Reducing tax evasion, boosting collection and transparency were key prorities
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It's a long way from the University of Maryland (UMD) to Romania's Finance Ministry in Bucharest - and not just in distance terms. But that didn't stop Ioana Petrescu from making the move.
A chance meeting in Washington with the future prime minister and a subsequent job offer, and she soon found herself swapping life at UMD's School of Public Policy for the slings and arrows of government service, serving first as an economic advisor to the country's prime minister and then as finance minister. Quite a shift - but one she has no regrets in accepting.
“For me, it was very exciting,” she explains. “I'm an academic and so the chance to work alongside my country's prime minister to apply and implement my ideas was something I couldn't turn down.”
Having agreed a leave of absence with her university employers, Petrescu's career in government began to a backdrop of challenges surrounding Romania's tax system. With avoidance up and compliance down, government coffers were running on empty. It was clear that reform - urgent reform - was needed.
“It was the biggest issue we were facing,” she recalls. “We had to reduce tax evasion, strengthen collection and increase transparency - these were our three main priorities and for someone like me, who had researched tax evasion and modernisation in developing and transition economies, I just couldn't wait to get started.”
Romania's tax system - like that of many countries the world over - was complex and offered no shortage of areas to investigate and reform. But actually her starting point was the taxpayers themselves, where a spell of re-education was deemed necessary. “I learned very early on that it was important to remind them about the actual value of tax and what it represents - schools, healthcare and so on,” she says. “Part of this, though, was for us to be more transparent as well as make it easier for citizens to pay - which is something my ministerial predecessors had failed to focus on.”
These difficulties manifested themselves in the long lines of people that snaked up to the exteriors of tax offices across the country. Neither quick nor efficient, the system itself needed to be opened up to encourage greater compliance. “We were very systematic and tried to figure out why these lines were forming,” explains Petrescu. “It turned out that there were a lot of people asking the same questions at the counter, many of which could be easily answered if they had access to a pamphlet or leaflet explaining how things worked. There were also individuals who had to learn how many taxes they had to pay, and so we decided to create an online system where they could check how much they owed before coming to the tax office.”
But more needed to be done. And so Petrescu and her colleagues decided to take a page from the Behavioural Economics playbook to see what else they could do. Knowing that many Romanians enjoy an occasional gamble, they designed and implemented a Fiscal Receipts Lottery to close the country's wide VAT gap, which was running at over 40% when she came to office.
“What we should have been receiving from transactions was nowhere near what was coming in, unfortunately,” concedes Petrescu. “So we launched this new lottery to try and persuade people to ask for a receipt when they buy something. It could be as small as a bagel, but the receipt enables them to enter a lottery which can earn them prizes in money. It's a form of voluntary compliance, but it has been very successful and VAT is now up by a lot. It's made a real impact, even though when I first presented the proposal it was met with a lot of scepticism. We're pleased with how it has turned out.”
Petrescu's spell as finance minister was followed by a stint overseeing the government's new Delivery Unit, a role that extended her remit beyond the financial brief. “We were also looking at other areas like public procurement, as well as state-owned enterprise reform and transparency,” she says. “It actually ended up being far more interesting than I expected, and far broader than what I was doing at the ministry.”
The design of the unit - which benefited from the assistance of the World Bank - was heavily influenced, at least initially, by the work of Sir Michael Barber's Delivery Unit in the UK. However, Petrescu is keen to stress that Romania's needs and priorities were woven deeply across its operations. “In the end what we did was something unique to Romania, as we had different types of challenges to those that were in the UK,” she explains.
“We always had to be very flexible and open-minded and think outside the box. For example, one of our goals was to simplify public procurement and reduce the number of days from the beginning of a public procurement process to the end. We soon realised that what we needed to do was something much broader, and we ended up writing a new strategy as well as writing four new laws to start implementing it.”
Their impact was soon clear for all to see, with the average time to finalise a procurement falling from 196 days to 174, and that's before all the reforms have been implemented. “Once everything is in place I think the impact will be huge,” adds Petrescu. “We also started with 13% of procurements being online and in June 2015 it was up to 41% - and this is only going to increase over time.”
Running the Delivery Unit was not without its challenges - not least the rapid turnover of the government's finance ministers. During a 21-month period, her team worked with four different finance ministers - necessitating a reset and restart every time the new politician took office. Hardly conducive to stable policies.
“It was certainly a challenge to keep our goals aligned and make sure that each new minister followed through on delivery,” admits Petrescu. “So we did things like a text message survey on how people perceive online systems - both to understand where the problems might be, but also to convince the minister that this was something that people wanted the government to focus on. With every new minister, we also sought to give them quick wins to help get them up and running and associate them with delivery successes. I think it helped, but it was difficult to adjust to each change of leadership over and over again.”
Coping with new ministers clearly demanded a bespoke approach for each individual - “it was very different from case to case”. Instead, a far more nuanced approach was required. “There was a lot of learning about how to manage the bureaucracy and what incentives were most effective for the people in the ministry itself,” she recalls.
“These are public employees who cannot be sanctioned or easily fired or given bonuses, and these were some of the issues you're landed with when you take up this kind of position and that no one necessarily teaches you when you're in academia. At the start you need to learn this by actually doing it - there is no substitute for experience - but I think that, for both roles, my knowledge of the subject matter was hugely helpful.”
Petrescu is now out of the government, looking at “delivery” and public impact from afar, and she agrees that it is both a science and an art.
“There is science in the importance of accurate data and KPIs that can be presented to the prime minister and his team, which is something that hadn't happened before,” she reflects. “Having it on a dashboard like that showed which reforms were doing well and others less so. This helped us steer the interventions to where they were most needed - and if the interventions were successful or not. But it's also an art. You need to know what is going on politically, be able to communicate clearly with the public and prime minister and keep stakeholders happy - like the World Bank and European Commission. This is not what can be classified as a ‘science', so it is definitely a combination of the two.”
At the end of the day, though, an injection of passion goes a long way. “Sure, you have to be persistent, but you also have to be truly passionate about what you are doing,” she concludes. “You mustn't take no for an answer if you truly believe your proposal will make a difference.”
