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2.90 Although de-linking the reform measures may be more attractive to the budget during the first three reform years (see Figure 2.5), a consequent rapid growth of public expenditures in 20062010 may make it difficult to sustain the pace of the reform agenda, which may in turn compromise the reform achievements. Overall, it seems as a less desirable strategy than the one that assumes a more steady reform effort and should be used with caution since it yields a less predictable fiscal implications pattern.

H. OVERVIEW OF RISKS ASSOCIATED WITH REFORM IMPLEMENTATION 2.91 Implementation of the broad civil service reform that would affect more than a million of employees in core government administration and about ten million of those employed in the civilian public sector, let alone the implications of the reform in non-civilian parts of the general government, is by definition a complex and risky task. Detailed analysis of all possible risks associated with the reform implementation process calls for a self-standing piece of research. Therefore, in this section we try to briefly overview only some key risks that should be taken into account during the reform implementation and that are directly linked to the fiscal implications of the reform process.

2.92 Firstly, a balanced relationship between different components of the public sector reform, especially between the reforms in core government administration and the rest of the public sector has to be established. The absence of such a relationship may lead to accumulation of disproportions in the public sector. In particular, it could trigger a nonsustainable wage differential between the core government administration and the public sector at large, which could cause either a slowdown in wage adjustment in the public administration or may result in excessive in creases in budget costs because of the need to adjust the remuneration in the highly overstaffed civilian public sector. As confirmed by our simulations, attempt to increase the real wages for the current level of employment in the civilian public sector would require additional financing of about two percent of GDP by Scenario 20: Moderate pay reform with a fair administrative reform effort and medium growth in private wages. Scenario 21(adj): Moderate pay reform with a significant administrative reform effort and medium growth in private wages (share of non-wage costs is 35 percent).

2010. Analysis of the current government plans for advancing the civil service reform suggests that this risk is not taken into account yet in the existing pay reform design.

2.93 Secondly, successful implementation of public administration reforms calls for a close coordination between the civil service and budget reforms. Slow delegation of authority for budget spending to budget units would undermine the overall efficiency of the reforms and would reduce incentives for implementing significant staff cuts both in core government administration and in the civilian public sector. Introduction of performance budgeting mechanisms that require a combination of more flexible rules for budget spending and higher degree of accountability for the results is a necessary precondition for implementation of many components of civil service reform, including HR management reforms, modernization of public service, as well as administrative reform. The failure to ensure such coordination may result in top-down mechanical cuts in staffing levels that would not be sufficiently concerned that adjustment in staffing was driven the considerations about quality of public service delivery. The recently approved Concept for Reforming the Federal Budget Process provides a basis for integrating performance budgeting principles and the performance management agenda advocated in the framework of civil service reform. However, the risk of possible disconnect between the two should be fully accounted for and controlled throughout the reform process.

2.94 Thirdly, the ultimate success of civil service reform depends largely on the incentives of subnational governments to pursue a similar agenda across the country. This is especially crucial because most of the public service delivery is taking place at the subnational level, hence the failure to demonstrate some tangible improvements in these parts of the public sector would undermine overall credibility of the reform process. Hence, the reform agenda should encompass both the activities related to building the capacity to implement public administration reforms at the regional and local levels (these issues are partly covered by the Presidential Program Civil Service Reform 2003-2005 that provides financing to undertake pilots and reform experiments in the regions) and, more importantly, building the incentives of the regional and local administrations to engage in the reform process. These incentives are associated with both getting additional authority in resource allocation and increased transparency and accountability of subnational administrations. One of the relevant policy measures that could strengthen the subnational incentive framework is currently proposed abolishment of a Unified Salary Scale in the public sector, which would be accompanied by the delegating to the regions the authority to determine the pay levels in the civilian branches of the public sector, taken into account the regional fiscal situation and local labor market prices.

2.95 Finally, successful implementation of the reforms in deconcentrated units of the federal civil service would also require a proper accounting for cross-regional variation in staffing needs and remuneration levels is also crucial for. Insufficiently differentiated pay adjustments for HQ-based staff and deconcentrated employees would create major disproportions in the regional labor markets and may also trigger significant additional budget expenditures (up to about 0.5 percent of GDP in 2010). Hence, identification and establishment of the pay levels for federal deconcentrated employees that are based on local market realities is one of the key preconditions for successful and sustainable pay adjustment in core government administration in Russia.

I. CONCLUSIONS AND RECOMMENDATIONS 2.96 Increasing efficiency of the government machinery and improving the quality of governance and service delivery in the country are prerequisites for successful implementation of the structural reforms in Russia. At the same time, implementation of these reforms would create additional fiscal pressures on the budget system of the country. Fiscal implications of public administration reforms depend on a large number of variables and are sensitive to changes in macroeconomic conditions. The model described in this Chapter does not capture all variables involved. However, the analysis of the incremental costs of civil service reform estimated for more than 40 reform scenarios allows for some preliminary conclusions.

2.97 Clearly, the reform approaches to different sub-sectors of the civilian part of general government would need to vary both in terms of pay adjustment and in terms of attrition measures. To achieve the reform objectives, the pay adjustment should be the most significant for the HQ-based portion of the core government administration, lower for deconcentrated units and regional and municipal parts of the core government administration, and the lowest for the civilian public sector. The latter could be justified in part by the growing share of feebased services provided by this sector, which would become a growing source of compensation of its employees. Inside the federal HQ-based executive service, the pay adjustment should be focused on managerial levels, which currently are affected by the highest pay gap with the private sector. Such a focus of the pay reform would allow addressing the key issues of low policymaking capacity inside the government and would help retain highly qualified public officials at key positions in the federal civil service.

2.98 Our simulations suggest that over the period till 2010 the budget is unlikely to accommodate a full closure of the current pay gap through a radical pay adjustment in the entire core government administration and civilian public sector. As a result, the average residual net public-private pay gap for core government administration would still remain significant (in the 100 percent range). However, the recent surveys of public officials reveal that such a gap may be quite acceptable and in general it reflects the existing expectations of the public officials.

2.99 In fact, implementation of moderate pay reform suggests that average wages in core government administration would grow 1.25 times faster than the average wages in the economy, while the average pay in civilian public sector would grow 1.17 times faster than the average wages in the economy respectively. Our simulations also show that by 2010 the average real wages in core government administration would be 1.7 times higher than current wages (average real wages in the civilian public sector would be respectively 1.6 times higher).

2.100 If such pay adjustment is complemented by more radical adjustments for a small number of decision makers in the headquarters of federal executive authorities, it is likely that the pay reform would achieve its objectives through both increasing external competitiveness of employment in the public sector (especially in core government administration) and significant internal decompression that would facilitate the introduction of a performance oriented system in the Russian civil service. The selected scenarios assume a substantial decompression: the compression ratio for the federal HQ-based executive civil service would increase from 2.5 in 2002 to 6.89.0 in 2010, while the compression ratio for the federal executive branch as a whole would by 2010 grow up to 9.913.2 from 3.7 in 2002.

The proposed pay reform would allow retaining a highly qualified cadre, which ultimately would result in better quality of policy making and public service delivery, as well as support the government anti-corruption effort.

2.101 The results of our estimates confirm that implementation of the administrative reform component and, more specifically, employment adjustment in core government administration and civilian public sector is critical to the success of the broad civil service reform efforts.

Even moderate pay adjustments not complemented by significant employment changes would result in unjustified growth of annual consolidated budget expenditures (2.8 to 4.2 p.p. of GDP in 2010). The expected employment dynamics in the core government administration and civilian public sector, as well as cross-country comparisons justify higher rates of attrition in the civilian public sector and in sub-national core government administration, but smaller cuts for the federal portion of core government employment. It is expected that by employment in the civilian public sector would decline by about 25 percent on average as compared to the 2002 baseline, while the overall employment cuts in core government administration would account for about 913 percent and attrition in the executive branch reaching 15 percent on average (with 13 percent attrition rate in the federal executive branch and 17 percent in subnational executive bodies). Similar adjustments would also be required in the non-civilian public sector that is reportedly overstaffed and for which cash remuneration is directly linked to the pay levels in the civil service.

2.102 Implementation of the broad reform agenda in the core government administration would entail significant additional non-wage expenditures. Full-scale modernization of public service would require both significant investment costs43 and significant recurrent costs for operation and maintenance of computer systems and physical infrastructure, as well as implementation of modern HR practices (including competitive recruitment, staff rotation, and training). However, our simulations show that Russia is unlikely to sustain the current share of non-wage expenditures in total costs of supporting the core government administration (37 percent). It is more likely that this share would have to go down to at least 35 percent, which would represent a significant increase in financing in real terms. Similar issues of non-wage expenditure control are also likely to arise in the civilian public sector at large, but specific estimates related to fiscal implications of growing non-wage expenditures in this sector go beyond the scope of this Chapter because these are highly dependable on specific situations in each particular sector (i.e., education, health, etc.).

2.103 Overall, the results of our simulations show that successful implementation of civil service reform calls for a broad approach to the reform, i.e. simultaneous reform measures in core government administration and civilian public sector at large44. Political economy of reform also suggests that civil service reform should not be applied to core government administration only. In fact, a significant pay adjustment in core government administration is likely to become a trigger for corresponding increases in civilian public sector and general government at large. Otherwise, it would be quite difficult for the government to sustain a drastic increase in the compensation gap between those in core government administration and the rest of the public sector employees.

2.104 Moreover, significant adjustments in the civilian public sector employment within five to seven year timeframe would yield the savings needed to keep overall fiscal costs of public administration reform more or less within the current limits. Although the fiscal implications of a moderate pay reform complemented by administrative efforts would account for about 1.22.3 p.p. of GDP as compared to 2003 levels, it is assumed that a substantial part of these costs (about two thirds) has been already included into the 2004 budget as a result of the October 2003 salary increase. Implementation of civil service reform complemented by OECD/SIGMA (1997), p.52.

In fact, these reforms should be closely linked with parallel adjustments in military and law enforcement parts of public service. Such integral approach seems to be shared by the government: representatives of both armed forces and law enforcement agencies have been involved in the preparation of civil service reform, and administrative restructuring of all non-civilian parts of public service has been recently announced by the Russian President.

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