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On Budget, Health and Social Protection Reforms in Croatia

June 9, 2016

Carlos Pinerua Lider Business Weekly

Interview with Carlos Piñerúa, World Bank Country Manager for Croatia and Slovenia for the Lider business weekly, published on May 27, 2016.

Shortly after his appointment in August 2014 as the World Bank Country Manager for Croatia and Slovenia, he stated for Croatian media that the country could not go on like this for very long. In a discussion with Carlos Piñerúa, we tried to find out whether anything has changed since that serious statement, the views of the World Bank about current, lively events on the local political scene, and how large the World Bank engagement in Croatia is. The answer to the last question is somewhat of a surprise: one of the most important financial institutions may no longer provide as many loans to Croatia, but it turns out that it is very much involved in recent events and the work of Tihomir Oreskovic’s government through advice and expertise.

" We are here to support the implementation of reforms.  "

Carlos Piñerúa


Lider: I believe that you have seen the Croatian government’s reform package. We know that the European Commission is relatively satisfied with it. What are your views?

Carlos Piñerúa: We were invited to participate, not in preparing but in commenting it and providing our views on the reforms. It is an ambitious program, but at the end of the day, like in any other country and any other strategy, it is the implementation that makes a difference. We are eager to see the implementation and to see whether the government can deliver on what it has promised. We are here to support that, not as supervisors who determine what has or has not been done, but as support in the implementation of reforms.   

L: Are you satisfied with the communication with the new government, especially on the preparation of the reform package?

CP: Absolutely. And I don’t say this lightly, because the Bank has different experiences in different countries. Here the level of engagement is very high. We have been invited from the beginning to provide our views on the budget and the strategy and we are happy to do that. I met more ministers than in any other country. I met thirteen out of the twenty ministers, and the prime minister three times to discuss what they would like to achieve. So, if you look at it from the point of view of access and the dialogue, I couldn’t be more satisfied.

L: Could you compare this with the former government? Was it less or more accessible than the current one?

CP: We had a good relationship with the previous government, that obviously at the end, the last six months of the previous government became less of an engagement, because of the political situation and preparations for elections.

L: Could you specify how the World Bank can support the government? Is it through favorable loans, expertise…?

CP: In terms of loans, Croatia by its own income and its own level of development is not in as much need of financial help as other countries. But what we can provide to Croatia is expertise, for example in the area of public finance and public administration. We can help define and deliver good health, social protection and education systems with the available money, that is help answer the question, how to lower the fiscal deficit and at the same time keep the same quality of services with less money.  That is where we can play a role and are trying to play a role.

L: What exactly have you worked on, which concrete projects and proposals?

CP: We are currently working on the two areas that I just mentioned, health and improving the quality of services.

L: In what way exactly?

CP: For example, you have many hospitals, where services are good but not good across the whole country, so we want to improve the distribution of services, make sure that there are no waiting lists.  These are tricky things. We tackled similar issues in other countries, so we have the expertise and the people who have worked on this before.  The person, who leads the work in Croatia, did the same work in Turkey, achieving great results there. I understand that people are concerned, that they may lose their hospital or their doctor, but the problem is that the system is very costly compared to other countries.  It is somewhat successful, because it delivers the quality that it has to deliver, but you need to make sure that everyone has the same access to the same services for the lowest cost. This is the experience we are trying to bring to Croatia. It is similar with social policies. It is no secret that Croatia has, I believe, 71 different social benefits. That is one of the highest numbers of benefits we encountered in the countries we work in. The question then is how to consolidate these benefits and make sure that the money that is used on the benefits goes to the people that need it. This is not easy because people will always complain, saying they deserve this…and that. However, there is a budget constraint, and a limited amount of money that can be spent. Therefore, it is very important to make sure that that money goes to the people that need it, not to everyone.

L: What are your views about the Ministry’s measures of charging for emergency services, and increasing the price of supplemental health insurance? Do you see it as part of what you have been working on or is this something that the government came up with on its own?

CP: This is the Minister’s idea but I am not separating myself from this. I think that the government needs to explain some of these reforms better. For example, when it comes to raising the price of insurance, just compare that to what it would cost in Slovenia or Serbia, much more than that.  The issue is not about trying to overcharge people. It is about bringing some rationality to the system. I have an anecdote about a colleague who collapsed in one of the meetings. He was taken to the emergency room and they did all the tests. He was incredibly satisfied and said he had never been treated as well.  When they came to charge him, it was six hundred kuna. Now that may seem like a lot to some but when he compared the quality of service, he could not believe how small the bill was. This is the balance that the Croatian system needs to find. We all want to drive a Ferrari, but can we afford it? If you want the quality of services, you need to pay for it. Again, I know that incomes here are not the same as in the US or in Germany, but we need to find that balance and that is what we are trying to do.

L: How do you comment the backtracking on territorial reform? It looks like it is off the table…

CP: At one point in time, Croatia will have to make that decision even if they do not want to do it now. It is not a risk now, but it is something that will have to be done in the medium term if you want a viable, efficient government. We have had that dialogue with the Minister of Public Administration who has approached us about how to proceed. But to be honest, you are right this has been put on the backburner. This problem is not specific for Croatia, and I have worked on several countries where this is an issue, the decentralization of decision making which puts pressure on public finances. But this is a politically charged issue. I used to work on Tajikistan and the Tajiks told me but the Swiss have as many state subsidies as they do. But the Swiss are richer so they can afford it. I think that Croatia cannot afford it and I repeat, this is not an issue that requires urgent action, but it will require some form of a solution. I believe that the reduction in the number of units of local self-government would make sense given the size of the country.

L: Returning now to the government…Considering the political situation, do you believe that this government can implement reforms, especially the tougher ones?

CP: That is something that is to be seen. As a representative of an international institution, I would like to see the implementation. I cannot judge, whether the politicians will do that. I think what they have put on the table, makes a lot of sense and needs to be done. Only they know if they are able to implement it. It is very difficult to make a judgement on my part. I understand that people are concerned because this is a new dynamic. You have a technocratic government and a coalition that is really not the same politically, so it looks very hard. What we see, is the determination to do this. We have had, a few meetings with the PM already and I see a clarity in what they want to do and what they want to achieve. And at the end of the day, these are things that need to be done. Whether this government or another government does them is a different question, but they need to be done.

L: Speaking of expectations, the Prime Minister is very optimistic about upgrading the credit rating through a quick sale of some public companies. Many people in the country are not so convinced. What is your view?

CP: He is trying to address the main concern of the credit agencies, the accumulation of debt. He came here, saw all these properties lying around idling, and decided to sell it. It is not necessary to achieve the full list of things that he wants to do. What the credit agencies are looking at is the implementation. If he really aims to do that and takes steps in the right direction, getting the five hundred million euros will not be key. The credit agencies will respond positively to the steps. They have been expecting for a while for something to be done on the fiscal side and it never really came. The Prime Minister wants to get things moving regardless of the achieved amount, which will probably contribute to upgrading the rating.

L: So the intent itself could be enough?

CP: Absolutely, and some success. However, if there is back tracking, which is seen in other countries, then there will be no improvement.

L: We have seen the budget, which is not much different from budget of the former government. Are you satisfied?

CP: As I mentioned before, on the second day following the government's appointment we were invited to provide views on the budget. We also worked with the previous government on what we call an expenditure review. What are the areas where you could see more effective ways of using your money. We have worked with both governments to help with the budget, as it is a critical policy tool that they have. This is another area where more work needs to be done. In particular, if public sector wages are increased in line with the increase of GDP. This would significantly affect the budget.  Also, if growth is stronger than projected, and it looks that way, this means more revenues. This, in combination with a delay in wage increases can make the budgetary goals reachable. So we are cautiously optimistic. What has been put on the table makes sense but again, implementation is key. If things change, we will express our views on that.

L: In principle, you are more optimistic than your sister organization, the International Monetary Fund. Recently they expressed some skepticism about the implementation abilities of this government.

CP: I used to work at the IMF and by their nature, they are somewhat skeptical. And it is not a criticism, but we are here and they are not. In my view, we have a stake in this country, more than they do and we have a much better understanding of what is going on.

L: Are you satisfied with economic developments? During the past few months, we have been observing positive indicators in many areas. 

CP: I think if I were a Croatian citizen, I would not be satisfied. Unemployment is still too high. Growth is still too low. There are good signs but there many things to be done. We continue to work, not only in those areas that I mentioned but also on the restructuring of public enterprises such as railways and the roads companies, to make sure that public finances, in the short and medium term are put on a stable path and to make sure there are no shocks to the economy. I think there is still a lot to be done on the business environment. The country has benefited a lot from the geopolitical situation in the world, especially in tourism. But that’s luck. So much more has to be done. Here, I’m not talking only about foreign investment, but also about local companies. There is a need to improve the regulation, taxation, everything that has to do with the business environment. Moody’s said, that medium term prospects for Croatia is one percent growth, which I find appalling. Essentially, if you do nothing, you get one percent. So at least, I would not be satisfied.

L: What about Croatian highways? Highways are a huge burden to the government and no decisions have yet been made about its future. The World Bank recently offered its assistance. What is the status?

CP: Our team is still working on this and this is a very complex issue. We are still working on that, it’s a very complex problem as you said. There are two things we are focusing on: the debt itself, which is very short term and expensive, so we are trying to design a financial scheme to approach the lenders, and extend the maturity of the debt, but with guarantees from the World Bank. We are not asking them to take a hit in any way. The other side is operational. We are working with the Ministry and the companies, to make sure, they are as efficient as they can be. Meaning that the cost of maintenance, the whole system of income, the vignette, all of these things we are discussing, everything is on the table. I can tell you that we are very serious about this and we will not walk away from this. But we need to make sure we have everything in place. I am encouraged by the determination of everyone involved to find a solution.  For example, during Spring Meetings in Washington, the Ministry of Transport was represented for the first time to my knowledge. This was an important signal to our Management about the commitment of all stakeholders.  

L: The concession model seems off the table at this point. Would a concession be a good solution?

CP: It would be an easy way out, neither a bad nor a good idea. The question is what exactly are you concessioning?  If your house is burning, to concession a burning house does not make sense. So that was our view from the beginning. It is better to put the companies in a viable position before you decide if you want to privatize, concession or whatever you want to call it. Trying to issue a concession for a company which is not financially and operationally restructured, does not make sense, because you are not going to get the best value for your investment. So Croatian Highways could be put up for a concession, but whoever decides to invest their offer will be based on its financial and operational status.

L: What are some of the upcoming projects? Where are you most active?

CP: We are focusing now on the highways. This is our main activity and we are trying to make sure that we get that right. We continue to work on existing projects, innovation support, health, social protection. Looking forward, we are working to support the government’s fiscal plans through a development policy loan, where we essentially lend to the government to support the implementation of reforms.

L: About two years ago, you stated that Croatia cannot go on like this for very long. What is your view today? Are you more optimistic?  

CP: As an economist you are never optimistic, but rather cautiously optimistic. What I tried to say at that time is that you are in a situation where interest rates are the lowest. So you could pretty much hide your mistakes if you wanted to. But these things can change very quickly. So the time to fix your house is now. Steps in that direction were taken with the last and this year’s budget. If you do not do that and interest rates change, and there is a lot of noise in the US that the central bank should start raising interest rates, those numbers can blow very quickly. That has been my experience in other countries. So you need to fix your house before the interest rates go up, that is what I was trying to say. If the government is able to deliver a deficit of 2.7% of GDP, they will be on their way. You know it is always an issue of politics. Decisions are not made in a political vacuum, but I do see willingness.

Media Contacts
In Zagreb
Vanja Frajtic