following scenarios have been proposed:

No administrative reform, which would lead to increased employment in core government administration and the civilian public sector at large. This scenario assumes significant expenditure growth without any fiscal gains from staff attrition. As a result, it is likely to lead to fiscal pressures, which would prevent any substantial progress in implementation of both HR management and public service modernization reform components. Thus, the share of non-wage expenditures in total expenditures on core government administration is assumed to be at the lower end (25 percent) of a broader interval.

Fair administrative reform with moderate achievements in both HR management and public service modernization components. This would provide for cuts in staffing by 710 percent in federal authorities and 1720 percent in regional administrations and local self-government and bring the share of nonwage expenditures in total expenditures on core government administration to about 32 percent.

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