Primary Health Care Improvement Project (RRP UZB 50190-002) FINANCIAL ANALYSIS A. Introduction 1. This financial analysis was undertaken in accordance with the guidelines for financial management and analysis of projects of the Asian Development Bank (ADB). 1 It includes assessments of health financing indicators, the fiscal impact of the project, and sustainability analysis. 2. The proposed project will support the government s health service optimization process, which aims to improve and expand primary health care (PHC) services delivered in the rural areas. 2 The process will bring health services closer to the people and improve early diagnosis and treatment with the goal of achieving healthy life expectancy and productivity. The project will strengthen rural health services by providing modern diagnostic equipment to the newly established rural polyclinics and by training its staff. This will be supported by tools to monitor the government s broader PHC reform and the project itself. B. Public Health Spending in Uzbekistan 3. Public spending on health care in Uzbekistan marginally increased between 2010 and 2014 both in absolute terms (in local and foreign currencies) and in relative terms (as a proportion of total government expenditure, gross domestic product, and per capita) (Table 1). Total health expenditure as a proportion of total public expenditure increased from 8.67% in 2010 to 10.74% in 2014. Health expenditure per capita increased from $75.74 to $124.11 in real terms, indicating a commitment to strengthen the sector. External resources decreased over the period. 4. PHC is funded predominantly through tax-based public financing, and (as laid down by policy) all citizens are entitled to a package of care, including services to cover chronic conditions. A social health insurance system does not exist (although one is planned), and private health insurance accounted for only 2.60% of total health expenditure in 2012 (the introduction of private health insurance is also planned). 3 Table 1: Uzbekistan Health Financing Indicators Item 2010 2011 2012 2013 2014 Total health expenditure a (% of total government expenditure) 8.67 8.99 9.58 9.70 10.74 Total health expenditure per capita (US$) $75.74 $90.90 $116.16 $123.49 $124.11 Public health expenditure (% of total health expenditure) 51.48 50.71 48.17 49.36 53.29 External resources for health (% of total health expenditure) 1.74 1.97 1.32 1.68 0.91 Out-of-pocket expenditures (% of total health expenditure from private sources) 45.63 46.36 48.75 47.63 43.93 Source: World Bank. Health expenditure per capita (http://data.worldbank.org/indicator) and M. Ahmedov et al. 2014. Uzbekistan: Health System Review. Health Systems in Transition. 16 (5). pp. 1 137. 1 ADB. 2015. Financial Management Technical Guidance Note: Financial Management Assessment. Manila. 2 ADB provided project preparatory technical assistance for the Electronic Health Care Development Project (TA 9148-UZB, $800.000, approved on 5 August 2016). 3 Republic of Uzbekistan. 2017. "On measures for the further development of private healthcare sector". Presidential Decree PP-2863. Tashkent (1 April).
2 C. Primary Health Care Financing in Uzbekistan 5. Uzbekistan initiated PHC reforms in 1999 and, under the State Health System Reform Program, improved and modernized health infrastructure, trained staff, and piloted new financing and management reforms to promote innovation. With the help of ADB and the World Bank, structural and financing reforms, in particular, have continued. 4 Some key achievements were made, but in terms of governance (transparency, accountability, efficiency and thereby government effectiveness), the impact of the reforms has been mixed and there are concerns about fiduciary risk. Challenges remain with respect to the transparency of public procurement, financial and management accountability, and efficiency in public resource management, all of which adversely impact the effectiveness of health service delivery. 5 Recent important steps have been taken by the government to mitigate these risks. These measures are outlined in the Financial Management Assessment. 6 6. Per capita financing. Until recently, resource allocation within the government s health care budget has been a challenge for the PHC segment, which has had to compete for funding with other health subsectors, in particular hospitals. Through the World Bank s Health-3 Project for PHC financing and management reforms, the pooling of funds at the regional level and direct (adjusted) per capita financing were introduced. 7 This shift has increased the predictability of financing for health facilities and the availability of resources for drugs, medical supplies, operation and maintenance (O&M), infrastructure, and salary incentives. 7. Prior to these per-capita financing reforms, the roles and responsibilities of the finance and health departments in financing service providers was unclear, and the autonomy of health facilities was restricted. The introduction of a per-capita financing in PHC has increased transparency by removing the discretion of the central regional hospitals in allocating resources to PHC facilities. The World Bank reports that the implementation of a new Treasury system, unifying the budget and accounting system and streamlining budget planning, execution, and reporting, has achieved significant results, including more timely cash allocations to health facilities, reduced delays in direct payments to suppliers, and tightened control over expenditures (footnote 7). It has enhanced local government capacity to prepare comprehensive and accurate management reports. Capitation is now used for budget allocation in 151 of 155 urban family polyclinics and will be used for the rural family polyclinics. 8. Spending on maintenance and repairs is key to maximizing the life of the equipment being purchased under the proposed loan. All equipment will include a 2-year warranty for maintenance to be provided by the manufacturer. As for the post-warranty period, the government has committed to providing maintenance through (i) its newly established National Maintenance Centre; and (ii) via a budget allocation outlined in the Ministerial Orders 127 and 175. These orders state that central budget funds will be allocated for providing rural family polyclinics with medicines and medical devices, reagents, waste materials, and transportation to improve health care. 8 All the equipment being procured is considered appropriate for the 4 The national priority areas in health policy have included the protection of maternal and child health, the prevention and control of infectious diseases, environmental protection, and the strengthening of tertiary care services. 5 World Bank Report No. 44530-UZ, Republic of Uzbekistan. Assessment of the Primary Health Care Reform: Transparency, Accountability, and Efficiency. 6 Financial Management Assessment accessible from the Project Administration Manual in the linked documents. 7 Implementation Status and Results Report from Health System Improvement Project (P113349), 29 August 2017. 8 Government of Uzbekistan. 2017 MOH order 127 About the Decree of the President of the Republic of Uzbekistan No. DP-2857 of March 29, 2017 On measures of further improving organization of activities of primary medico-sanitary care institutions in the Republic of Uzbekistan. Tashkent (31 March); and Government of
3 circumstances and all, except for the ultrasound machine, are considered as robust and requiring limited O&M. D. Fiscal Impact and Sustainability Analysis 9. A fiscal impact analysis on the government s ability, as the end-borrower, to cover loan repayment, provision of counterpart funds and other financial covenants were undertaken. 10. Fiscal impact. The fiscal impact analysis of the project presents the projected total estimated annual expenditure of the government (2018 2021), the health sector, and the funding needed to finance the proposed project during implementation. Project costs are expected to be incurred annually over a 4-year period and accumulate to about $58.80 million (Table 2). Table 2: Fiscal Impact Analysis Indicator 2018 2019 2020 2021 Total government expenditure ($ million) 21,583 22,230 22,897 23,584 Total health expenditure ($ million) 2,158 2,223 2,289 2,358 Project total cost ($ million) 5.56 27.86 23.42 1.53 - Counterpart funding 1.33 6.54 5.51 0.36 - ADB loan 4.25 21.32 17.92 1.17 Total project cost (% government total expenditure) 0.026% 0.125% 0.102% 0.006% Counterpart funding (% government total expenditure) 0.01% 0.03% 0.02% 0.00% ADB loan (% government total expenditure) 0.02% 0.10% 0.08% 0.00% Total project cost (% government total health expenditure) 0.26% 1.25% 1.02% 0.06% Counterpart funding (% government total health expenditure) 0.06% 0.29% 0.24% 0.02% ADB loan (% government total health expenditure) 0.20% 0.96% 0.78% 0.05% Source: World Bank. 11. The total annual project cost (ADB loan and counterpart funding) as a proportion of the government s total annual expenditure ranges from 0.02% in 2018 to 0.12% in 2019 before decreasing to 0.01% in 2021. As a proportion of the government s total health expenditure, the total annual project cost ranges from 0.26 to 0.06% over the same period. Financial analysis confirms that the government has adequate financial resources and will be able to fulfill all its financial obligations under the project. The total project cost is significantly less than 1% of the government s total annual expenditure and total health expenditure (Table 3). 12. Fiscal sustainability analysis. The analysis shows that the government, as the endborrower, can cover both annual O&M costs and debt service requirements beyond the project implementation period. The sustainability analysis considered the impact of increasing the cost of O&M (considering recent currency devaluation) to 10% of the of total investment on equipment and furniture (current estimate is 2%), and even with this inflated estimate, as a Uzbekistan. 2017 MOH order 175 On organization of activities of primary medico-sanitary care institutions. Tashkent (22 April).
4 proportion of total government annual expenditure, annual O&M costs and debt service account for, at most, 0.01% in 2022, when amortization payments on the ADB loan are expected to begin. This is projected to remain constant until 2027. Table 3: Financial Sustainability Analysis ($ million, unless otherwise indicated) Item 2022 2023 2024 2025 2026 2027 Annual O&M cost a 0.0010 0.0010 0.0010 0.0010 0.0010 0.0010 Investment for replacing equipment b 0 0 0 0 0 0 Government salaries of projectassigned personnel c 0.50 0.50 0.50 0.50 0.50 0.50 Loan repayment 1.13 1.13 1.13 1.13 1.13 1.13 Total O&M and loan repayment 1.63 1.63 1.63 1.63 1.63 1.63 Government total expenditure 24,292 25,021 25,771 26,544 27,341 28,161 Government total health expenditure 2,429 2,502 2,577 2,654 2,734 2,816 Government total PHC expenditure 729 751 773 796 820 845 (% total government expenditure) 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% (% total health expenditure) 0.07% 0.07% 0.06% 0.06% 0.06% 0.06% (% total PHC expenditure) 0.22% 0.22% 0.21% 0.20% 0.20% 0.19% PHC = primary health care, O&M = operation and maintenance. a Annual O&M cost is estimated at 10% of total investment on equipment and furniture. b Equipment is replaced every 10 years. c Consultant estimates based on project cost estimates. Sources: World Bank; Government of Uzbekistan, Ministry of Health and Ministry of Finance; and Asian Development Bank estimates. E. Financial Management Assessment 13. The project financial management assessment (FMA) was conducted in accordance with ADB s Guidelines on the Financial Management and Analysis of Projects; the Financial Due Diligence: a Methodology Note; and the Technical Guidance Note: Financial Management Assessment. 9 The assessment covered funds-flow arrangements, staffing, accounting and financial reporting systems, internal and external auditing arrangements, and financial information systems using ADB s FMA questionnaire. 14. The FMA identified a substantial inherent financial management risk. The government s public financial management system functions well in some areas (e.g., budget credibility and comprehensiveness, tax administration, and the treasury function). However, there are weaknesses in medium-term budgeting, the appropriation system, accounting, payroll-related internal controls, procurement, and internal audit and external audit. As of 1 September 2017, the government put in place a resolution on the financial control and restructuring of the accounting and internal audit in budget organizations. The internal audit system recently created in the structure of the Ministry of Health (MOH) and other line ministries will manage prevention 9 ADB. 2015. Financial Management Technical Guidance Note: Financial Management Assessment. Manila.
5 and detection of cases of illegal consumption, strengthen financial controls, including development of an internal audit manual, and adopt annual work plans. 15. The World Bank conducted a Country Integrated Fiduciary Assessment (CIFA) of Uzbekistan in March 2011. 10 Prior to this report, a public expenditure review was conducted in 2005. 11 The CIFA provides benefits for the government, ADB, and other development partners. It provides an update on all the various studies conducted by the development partners and the government since 2005. It also details the progress made by the government in implementing key reforms in several critical public financial management and procurement systems areas. 16. Several recommendations resulted from the CIFA, including a recommendation that the government establish a strong legal, institutional, and regulatory framework for the conduct of its public procurement activities. Significant progress has been made toward all the CIFA recommendations since 2011. This progress was further strengthened by two new presidential decrees, signed in 24 August 2017, which outline modernized methods for improving state and corporate procurement to ensure their openness and transparency, and state financial control and internal auditing procedures. 12 F. Conclusion 17. Uzbekistan has made political, legislative, and financial commitments to strengthen the health sector overall and the PHC segment in particular. This has been done by increasing health sector financing, PHC spending relative to hospital spending, and almost completing the move toward per-capita financing in the PHC segment. The introduction of a per-capita financing has increased transparency, the predictability of financing, and availability of resources. The government has committed to providing post-warranty maintenance to maximize the life of the equipment purchased under the loan. This is being done through the National Maintenance Centre, and via a budget allocation outlined in ministerial orders. All equipment is considered appropriate for the conditions and, except for the ultrasound machine, considered robust and requiring limited O&M over its life. 10 Republic of Uzbekistan Country Integrated Fiduciary Assessment. The World Bank, Operations Services and Quality Department Europe and Central Asia Region, Report 60713-UZ, March 2011. 11 World Bank. 2005. Uzbekistan: Public Expenditure Review. Public expenditure review (PER). Washington, DC.World Bank. https://openknowledge.worldbank.org/handle/10986/8528 License: CC BY 3.0 IGO. 12 Republic of Uzbekistan, 2017 Decree of the President of the Republic of Uzbekistan "On measures to further introduce modern forms and methods of implementing state and corporate procurement of goods (works, services)", No. PP-3237; Republic of Uzbekistan. 2017 Decree of the President of the Republic of Uzbekistan On further improvement of the mechanism of financing educational and medical institutions and the system of the state financial control PP-3231.