Report No. 19232-BO Bolivia Public ExpenditureReview Public Disclosure Authorized
June14, 1999
Country Management Unit Country Department VI ILatinAmerica and Caribbean Regiort Public Disclosure Authorized Public Disclosure Authorized
Documentof theWorld Bank Public Disclosure Authorized FISCAL YEAR
January 1 to December 31
CURRENCY EQUIVALENTS
Currency Unit: Boliviano (Bs) Exchange Rate: June 10, 1999 US$1.00 = Bs 5.74 Bs 1.00 =US$0.17 Acknowledgements
This report was prepared by a team led by Jose Antonio Gonzalez (co-Task Manager, LCC6C) and Desmond McCarthy (co-Task Manager, DECRG) and is based on two missions to Bolivia during 1998. Core team members were Carlos Mollinedo and Jim Stephens. J. A. Gonzalez was responsible for Chapter 1 (macroeconomic issues). Chapter 2 (tax policy and issues was written by IMF staff and (external financing) by Keta Ruiz. Chapter 3 (decentralization) was written by Fernando Rojas (LCSPR). Chapter 4 (education) was written by John Newman, and Manuel Contreras. Chapter 5 (health) was written by John Newman and Marina Cardenas. Chapter 6 (water and sanitation), was written by Caroline van den Berg and J. A. Gonzalez. Chapter 7 (roads), was written by J. A. Gonzalez, Carlos Mollinedo and Alberto Nogales. Also contributing to the report were Abel Mejia, Oscar Alvarado, Alex Bakalian. Carmen Machicado, Menahem Libhaber, Shantaya Devarajan, Jose Maria Alonso Biarge, Alejandra Ortiz, Adalid Arratia, and Ronnie McClean.
Peer reviewers are Vinaya Swaroop (DECRG) and W. McGreevey (TFGI).
Team members acknowledge the support, time, and information provided by the Bolivian authorities. In particular, we would like to thank the following government officials: Herbert Muller (Minister of Finance), Amparo Ballivian (Minister of Housing and Basic Sanitation), Guillermo Cuentas (Minister of Health), Tito Hoz de Vila (Minister of Education), Carlos Iturralde (Minister of the Presidency), Jorge Pacheco (Minister of Economic Development), Erika Brockman (Senator from Cochabamba), Juan Antonio Morales (President of the Central Bank), Alberto Valdes (Vice-Minister of Public Investment and External Financing), Amalia Anaya (Vice-Minister of Education), Ramiro Cavero (Vice-Minister of Budgeting and Accounting), Alberto Machicado (Vice-Minister of Tax Policy), Marcelo Montero (Vice-Minister of Treasury), Ramon Prada (Vice- Minister of Transports), Bernardo Requena (Director of UDAPE), Alberto Leyt6n (General Advisor of the Vice-President), Carlos Klinsky (Director of SNC), Johnny Ferrel (President of FIS), Oscar Ponce (President of the FNDR), Marcelo Paz (Director of UPF), Jose Antonio Gonzalez (Mayor of the Municipality of Punata-Cochabamba), Mario Costas (Vice-Ministry of Budgeting and Accounting), Rodney Pereira (UDAPE), Marianela Zeballos (VIPFE), Hernan Zeballos and Fernando Mustafa (Ministry of the Presidency), Patricia Alborta (UPF), Marisol Fernandez (Prefecture of La Paz), Mauricio Lea Plaza and Fernando Medina (Vice-Ministry of Popular Participation), Jose Rivera (Ministry of Housing and Basic Sanitation), Luis Soto and Jose Antonio Teran (VIPFE) and Boris Arias (UDAPE).
The team gratefully acknowledges the participation of many donors, especially the financial support of the Swedish Cooperation for the education chapter and GTZ for inviting us to visit their health project in Cochabamba.
The Country Director is Isabel Guerrero, the Lead Specialist for Economic Policy is Eliana Cardoso, and the Lead Economist is Ernesto May. BOLIVIA
PUBLIC EXPENDITURE REVIEW
EXECUTIVE SUMMARY
MAIN REPORT ......
BACKGROUND CHAPTERS
CHAPTER 1: MACROECONOMIC POLICIES FOR GROWTH ...... I...... I
CHAPTER 2: DOMESTIC RESOURCE MOBILIZATION AND EXTERNAL FINANCING ...... 31
CHAPTER 3: A STRATEGIC VIEW OF DECENTRALIZATION IN BOLIVIA ...... 49
CHAPTER 4: EDUCATION SECTOR...... 73
CHAPTER 5: HEALTH SECTOR...... 1
CHAPTER 6: WATER AND SANITATION SECTOR ...... 133
CHAPTER 7: ROADS SECTOR ...... 159
STATISTICAL APPENDIX ...... 171
Vice President: Shahid Javed Burki Director: Isabel Guerrero Lead Economist: Ernesto May Staff Member(s): Jose A. Gonzalez/Desmond McCarthy ACRONYMS
CAPYS: Water and Sanitation Committees CAS: Country Assistance Strategy CDF: Comprehensive Development Framework CIDI: Centros Integrales de Desarollo Infantil (Integrated Child Development Centers) CPNC: Consejo de la Politica Nacional de Cofinanciamniento(National Cofinancing Policy Council) CVS: Comites de Vigilancia (Municipal Oversight Committees) DIGESBA: Directorate for Water and Sanitation DSA: Debt Sustainability Analysis ECD: Early Childhood Development EIH: Encuesta Integrada de Hogares (Integrated Household Survey) ENDE: Empresa Nacional de Electricidad (National Electric Company) ENE: Encuesta Nacional de Empleo (National Employment Survey) ESAF: Enhanced Structural Adjustment Facility FDC: Fondo de Desarrollo Campesino (Fund for Rural Development) FIS: Fondo de Inversion Social (Social Investment Fund, FIS) FNDR: Fondo Nacionalpara el Desarrollo Regional (National Fund for Regional Development) FONAMA: Fondo Nacional del Medio Arnbiemte(National Environiment Fund) GDP: Gross Domestic Product (Producto Interno Bruto, PIB) GNP: Gross National Product HIPC: Highly Indebted Poor Country LDD: Ley de Descentralizaci6n (Decentralization Law) LPP: Ley de Participaci6n Popular (Popular Participation Law) IEHD: Impuesto Especifico a los Hidrocarburos (Excise Tax on Oil and Gas) INE: Instituto Nacional de Estadistica (National Statistics Institute) IRP: Impuesto a la Renta de las Personas (Personal Income Tax) IPBI: Impuesto a la Propriedad de Bienes Ininuebles (Real Estate Property Tax) IT: Impuesto sobre las Transacciones (Transactions Tax) IUE: Impuesto sobrelas Utilidades de las Enipresas (Corporate Utility Tax) IVA: Imnpuestoal ValorAgregado (Value Added Tax, VAT) LOPE: Ley Organica del Poder Ejecutivo (Law 1788) MECD: Ministerio de Educaci6n, Cultura, y Deportes (Ministry of Education) MFP: Ministerio de Finanzas Ptblicas (Ministry of Finance) MHBS: Ministry of Housing and Basic Services NFPS: Non-Financial Public Sector NGO: Non-Governmental Organization OTBs: Organizaciones Territoriales de Base (Basic Territorial Organizations) PAD: Project Appraisal Document PAN: Programnade Atenci6n de Ninos de Seis Anos (Early Childhood Program) PDM: Plan de Desarrollo Municipal (Municipal Development Plan) PIB: Produclo Inferno Bruto (Gross Domestic Product, GDP) PIP: Public Investment Program PIDI: ProgramnaIntegral de Desarollo Infantil (Integrated Child Development Program) PNC: Politica Nacional de Cofinanciamiento (National Cofinancing Plan) POA: Plan Operativo Anual (Annual Operating Plan) PROSABAR: Programa de Saneamiento Bdsico Rural (Basic Rural Sanitation Program) PROSANEAR: Brazil Water and Sanitation Project for Municipalities and Low-Income Areas PSP: Private Sector Participation RAU: Regimen Agropecuario Unificado (Unified Agricultural Regime) RC-IVA: Re'gimen Complementario al IVA (Complementary Regime to the Value Added Tax) RTI: Regimen Tributario Integrado (Integrated Tax Regime) RTS: Regimen Tributario Simplificado (Simplified Tax Regime) RUC: Registro Unico del Contribuyente (Taxpayer Identification Number) SAGUAPAC: Municipal Water Utility for Santa Cruz SAM: Sistema Automatizado de Mantenimiento (Maintenance Administration Program) SDC: Servicio Departamental de Caminos (Departmental Roads Service) SEMAPA: Servicio de Agua Polable y Acantarillado is Cochabamba's water utility SIE: Information Systems SIF: SociialInvestment Fund (Fondo de Inversion Social, FIS) SIMECAL: National Surveys of Academic Achievement SIRESE: Sistema de Regulacion Sectorial (Sectoral Regulatory System) SISIN: Sistema de Informaci6n Sobre Inversiones (Investment Information System) SNC: Servicio Nacional de Caminos (National Roads Service) SNE: Sistemas Nacionales de Evaluaci6n (National Evaluation Systems) SNPP: Secretaria Nacional de Participaci6n Popular, later transformed into the Viceministeriode Participaci6n Popular y Forialecimiento Municipal SNIP: Sistema Nacional de Inversi6n Pu~blica(National Public Investment System) SSEM: Sistema de Seguimiento y Evaluacion Municipal STI: Sislema Tributario Integrado (Integrated Tax System) TGN: Tesoro General de la Naci6n (National Treasury) UDAPE: Unidadde Analisis de Politicas Econ6micas (Economic Policy Analysis Unit) UPP: Unidad de Participaci6n Popular (Popular Participation Unit) VAT: Value Added Tax (Impuesto al Valor Agregado, IVA) VIPFE: Vice-Ministrode Inversi6n Puiblicay Financiatniento Externo (Vice Ministry of Public Investment and External Financing) YPFB: Yacinientos Petrolifieros Fiscales Bolivianos (Bolivian Petroleum Company)
Funds: Shorthand for safety nets, social investment and basic infrastructure special funds (central government). Includes: FDC, FIS, FNDR, FONAMA.
Social Funds: Shorthand for FDC and FIS Public Expenditure Review
SUMMARY OF FINDINGS AND RECOMMENDATIONS Bolivia has made tremendous progress in macroeconomic stabilization and in structural reformns.Authorities have been effective in redefining of the role of the public sector away from production activities and towards social sectors. To continue the reform effort requires increased efficiency of tax collection; improved efficiency and poverty impact of expenditures by increasing the role of outcomes and accountability in expenditure allocations; and provision of incentives to increase private sector participation to complement public investment. The executive summary groups major findings and recommendations in: overall public sector, sectoral, and institutional issues. * There are two fiscal challenges: (i) To maintain a sustainable fiscal path, Bolivia must improve the non-pension fiscal balance from the present zero to a surplus of 1.5 percent of GDP by the year 2002. (ii) Prepare a soft landing for the expected reduced, access to concessional external financing over coming years. * IMF ESAF fiscal deficit targets should be followed to ease the debt burden and smooth the transition to non-concessional financing. While tax revenues have improved and are reasonable considering Bolivia's GDP per capita, tax collection efficiency must increase to cope with future expenditure needs. Implement the suggested tax reform which includes replacing the RC-IVA with a simple, broad-based income tax. - Although, economic composition of expenditures in most sectors is in line with international comparisons, there is a pervasive lack of operational and maintenance funds across the public sector. Estimates suggest an I extra point of GDP per year. All projects should take due account of sustainability and fiscal costs beyond their duration. * The report detects the need to increase public employment "productivity", reduce overstaffing and banish high turnover, suggesting the need for human resource structural changes including eliminating the old practice of party employment patronage and of voluntary but automatic salary deductions to finance political parties. * Health expenditures are low by most measures and warrant a sustained I percent of GDP increase only after internal reorganization. War of El Chaco Veterans' payment need to be scrutinized and taken off the health budget.
* Expenditures in education compare favorably internationally and need not be increased as a share of GDP. Primary school spending is now adequate but dropout rates remain high. Teachers compensation is competitive although there is heterogeneity and needs modification to increase incentives to undergo training and improve teaching. Spending in secondary and pre-school should be increased at the expense of university education. A deterrent to learning is malnutrition and anemia in poor areas. * Improvements in water and sanitation are important but unevenly distributed. Investment can be maintained at the current share of GDP but larger cities should be concessioned to the private sector to liberate funds for rural areas. No public subsidies should be given to ameliorate the increase in water tariffs in Cochabamba, which should reflect the full cost of provision by the Misicuni multipurpose project.
Executive Summary Public Expenditure Review
* Roads pose a formidable challenge. Maintenance and rehabilitation spending requires additional .resourcesof 0.75 percent of GDP per year. Investment requirements need additional resources of almost 1.5 percentage points of GDP. Sector plans need to draw in private financing to upgrade, maintain, and operate existing and future roads in order to liberate public funds to consolidate export corridors earlier, with perhaps lower specifications initially.
* Institutional Issujes. The budget process is too cumbersome to be used as a tool and the government has a dual budget. The budget submitted to congress should be simplified in terms of spending categories and number of projects. * Popular participation and decentralization has been successful in mobilizing civil society. The focus should now shift to increase efficiency and equity impact of public expenditures. Four hurdles are: strict limits on sub-national debt, redefinition of the role of prefectures, modification of the political processes to replace mayors, and a redefinition of the role of the Funds (within the national co-financing policy). Table I: Conceptual Sectoral-Thematicand Instrasectoral Reallocations Summary Education Health Roads Basic Water/Sanitation 1. Incidence and * Real expenditures *Expenditures are .There are too few *Tremendous progress in Intrasectoral have doubledand low, and have fallen. paved roads. coverage No longer one Reallocations compare favorably .Indicators are * One of LAC's worst of the worst in the with LAC averages. among worst in LAC maintained networks. region. eProgressin basic *Re-direct *Expenditures on *Unequal progress education but drop out administrative and routine maintenance regionally and by rates are high. tertiary spending to are half of what they income. *Reduce university immunizations should be, and in *Rural coverage is still spending. Raise pre- *Scrutinize War of el maintenance (broadly low, 37%. and secondary school. Chaco payments. defined), only 25%. 2. Current Vs * There are some *Administrative costs *Maintenance is a * Continue policy of no Investment problems with lack of rose as a share of major problem (see public funds for O&M Expenditures school materials. total budget. previous cell) 3. Resource *Increase fees *Increase fees in *Increase revenue * Tariffs continue to Mobilization especially in higher tertiary care. through better cover O&M. education. *Leadership in administration, tolls *Re-structure tariffs so coordinating donors. and licensing. more pro poor. 4. Cost of *Maintain spending as * Expenditures per- *Expansion plans are *Urban costs are high Reforms a share of GDP. capita and as share of too ambitious (2% of US$ 97 million while *Re-direct spending GDP have to increase GDP per year). Lower rural are low US$18 from salaries and *Correct Seguro length, quality and million. Re-direct to rural universities. Basico. concession. through concessions. 5. Human *Average teachers' *In the biggest state 'Increasecapacity at the Resources salaries are OK but w/ of disarray. Ministry and heterogeneity. *Compensation has Superintendence. * Modify the increased as much as escalafon. for teachers. 6. Public Vs *Investigate fall in PP *Implement short nat/ *Private participation 'Redirectpublic funds to Private Delivery in primary and immunization in maintenance and rural areas by awarding secondaty and campaigns. construction is concession in large cities. increase it in 'Leave tertiary care imperative to achieve universities. to the private sector. the expansion plans. 7. 'Fragmentationof 'Fragmentationof 'Centralization for *Municipal utilities, Decei.tralization responsibilities. responsibility is the national roads is good, autonomous or not, are 'Continue 30-city worst of any sector. but clarify role of subject to political pilot of education. Need a clear policy. prefect/municipios. influence.
Executive Summary Public Expenditure Review j
MAIN REPORT
1. Bolivia ranks among Latin America's 'early adjusters.' Most of the early adjustment efforts since 1985 were directed towards macroeconomic stabilization but also included lifting price and interest rate controls, tax reform, liberalization of the exchange rate, and trade liberalization. Since the early 1990s, there has also been progress on reforms aimed at redefining the role of the state in order to provide an environment more conducive to private sector led growth.
2. The last Public Expenditure Review was carried out in 1992 predating many of the structural reforms. As a result, a vacuum of analysis exists with limited consideration of the impact of structural reforms on public expenditures. The main thrust of that early report was to recommend lower direct state involvement in productive activities through its public enterprises. Mostly on its own initiative, Bolivia staged a comprehensive structural reform program largely retiring from direct involvement in production and assuming the role of regulator in most public services. The major reforms since 1992 are outlined in Box I and include divestiture of public enterprises, which shrank their participation in the economy from 25 percent of GDP in 1995 to 8 percent in 1998, and is expected to be less than 2 percent by the end of 1999; trade and financial liberalization, regulation and decentralization; and an increased emphasis in education and basic infrastructure. Most reforms were supported in different ways by donors, the IMF and the Bank.
Box 1: Major Reforms since the last Public Expenditure Review Divestiture of Public Enterprises 1992-ongoing *Passage of the Privatization Law *Capitalizationof 5 major enterprises including telephones * Over 50 small public firmnssold or liquidated * Pending: Oil refineries, smelting company Financial Market Liberalization * Independent supervision 1990 * Closure of state owned banks 1992 * Central Bank Independence 1993-97 • Capital Market Development: insurance, securities 1998 Judicial Reform * Ombudsman, Judicial Council, Constitutional and Supreme Court 1997-ongoing Independent Regulation: Electricity,telephones, water 1996-ongoing Public Administration * Pension Reforrn 1996 * Popular Participation and Decentralization 1994-95 * Budgetary Reform (SAFCO Law) 1990 Source: World Bank Staff
3. The purpose of this PER is threefold: (i) to provide an overall picture of public spending in light of recent structural reforms; (ii) to analyze and provide recommendations on specific public sector issues in sectors related to recent state reform efforts, which are affecting the composition, efficiency and incidence of expenditures; and (iii) to evaluate fiscal costs of the major reforms being proposed and provide suggestionsto accommodate these challenges in the context of fiscal adjustment.
Main Report ii Public Expenditure Review
4. Audience: This PER is part of the government's agreed work program with the donor community. The Bank was asked to present it as a background paper at the next Consultative Group Meeting in June of 1999 to provide donors with an overall perspective of the role of external assistance in the public expenditure program, and to develop a framework to detect new opportunities for assistance and constraints. The findings will aid the government to enhance the effectiveness of public expenditures.
5. The PER as a Process. The report should be viewed as one step in an ongoing process with the Bolivian authorities to systematically analyze the whole public sector over the next few years. The work on the PER has already yielded positive results. First, in the process of gathering data, it became painfully obvious that there were deeper problems than informatics with the budget process and institutions. Partly as a result, and following the recommendations in this report, a budget reform effort is being supported by the Institutional Reform Loan (IRL). Second, while gathering data on public servants' compensations, the ]ong standing voluntary practice of contributions to political parties was identified and is:now being addressed as part of Civil Service Reform supported by the IRL. Third, haviingidentified a pervasive lack of funds for recurrent/operational and maintenance costs, the latest projects within the World Bank have included detailed fiscal cost analyses and projections of projects' recurrent costs. Finally, numbers from various sources of data, notably in education and health, were reconciled in the process.
6. Coverage and Approach. Ideally, most sectors should be included in a comprehensive expenditure review at this stage. To keep it manageable, the report addresses a limited number of the fiscal problems and sectors that require analysis. There are three main building blocks of the report: the first is an evaluation of the budget as whole. The second, which includes chapters two and three, deals with institutional issues in decentralization, domestic resource mobilization and external financing. The third is a sectoral-thematic coverage of a limited set of sectors and the most pressing generic issues in the public sector. 'The structure and results are summarized in Table I of the Executive Summary. Education, health, roads, and water and sanitation were selected because these sectors have some of the most pressing reform agenda and they hold significant potential for advancing poverty reduction. In some instances the report does not offer detailed sector analysis but concentrates on pressing issues across the public sector: poverty incidence, operational and maintenance vs. investment expenditures, resource mobilization, private participation, decentralization, human resources and cost of reforms/expansion. Notable omissions in sector coverage are agriculture and the environment. Both have large poverty incidence but would have required considerable additional resources and made the report unmanageably long. Omissions in evaluations of structural changes include pension reform, and capitalization-together with the associated voucher program "Bonosol" (recently modified by the PCP Law) intended to distribute proceeds from capitalization that could amount to almost 20 percent of GDP. Given the fiscal challenges currently facing the Bolivian economy, the option of using Bonosol as an instrumnentto distribute privatization receipts might, in retrospect, not have been the best alternati.ve.This merits an evaluation to better understand the benefits and costs of such an option.
Main Report Public Expenditure Review iii
Chapter 1: A Bird's Eye View of t/e Budget
7. Although the principal focus of this report is on analyzing the composition of public spending, the starting point for such analysis is the determination of an aggregate level of spending consistent with the medium-term macroeconomic objectives outlined in Table 1.I (i.e., a sustainable fiscal deficit and public debt ratio). Since 1985, fiscal policy has aimed at avoiding Central Bank financing of the non-financial public sector by limiting the NFPS deficit to expected concessional external financing. Credit policy has been restrained, and the exchange rate policy has helped preserve external competitiveness.
Table 1.1: Selected Economic Indicators, 1992-2002 Base Case Scenario Actual ' Prd. Projection 1992 1993 1"4 199 199X 1997 I99t i9 2000 2001 2002 Reat(;r,owlh Rare GDP 1 7% 4 3% 4 7% 4 7°% 41% 4 2°o 4 S% 5 0% 5 2% 5 5/ 6 0% GDPper caprra -1 2%. 1 9%1o 2 2% 2 2% 17% 1 S% 2 2% 2 4% 27% 3 2% 3 7% Prrvate Consutption per capita 0 1°% 09%/o 055% 05%o 01% I 5% 13% 0%6 I 0°/ 1 6% 18% Expormsof goods 1 1% 5 3D I69% 112% 3 0% 5 0%o 16% 5 O0%. 7 8% 112% 9 7%
.sre-s ,f1;I1 (%)' Gross Domest lIcnestment 1600% 153% 149es 1566% 165% 187% I88% 195% 198% 2033% 210% CurrentAccount Balances -7 2% -7 3% -3 6%.5 1% -5 3% -7 0% -7 9% -7 2% -6 9% -6 4% -5.9%
Oihe- Inlation (CPI eop%) 10 5% 9 3% 5% 12 6% S00% 6 7%. 4 4% 5 5% 5 0/. 4 5% 4 0%/6 Grossreservesrnmronhs ofimports 44 47 57 56 74 63 75 67 7.0 70 70 Pubic sectest debt/GDP(after HIPC) 71 3% 74 7% 78 3% 72 5%/ 61 7% 56 2% 50 3% 48 7% 46 5% 44 6% 414% Debt serviceratio (afterHIPC) 545% 491% 35 4% 422% 25 6% 201% 230% 188% 18(P/o 16S% 161%
I...... I Ac,,,,t, Total Re,enues 23.9% 22.9% 25.2% 25.2% 24.3% 23.7% 23.5% 24.3% 24.3% 24.8% 28.0% Total Expen,,tdres 28.3% 28.9% 2S.2% 27.05'. 26.2% 27.0% 27.6% 2S.2% 27.7% 27.5% 27.0% Overall Balance -4.4% -6.0% -3.0% -1.S% -1.9% -3.3% -4.0% -3.9% -3.4% -2.7% -2.0% Nom-peasioabalance -3.2% -5.3% -2.2% -1.2% -0.7% -0.S% -0.0% 0.3% 0.5% 1.0% 1.5%
Note: Data are obtained from World Bank Estimates based on IMF Staff Estimates and Ministry of Finance. The most recent National Account statistics of March 1999 were not available in time to be incorporated into this study.
8. Bolivia has now achieved a considerable degree of macroeconomic stability. Performance in 1998 was broadly in line with the latest IMF ESAF program: preliminary data suggest GDP grew at an annual rate of 4.8 percent despite the adverse effects of El Nifo and of the Aiquile Totora earthquake, inflation fell to 4.4 percent, the NFPS deficit was 4.0 percent - in line with the program - and international reserves increased more than expected (by US$ 125 million). The budget deficit contemplated for 1999 is 3.9 percent of GDP.
9. An important weakness in macroeconomic performance is related to the current account deficit which reached nearly 7.9 percent of GDP. The surge in the current account deficit is due to the fact Bolivia is in the middle of a foreign direct investment (FDI) boom, which was recently re-estimated at 10.2 percent of GDP. The surge in FDI will have to be monitored closely to prevent overheating of the economy or erosion of investor confidence because of a large current account deficit.
Main Report iv Public Expenditure Review
10. Table 1.1 indicates that Bolivia faces a tough fiscal challenge in the short and medium term due to the large reform agenda and fiscal costs from previous structural measures--notably pensions, which accounted for 4 percent of GDP in 1998. Bolivia will have to undergo a fiscal adjustment of the non-pension balance of the NFPS from zero to a surplus of 1.5 percent of GDP by the year 2002 in order to reduce the overall deficit below 2 percent of GDP. This shift will enable: (i) reduction of public domestic financing leaving more private savings due to pension reformnfor private investment; (ii) prevention of an ove:rheatingof the economy due to the FDI boom which has opened the current account deficit; and (iii) lowering the debt burden to implement a soft landing into the expected reduced access to concessional financing. Authorities must continue fiscal discipline as envisioned in the IMF ESAF program. This will allow Bolivia to maximize the benefits of a series of reschedulings with bilateral creditors and the US$450 million debt relief under the HIPC initiative, and to place itself on a sustainable debt path. The report concurs with the HIPC recommendation to limit non-concessional financing in the short run.
I1. In the context of its new role as a regulator, the size of the General Government in Bolivia is not an outlier in either direction. Great strides have been made in increasing domestic revenue collection from well below 10 percent in the mid-1980s to 15.3 percent in 1990 and to 19 percent in 1998. In fact, international comparisons which take into account the level of income per capita suggest that the general government revenue as a share of GDP is not low, see Figure 1.2. Thus, a major tax reform to increase revenues is probably not appropriiateat this time because it may hurt competitiveness. Nevertheless, there are measures to improve the performance of tax collection and reduce evasion discussed below and in Chapter 2. In Bolivia, the General Government (GG) is a true measure of the public sector because, unlike many countries in the region, the sale of the remaining assets of YPBF (oil), and Vinto (metals) are expected to shrink the contribution of public enterprises to less than 2 percent of GDP by end- 1999.
Figure 1.2
GCnl Govwrr_t ExWrdtwe verus GMPpe captaC Geeral Govenent Tax Revenueand MP per caia for selecedcounies, 1997 fo seected cotri, 1997 50 3.5 45 30
4C
30 9BW @ 2D . . . * a.253. . X . .~~~O > 15 l ,
Us15 o1D
10
0 2000 4000 8000Wm 10000 O 2000 40D00 &000 10DD0 I2D CDP pe . MP per cap.t
The JapaneseODA recentlypledged US$260 million raising the total amount underHIPC to US$700 million.
Main Report Public Expenditure Review v
12. Aggregates indicate that the economic composition of public expenditures in the GG, which now encompasses almost the entire public sector, are broadly in line with international experience. On one hand, Bolivia's 8.3 percent wage bill as a share of GDP is higher than the LAC average (6.3 percent), indicating a bias towards current expenditures. Conversely, public investment is 6.0 percent of GDP compared to a LAC average of 3.0 percent. The undesired result of this development is that O&M expenditures have been squeezed out (see a fuller discussion below). In terns of GDP, the transition pension costs are the highest in LAC and, while they will disappear in the long run, they will remain high in the medium term hampering the Government's efforts to increase social public investment. 13. From 1989 to 1997, overall public sector employment remained constant at about 200,000 employees.2 This seems a great accomplishment, given per annum GDP growth of 4.1 percent and population growth of 2.4. Yet, because of capitalization and the fact that popular participation transferred an additional 10 percent of revenues to municipios, one would expect that public employment in the General Government (excluding municipios) should have been significantly reduced. Since we have not observed such a decline, this suggests that there is space for; (i) a reduction in the number of public sector employees, and/or (ii) an increase in public employment "productivity." Preliminary calculations in Chapter 1 offers specific estimates on the level of overstaffing and a discussion of the definition of productivity used, but the issue needs to be looked at further. 14. The evolution of public salaries accounts for much of the yearly wage bill pressure. The average rise in the real wage per public employee is equivalent to 2 percent per year--just above the average per capita income growth of 1.7 percent. Public employees are comparatively not worse off than the average Bolivian. The wage pressure arises from an uneven distribution of salary increases. The number of teachers and their salaries increased an average of about 2.5 and 7.9 percent per year respectively. However within teacher groups those at the lower end of the scale benefited least. In 1999 the Government undertook some efforts to reverse this trend. The above implies that the rest of the General Government employees saw an average increase of only I percent per year, or half of the average per capita growth rate. 15. A problem related to the public sector wage bill is the high turnover of technical staff. A tradition of political patronage has been behind a long history of failed Civil Service reform attempts in Bolivia. When a ministry changes party control a critical mass of public employees are laid off and replaced by party loyals. These party loyals can voluntarily have up to 10 percent of their salaries automatically deducted in favor of the party in power. This practice goes against the basic separation of politics and administration which is the core of Civil Service reform. This administration is committed to a Civil Service reform that will last. Hence, they are willing not only to foot the necessary costs, but also to end old practices, such as the one previously
2 Employmentin publicenterprises fell by about24,067, and in publicfinancial institutions fell by 3,919. Thiswas offsetby an increase(largely in Prefectures)of 35,973 for educationand healthwhich, in principle,is the appropriatereorientation.
Main Report vi Public Expenditure Reviewi
mentioned. Chapter I contains some preliminary estimates of the fiscal costs of Civil Service reform.. These estimates indicate that substantial increases in salaries, coupled with a 27 percent reduction of staff in the Central Administration, and 5.5-6.0 percent growth per year would be consistent with a lower salary mass as a share of GDP. 16. A major problem in the composition of the budget is the lack of O&M funds. The issue is discussed at length in Chapter 1. This is a common problem, especially in countries with a large donor-driven investment program. and there are no easy solutions. Wages are inflexible, and since the overall fiscal deficit is determined by concessional funds, investment is not a residual claimant, as exemplified by the 1992-98 average execution ratio of 92 percent. The drawback is that recurrent O&M expenditures show large volatility. Moreover. O&M has not increased despite the fact that the composition of investment shif'tedtowards social sectors, which require larger O&M expenditures per dollar of investment. The result is a familiar one: schools without materials, health facilities without doctors or medicine, poorly maintained roads, etc. A simulation in Chapter I finds that with the current investment profile, O&M expenditures have to increase by at least an additional I percent of GDP in the medium term. Authorities and donors should make provisions for recurrent cost requirements in each project at approval in order to ensure that funds are available wlhendonor financing is phased out. 17. The decisions to reallocate spending across sectors is inherently difficult because benefits are difficult to compare between sectors. The World Development Report 1988 (on Public Finance) stated "intersectoral allocations are inevitably based largely on intuitive judgements" and reflect political considerations. Despite the caveats, the analysis reaches two conclusions: (i) Health indicators are among the worst in LAC, yet public expenditur:s on health are dismal and probably decreasing. (ii) Among other sectors, Bolivia's flunctional distribution of expenditures is broadly in line with international comparisons and there has been major progress in reorienting public investment away frorn production activities such as industry, energy, agriculture, mining, and telecommunications, thus allowing authorities to concentrate on social sectors (see Figure 1.6). Efforts in education and transport are higher than the LAC average but lower than in East Asia.
F!gure 1.6: Distribution of Investment by Sector (% of GDP) 100%, 0the rs
9 0% :1oining Olndustry and Tourism B 0% oHydrocarbons
7,0% E rg
5 0% MMutisecioral * Transports 4 0%
3 0% mUrban Oeselopm ent and H o u sin g 2 0% :Basic anitation
1 % E ducation and Culture rOHealthr and Social Security ° ° % * Hydric Reso urce s 1987 198e 1889 1950 1981 1992 1583 1984 1895 1996 1557 1998 Source: Coritaduria General del Estado and World Bank Estimates
Main Report Public Expenditure Review vii
18. Bolivia's difficult topography, poor road network, strong ethnic component reluctant to emigrate from the highlands, and dualistic development pattern place a heavy burden on the public sector to equitably distribute expenditures regionally. Surprisingly, social expenditures are not regionally regressive except for the case of Santa Cruz (see Figures 1.7 a and b). This municipality accounts for about 10 percent of the population and approximately 43 percent of public social sector spending. It is also an outlier in terrns of high expenditure per capita and the best social indicators. In contrast, expenditures for the rest of the cities are not regressive. La Paz, Cochabamba and Sucre,
Figure 1.7.(a): Cumulative Population and Social Sector Spending(by municipality)
10 0 . 90
80 l 0 70
CL o 30
0.
30 ~ ~ Cmuaiv CumulativeSocialoca SeScorEpndicptur muoicipenditures( ( ffttl otl
60Lar0 ge.t
a *-~~~~~~~~~~~~~a 'E 1000
v0Santat Cruz
120000
1i200000, Oru^--* -: - 6 FIgurex of.(Demand for Basic Servcesvs.te
FL 20000* lr *. 40 60 0 100 80000 0 08 9 Per capita SocialSectorMExpenditur InexofDeantfrBaicNeesite
C ~~~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~anRpr viii Public Expenditure Review which have some of the best social indicators, do not receive large contributions per capita. In general, the poorer the municipality the larger the contribution per capita. Nevertheless there are cities such as El Alto which, despite poor indicators, receive low social expenditures per capita to an overall scarcity of funds. An encouraging development is that donor participation is negatively correlated with domestic social spending indicating complementarity. Good regional targeting of education expenditures contrasts sharply with seemingly poorly focused health expenditures.
Chapter 2: Tax Ref,orm (elaborated by lMFStaff) and External Financing
19. The magnitude of the present and future reform agenda creates spending pressure that will require additional resources. Externally, Bolivia is approaching graduation status with many donors, resulting in lower access to concessional financing. Therefore, domestic resources will have to increasingly cover current costs and investment. The first part of the chapter presents an overview of the external financing profile and suggestions to improve its development impact. The second section presents a strategy to reform the domestic itaxsystem to improve its efficiency and equity impact.
20. Both as a share of GDP and in terms of dollars per capita, the level of official development assistance received by Bolivia is one of the highest in the world for countries of similar size.3 Moreover, over 90 percent of this assistance is on concessional or grant terms. In the past decade, net external credits grew at an annual rate of 2.3 percent, and by 1998 supported 45 percent of the public investment program. Grants declined in real terms reflecting a more stringent international environment.
21. A long history of foreign assistance led to the accumulation of a large external debt of US$4.3 billion which represented 50 percent of GDP at the end of 1998. Despite its concessional nature, external debt service placed a heavy burden on the economy. Because of its strong track record, Bolivia reached the completion point of the HIPC initiative qualifying for debt relief of US$450 million in NPV terms, or 13 percent of debt outstanding at end-1997.4 This debt reduction will provide Bolivia room to maneuver while consolidating its adjustment efforts, and free resources for investment. Chapter I concurs with the HIPFCdocument conclusion that non-concessional financing should be limited to maximize benefits of debt relief. Thus, the focus should shift to reducing dependence on external financing.
22. A large number of donors are active in Bolivia but a select few dominate lending in most areas. In 1997-98, while 30 donors initiated new credits/grants, 8 donor entities provided three-quarters of the US$1.2 billion contracted during the period (see Table 3). Consistent with the N'ational Action plan for poverty alleviation, equity is the pillar that has attracted the most financing (49 percent), followed by opportunity, institutionality, and dignity.
}In LAC, only Nicaragua receives more aid as a share of GDP and in dollars per capita.
4See footnote 1.
Main Report Public Expenditure Review ix
23. As of January 1999, there were 36 active international donor agencies working in Bolivia. The large number of donors imposes a heavy burden on the Government in terms of coordination. There are a large number of donors in agriculture and health, with few resources channeled to these sectors. Moreover, the number of sectors per donor grows with the size of resources. For large donors, spreading into many sectors may be desirable but poses the question of division of responsibility and accountability among donors. The newly proposed Comprehensive Development Framework (CDF) should help address these issues by providing the Government with a tool to maximize comparative advantage among donors as well as the impact of scarce aid resources.
Table 3: Bolivia External Funding - Credits and Grants 97-95 (in millons of US dollars) Agency Contract' Equity lnstltutlon.iltyOpportunity Dignity Others Total %ofTotal IDA c 163 15 65 243 20% [OB CID 141 2 40 1 185 15% USAID D/C 10 11 75 12 107 9% CAF C/D 1 94 0 95 8% GERMANY D/C 24 15 33 72 6% NETHERLANDSD 48 23 71 6% OTHER 200 40 140 27 20 426 36% Total 585 83 410 39 22 1,198 100% (% of Total) 49% 7% 39% 3% 2% 100% SourceMinistry of Finance " C Credit,D Grant
24. The evidence on regional targeting of external finance is mixed. On one hand, Chapter I shows that for municipalities social spending and external financing per capita are negatively correlated, hinting at a complementary relationship. On the other, external financing per capita is higher in the richest municipalities. The broad conclusion is that while there is no systematic perverse relationship, external financing could improve its poverty impact by diverting some funds from the richest cities to some neglected ones.
25. Finally, there is a solid institutional capacity in the Vice-Ministry of Public Investment (VIPFE). They could still play a greater screening role in accepting externally financed projects. Greater institutional development is needed in implementing agencies in sector ministries and subnational governments. Donors, in particular feel that undue bureaucratic requirements may be hampering their work while authorities are burdened by many different procedural requirements. It might be useful to have a discussion with donors on this issue and ideally aim for a "one stop shop ".
26. The conclusions regarding aggregate public revenues in the analysis of Chapter I coincide with IMF staff's independent analysis of the tax structure: Bolivia has made notable progress in increasing its non oil tax collection efforts since the mid 1980s to the point where tax revenues as a share of GDP compare favorably with the LAC average and are high for its income group. Taxes are raised from more stable sources. Thus, a major tax reform to increase revenue as a share of GDP is not advisable at this time since it might hurt external competitiveness. Nevertheless, there are a number of suggestions to improve the buoyancy, equity, and efficiency of the tax system, and to widen the base of tax collection. The series of measures should be implemented as a package rather than as isolated measures. The most important, although not the must urgent is to replace the existing 13 percent retention of the RC-IVA with a progressive yet simple personal
Main Report x Public Expenditure Review income tax with a wide base. There are various implementation issues, not covered in this report, which need to be resolved.
27. Bolivia's tax system is made up of around a dozen taxes, and while relatively straightforward it has a number of idiosyncratic characteristics. (i) Revenues are more dependent on consurnption than on income or trade taxes. The forner account for nearly 8 percent of GDP while the latter two barely reach 3. percent. (ii) Tax revenues are largely dependent on retentions rather than declarations. (iii) Taxes are interrelated and cross enforce each other. Two examples are: The RC-IVA retains 13 percent of salaries of employees but can be reduced by submitting IVA invoices. The rationale was to have civil society force firms to declare the IVA. The strategy once worked but has been exhausted. The net yields of the RC-IVA are small due to easy access to invoices, legitimate or not. Moreover, the cross reference lowers incentives to save. (iv) The IUE (Corporate Income Tax) is deductible from the IT (Transactions Tax) the following fiscal year. (v) There are a number of special regimes which erode the tax base of other taxes (agriculture, trucking, artisans etc.)
28. The suggestions proposed are to increase revenues moderately and to improve the buoyancy of the system. The implementation should be done holistically. In order to prevent jeopardizing the integrity of the tax system, no tax should be abolished until the substitute is functioning. It is politically easier to approve tax cuts. The restructure will improve income distribution effects, and broaden the base of contributors:
* Improve the already well functioning IVA by reducing evasion and exemptions, which would increase revenues by 1.13 percent of GDP.
* Replace the RC-IVA with a fully functional personal income tax. The RC- IVA is based on salary retention of a limited number of individuals and distorts incentives. Implementation is complex and thus the tax should be simplified: one or two brackets, few if any deductibles, should cover all forms of income (interest, rents etc), and be more widely encompassing with the same level of exemptions as the RC-IVA, i.e., 4 minimum salaries. Such a switch is not as drastic as commonly believed given that the RC-IVA is already an income tax. This would allow the self-employed to transfer from the corporate to the personal income regime. Thus, it is important to ensure the maximum corporate income tax is equal to the personal income tax to avoid evasion and informality. To maintain some cross-enforcement, the percentage of IVA invoices could be gradually reduced. Administering a more encompassing income tax will require the resolution of numerous issues in tax implementation.
- Replace the existing IT (transactions tax) with a 1 percent tax on corporate assets. This switch would elliminatethe distortions caused by the accumulative IT. Collection would improve modestly by 0(.1percent of GDP.
- Take advantage of the consensus to eliminate special tax regimes which distort production and encourage informal sector activities. Incorporate the high brackets of the RegimenTributario Simplificado (RTS) and the Sistema TributarioIntegrado (STI) in the general regime and eliminate the remaining ones. The agriculture regime (RAU) is
Main Report Public Expenditure Review xi problematic because it is based on outdated property values. The cadastre needs to be updated and the regime combined with the existing property tax (IPBI).
2a. Budget Institutions and the Budget Process5
29. Despite any faults found in the budget process and institutions, a non-trivial accomplishment is that Bolivia has an effective control of the overall fiscal balance. This is an important accomplishment which has allowed Bolivia to achieve a great degree of macroeconomic stability. Any modifications to the process must not compromise the degree of control over fiscal discipline currently in place.
30. Modifications to the budget process must now focus on increasing the allocative efficiency of expenditures, transparency, accountability, and links with policy, planning, outputs and outcomes. The following issues have generated widespread dissatisfaction with the budget process within the Ministry of Finance, line ministries, and private contractors: (i) The process is overly complex and detailed forcing various levels of Government to "count beans instead of sacks." This has resulted in a lack of timely information, flexibility and transparency. (ii) The actual executed cash budget differs from the budget approved by Congress. The budget process is not being used as an effective tool for integrating development plans and policies. (iii) The uncertainty of budget envelopes results in operational inefficiencies, over commitments and short-term planning horizons.
31. When implemented in 1990, the SAFCO law was thought to be a "state of the art" budget law establishing program budgets. In retrospect, the process it generated was too complex, it did not lend itself to deep structural reforms and has prevented the formation of effective budget institutions and management. Capitalization, decentralization, and popular participation put high information requirements on institutions with little public finance capacity.
32. The present budget system is cumbersome. All agencies are required under SAFCO norms to present annual work programs using the program concept-planes operativos anuales (POA)-which together form the budget submitted to Congress.6 In reality, there are weak links between programs and outputs. Rather they are merely an extensive disaggregation of budgetary line items based on the previous year's budget. Budgets are then modified by the Ministry of Finance but Congress can still increase expenditures based on questionable revenue collection projections to maintain the same fiscal deficit target.
33. To meet the fiscal target, the MOF has the responsibility of controlling the cash flow through the allocation of monthly payment quotas and even daily line item payment approvals. The budget is then formally modified once over the year with Congress' participation even though it has little bearing on actual spending.
This section draws from extensive discussions with officials, various BTORs of the ILACO project, and the IRP.
6 The document consists of five volumes which are difficult to follow.
Main Report xii Public Expenditure Review
34. In sum, it is difficult to manage the budget effectively. A partial list of outstanding issues is: (i) The concept of accountability is diffused among all parties involved in the process. (ii) The Treasury controls overall fiscal targets through a tight lid on cash management making agency ceilings rather than the program budget the control variable althDugh attempts are made to follow the budgeted figures. (iii) The expenditure disaggregation is so extensive it is unmonitorable, with widespread reallocations within ministries. (iv) Some information systems are over six months behind actual time. The emergency unit, Unidad de Programacion Fiscal, with limited but significant coverage is the only agency that provides budget execution figures in a timely manner but only in an aggregated fashion, i.e. not by ministries. Investment figures are up to date, by any disaggregation desired.7 (v) With delays in the approval of the budget and its modification, investment projects are delayed for much of the year shortening the window of action (not the case for 1999. (vi) Line ministries have resorted to Notas de Debito to cover cash flow imbalances due to complex accounting. (vii) As is usually the case, there is an increasing undocumented amount of floating debt issued by the line ministries. This is a contingent liability that needs to be resolved. (viii) More systematic problems to solve in the medium term are the biases for underfunding of maintenance costs, and a consultant salary budget line for compensation of public officials.
35. Progress since 1990 has been limited. However, the 1999 budget process saw significant progress. (i) The budget was more realistic than previously and thus the execution will be closer to the programmed. (ii) The budget was approved by congress before the beginning of 1999 and therefore all institution could start executing their investment plans from the beginning of the year. (iii) Congress did no modify aggregate income or expenditures levels. Rather, it only reallocated expenditures.
36. Given the magnitude of the problem, it will be difficult to solve it in the short term. However, efforts should be made to have one integrated budget. It may need to be prepared as much as six months before the corresponding year, have a much less extensive disaggregation of line items, and be prepared in a way that can be widely disseminated. The process of linking policies with the budget should be a transparent process. Over time, performance-based criteria should be introduced to the whole budget. This implies that line ministries are given predictable aggregate budgets for which they are accountable and have some flexibility to reallocate across projects and types of spending.
37. There are various technical and political issues that need to be resolved, such as the appropriate performance criteria, the level of aggregation of line items, the degree of flexibility awarded to line ministries, etc. Although there is general agreement on the need to reform it is recommended that a multi-partisan group of technical experts be asked to deliver a proposal for an alternate budget approach to meet the following criteria: it should have twenty to thirty line items, should enforce mandatory approval before the beginning of the year, budget quotas allocated based on projected
7In fact, data from the UPF is used as the reliable source to monitor fiscal developments by the IMF with success.
Main Report Public Expenditure Review xiii
commitments not payments due, built-in mechanisms for midyear adjustments, and finally the group could move to agreement on performance based criteria.
Chapter 3: A Strategic View of Decentralization in Bolivia
38. Along with capitalization, decentralization is one of the most imnportantstructural reforms implemented in the 1990s. The process is conceptually and legislatively divided in two parts: Popular Participation which awarded a large degree of autonomy to municipal governments along with 20 percent of tax revenues with minor restrictions from a previous 10 percent with stricter conditions; and Decentralization which delegated responsibilities to sub-national governments in all areas of public sector services. There have been positive developments but a variety of issues remain.
Table 1.12: Investment by Administration Levels (in percent) 1992 1993 1994 1995 1996 1997 1998 CentralGovernment 71.8% 72.5% 65.5% 53.4% 24.1% 18.0% 29.4%
Ministries 32.4% 38.3% 37.5% 33.3% 10.5% 11.8% 28.3% of whichSNC 22.5% 27.8% 30.8% 22.3% 0.0% 0.0% 15.1%
PublicEnterprises 39.3% 34.3% 28.0% 20.1% 13.6% 6.2% 1.1% of whichYPFB 22.0% 19.7% 20 0% 11.0% 9.1% 4.9% 0.5% of whichENDE 11.9% 6.5% 5.0% 7.3% 4.2% 1.1% 0.1% RegionalCofinancing 6.7% 7.2% 13.1% 8.8% 19.3% 19.2% 18.2% of which FIS 2.7% 3.7% 4.8% 4.8% 5.9% 8.5% 6.4% of which FDC 0.7% 0.0% 0.4% 1.6% 1.1% 1.7% 2.3% of which FNDR 3.3% 3.5% 7.8% 2.4% 12.2% 8.4% 8.8% DepartmentalAdministration 19.6% 17.9% 12.0% 13.4% 34.8% 38.0% 27.0% Prefectures 0.0% 0.0% 0.0% 0.0% 14.0% 17.3% 24.9% Corporations 19.6% 17.9% 12.0% 13.4% 0.0% 0.0% 0.0% SNC* 0.0% 0.0% 0.0% 0.0% 19.0% 18.1% 0.0% Other Reg. Entities 0.0% 0.0% 0.0% 0.0% 1.7% 2.6% 2.1% LocalAdministration 1.9% 2.4% 9.4% 24.4% 21.8% 24.7% 25.5% MunicipalGovemments 0.2% 0.4% 7.9% 22.8% 19.9% 23.2% 25.0% W'ater Enterprises 1.8% 2.0% 1.6% 1.6% 1.9% 1.5% 0.5%
TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% TOTAL(in Ni IS$) 531579 480570 513288 519731 588694 548280 504689 Source: VIPFE *SNC stands for Servicio Nacional de Caminos (National Road Service). The entity was temporarily decentralized in 1996 through 1998. (See institutional issues for road sector).
39. The process is a moving target and authorities remain committed. Table 1.12 shows the radical change in investment responsibilities due to these two pieces of legislation. In 1992, 71.8 percent of public investment was executed by the Central Administration, while in 1998 the share declined to only 33.9 percent.8 Regional funds increased their share from 6.7 percent in 1992 to 19.7 percent in 1998. Departmental Administrations increased their share moderately from 19.6 percent in 1992 to 25 percent l~~~~~~~
8 For comparability and because SNC will return to the Central Administration in 1999, road investment was countedas partof the CentralAdministration's share.
Main Report xiv Public Expenditure Review in 1998. The most prominent increase is local administration's importance in the investment budget increasing from 1.9 percent in 1992 to 23.5 percent in 1998.
40. Popular Participation is functioning well. There has been a revival of smaller cities in particular, due to transparent, almost unconditional central government transfers. Municipalities are mnoreautonomous and responsive to civil society preferences and controls -though there may be some instances of clientele bondage in ways that require further in-depth studies. Preliminary evidence indicates the participatory decentralization process is leading tc enhanced allocative efficiency at the local level. There has been a mobilization of civil society for participation in local affairs. Mayors have become more accountable to their constituents, since "everyone knows the amount the town gets due to PP." Nevertheless, further work is needed to improve administration.
41. The absence of incentives in the PP scheme has also created some problems. There is little evidence of greater efficiency in production or service delivery. More importantly, there has been little additional mobilization of resources at the municipal level. Only some oi. the larger municipalities have reinforced their local autonomy by increasing their own tax revenues. Table 3.3 shows that average fiscal dependency rates for the bigger cities improved while for the smaller cities worsened between 1995 and 1996. Fees and other applications of the benefit principle of taxation remain largely underdeveloped. Authorities (the Funds in particular) should use incentives in inter- governmental fiscal transfers to increase revenue collection at the municipal level.
Table3.3: FiscalDependency Rates by Type of Municipality,1995-96 Coparticipaciones/Total Coparticipaciones/Total MunicipalIncome Municipal Income 1995 1996 Capital cities and El Alto 29% 26.9% Rest of municipalities 63.3% 68% Source:Parlicipaci6n Popular: Una evaluaci6n-aprendizajede la Ley 1994-1997.Ministerio de Desarrollo Sostenible y Planificaci6n.Viceministerio de Participacifn Popular, La Paz, 1998, p 124.
42. Sub-national borrowing, particularly municipal debt, is growing in a disorganized, potentially problematic manner. Authorities have started to take measures some with success. Nevertheless, some sub-national debt is not properly accounted for nor are there effective mechanisms to prevent over-indebtedness, pressures for central government bailouts, or fiscal instability. The problem does not appear to be so much with loans for investment as with short term and contingent debt, particularly related to dismissals, to meet current expenditures. Non-recurrent sources of income have reached significant proportions in the early years of Bolivian decentralization, and continued sale of sub- national assets without proper controls may open the door to corruption. Donations still play a large role in financing of sub-national governments. Above all, there seems to be a growing risk of committing non-recurrent resources to recurrent expenditures -- a sure formula for fiscal crisis in the coming years. The Central Government should improve its institutional mechanisms in order to be able to effectively to restrict sub-national access to capital marlcetsto a regulated, controlled environment that prevents moral
Main Report Public Expenditure Review xv hazard and fiscal instability. Chapter 3 documents isolated cases but a field study to document the actual debt situation in municipalities should be carried out.
43. The role of prefectures has to be redefined in such a way that this intermediate level helps rather than contradicts the process of PP and decentralization. The link between the central government and prefectures is functioning better than between prefectures and municipal governments. The new departmental services have contributed to create a confusing panorama of responsibilities, revenues and accountability across sectors: in education and health municipal governments own the infrastructure but prefectures administer personnel with nobody fully accountable. The ministry of the presidency has instituted a program to rationalize human resources, reducing over 30 percent of personnel, and strengthen institutionally.
44. The municipal institutional arrangement has a number of drawbacks. Although municipal governments are autonomous, they are not isolated from national party politics which may distort achievements of PP in terms of creation of participatory, credible institutions at the local level. Censura constructiva is sanctioned by the Senate and subject to national party politics for example (see Chapter 3). It is urgent to draw clear boundaries between signals, incentives, monitoring, evaluation, and orientation, on the one hand, and re-establishing central hierarchies and controls, or subordination of fiscal local autonomy to national politics, on the other. In addition, there is a high rotation of mayors due to laws which allow easy impeachment. Although a political issue, it affects public expenditure performance and the fiscal balance since large severance payments are made to dismissed staff. Laws and regulations should be re-examined to remedy the situation without compromising democratic principles.
45. Although there is increasing participation in planning and control, municipal management capacity remains largely underdeveloped. Since the present system of inter- governmental transfers involves little explicit, transparent conditionality, it seems necessary to complement general revenue sharing with transfers geared to stimulate, monitor and achieve strengthened management capacity, efficiency in allocation and production, and inter-government coordination of priorities. Social investment and development funds --that have become independent entities in their own right and maintain discretionary decisions with respect to municipalities-- should evolve towards formula driven and transparent conditional or earmarked transfers. The government should accelerate the conclusion of the national cofinancing policy.
46. The Bolivian process of decentralization requires substantial inter-government reporting and coordination. It is necessary to build confidence among layers of government which can only occur through uniform accounting, information exchanges, monitoring, and evaluation. Top-down and bottom up exchanges of information, inter- government monitoring and shared, disclosed evaluations are needed to reinvigorate the faith in decentralization.
Main Report xvi Public Expenditure Review
A Limited Sectoral- ThematicAnalysis of Public Expenditures
47. The socio-political goals of the present administration: opportunity, equity, dignity, and institutionality emphasize the cross-cutting nature of public sector issues. However, given that the present administrative structure is along ministries this report chose to organize chapters along sectors. Table I in the executive summary highlights the conceptual structure and the results of the sector-thematic approach followed. This matrix structure of analysis was deemed appropriate to emphasize pressing issues in the public sector in the sectoral analysis and to limit the sector analysis itself without losing generality. The matrix hints at the fact the material can be presented either by cross- cutting issues (horizorntally)or by sector (vertically).
Chapter 4: Education
48. There has been significant progress in many areas of education in Bolivia in recent years. Between 1990 and 1997, real educational expenditures more than doubled, increasing from 3.1 percent to 5.3 percent of GDP. Recent expenditure ratios exceed the average for both lower- and upper-middle income countries (4.6 percent and 4.5 percent, respectively) (World Blank,Edstats). The rise has been due to an increase in the number of teachers and their compensation (69 percent), an increase in the amount devoted to higher education (20 percent) and an increase in educational investments for the Ministry of Education (II percent). Mingat and Tan (1998) observe that rich and poor countries spend between 13-17 percent of their public budget on education. With a share of education in total public expenditures close to 16 percent in 1997, Bolivia does not spend too little on education, and the scope for increases is limited. Thus, authorities need to develop a strategy to maximize the effectiveness of public funds.
49. Recent expencliture increases have already produced favorable results, but accumulated problems can not be eliminated overnight. The most important features and recommendationsare highlighted below.
50. Readiness to learn. Too many children are entering the formal educational system with a legacy of malnutrition and other health problems. According to the 1998 National Demographic and Health Survey, the percentage of children under 3 that is considered chronically malnourished is 24.2 percent down slightly from the 1994 figure of 28.3. In some areas 47 percent of the children were malnourished in 1998. The same 1998 survey conducted blood tests and found a prevalence of anemia in children that was extremely high (67 percent). There are two types of programs that can improve the readiness of children to learn: early childhood programs (ECD); and formal early education.
51. Coverage rates for early education increased slightly recently but continued work is needed In 1998, 15.4 percent of children 0 to 6 years old received some sort of early education, which is below the 1992 Latin American average of 17 percent for children under 5 years old. An effective early education is increasingly viewed as essential to later success in school, especially for children from poor backgrounds. Benefits of ECD programs include: (i) Older children are often freed from caring for their younger siblings and therefore go back to school. (ii) Strong health benefits and improved nutritional
Main Report Public Expenditure Review xvii status and practices, better reproductive health, and increased productivity. (iii) Parents can go to work and repetition and dropout rates decline. The recently approved (1998) policy for early education highlights the importance of this level of education and sets forth the challenge of universalizing early education. The assignment of sufficient resources for this level of education is important.
52. Primary Coverage has reached acceptable levels but too many students drop out without attaining adequate levels of schooling. Table 4.2 indicates Bolivia has achieved primary school enrollment levels typical of lower middle income countries and is approaching the levels of other Latin American countries. Enrollment levels are lower than the Latin American and Lower and Middle Income averages at the secondary level, but are higher than average gross enrollment rates at the tertiary level.
Table 4.2: Comparative Data on Gross Enrollment Rates (1995) Gross Enrollment Rates Primary Secondary Tertiary Bolivia 101.7 (1997) 53.4 (1997) 22.0 Argentina 113.3 76.8 41.8 Brazil 117.6 45.1 11.5 Chile 101.3 74.9 30.3 Colombia 112.5 66.7 18.6 Ecuador 122.6 49.9 23.4 Paraguay 111.7 43.5 11.4 Peru 122.9 69.7 31.1 Uruguay 108.8 85.1 29.4 Latin American Average 107.2 57.0 19.6 Lower Middle Income Average 101.9 64.6 18.8 Upper Middle Income Average 100.7 73.9 19.2 Source: World Bank, Edstats, and; Govemment of Bolivia
53. In Table 4.3 Bolivia's relatively high gross enrollment rates in primary school contrast with low retention rates. Only 66 percent of the students who enter primary finish sixth grade and only 51 percent complete the full primary cycle.
54. Gender disparities in educational attainment have improved considerably over the last 20 years, but some differences still remain. In the 11 to 15 age group there is a difference of three percentage points between girls and boys in school attendance (89 versus 92 percent). There is no statistically significant difference in the capital cities or in El Alto. However, significant differences exist in other urban (94 versus 96 percent) and rural areas (79 versus 87 percent).
55. The students' mastery of the primary school material is unsatisfactory. Despite improvements in enrollment rates, there is still a challenge in improving the quality of education. Recent UNESCO test scores for language and mathematics in third and fourth graders place Bolivian students below the LAC average.
Main Report xviii Public Expenditure Review
Table 4.3.(b): Comparison of Gross Enrollment Rates for Bolivia and Chile Primary Primary Primary Prinary Enrollment Enrollmentin Enrollment Enrollment Bolivia graderelative Chile In graderelative to enrollment to enrollmentin infirst grade firstgrade (1995) (1995) (1995) (1995) Primary Grade 1 292,838 100 308,523 100 Grade2 244,013 83 293,966 95 Grade 3 217,182 74 277,913 90 Grade4 19,4236 66 247,530 80 Grade5 175,849 60 256,520 83 Grade6 161,483 55 251,675 82 Grade 7 135,226 46 249,213 81 Grade 8 117,628 40 228.865 74
PrimaryGross Enrollment 100 101.3 Rate l Sources:Bolivia, Estadisticas Educativas Serie 1975-1995. Secretaria Nacional de Educacion.Chile,UNESCO Education Statistics
56. The Education Reform program is the government's effort in improving quality. There are six main components in this program: transformation of the nature of instruction; teacher training (both pre-service and in-service); school improvement projects (combining infrastructure with other inputs); promotion of greater involvement of parents and the community; improved administration; and enhanced monitoring and evaluation. Chapter 4 has specific suggestions on each component. With the exception of the pre and in-service teacher training programs and the system for measuring results, virtually all elements of the Education Reform are now in place. The projected costs are presented in Chapter 4 and the issue of teachers compensation is highlighted below.
57. Relative to primary and tertiary levels in Bolivia and relative to other countries, coverage rates for secondary education are low. Secondary education has been a neglected area. Extending a cohort analysis, one finds that out of 100 students who enter first grade only 26 complete twelve years of schooling. While much has to do with demand factors, supply factors are also important. In 1996 there were ten times as many public primary (12,358) as there were public secondary schools (1,296). The imbalance is greater in rural areas. Only 1,737 primary schools include all primary grades. The share of secondary in total educational expenditure in Bolivia is about 10 percent--low by most international measures.
58. The success of the education reform will inevitably raise the demand for secondary education. Already, there is evidence that supply constraints in secondary education in rural areas is one factor for migrating to cities. By the year 2002, there will need to be an increased share of investment in secondary education. The curricula for secondary education needs to be developed in the year 2000.
59. Progress in adult education but greater effort needed. The average years of schooling of the entire population is 5.2 years. This relatively low level of education of
Main Report Public Expenditure Review xix the adult population reflects deficiencies of past educational system. Although declining rapidly, there is still a significant proportion of the adult population that is illiterate (15.2 percent). This figure is higher in the rural areas and for females.
60. For a country of Bolivia's per capita GDP, there are too many low quality public university students claiming an excessive share of the public budget on education. Despite the fact that only 25.7 percent of the cohort complete 12 years of schooling, gross enrollment rates for higher education (22 percent in 1995) are above the Latin American region's average (19.6 percent in 1995). High enrollment rates in tertiary education are explained by the large percentage of high school graduates who attend university and the long time taken by students to graduate. Public opinion surveys indicate that neither students nor employers rate the public universities highly.
61. Table 4.11 indicates that compared to other countries in the region, Bolivia assigns one of the highest amounts of public resources to universities both as a percentage of the education budget (26.8 percent in 1994) and as a percentage of GDP (1.25 percent in 1994). In addition, between 1990 and 1997 public expenditures on university education grew by 86 percent in real termnsand their share in GDP rose from 0.87 percent to 1.2 percent. These efforts are not reflected in the unit cost per student. Thus, it is not an issue of increasing public resources to improve the unit expenditure per student, but of decreasing the number of students, both at intake and by increasing graduation rates.
Table 4.11: University expenditures as a percentage of the education budget and GDP and unit student costs, 1994 Country lniversity Country Universily ICounlry Unit cost budget as budget a% of total as a % of in5us education GDP Range Expenditure Range Range Over40% Venezuela 43.6 Over 175% Cuba 1,59 7er $us 6000 Brazil - 6.99
Brazil !s35 anama - 1,40 SU-s000as Venezuela 3.35 30-40% Nicaragua 33.9 Boblvi 1.25 Colombia 3 405
Guatemala S Costa Rica 1.20 Sus2)000-3000 1 Argenia 2.67 Boiihiu 26.8 1-1,5% Venezuela 1.18 truguay1 Panama 22,7 Honduras 1.10 Sus1500-2000 Chile 1 855 20-30% Costa Rica 22,1 Guatemala 1.10 Paragtuay 1.776 Ecuador 21,4 Nicaragua 1.00 P'ostaRica 1.gua Uruguay 20.4 Colombia 0,6 Stis1000-1500 Panama 1.247 Honduras 20.4 Brazil 0.76 Cuba 1.166 Colombia 19, Uruguay 0,69 Mexico 1.065 Paraguay 19.3 0.5-1,0 Ecuador 0)63 Nicaragua 15-20% Chile 19,1 Paraguay 0.59 El Salvador 708 Argentina 16,5 Argentina 0,58 Stus500-1000 Icuador 699 Cuba 15.2 Chile 0,52 Bili 621 Peru 13E Mexico Peru 610 El Salvador 12.8 0,0-0.5% Peru 0.35 ilonduras 584 10-15% Mexico 10,4 R Dominicana 0,30 Siis 0-500 Guatemala 550 Rep. Dominicana 10,0 El Salvador 0,23 R Dominicana 424 Asverage 1,7 Average 0 ,83 ANeragc -. Source. armen (iarcia (iu-ila 19Y)7.-
62. As in other Latin American countries, university expenditure is regressive. Data from Bolivia's November 1997 Encuesta Nacional de Empleo indicate that 89 percent of the students come from households in the top three quintiles, with 1 percent coming from
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the lowest quintile and 40 percent from the highest quintile. However, the incidence is not as regressive as in other countries because there is not much of a filter from secondary to tertiary education.
63. Specific suggestions to confront the problem are detailed in Chapter 4. The most important include: a broad public information campaign to sensitize the public to the issue; concerted effort to reduce the amount of transfers, raising fees gradually (grand- fathering existing st:udentsto avoid riots), tightening admissions standards, and greater use of competitive mechanisms for allocation of public resources.
64. A broad conclusion from the discussion of the issues in different levels of education is to reconfigure the education budget with a shift away from tertiary education toward increased emphasis on early and secondary education levels. The chapter presents a detailed projection of an education budget.
65. Problems and Achievements in Decentralization. The Popular Participation and Decentralization Latws increased municipal responsibility for financing educational investments. Departments are responsible for hiring teachers (but not for paying them). The national level is responsible for allocating teacher positions, paying teaclhers,and for carrying out the Education Reform program.
66. Education investment at the municipal level has increased three-fold between 1993 and 1995. Unfortunately, a significant amount of municipal investment has gone into school feeding programs whose existence is necessary given the levels of malnutrition but whose efficiency could be improved. Municipal governments should be made aware of "almost costless but effective interventions" as detailed in chapter 4.
67. The fragmentation of responsibilities has given rise to a problem of accountability. One obvious solution is to concentrate all decisions concerning teachers, investments and educational materials at the municipal level. Countries that have had a fragmentation of responsibilities across different levels of government have moved in this direction. The transition costs involved in making this change are not trivial because the teachers' unions violently oppose the municipalization process. Thus, the Government faces a strategic decision when the gains from the Education Reform have yet to be consolidated and when the reform of teacher training looms as a major pending issue. It may be preferable to continue with its pilot plan of granting greater municipal autonomy in 30 municipios.9
68. Facing the problem of teachers compensation. The number of teachers has risen from 67,092 in 1990 to 82,286 in 1998-an increase of 23 percent (2.6 percent per year). This increase is less than the rate of growth of enrollment, which has allowed the pupil- teacher ratio to rise to its current value of 22 suggesting a closer examination or the distribution of teachers.
9There areother instruments that can be usedwithin the existing system to counteractthe adverse incentive problemsassociated with the fragmentation of responsibility.For example, the nationallevel can conditionaccess co-participation funds on theirefficiency of servicedelivery.
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69. There is a widespread impression that teachers in Bolivia are very poorly paid. While previously true, this is no longer the case. The average compensation per employee increased by 70 percent in real terms between 1990 and 1997 (compared to a real increase in per capita GDP of 25 percent). Table 4.10 illustrates how real wages have increased for two types of teachers. The relative real wage gains of the two types of teachers are similar and, at 66 percent, are consistent with the increases in average compensation per employee. On average, teachers in Bolivia now receive roughly 2.5 times per capita GDP. Excluding African countries in the sample, 70 percent of the countries pay teachers less relative to GDP per capita than Bolivia does. Heterogeneity among teacher's salaries is significant indicating that: qualified and experienced teachers earn quite well, unqualified teachers do not, and over 50 percent of all teachers are in the lowest three categories.
Table4.10: Comparisonof realwages of teachers Year Realwages Salaryof Teachers Average Salaryof Teacherrelative Relativeto PerCapita income to AverageSalary (All GNP Capital salariedworkers, HH Cities(HH surveydata) Survey) Capital Rural Capital Rural Capital Rural Nornalista Interino Normalista Interino Normalista Interino 1990 282 254 1.52 1.37 397.2 71.1% 63.9% 1991 296 266 1.58 1.42 445.3 76.1% 68.4%0 1992 325 292 1.71 1.54 515.7 78.8% 70.9% 1993 363 327 1.83 1.65 619.8 78.7% 70.7% 1994 382 344 1.85 1.66 733.1 74.5% 67.1% 1995 393 355 1.87 1.69 782.9 78.0% 70.4% 1996 422 381 1.90 1.72 868 79.4% 71.8% 1997 468 422 2.06 1.85 Source: INE, EIH 1990-1995 and ENE 1996 Ministerio de Desarrollo Humano, SNE, Subsecretaria de Educacion Preescolar, Primaria y Secundaria, Programacionmonitoreo y Evaluacion. "Propuesta de Modificacionesal Escalafon", reported in Murillo (1998).
70. The issue of teacher compensation then is not a matter of raising the salaries of underpaid teachers. The challenge is to improve the quality of the teachers at the low end of the distribution and to link the compensation to an improvement of skills. It now appears that the Government is turning away from the partial approaches in favor of a more comprehensive approach to the issues of teacher compensation, training and human resource management. The Government's current approach to modify the escalafon is on the right track, it is an important advance and the six elements are described in Chapter 4.
Chlapter5: Health2
71. Chapter 5 first reviews health conditions in Bolivia which raise important concerns. This is followed by a review of recent trends in expenditure. A third section identifies some of the challenges facing policy makers and discusses some of the options. Finally suggestions are offered on how some expenditures might be distributed within the
Main Report xxii Public Expenditure Review available budget. A major finding is that public expenditures in the health sector are too low.
72. Table 5.1 indicates performance in the health sector in recent years has been rather poor. This contrasts with the improvements achieved in education. Much of the explanation may be due to poor funding and cultural barriers. The areas where the least progress has been made are in immunizations and in coverage of severe diarrhea. If the government is going to make any expenditures on health, they should be in immunizations, which could be implemented in national campaigns of short duration. This administration earmarked 10 percent of employers contributions to social security to finance the Immunization Shield Program.
Table 5.1: Health Indicators from Demographic And Health Surveys, selected years Indicator 1989 1994 1998 Infant Mortality Rate (per 1,000) 99 75 67 Under Five Mortality Rate (per 1,000) 142 116 92 Gross Fertility Rate 5.6 4.8 4.2 (Births per woman) _ Maternal Mortality Rate (per 100,000 births) 416 390 NA Percent of births with some prenatal care by trained 44 49.5 65.1 medical personnel Percent of women who use modem contraceptives 12.2 17.8 48.3 Urban 17.9 25.3 57.6 Rural 5.2 6.9 30.1 Percent of children less than 5 years old with moderate 13.3 15.7 7.6 malnutrition Percent of children with complete vaccinations for: DPT3 28.3 42.8 48.6 Measles 57.5 55.7 50.8 Polio 37.8 47.5 39.1 Percentage of births occurring in medical facilities 37.6 42.3 52.9 Percentage of cases of Acute Respiratory Infections 28.7 43.4 NA (cough with fast breathing) treated by medical personnel Percentage of severe diarrhea cases treated by medical 24 32.4 36.4 personnel _ I_
73. Bolivia is a country where health conditions are heavily influenced by poverty, cultural, and geographical barriers. Cultural traditions result in unused health facilities. However, regression analysis results presented in Table 5.2 suggest that even when controlling for GDP per capita, Bolivia is a consistent underperformer in its health indicators. While a large number of deaths and high morbidity levels may be attributed to absence of typical health care facilities, the problem must be seen in a broader context. These include malnutrition and anemia related to low income levels, together with a inadequate levels of infrastructure in water and sanitation. Although, as argued in a Section below and Chapter 6, the situation appears to be good considering Bolivia's level of income. In addition, the donor community plays a major role in the health sector. While their efforts are commendable, in some instances there is not enough consideration given to how operations can be sustained after donor funds are phased out.
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Table 5.2 Key Indicators for Low and High Performing Countries and Bolivia Indicator Low High Testof Difference Bolivia Performing Performing (significance) InfantMortality 68 27 .00 69 1995 GDPPer Capita(1987 PPP $) 2309 2272 .45 2250 Accessto SafeWater (% of total pop) 63 71 .14 72 Accessto SafeWater (% of rural pop) 53 61 .21 37 Childmalnutrition (% under5 yrs) 21 15 .06 16 Immunizationrate (% < 12 mos.with DPT) 65 88 .0001 49 % of deliveries attended by trained 58 82 .002 29 personnel % of childrenreaching grade 5 67 80 .05 60 Sources: World Development Indicators 1998 CD-Rom, IBRD, www.unicef.org/statis, ww'w.who.int/whosis,Ch 6.
74. Infant mortality rates and immunization levels are among the worst in Latin America to the extent that even if health services were readily available, there would still be a need to educate the population to demand preventive care. These rates mirror the levels of public health expenditures. While these increased from 1989 to 1994 they have remained essentially constant from 1994 to 1998. Chapter 5 shows health indicators are strongly correlated with income level and are notably worse in rural areas. Recent work suggests that in countries with low per capita income levels, improvement in water and sanitation is extremely cost effective. This further supports the need for making potable water available to all--especially among the poorer and rural groups where infant mortality rates are high. Chapter 6 describes progress made in the Basic, Maternal, and Old Age Insurance programs as well as the Immunization shield.
75. Reverse the trend of declining health expenditures with related outcome objectives. Given the evident need for health services, it is disturbing to note recent trends in public expenditure on health illustrated in Table 5.7. Health expenditure shares in Bolivia are deemed low compared to countries with similar levels of income. More importantly, total public health expenditures stagnated in real terms since 1990.10 While Ministry of Health expenditures fell by 50 percent as a share of total public expenditure (mostly due to the process of decentralization), the decline has not been fully compensated for by an increase in estimated health expenditures at the municipal level. The situation is compounded by administrative costs which increased from 19 percent of the Ministry of Health budget in 1990 to 54 percent in 1998. Finally, 30 to 40 percent of the health budget are payments to War of Chaco veterans. It is a puzzle why pension costs should be so high for a war that ended over 60 years ago and the situation should be scrutinized. The result is that expenditures on goods (medicines, vaccines) and maintenance is severely underbudgeted. Whereas in 1991, 60 percent of all expenditures was devoted to non-personnel, non-pension activities, by 1998 the number was only 6 percent.
10 This conclusion is based on estimates of health expenditure at the municipal level and, given the lack of reliable data, these expenditures may be understated. However, based on the magnitude of the decline in total public sector health expenditures, inaccuracies in estimating expenditures at the municipal level are most likely not large enough to significantly affect the argument here.
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Table 5.7: Real Expenditureof the Ministry of Health (1990 US dollars '000) 1991 19 1993 1994 1995 1996 1997 1998 Personnel services 19,028 23,808 28,861 31,489 36,886 40,019 42,957 45.469 Total 89,661 101,116 100,923 87,783 86,726 86,732 87,409 84.541 Total (w/o Chaco pensions) 62,422 73,101 71,571 58.065 53,782 52,465 51,774 50.110 Non-personnel, non-pension 43,395 49,293 42,710 26,576 16,895 12,445 8.818 4.641 expenditures of MOH MOH Exp/ Total Publi: Exp 8.0% 7.9% 7.9% 6.8% 6.2% 6.0% 5.5% 5.1% (w/o Chaco Pensions) 5.6% 5.7% 5.6% 4.5% 3.8% 3.6% 3.3% 3.0% MOH Exp/GDP 2.1% 2.2% 2.2% 1.8% 1.6% 1.5% 1.4% 1.2% (w/o Chaco Pensions) _ 1.4% 1.6% 1.5% 1.2% 1.0% 0.9% 0.8% 0.7% Exchange rate 3.58 3.90 4.26 4.62 4.81 5.08 5.26 5.5 DeflatorPublicAdmin 123.14 145.65 163.96 182.28 199.46 222.28 249.48 272.55 Source: Health Reform Unit from information provided by the Comptroller General of the State.
76. Ensure expenditures are targeted and address problems of low utilization of services in poor conmmunitiesdue to cultural reasons. The variation in health outcomes by income quintiles suggests that it is important for public health expenditures to be targeted to the poor. International comparisons suggest health conditions improve markedly with income level, but that the situation is not particularly acute in Bolivia (see Table 5.5). The main mechanism that the Government will be using is the introduction of
Table5.5 CountryComparisons of Health Outcomes by IncomeQuintile Country Quintile1 Quintile Quintile 3 Quintile 4 Quintile 5 Ratio I (poorest) 2 (richest) Low/High Under 5 Mortality Bolivia 94 172 118 108 93 68 2.51 Malawi 92 230 239 243 245 210 1.09 Cote d'lvoire 94 172 162 139 141 121 1.42 India 92-93 138 131 107 92 61 2.25 Tanzania 96 119 151 161 129 118 1.01 Morocco 92 99 87 77 57 37 2.71 Peru 96 90 67 43 39 32 2.79 Philippines 93 74 60 47 48 36 2.02 Vietnam 97 51 43 42 24 19 2.69 ARI Medically Treated Bolivia 94 24 29 43 52 56 .43 Malawi 92 51 52 54 51 61 .84 Cote d'lvoire 94 30 25 35 52 56 .53 India 92-93 61 65 72 73 78 .79 Tanzania 96 70 68 69 63 80 .88 Morocco 92 I.. 35 26 Peru 96 36 42 52 56 67 .54 Philippines 93 42 52 54 59 53 .79 Vietnam 97 57 65 73 74 82 .70 All Immunizations Bolivia94 29 32 30 43 [ 60 .51 Malawi92 8 1 77 82 83 87 .92 Coted'lvoire94 16 31 4 1 51 54 .29 India 92-93 20 25 34 47 60 .33 Tanzania 96 59 65 70 80 81 .72 Morocco 92 54 69 85 92 95 .57 Peru 96 56 65 65 66 | 67 .84 Philippines 93 | 64 75 69 76 75 .85 Vietnan 97 45 43 59 52 54 .83 Sources: World Bank Poverhy Fact Sheets
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a Basic Health Insurance Program. All municipalities are asked to contribute 6.4 percent of the coparticipation funds to finance a basic set of health services for their residents. This program represents an important advance. If investments are targeted to the poor, then recurrent costs must also be well targeted. Otherwise, one will find that there are more health facilities in poor communities but insufficient funds for operation.
77. Correcting implementation issues of the Basic Health Insurance. While the Basic Health Insurance Program represents a significant advance, there are likely to be implementation issues such as: (i) An effective referral system which induces the use of primary rather than tertiary health care. (ii) Difficulty in enforcing citizens' use of facilities only in their own municipality.
78. Establish a National Cofinancing Policy and address adverse incentive problems in assignment of responsibilities at different levels of government due to decentralization. The chapter argues for central government financing/co-financing of health projects under various alternatives using the degree of externalities as a criteria for national financing. It advocates decentralization to improve management. In health, as in education, there is a problem of fragmentation of responsibility. The infrastructure was decentralized to municipalities, the responsibility for managing human resources was delegated to prefecturas, and the national government is responsible for paying health workers. No single agency is responsible for the quality of health care provision as a whole, and those responsible for making investments are not responsible for managing recurrent costs. The problem of just where the responsibility should lie is more complicated in health than in education. Whereas it could be reasonable to assign responsibility for managing health clinics to municipalities, a hospital may serve a wider community than a municipality. There is a need to define where responsibilities lie.
79. Government must exercise leadership in coordinating activities of international cooperation especially with regards to recurrent costs. Partly as a result of the decline in participation by the state, in 1997 there were 17 international cooperation agencies financing roughly 60 percent of the investment budget. The risks are that actual expenditures may reflect priorities of the funding agencies rather than the government and that coordination is difficult. Perhaps the biggest problem in this respect is that there are a large number of projects abandoned because the state cannot afford recurrent costs when donor funds are phased out.
80. Overhaul Human Resource Policies. More so than any other area analyzed in this report, human resources are a problem in health. There are too many administrative personnel relative to health personnel. The ratio of doctors to nurses is 2 to 1, when the recommended ratio is to have I doctor for every 2 nurses. Doctors in the rural areas are typically completing their obligatory year of service and will not stay. The system is heavily reliant on auxiliary nurses. In the past, health workers were poorly paid but that situation is changing. Average real compensation increased 62 percent between 1991 and 1997, close to the real wage gains realized by teachers and more than the 25 percent increase in real GDP per capita registered over this period. Personnel costs account for 54 percent of the budget. Over this same period, there was a 22 percent increase in the number of health workers (from 11,080 to 13,363).
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Chapter 6: Water and Sanitation
81. The health externalities of water and sanitation for a country at Bolivia's level of development are significant. The increased emphasis making the sector second in investment importance to roads is a good development. The report strongly supports this shift and indicates that every effort should be made to achieve close to 100 coverage of piped water in the medium term. There have been major coverage improvements in recent years. Coverage of water and sanitation reached 72 percent overall in 1998 which implies that Bolivia no longer has one of the lowest coverages in LAC. A closer look reveals large disparities between urban and rural areas, between rich and poor, and between regions. On one hand, piped water supply coverage is higher in urban areas (93 percent) than in rural areas (37 percent).'1 Access to piped water supply is directly linked to poverty level. About 32 percent of the poorest quintile of the population has access to piped water supply while 93 percent in the richest quintile does. On the other, rural water supply coverage increased from 24 percent in 1992 to 37 percent in 1997 due to increased emphasis in the investment program. As in other countries, sanitation coverage lags behind water supply. The situation should be remedied in large urban areas for environmental and health reasons and because international experience has shown that people are willing to pay for sewerage collection.
TABLE 6.2: BOLIVIA'S PERFORMANCE IN AN INTERNATIONAL CONTEXT
Country Access to Piped Water Supply Access to Sewerage Argentina 72% 38% Brazil 87% 49% Chile 87% 85% Mexico 89% 50% Nicaragua 56% n.a. Peru 63% 58% Bolivia 72% 28%
Note: Speech prepared for Sanitation and lHealthand the Environment in the Third Millenium. Conference organized in Fortaleza, November 26, 1998. Brazil's Water and Sanitation Sector Challenges and Opportunities by Abel Mejia (World Bank). Nicaragua's data are from SAR Nicaragua Water Supply and Sanitation lProicct(dated February 1997).
82. The institutional environment in the sector is still evolving and although progress has been made, further adjustments are necessary. It is notable that water supply delivery has worked well under three different structures: private concessions, cooperatives, and municipal companies. The reforms in the early 1990s changed the role of the Central Government from service provider to normative but failed to establish a regulatory framework. Oversight and policy formulation was consolidated under the Ministry of Housing and Basic Services yet even today, no single agency oversees all the investments in the sector. Additionally, the technical capacity of the ministry needs to be strengthened in order to: ensure consistency in the rest of central government activities, define sector policies and priorities, define better target mechanisms, establish performance standarcds,and establish sector wide information system.
Il See Chapter 6 for a discussion on the reliability of the data.
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83. Establishing a water Superintendence was a solid step but it has been this administration's role to formulate a modern regulatory framework for the sector and more important, to implement it. The new Water And Sanitation Services Law is expected to be approved in the summer and includes desirable features: (i) Tariffs should cover O&M costs entirely in the entire country and revenues from collection can only be used in the sector. (ii) Concessions to private or municipal companies, or cooperatives, have to be awarded in municipalities with populations of 10,000 or more (there are 40 in the country) taking a solid first step in establishing an arms length relationship between water utilities and municipal governments. (iii) The law is flexible in the criteria for awarding concessions, which is appropriate given the heterogeneity in size and technical sophistication of municipalities. Authorities should prepare standard bidding documents available to every municipality and actively pursue awarding concessions in the biggest systems. (iii) In the Bolivian context, it is appropriate for the Superintendence to award the concessions. In principle this poses a conflict of interest but the arrangement has worked well in other sectors An outstanding issue which has not been resolved in many other countries either is procedures and obligations in case the concession is revoked.
84. The role of the funds in the sector needs to be re-considered in the context of the national cofinancing policy. An Impact Evaluation Study showed that the funds are not well geared to provide water supply and sanitation infrastructure (as opposed to education where they are effective). To improve effectiveness the funds must: (i) Make technical standards requirements more flexible. The costs per connection, which range from US$95 to US$140, are prohibitively high. (ii) Increase community participation in delivering infrastructure to improve sustainability. Of 18 systems sampled in the survey, only four were operating after four years in service. (iii) Improve financial evaluation and approval procedures in coordination with the Ministry. (iv) Introduce competition among different funds and other NGO's as well as performance indicators to improve current institutional procedures which centralize most decisions in La Paz. 1 (v) Lower administrative costs and change the current fee scheme from a percentage of investment cost to a fixed fee in order to eliminate the bias against small projects. (vi) Redesign/lowerthe subsidy ceiling from its current level in order to eliminate the bias for overly ambitious provision of service quality. For example, the public sector will only finance the cost of standpipes to a community or the subsidy ceiling, whichever is lower. (vii) Improve coordination with the sector ministry regarding sector policies.
85. Bolivia has done well compared to other countries in the region in limiting explicitly public funds for operation and maintenance in the sector. However, it should step up its efforts to insure that in practice utilities invest enough in rehabilitation to avoid reconstruction of systems. To improve financial performance of utilities, authorities should introduce incentives to reduce unaccounted for water, lower employees per water connection, and set tariffs to cover full cost of service (full maintenance, and eventually part of the investment cost). To target the subsidies, tariff structures should be re- designed to favor poorer residents.
12 Although appropriate for the sector, this is a contentious issue even within Bolivian authoritieswhich needs to be analyzed carefully under the national cofinancing policy.
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86. Investment in the sector has increased during the 1990s from 0.6 to I percent of GDP in 1992 and 1997 respectively. Rural investment share increased from 19.5 to 78 percent in 1992 and 1996 respectively. External financing increased its share from 46 to 61 percent in the same time period. Sewerage investment lags behind water supply. There is heterogeneity among regions for both water and sanitation. Paradoxically, Popular Participation diminished the investment execution of Municipalities and increased that of the Funds.
87. Past performance to quantify the costs of future public investment plans indicates high costs to achieve modest goals (Table 6.14). Due to population growth, maintaining coverage levels requires US$71 million per year, equivalent to the 1996 investment level. A scenario which mnaintainsurban coverage and improves rural to 55 percent implies US$83 million. And finally, raising urban coverage to 95 percent and rural to 70 percent requires US$100 million.
88. The goal of providing access to close to over 90 percent of the population is within reach. Due to migration, urban investment costs account for 90 percent of total costs. Therefore, a small reallocation from urban to rural improves targeting dramatically.
89. The obvious solution to increase coverage and improve targeting is to introduce PSP. The government's plan to award concessions which do not permit subsidies, to either private firms, municipal companies, or cooperatives in the forty largest municipalities is a good start. La Paz alone "saves" the public sector US$12 million because investment funds come from private funding. As an illustration, if the Government awarded concessions which did not require public investment funding in Cochabamba, Sucre and Tarija, it could further liberate US$13 million which would allow it to more than double rural investments and solve the rural water problem.'3 In addition, authorities could: (i) Lower the maximum subsidy to provide incentives to lower technologies and increase coverage. (ii) Improve cost recovery in investments beyond the maximurn subsidy. (iii) Improve targeting. (iii) Link availability of funds to performance indicators. Awarding concessions is difficult and Chapter 6 offers some guiding principles. As the Misicuni multipurpose project is implemented to resolve the water supply shortage in Cochabamba, the Government should resist pressures to provide public subsidies to ameliorate the increase in water tariffs necessary to reflect the full cost of private provision.
90. Decentralization of ownership of water utility companies to municipal governments has brought service delivery closer to beneficiaries but political interference in water utilities, autonomous or not, is the rule rather than the exception. Awarding concessions establishes and arm's length relationship which would alleviate this problem.
13 There is a question of whether these funds can be reassigned as suggested. Some argue these funds presently come from the existing utilities yet table 6.11 suggests much investment to the sector comes from the Funds. The matter should be looked at in more detail as part of a study which analyses willingness to pay for water and sanitation services in order to determine which systems are viable and to define subsidy policy for the sector within the context of the national cofinancing policy.
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Table 6.14: Investment Requirements 1998 - 2010 (US$ million) Sector Base Case Moderate Growth Optimistic Growth Scenario Scenario Water Supply (1) 93% 93% 95% Sewerage 44% 55% 75% Total Urban WSS Cost 75 82 94
Water Supply 37% 55% 7 0%o Sanitation 33% 45% 60% Total Rural WSS Cost 8 14 18
TOTAL WSS Cost 83 96 112 Expansion 25 37 54 Rehabilitation 58 58 58
FINANCING 83 95 112 Private Sector (2) 12 12 12 Public Sector 71 83 100 Assumptions: Unit cost of urban water system rehabilitation 15 Unit cost of urban water expansion (network cost) 100 Unit cost of urban sewerage system rehabilitation 15 Unit cost of urban sewerage expansion (network cost) 100 Unit cost of rural water system rehabilitation 15 Unit cost of rural water expansion 100 (PROSABAR experience) Unit cost of rural sanitation expansion 23 Annual population growth rate 2.4% Annual urban population growth rate 3.5°0% Note: I According to the Regulation of 1992, the only service level approved in urban areas is house connections. Changing all current yard connections and standpipes into house connections will require additional investments from the water utility and the consumer. 2 The investment plan of Aguas de Illimani foresees a total investment if US$362 million over the 30-year horizon. Because of lack of more detailed information on the concession, it is assumed that investment costs are proportionally distributed over the 30-year distributed. An alternative calculation involved determining the population in La Paz and assuming investment per capita are evenly distributed in urban areas. The resulting more plausible investment levels are US$ million 20, 21, and 25 respectively. 3 Rehabilitation needs are estimated at US$15 per capita. However, it is assumed that because of the impressive growth in coverage rates in the past decade, only 50 percent of the existing infrastructure needs rehabilitation. This assumption should be validated with operational and financial data from the utilities.
91. The water supply shortage in Cochabamba is worrisome and needs to be resolved. However, past analyses have shown that the Misicuni project as currently envisioned, with a capacity of 3.9 m3, may not be a desirable solution. The operational viability hinges on selling water to farmers at a price that they will not be able to afford, and exporting electricity. The project could cost the public sector substantial investment resources as time runs out and the water shortage becomes an emergency. An alternative approach would be to stop all public funds to the Misicuni project and competitively award a private investor a redefined project with a smaller capacity and no explicit (tunnel costs) or implicit public subsidies. Past public investments totaled over US$30
Main Report xxx Public Expenditure Review million for a tunnel which is expected eventually to cost an additional US$40 million, which alone are enough to provide water access to most of the Bolivian rural population.
Chapter 7: Roads
92. The road sector receives the largest share of public investment, almost 33 percent on average in the 1990s, and it is widely perceived that the lack of roads is an important bottleneck for the country's development. The sector poses difficult challenges to the public sector: There are too few roads, they are poorly maintained, and the expansion and maintenance-rehabilitation plans involve substantial public funds. The situation is further complicated ly the fact donors have actively participated in the construction of roads which have not been properly maintained, and since future flows to the sector are limited pressure has been put on government policies.
93. The total road.network, comprising the national network, the departmental and the municipal network, totals about 55,000 Km (Table 7.3). However, only about 3,000 Km are paved. There is a concentration of roads in the West due to former dynamic mineral exports while modern economic conditions necessitate more roads in the East and North.
Table 7.3: Bolivian Road Network as December 1996 (Km.) National Network Departmental Municipal Total Network Network Network Paved Gravel Dirt Total West andSouth Departments La Paz 302 351 96 749 1077 7213 9039 Chuquisaca 159 662 94 915 374 4664 5953 Tarija 217 550 61 828 74 1770 2672 Cochabamba (center) 556 357 0 913 219 4995 6127 Oruro 188 242 0 430 585 3542 4557 Potosi 133 404 0 537 1409 9395 11341 East and North Departments Santa Cruz 785 642 412 1839 1400 5776 9015 Beni 67 728 410 1205 663 1302 3170 Pando 2 91 93 186 290 803 1279 Total 2409 4027 1166 7602 6091 39460 53153 Source: SNC
94. Table 7.2 shows that by most measures (surface or population density, and even considering GDP per capita) Bolivia has too few paved roads. The increase in the road network from 1960-90 has been small. However, the last 10 years have seen much progress: a total of 11,700 Km were added and 1000 Km were paved thereby increasing the national network 20 percent and the length of paved roads 30 percent.
Main Report Public Expenditure Review xxxi
Table 7.2: Cross Country Road Selected Indicators Popul. Extens. GDP Density % network % in Km paved 1997 Th. Percapita paved Good million Kms2 USS 1996 Condition COUNTRY Inhab. Km for 60's 90's For Million Km2 Inhab BOLIVIA 8 1,099 950 7 198 6 21% 569 2,933 PERU 25 1,285 2,460 19 347 10 24% 4,016 7,500 BRAZIL 164 8,512 4,720 19 704 9 30% 12,703 161,503 PARAGUAY 5 407 2,010 12 t0 .. 254 3,000 ARGENTINA 36 2,767 8,570 13 858 29 35% 22,712 57,280 CHILE 15 757 5,020 19 753 14 42% 2,604 10,983 ECUADOR 12 284 1,590 41 336 13 53% 719 6,322 COLOMBIA 38 1,139 2,280 35 309 12 42% 22,998 10,329 NIGER 10 1,267 200 7 383 8 60% 4000 MALI 10 1 ,220 260 8 308 12 63% 5959 Source: 1994 World Development Report on Infrastructure;World Development Indicators 1998/9; SNC
95. A major problem in the sector is that lack of maintenance has translated into a deterioration of the existing road network. Tables 7.8 and 7.9 provide maintenance expenditures for the National Road Network, which comprises 10,400 Km.14 Only about 20 percent of the national road network is in good condition and 34 percent is in bad or extremely bad/not-transitable condition. This result is not surprising given that the expenditure on routine and periodic maintenance averaged US$1l million since 1994 equivalent to 58 percent of routine maintenance recommended by the computerized SAM (Sistema Automatizado de Mantenimiento).'5 The gap totals US$10 million per year.
Table7.8: Percentageof MaintenanceCosts Executed in Selected Departments (US$ millions) 1994 1995 1996 1997 1998 Average La Paz 65%/ 58% 58% 93% 69% 68% Chuquisaca 83% 75% 82% 89% 47% 740/a Cochabamba _44% 75% 68% 34% 42% 50% Santa Cruz 39% 38% 32% 26% 46% 36% Oruro 66% 94% 92% 59% 31% 60% Beni 36% 141% 46% 19% 42% Total Required 16.14 18.35 20.60 21.45 19.14 Executed 8.87 11.74 12.22 11.51 11.09 Percent 55% 640/o 59% 54% 58% Source: SDC
4The length of the national road network was recently increased from 9020 km, of which 1944 km are under construction, and 184 km are in urban areas. Thus only 6892 km are scheduled for maintenance. The report uses this latest figure for maintenance calculations. 5 The actual average of maintenance for the entire national network was US$ 14 million per year. However, comparisons for the SAM were not obtained for all departments. The percentage of the recommended execution is unlikely to be different with the extra two departments.
Main Report xxxii Public Expenditure Review
Table 7.9: Condition of the Newly Defined National Road Network 1998 Departments Km % Km in Km in Built Km by Condition wnstruction urban areas _rotal 1 2 3 4 5
La Paz 775 8.6 103 24 646 2.1% 11% 61% 24% 0 .11% Chuquisaca 731 8 .1 112 24 594 0.2% 17% 65% 17% 0.00% Tarija 689 7 .6 86 27 574 0 .4% 6% 68% 24% 0 .00% Cochabamba 816 9 80 17 717 5 .1% 33% 29% 32% 0 .00% Santa Cruz 2676 29 .7 1234 35 1407 10.6% 23% 37% 27% 1 .69% Oruro 722 8 203 20 498 0.00% 27% 13% 53% 5.58% Potosi 1084 12 36 26 1021 0 .4% 40% 58% 0.29% 0.00% Beni 1200 13 .3 85 2 320 0.00% 89% 10% 0.00% 0.00% Pando 322 3 .6 0 5 .15 1109 0.6% 52% 46% 0.86% 0.00% Total 9020 100 1944 185 6890 3.1% 31% 45% 18% 0.76% Source: SNC
96. The routine maintenance expenditures in Table 7.8 do not include periodic maintenance and reh1abilitation,or any other current expenditures which needed to keep the road in good condition. As a result, many roads in Bolivia need major rehabilitation and/or outright reconstruction. Pinpointing rehabilitation/reconstruction costs for the entire network is difficult because of a lack of a reliable assessment.
97. Preliminary calculations used three methods for estimating the required "steady state" maintenance and rehabilitation broadly defined and produced very high and surprisingly similar numbers.16 That is, the total expenditures necessary per year to keep the network in good condition indefinitely assuming major rehabilitation and reconstruction had been performed).
(i) A World Bank study in the Dominican Republic suggested an expenditure of US$15,000 per Km per year for that network. Bolivian roads in general have lower specifications which require less maintenance. An optimistic reduction lowers the estimate to US$10,1000per Km per year.'7 The total amount of maintenance funds "broadly defined" for the 6,892 Km of national roads which are scheduled for maintenance would result in US$ 69 million per year.
(ii) Using a "standard" life of a road of 30 years resulting in a depreciation rate of 3 percent, and an average construction cost per Km of road in Bolivia of US$0.3 million results in US$61 million per year in required maintenance and rehabilitation costs.'8
16 In the Bolivian context, this implies mantenimiento peri6dico, rutinarioy rehabilitacion.
17The concessioning unit independently came up with the same figure to calculate planned maintenance costs in future concessions. 18 Estimating the average cost per Km of road is non trivial. Documented past road construction of paved roads cost about US$0.5 million per Km. Gravel and dirt roads could cost substantially less and thus an optimistic valuation would be US$0.3 million.
Main Report Public Expenditure Review xxxiii
(iii) Using the lower bounds of Heller's (1979) and Humplick's (1997) "r" coefficients, given the road characteristics in Bolivia and a cost per Km of US$0.5, 0.4, and 0.25 for paved, gravel and dirt respectively results in US$73 million.
98. The conclusion is that the "commonly' understood sum for adequate maintenance of US$20 million per year is only for routine maintenance. Bolivia has spent US$14 million per year on average since 1993. Achieving a truly sustainable level of maintenance (broadly defined) is much higher. The choice is difficult because the analysis suggests that given the current allocation of public funds to the sector, the majority of them would have to go to maintenance when the country lacks roads.
99. Authorities have taken some steps in resolving the deficit maintenance. The SNC was re-centralized, made responsible for the National Road network and 70 percent of toll collections (about US$15 million) are earmarked for maintenance of the network. In addition, authorities made a commitment with the World Bank to assign US$22 million a year on routine maintenance. This represents a 60 percent "guaranteed" increase in the amount spent on maintenance and will prevent fast deterioration of roads. For periodic and rehabilitation maintenance progress is less certain but a plan which concessions close to 30 percent of the network for private administration is being implemented, and a road fund which includes users is being defined. Finally, a weight and measures law was approved to prevent premature damage.
100. The expansion plans for the national road network are overly ambitious and do not fit the macroeconomic fiscal envelope. Between 1992-96 an average of about US$ 105 million a year was invested in construction and major rehabilitation of roads. The expansion plans for the next five years call for the consolidation of the export corridors to Brazil, Argentina and closing internal loop between major cities (one to Chile exists, to Peru is under construction, and to Paraguay has been delayed ).19 The remaining segments are (i) Abap6 - Camiri (150 Km, US$100 million) to link Argentina; (iii) Santa Cruz - Puerto Suarez (600 Km, US$290 million) to link Brazil; and (iv) to construct the stretch Ventilla-Tarapalla (86 Km, US$64 million) to complete an internal circuit. In addition, ongoing projects totaling 180 million are expected to be finished in the next three years. With adequate maintenance and rehabilitation, expenditures in the sector in the first three years would total US$210 million.
101. The future costs are alarming. Consolidating the basic export corridors, and a 'steady state" maintenance plan requires resources for the sector to be more than doubled. The roughly US$110 million increase in resources is equivalent to about 1.5 percent of GDP. Unfortunately, it is not only a problem of financing. Even if all of the financing were available on concessional terms, carrying out the plan would imply raising public expenditures by which without an increase in revenues would translate into an unacceptable fiscal deficit of over 5 percent of GDP.
9 The PlanNacional de Transportedoes not offera strategy that can be implementedreadily. The conjecturesabout general objectives for roadexpansion and their implicationsin termsof road constructionwas carried out by WorldBank staff. Chapter7 detailsthe segmentswhich need to be built alongthe exportcorridors.
Main Report xxxiv Public Expenditure Review
102. A tough choice from the following three alternatives should be made decisively i.e. shirking in maintenance will only turn out to be more expensive: (i) Lower the number of new Kilometers per year and consolidate the export corridors at a later date. (ii) Lower road specification to complete the corridors as fast as possible. Allow traffic levels to rise and then concession the upgrade and operation of the roads to private contractors. (iii) Obtain private sector financing from the outset.
Table 7.11 Summary Costs for the Road Sector YEAR 2000 2001 1 2002 T 2003 2004 USS MILLION
MAINTENANCE 60 60 60 60 60 Rouline 21 21 22 23 24 Rehabilitation 39 39 38 37 36 EXPANSION 92 100 115 129 129 Export Corridors 32 50 86 119 119 Ongoing Projects 60 50 30 20 20 TOTAL 152 160 175 216 216
103. Table 7.11 summarizes a more feasible expansion plan based on past execution capacity which nevertheless contemplates higher resources than the past years' average. With current road specifications, by the year 2004 the Argentinean export corridor will be finished, and the Brazil corridors will be less than 50 percent completed.2 0
104. Overcoming osbstaclesto private participation in roads is imperative. The choice is no doubt difficult. In maintenance, authorities must find ways to lower costs without cutting corners, i.e. through private sector concessions in maintenance tied to toll collections and/or some sort of road fund which is monitored by users. For the expansion of the network, the report recommends following the second alternative. First, insure the geometry, size and foundation of the road bed are adequate to meet eventual road specifications. Lower some of the remaining road specifications (narrower paved roads, gravel instead of pavement etc) to complete export corridors within five years. Allow traffic to increase, and then concession the upgrading and operation of roads to private financing and construction. To obtain public approval, authorities must state that roads will be built with lower specifications but that they will be upgraded in the future.
105. Congress recently approved the Public Works Concession Law and related regulations. This law is important because, a least subsidy concession and or exporter's financing could tip the balance in favor of private participation. The road concession unit is small, functioning and working along the lines of the upgrading recommendation of the report. The concessioning plan for upgrading and operating existing roads appears ambitious. Nevertheless, it is a good investment to strengthen the capacity of the unit to
20 Thesame table in the nrlainChapter details the anapproximation of expenditureson eachcorridor.
Main Report Public Expenditure Review xxxv enhance private sector participation in the sector. At the same time, authorities should make sure private financing does not create contingent liabilities for the public sector.
Intersectoral Reallocation: Some Tough Choices
106. Although Chapter I argues intersectoral reallocations are difficult to prescribe because of the difficulty of comparison of benefits across sectors, one can point out discrete prominent cases. The criteria used is the opportunity cost of funds as a share of GDP; i.e., given a set amount of resources, should funds be used in project X versus Y. It is important to reiterate that Bolivia has made tremendous progress in the last ten years in shifting the role of the public sector away from productive activities.
107. From the four sectors analyzed there are a few clear messages: (i) Health expenditures, need to be increased substantially at the expense of other sectors (about I percent of GDP). Increased funds should be directed at immunizations, primary health care and should be coupled with institutional recommendations detailed in Chapter 5 to increase the efficiency in the sector. (ii) The level of expenditures in education compares favorably and should be maintained. Emphasis should be given to preschool and secondary education at the expense of universities. Teachers' salaries should not be increased further but should be made more equitable. (iii) Funds in the water sector can remain at the current level as long as some of the larger cities can successfully be concessioned to the private sector, liberating funds to smaller municipalities and rural coverage. Cochabamba, Tarija and Sucre could liberate enough funds to double funds for rural water systems. (iv) The road sector receives a third of all public investment. Any progress in reducing public participation through private participation could give Bolivia tremendous room to increase investment in other areas. Realistically, Bolivia will finish its export corridor to Argentina in three to four years, and the one to Brazil in five or six years. The recommendation is to reduce road specifications to complete the distance, allow traffic to increase, and then concession up-grading of the road to the private sector.
108. A poor country like Bolivia cannot afford "white elephants." Authorities must cut all public funding, and redefine the project such that the rest can be carried out with entirely with private financing. The remaining US$40 million which authorities were expecting to construct the tunnel, are 0.5 percent of GDP and could solve the water problem or increase health expenditures by 50 percent. Unfortunately, the project can become a large contingent liability because access to water in Cochabamba is a serious problem, time is running out, and the government may be forced to step in to rectify the situation at a heavy cost. A second dubious expenditure that need to be scrutinized is payments to veterans of the War of El Chaco.
109. In conclusion, Bolivia has made substantial progress in just a few short years, but needs to maintain the reform momentum. If this is maintained then one could envisage a strong growth rate, macroeconomic stability, and steady improvement in human development. Authorities are committed and this will undoubtedly help move the country along the path of the stated government goals of opportunity, equity, institutionality, and dignity.
Main Report Public Expenditure Review
1. AN EVALUATION OF THE OVERALL BUDGET
1.1. Background
1.1. Bolivia is at a difficult juncture in terms of its overall fiscal situation. On one hand, there is a large reform agenda with difficult challenges and associated fiscal costs in health, education and basic infrastructure which are central to advance its poverty alleviation goal. On the other, the state is incurring the fiscal cost of many of the reforms already undertaken. Pensions alone accounted for 4 percent of GDP in 1998. In the immediate future, Bolivia will have to undergo a fiscal adjustment which will permit it to increase its non-pension balance of the Non Financial Public Sector (NFPS) from zero to 1.5 percent of GDP by 2002. Moreover, Bolivia is approaching graduation status from concessional financing with many donors. The situation is further complicated by developments in the global economy, where Bolivia has suffered adverse terms of trade effects in recent years. Thus, Bolivia must devise a medium term fiscal plan in order to cover current costs entirely, as well as an increasing share of investment, from domestic resources.
1.2. This chapter is organized into five additional sections. Section 1.2 explores a macroeconomic consistent expenditures envelope. The situation in the short and medium term presents difficult challenges but Bolivia is on the right path to alleviate its heavy debt burden. Section 1.3 examines the size of the public sector. Bolivia has made much progress in increasing its revenue base and compares favorably with other countries in the region. This is a tremendous accomplishment from 15 years ago when tax revenues were among the lowest in LAC. Section 1.4 analyzes the economic decomposition of expenditures. It argues that aggregate expenditure and revenue categories are broadly in line internationally. Public sector employment "productivity" has been stagnant since 1989. While on average, public servants' salaries have increased with GDP per capita, teachers have taken the lion's share of the increase while the rest have received increases equivalent to about half of GDP per capita growth. The section discusses the major issues associated with civil service reform and its fiscal costs. It presents investment spending by categories and an overview of donor financing, and concludes with the largest problem in public spending: a shortfall of recurrent operational and maintenance expenditures.
1.3. Section 1.5 analyzes the functional distribution of public expenditures. It shows that there has been dramatic progress in reorienting public funds away from production activities towards social sectors, and education in particular. The reorientation is not only due to capitalization, which virtually eliminated the parastatal sector but to changes within the general government. Section 1.6 shows that the regional distribution of social expenditures are in general not regressive except for Santa Cruz; i.e., the largest cities with the best social indicators do not receive the largest social expenditures per capita. Education expenditures are well targeted while health expenditures are not.
Evaluation of the Overall Budget 2 Public Expenditure Review
1.2. Macroeconomic Consistent Expenditure Envelopel
1.4. Although the principal focus of this report is on analyzing the composition of public spending, the starting point for such analysis is the determination of an aggregate level of spending consistent with medium-term macroeconomic objectives (i.e., a sustainable fiscal deficit and public debt ratio). Since 1985, Bolivia has been committed to a strong macroeconomic stabilization and structural adjustment effort to accelerate economic growth and reduce poverty. Fiscal policy has aimed at avoiding Central Bank financing of the non-financial public sector by limiting the Government deficit to the level of expected concessional external financing. Credit policy has been restrained, and the exchange rate policy has helped preserve external competitiveness. These stabilization policies have been accompanied by comprehensive structural reforms, including the lifting of price and interest rate controls, tax reform, liberalization of the exchange rate, opening of the trade regime, and capitalization (privatization) of public enterprises. There has been a series of concessional reschedulings with bilateral creditors. In Septemrber1998, Bolivia reached the completion point and was declared eligible for US$ 450 million of debt relief in NPV terms under the HIPC initiative.2
1.5. Bolivia has now achieved a considerable degree of macroeconomic stability. Performance in 1998 was broadly in line with the latest IMF ESAF program: preliminary data suggest GDP grew at an annual rate of 4.8 percent despite the adverse effects of El Nifbo and of the Aic[uileTotora earthquake, inflation fell to 4.4 percent, the combined public sector deficit was 4.0 percent - in line with the program, and international reserves increased more than expected (US$ 125 million).
1.6. An important weakness in the macroeconomic scenario lies in a current account deficit which reachecdnearly 7.9 percent of GDP. The surge in the current account deficit is due to the fact Bolivia is in the middle of a foreign direct investment (FDI) boom which was recently re-estimated at 10.2 percent of GDP (up from 7.5 percent). The basic identity is CA = PS + FD where CA is the current account of the balance of payments, PS represents the private sector savings-investment gap, and FD is the NFPS budget deficit. A bigger budget deficit implies bigger private savings, lower private investment or a bigger current account deficit. Given that private sector savings do not change much in the short term, thie result is a crowding out of investment. Alternatively, a fiscal contraction together with monetary easing could lead to a reduction in the trade deficit and an increase in investment.3 The surge in FDI will have to be monitored closely to prevent overheating or erosion of investor confidence because of a large current account deficit. The Authorities have agreed to tighten fiscal policies if the current account turns
IThissection draws heavily on IMF staff reports of the ESAF program and the debt sustainability analysis of the HIPC document.
2 The Japanese ODA pledged an additional US$264 million just after the HIPC completion point making total debt relief US$710 million.
3An alternative view of the problem is through goods market equilibrium given by Y=C+I+G+NX. If I rises, then G has to clecreaseto accommodate in order to avoid an unsustainable NX term; i.e. With an FDI boom, a fiscal contraction is necessary to return to equilibrium.
Evaluation of the Overall Budget Public Expenditure Review 3 out to be higher than projected in the program. After negotiations with the IMF the budged deficit targeted for 1999 is 3.9 percent of GDP.
Table 1.1: SelectedEconomic Indicators, 1992-2002 Base Case Scenario At"ul Prd. Projection 1992 1993 14 in5 19916 17 1ns 199f 2000 2001 2002 RealGry-th Rates GDP 1 7% 4 3% 4 7% 4 7% 411% 4 2% 4 8% 5 0. 5 2% 5 5% 6 0% GDP p capita -1 2% 1 9%/ 2 2% 22%. 1 7% 1 8%. 2 2% 2 4% 2 7% 3 2% 3 7%1. PrivateConsumption per capita 0 1% 09°/, 0 ", 05%i 01% 15%! 13%. 10. I 0l". 160 I 8% Exporsoorgoods I 1% 5 3% 16 9% 112% 30%6 50% l 6° 5 0% 78% 11 2% 977%
Sh-e,,,-, P (t/e) GrossDomestic Investment 16 0% 15 3% 149", 156% 165o% 1875, 1888% 195% 198% 20.3% 21 0% CurrentAccount Balaces .7 2% -7 3% -3 6% -5 1° -5 3" -7 0° -7 9%/6 -7 2% -6 9%! -6 4% -5 9'!
OMh-, Inllation (CPI eop%) 10% 9 3% 8 5% 12 6% 8 0%/. 6 7°', 44, 5%5% 5 0% 4.5% 4 0°%. Grossreserves in monthsof impos 4 4 4 7 5 7 5 6 7 4 6 3 7 5 6 7 70 7 0 7 0 Public sectext debt/GDP(after HIPC) 71 3% 74 7% 78 3% 72 5% 61 7% 56 2%/o 50 3% 48 7', 46 5% 44.6% 41 4% Debt serviceratio (afterHIPC) 54 5% 49 1% 35 4% 42 2% 25 6% 26 1% 23 0% 18 8% I8 010/, 16.8% 161%
I iscl Au-'-,,,r. Total Revenues 23.9% 22.9% 25.2% 25.2% 24.3% 23.7% 23.5% 24.3% 24.3% 24.8% 25.0% Total Expenditures 2S.3% 20.9% 2S.2% 27.0% 26.2% 27.0% 27.6% 2S.2% 27.7% 27.5% 27.0% Overall Deficit -4.4% .6.0% -3.0% -I.S% -1.9% -3.3% -4.0% -3.9% -3.4% -2.7% -2.0% DeficitWithOUt Pensions -3.2% -5.3% -2.2% *.2% -0.7% -0.S% -0.0% 0.3% 0.5% 1.0% 1.5%
Note: Data are obtained from World Bank Estimates based on IMF Staff Estimates and Ministry of Finance. The most recent National Account statistics of March 1999 were not available in time to be incorporated into this study.
1.7. The macroeconomic program summarized in Table 1.1 is broadly consistent with the CAS base case, and entirely consistent in the short term with the IMF program. The program aims to boost economic growth to between 5.5 and 6 percent by the year 2002, maintain international reserves at about 6.5 months of imports, lower inflation to international levels, and at a fiscal policy unreliant upon Central Bank financing of the non-financial public sector. The structural reform assumptions of the base case are that: (i) there is a strong fiscal correction; (ii) pension costs remain as currently estimated; (iii) financial sector reform prevents a banking crisis, deepens financial penetration, and lowers internediation margins; (iv) regulations and privatizations serve as moderate triggers for private investment; and (v) customs operations and tax revenue collections improve modestly increasing revenues 2 percent per year (i.e., there will be no major tax reforms). The latter conservative assumption, is in line with the IMF ESAF program assumptions and allows this report to concentrate on the trade-off costs of redistribution. Moreover, it will be argued that Bolivia's tax burden is not unreasonably low.
1.8. Bolivia's fiscal policy faces a complex challenge over the next few years, with the need to absorb the fiscal costs of structural reforms entirely from domestic resources. Especially pension reform whose fiscal pressure will not lessen in the short run and hampers the Government efforts to increase social public investment) --a task compounded by the fact that a significant proportion of expenditure responsibility has been transferred to local governments' jurisdiction. At the same time the fiscal policy needs to provide incentives for the private sector. After the temporary rise in the deficit due to pension costs, the deficit should return to its levels of 1995-96 by early next decade to ensure that the gains in private savings from the pension reform are not offset by lower public savings.
Evaluation of the Overall Budget 4 Public Expenditure Review
1.9. For the next three years, the budget deficit envelope looks difficult. Domestic financing has to be reduced from the 1.5 percent of GDP level observed in 1998 to levels below 1 percent in order to avoid crowding out private investment. As can be seen in Table 1.1, the current fiscal program assumes that the non pension balance moves from zero in 1998 to 0.3 percent of GDP in 1999, 0.5 percent in 2000, 1 percent in 2001, and 1.5 percent in 2002 and beyond. This implies a considerable fiscal effort on the part of the Bolivian authorilies. Without major increases in revenues as a share of GDP, the adjustment must corne through expenditure cuts. The rest of the report will include suggestions with this fiscal envelope in mind.
1.10. Over the longer horizon, fiscal deficits will be set not only to have a sustainable level of debt i.e. a constant debt/GDP ratio, but to lower Bolivia's heavy debt burden and maximize the benefits of HIPC debt relief. The main ingredients of a debt sustainability analysis (DSA) are: the real interest rate, the demand for money, the inflation rate, and the growth rate of the country. The principal determinants of medium term debt dynamics are given by the equation (see Anand and van Wijnbergen,1989 and Fischer and Easterly 1990 for further elaboration )
AB eAB* G-T rB r*eB* AH 1y y y y y Y where B, and B* are internal and external debt respectively, AH is seignorage, (G-T) is the primary deficit, r and r* are domestic and external interest rates, and aA before a variable indicates rate of change. In general, an increase in the debt/GDP ratio results when the primary surplus plus current interest payments is not offset by seignorage. The debt ratio will be lower, ceteris paribus, with lower primary deficits, higher output growth rates and an average real interest rate on the debt below the growth rate of the economy. The gains from constraining external debt can be offset by an increase in interest on domestic or external debt, highlighting the importance of concessional external flows (at real interest rates below the growth rate of the economy), and the importance of strict limits on non-concessional financing at the national and subnational levels. For the present debt sustainability (DSA) analysis, the assumptions are: growth projections as shown in Table 1.1 up to 2002, with assumed annual growth of 6 percent thereafter; official grants taper off to less than 1 percent in 2003; concessional loans decrease from 2.5 percent of GDP in 1997 to less than 1% in 2003, a relatively constant share of M2/GDP ratio making seignorage revenue constant as a share of GDP (and therefore neutral in debt sustainability calculations). In short, the DSA discussion can be reduced to whether the overall fiscal balance (adjusted for seignorage ), is smaller than the growth rate of the economy, i.e., allows the debt/GDP ratio to fall over time.
1.11. Table 1.1 shows the deficits presented indeed allow Bolivia to lower its debt burden before reaching the steady state deficit of 2 percent of GDP. The report concurs with the HIPC document that Bolivia must strictly limit non-concessional external borrowing until the size of the debt reaches sustainable levels. As an illustration, if one
4A more detailed presentation of assumptions and methodology is presented in the HIPC completion Point Document:Bolivia, World Bank and IMF 1998
Evaluation of the Overall Budget Public Expenditure Review 5 quarter of the new concessional borrowing by the public sector were replaced by non- concessional borrowing with six-year maturity and one-year grace, the debt service ratio would rise by 4 percentage points to 20 percent by 2005, more than offsetting the benefits of the HIPC assistance.5
1.3. The Size of the Public Sector in Bolivia: Is it too Large?
1.12. The section will provide some guidelines on the size of the public sector in Bolivia. It is important to state from the outset that there is no consensus as to the "right" size of the public sector. Much depends on the objectives of the Government. Cross- country observations indicate a positive correlation between the size of the public sector as a share of GDP and income per capita for lower ranges of income but there is a lot of variation within this relationship largely explained through cultural and political factors. European countries such as Denmark, Italy, Norway and Sweden have central government expenditures in excess of 40 percent of GDP, a much higher level than in the U.S., where the central government share of GDP is about 22 percent. However, international experience does provide parameters by which to judge whether Bolivia is an outlier given its income level. The underlying question is whether there is need for tax reform to increase domestic tax revenues.
1.13. Following convention, the definition of the public sector used throughout is the consolidated non financial public sector (NFPS) which includes: Central Administration, Prefectures, Municipalities, Social Funds, transfers to pensions, profits and losses of the monetary sector, and consolidated transfers from autonomous public entities and enterprises (Universities, productive enterprises etc.). (See Figure 1.1).
5See HIPC Completion Document: Bolivia, World Bank and IMF 1998.
Evaluation of the Overall Budget 6 Public Expenditure Review
Figure 1.1
Treasury Executive Central Administratiorj Contraloria, CNE Legislative Judicial ICsntral Government
Natonal Road Authority Rest of CentralGovernmen FNDR,FIS, FOC
Univers,tbes Other Decentralized Instnutons
Ge.neral Go/vernmen]
Pref ectures
[Rest of General Governmnent Mur,Eoriabldes
Socxal Securnty InsItutIons CNS CPS INASES Other mnstutions
FANCESA je.gonal entrrieTss BERMEJO Other Ernterpnses
__YPFB residual National Enterprises Co."",L
State Enteprises
SEMAPA Water enterprises SELA ELAPAS
1.14. Figure 1.2 (two panels) shows a scatter plot of expenditures and tax revenues of General Governments as a share of GDP vs. GDP per capita for some lower income countries. Bolivia does not appear to be an outlier. In fact, for its level of income per capita, expenditures cf the general government seem to be on the high side. Bolivia's 27 percent of GDP expenditures are comparable to Costa Rica, Colombia, Panama, and Brazil. They are higher than Chile's, Mexico's, Peru's and Argentina's. The level of public expenditures is ultimately dependent on pre-established goals. Costa Rica supports public sector roles requiring expenditures approaching 30 percent of GDP. Asking Costa Rica to reduce expenditures to the level of those in Peru would mean foregoing many of the accepted objectives. A similar argument could be made between the U.S. and Scandinavian countries.
Evaluation of the Overall Budget Public Expenditure Review 7
Figure 1.2
General Government Expenditure versus GDP per capita for selected countries, 1997 50 ------
45 . Nicaragua 40 * Russia 35 30 ~~~~~Venezuela 30~~~~~~~ *Brazif B3olivja Costa Rica : 25 Colombla * Panama * Malaysia * Mexico * Chile Malaysia co20 . Paraguay ArgentIna 0. 1* Thailand W1 15 vPert * Guatemala 10
5
0 0 2000 4000 6000 8000 10000 GDP per capita
GeneralGovernment Tax Revenueand GDP per capita for selected countries, 1997 35 ...... ----- ...... _._._.__.
30 Malaysia
CL 25 *Brazil a Nicaragua CostaC Rica
Q 20 Russia . ChileC Argentina C Bolivia 1Panana > 15 Eudr**Colontla IEcuador #*Peru X . Paraguay 1 10 .Guatemaa* Venezuela
5
0. 0 2000 4000 6000 8000 10000 12000 GDP per capita
Evaluation of the Overall Budget 8 Public Expenditure Review
1.15. Similarly, tax revenues (including hydrocarbon taxes) are high for the level of income per capita;6 i.e. there is not a revenue crisis in Bolivia. Tax collection revenues are similar to levels in Argentina and Mexico (without hydrocarbon taxes).7 Brazil and Costa Rica both have significantly larger tax collection efforts than Bolivia. But, Colombia, Peru, Venezuela, and Panama have lower tax collection. Additionally, Bolivia has progressed in increasing its tax collection effort. Tax revenues have increased steadily as a share of GDP from below 10 percent in the 1980s to 15.3 percent of GDP in 1990 to 19.0 percent in 1998. This represents a respectable average increase of 0.46 percent of GDP per year due to increased collection efficacy. The objective should be to ensure that the tax structure permits taxes as a share of GDP to stay constant or increase gradually. There is still a large degree of evasion, indicating that there is room to increase tax revenue under the current tax regime. Added emphasis should be placed on widening the tax base rather than on increasing the burden on current taxpayers which might serve to encourage tax evasion and informality. Chapter 2 deals with the tax system in more detail.
1.16. An important issue regarding public participation in the economy is the drastic redefiniticn of the role of the state due to the capitalization of public enterprises.8 The state abandoned its clirect involvement in productive activities and has limited its role there to regulatory oversight. Analysis of the consolidated public sector or of the General Government masks this issue. Figure 1.3 shows the evolution of the participation of public enterprises in the economy. The entire public sector would total about 53 percent of GDP in 1992 and 33 percent in 1998 if public enterprises were included. The eight largest enterprises accounted for 90 percent of the parastatal sector. In total, 38 enterprises were in the pipeline for capitalization and some 50 small ones were privatized directly. The public enterprise sector in other Latin American countries has followed a similar experience to the Bolivian one. Although no cross-country evidence is presented, the remaining parastatal sector in Bolivia is small, and with the completion of the privatization of YPEIF and Vinto within a year, participation of the remaining 17 enterprises will shrink to less than 2 percent of GDP. One cannot overemphasize the progress Bolivia has rnade in moving the public sector away from productive enterprises. Comparable international experience shows large increases in efficiency following privatization (see Rafael La Porta and Florencio Lopez de Silanes 1997). However, a direct evaluation of the impact of capitalization would imply evaluating performance of enterprises today and is beyond the scope of this work. Authorities should proceed with the privatization of the remaining ones to eliminate fixed administrative costs of control.
6 It is interesting that tax revenues show a stronger positive correlation with income per capita than expenditures highlighting heterogeneity in the size of fiscal deficits. 7This is an important difference. Some countries count royalties on natural resources as taxes (Bolivia) while others do not (rMexicogets over 10percentage points of GDP from oil related taxes, transfers). Data limitations prevent a thorough comparison between countries. 8 Instead of privatizing, the largestpublic enterprises in Bolivia were capitalized. i.e. the companies were awarded to the bidder who was willing to invest the highest amount.
Evaluation of the Overall Budget Public Expenditure Review 9
Figure 1.3: ExecutedBudget of PublicEnterprises (% of GDP) 25% i i~~~~~~~~~~~~Other [:~~~~~~~~~~~~~ ENFE (Railroad) 20% ENTEL(Telephone) 20\ /O o~~~~~~~~~~~Lloyd (LAB) \ o~~~~~~~~~~~EN DE (Electricity) \~~~~~~~~~~~~[ oVinto (MetalIs) 15% \ COMIBOL (Mining) Ada. De Aereopuertos YPBF (Petroleum) 10%
5%
0% 1995 1996 1997 1998
Source: Contaduria General del Estado
1. 17. There are two conclusions regarding the overall size and role of the public sector in Bolivia: (i) The progress in redefining the role of the state away from productive activities is commendable; and (ii) International comparisons which take into account the level of income per capita suggest that the general government revenue as a share of GDP is not small, and that a major tax reform to increase revenues is probably not appropriate at this point in time. Critical questions to be addressed in the following sections are measures for taxes to be collected efficiently, and public expenditures allocated, executed and targeted efficiently.
1.4. Economic Distribution of Expenditures: The O&M Dilemma
1.18. This subsection discusses the economic distribution of expenditures in Bolivia. Typically, the issues in looking at this type of disaggregation include: a bias towards capital expenditures vs. non wage operation and maintenance, and an overstaffed, poorly paid civil service. Both issues are important in Bolivia. There is a commonly held view that the public sector overspends on wages, underinvests, and devotes minimal resources to operation and maintenance. While international comparisons can indicate general problems across the public administration, this cross-sectional approach must be used with caution because there is no "right mix." The distribution of expenditures varies across sectors and thus countries with different priorities will inevitably have a varied economic distribution of expenditures. First the section will present data for Bolivia and compare it internationally and argue that the main aggregates are broadly in line. Then wages and overstaffing will be discussed at a general level. Finally, the large problem of underfunding of operational and maintenance costs in Bolivia will be discussed.
Evaluation of the Overall Budget 10 Public Expenditure Review
1.4.1 International Comparisons: Aggregates are Broadly in Line
1.19. Table 1.2 shows the evolution of revenues and expenditures of the NFPS in Bolivia from 1990 to 1998. Stable current revenues and expenditures mask the redefinition of the public sector role due to capitalization and decentralization. The operating balance of public enterprises shrank from 2.4 to -0.8 percent of GDP and investment by public enterprises decreased from 4.1 to 0.3 percent of GDP. Both developments reflect the diminishing participation of public enterprises shown in Figure 1.3. due to the aggressive capitalization program. The "slack" in revenues has been taken up by significant tax collection efforts. In expenditures, general govemment investment and wages and salaries have remained constant at around 6 and 8.3 percent of GDP respectively. The fall in public enterprise investment has been more than compensated for by a large pension deficit which reached 4.0 percent of GDP in 1998. Non-wage, non-interest current expenditures have remained constant at around 7 percent of GDP despite a reorientation of investment towards social sectors which require higher O&M expenditures (see the following section for a more complete discussion).
Table 1.2: Bolivia:Operations of the CombinedPublic Sector (In percentof GDP) 1990 1991 1992 1993 1994 1995 1996 1997 1998 Overallbalance without pensions -3.7 -3.2 -3.2 -5.3 -2.2 -1.2 -0.7 -0.8 0.0
Currentrevenue 18.9 20.3 21.1 20.3 21.6 22.7 21.9 21.3 21.4 Generalgovernment 17.1 18.2 18.9 18.5 19.5 19.9 20,0 20.1 21.8 Tax revenue 15.3 16. 16.5 16.9 17.2 17.5 17.4 17.5 19.0 Hydrocarbonstaxes 8.0 8.7 7.1 6.6 5.9 5.3 5.6 4.4 5.6 Othertaxes 7.3 7.7 9.5 10.2 11.2 12.2 11.8 13.1 13.4 Nontaxrevenue 1.8 1.8 2.4 1.5 2.3 2.4 2.6 2.7 2.8 Operatingbalance of public 2.4 2.8 2.4 2.4 1.4 2.0 1.3 0.5 -0.8 enterprises CentralBank operating balance -0.6 -0.7 -0.2 0.4 0.7 0.8 0.6 0.7 0.4 Current expenditure 16.6 17.1 18.1 18.2 17.6 18.2 17.1 17.3 17.3 Wagesand salaries1/ 6.8 6.9 7.7 8.2 8.3 8.3 7.9 8.2 8.3 Externalinterest 2.6 2.7 2.6 2.6 2.5 2.9 2.7 2.0 1.9 Other 7.2 7.5 7.8 7.4 6.8 7.0 6.4 7.0 7.1
Official grants 1.8 1.7 2.7 1.5 2.5 1.7 2.4 1.4 1.8
Capitalrevenue 0.2 0.4 0.1 0.2 0.2 0.8 0.1 1.0 0.4
Capitalexpenditure 8.3 8.7 10.0 9.1 8.9 8.2 8.0 7.2 6.3 Generalgovernment 4.4 4.9 5.9 5.9 6.3 6.1 6.4 6.5 6.0 Publicenterprises 3.9 3.8 4.1 3.3 2.6 2.2 1.7 0.7 0.3 Balanceon pensions -0.7 -1.1 -1.2 -0.7 -0.7 -0.6 -1.1 -2.5 -4.0
Overallbalance without pensions -3.7 -3.2 -3.2 -5.3 -2.2 -1.2 -0.7 -0.8 0.0 Overall balance -4.4 -4.2 -4.4 -6.0 -3.0 -1.8 -1.9 -3.3 -4.0 Sources:Unidad de Programaci6nFiscal and IMF and WB Staffestimates 1/ Consistsof wages,pensions to war veterans,and severancepayments.
Evaluation of the Overall Budget Public Expenditure Review 11
1.20. Table 1.3 presents economic international comparisons and the 1998 Bolivia economic disaggregation as a share of GDP and as a percentage of total expenditure. Bolivia's share of current expenditure is lower than that of most of the countries presented, highlighting the importance given to the public investment program. On one hand, this is a good indicator that a priority of the public sector is to increase the capital stock outside of the traditional parastatal industrial sector. Even more commendable is the increase in resources for improving human capital which is reflected in the rising share of investment devoted to health and education. On the other hand, too much of good thing turns into a deficit in O&M expenditures, whose share has not increased despite the existence of a higher capital stock requiring larger current expenditures for maintenance.
Table 1.3
am Ap*u am of Wmta 0 Gn 1d Itmu n FW Fimi Ui LW toc O tn(W (anto tw ti t n mm MOi
Tdm.a 2A0 194 22 26 2A 278 ItS na na 187 170 3Z2 4a4 Sl0 TauBne 190 178 24.5 197 197 235 a9 na 161 11.8 134 102 27.8 4!3 Tdc eamhe 27A 219 293 214 27 2&O U9 2Z8 28 212 19 313 427 !5 24 CQIleteqar 21.7 20228 190 186 256 a1 191 2a 14.8 11.7 21.8 4(2 51.5 17.6 hist 1.9 1.9 25 Q6 ao 53 09 43 31 95 00 29 40 4.0 36 Chrf 71 1.6 84 a4 21 98 1.8 ...... 20 34 Q8 159 163 37 TraEs 41 44 1.0 53 69 34 21 67 1.7 Q5 Q0 32 63 39 40 Wgsadsaim a3 73 11.9 45 66 58 34 26 1Q2 85 67 42 87 198 63 $epdlJe 60 1.7 25 4.4 7.8 24 48 37 38 54 42 a5 25 49 30
Tcd ;o imO 1Xo 1ao lmo 1mo lmo lmo 1mo 1aao lmo 1cao 1aao 1ao uGo 1mo TaueAnB 792 91.8 839 77.0 71.8 94.8 77.4 ...... 631 7 31.7 8 6s9 TS prdU 110 10mo1mo 0mo o 0mo1mo 1mo 1o0 1610110 161Oa 110 1mo10mo On"1epiie 792 962 91.5 812 R5 91A4 8 639 a9 733 737 71.9 941 91.3 63 h3eq 69 a7 a8 26 11A 189 7.0 1la 11.7 25 9o 96 94 7.1 156 (Gm&tmc 219 7.3 2a7 9 a1 29 140 ...... 99 21.3 26 372 29 9161 Trask 150 211 34 226 27 121 159 24 63 25 1o06 14.8 69 198 V,batIaia 323 33 346 192 247 2X7 2O 11.6 311 41 423 139 224 191 336 CapWoqm1tue 21.9 7.8 a518a8 2R3 a6 372 161 142 17 213 211 59 a7 143
1.21. The wage bill in Bolivia is not an outlier either as a ratio of GDP or a percentage of total expenditures.9 As a share of GDP, Bolivia's 8.3 percent wage bill is higher than the 6.3 LAC average, and as a share of total expenditures Bolivia's 35 percent figure is higher than the 33 percent LAC average, but neither portions seem unreasonably high. The sense of overstaffing, and an underpaid civil service is discussed below.
9 The wage bill data reported includes payments to El Chaco War Veterans. The issue will be discussed in more detail in the health sector.
Evaluation of the Overall Budget 12 Public Expenditure Review
1.4.2 Public Sector Employment
1.22. A closer look at employment in the public sector as a whole (as opposed to simply general government) provides some insight into the broadly held view that there is high wage bill pressure. Table 1.4 outlines some basic public sector data (excluding municipal governments). From 1989 to 1997, overall public sector employment remained relatively constant at about 200,000 employees. At first glance this seems a great accomplishment, especially given that GDP grew at an average of 4.1 percent per year and population growth averaged 2.4 percent in the same time period. The public share of total employment fell from 8.0 percent to 6.4 percent.
1.23. However, capitalization, and popular participation should have reduced public employment. Popular participation should have reduced public employment as determined in Table 1.4 because an additional 10 percent of revenues were earmarked to municipal governments and the data does not include employment in municipal governments. Employment in public enterprises fell by about 24,067 employees from 33,410 in 1989 to 9,343 in 1997 due to capitalization i.e. workers were not laid off but became private sector workers. Employment in Regional Corporations was reduced from 4,713 in 1989 to zero with the restructure of the General Government. In short, due to a successful strategy of transferring productive activities to the private sector, public employment was reduced by 28,780 between 1989 and 1997, equivalent to 14 percent of the public labor force. No doubt a tremendous accomplishment.
1.24. The other side of the issue is that the public sector absorbed 24,069 employees in 8 years even as some responsibilities have been diminishedl' and there has been enormous technological progress, implying that productivity, as measured by output per worker, deteriorated significantly since 1989. In a sense, Bolivia missed an opportunity to downsize public employment. The largest share of the increase is taken up by 27,356 new employees in the Prefectures. Similarly, the largest additions within prefectures correspond to increased employment levels in both education and health of 18,447 and 2,240, respectively. In principle, this transfer of public employees from productive activities to public services such as health and education is in line with overall government objectives. The question is whether the extra education and health workers are getting the results expected. An auspicious indicator is that the share of administrative personnel in education remained constant at 10 percent throughout the period. Both of these results are robust across Prefectures and time periods. However, the education section argues that there is a low pupil to teacher ratio and the one on health identifies an overstaffing in health personnel. Human resource issues are addressed in more detail in the education and health chapters.
0 The reduction of responsibilities are related to the decentralization process where municipalities are now discharging an increased number of functions. It is important to underline, however, that during this period Central Governrent has also undertaken new activities such as judicial and regulatory functions.
Evaluation of the Overall Budget Public Expenditure Review 13
Table 1.4: Employment in the Public Sector (not including Municipios) between 1989 and 1997 1989 1997 Change Total Public Sector 204,286 199,575 -4,711
Central Administration 43,681 52,116 8,435
Decentralized Public Entities 11,383 3,396 -7,987 Junta Nacional de Desarrollo y 1,270 0 -1,270 Solid Social. Servicio Nacional de Caminos 4,703 348 -4,355 Social Security Institutions 9,584 9,557 -27 0 Regional Corporations 4,713 0 -4,713
Prefectures 96,804 124,160 27,356 Education 85,465 103,912 18,477 Health 10,970 13,210 2,240 Public Enterprises 33,410 9,343 -24,067 Financial Public Enterprises 4,711 792 -3,919 Central Bank 870 492 -378
1.4.3 The Wage Bill and Civil Service Reform
1.25. The aggregate behavior of public salaries partially complements the poorly paid civil service part of the problem. The wage bill of the General Government sector has remained roughly constant at 8 percent of GDP since 1989. Given an average real GDP growth rate of 4.2 percent per year, the wage bill increased 38.8 percent in real terms from 1989 to 1997. However, employment in the General Government increased 18.6 percent in the same period resulting in an average rise in the real wage per public employee of 17.0 percent in 8 years. The increase is equivalent to 2 percent per year-- just above the 1.7 percent average income per capita growth. Public employees are comparatively not worse off than the average Bolivian.
1.26. The wage pressure arises from an uneven distribution of salary increases. Teachers' salaries increased an average of about 7.9 percent per year, and the number of teachers increased 2.5 percent per year since 1989. However, within this group those at the lower end benefited least.' Thus, teachers' share of the General Government wage bill increased from about 30 percent in 1989 to 42 percent in 1997. The above implies that the rest of the General Government employees have seen a more modest increase in the wage bill of 18 percent since 1989. Given that employment in the rest of the General Government increased 8 percent, the rise in real wage per capita was 10 percent, or an average increase of 1 percent per year-just half that of the average per capita growth. This explains the discontent among public employees and the degree of pressure. (See the Education chapter for a more complete analysis of teachers salaries).
In 1999, authorities took some measures to correct the imbalance.
Evaluation of the Overall Budget 14 Public Expenditure Review
1.27. A related problem to the public sector wage bill or low salaries to public employees (excluding teachers) is the high rotation of technical staff. Civil service reform has a long history of failed attempts in Bolivia. Civil service reform projects financed by the international community including the World Bank have as their ultimate objective to form a "Civil Service" core of public employees which are technically competent, independent of the political process, and promoted by merit. The means to achieve the goal has been to finance isolated blocks which are recruited based on technical skills and cannot be fired due to political reasons. This island approach has failed to extend to the rest of the public sector, and has become increasingly isolated and unsustainable. The rnost important reasons were that fiscal costs could not be afforded by the public sector in Bolivia, that it is impossible to isolate technical staff from the political process, and that there was resentment from those not benefited.'2
1.28. Bolivia's old practice of political party's employment patronage in the public sector and to a lesser degree the financing mechanism of political parties in its coalition system are the underlying cause for labor. Parties obtain sonle funds by deducting up to 10 percent of public employees' salaries. Although the process is illegal, it is common.'3 Parties therefore have an incentive to have large public payrolls. The stronger the party, the more ministries it controls. When a ministry changes party, a large part of the payroll is c;hangedto reward party loyalty and maximize funds.
1.29. Various reform projects have attempted to restrict rotation by issuing hiring, firing, and promoting procedures which are transparent, competitive and independent of politics. The approaches have, and the report ventures to say will continue to fail unless civil service reforms are complemented with deep political structural reforms which change the structure of party financing and patronage. A difficult task indeed The National Institutional Review will attempt to analyze it in more detail.
1.30. The World Bank in cooperation with other donors is working with the Government of Bolivia to define a new Civil Service Reform with these two aspects in mind. First, it will use the recommendations from the National Institutional Review to remedy the party financing issues. It will be impossible to implement merit systems of promotion, hiring, and firing when there are strong underlying political forces at work. Second, although it is clear that public employees are badly paid, it is also clear that there is a serious overstaffing problem. Failure to address both issues will probably mean that the new Civil Service program will fail again. As such, fiscal projections for the civil service reform component will cover most employees in the central administration,14 and aim to reduce the current wage bill as a percentage of GDP to insure sustainability i.e. when the project stops disbursing, the public sector will be able to afford the wage bill.
12 See AnteloEduardo "Sostenibilidad Financiera del Programde ServicioCivil" for an excellenthistorical accountof civilservice reform in Bolivia.
3For obviousreasons, there is no hard evidence. However,wide anecdotal evidence suggests parties either have a person in each entity collecting party dues, or there is a special contribution account which is actuallyfor the party. 14Theprogram envisions a gradualincorporation not includingteachers and healthworkers.
Evaluation of the Overall Budget Public Expenditure Review 15
1.31. Table 1.5 includes preliminary fiscal projections for civil service reform for the 13,000 employees in the central administration and prefectures.'5 The macroeconomic assumptions are the same as in Table 1.1 and an assumed annual international inflation rate of 1.5 percent. Even though salary expenditures increase 64 percent in dollar terms during the period, the salary mass as a share of GDP decreases from 0.77 to 0.61 percent of GDP. The two reasons are: (i) the projections contemplate a reduction in public employees of 27 percent, and (ii) growth assumptions allow for these increases. A sensitivity analysis shows that the country could grow at an average rate of 4 percent per year and still maintain a constant salary mass ensuring sustainability. Although the first phase of the project only covers 9 agencies, the GOB, the World Bank and the rest of the donors should work together to cover the entire range of public officials in the central administration to avoid less comprehensive approaches which did not succeed in the past.
1.4.4 Investment, Operational and Maintenance Costs
1.32. The entire investment program is financed with foreign resources. However, net foreign resources finance only half of the 6 percent of GDP investment program (i.e., disbursements amount to 6 percent of GDP and capital repayments are 3 percent of GDP). As such, it presents some of the typical characteristics of a largely donor driven program: a high execution ratio because the availability of foreign resources determines the fiscal deficit ceiling, numerous projects, and a bias against O&M vs. new capital investment (Pradham 1996). This subsection examines the economic decomposition of investment, the increasing share of investment executed by sub-national governments, and simulates reasonable O&M costs associated with the investment plan.
Table 1.5: Fiscal Costs of Civil Service Reform in the Central Administration (in US$) Year Costs Costs Total TGN Total Financing Additional External. Required Fin Total Cost Present System Civil Service Costs Available Required Contribution Financing % PIB % PIB 1998 65,501.462 0 65,501,462 65,501,462 0 0 0 0.00% 077% 1999 58,951,316 10,697,638 69,648,954 69,304,984 343,970 0 343,970 0.00% 0.75% 2000 52,401,170 21,395,276 73,796,446 71,805,244 1,991,202 0 1,991,202 0.02% 0.75% 2001 45,851,023 32,092,914 77,943,937 74,385,462 3,558,475 0 3,558,475 0.03% 0.74% 2002 39,300,877 42,790,552 82,091,429 76,996,864 5,094,565 0 5,094,565 0.04% 0.72% 2003 32.750,731 53,488,190 86,238,921 79,669,677 6,569,244 0 6,569,244 0.05% 0.71% 2004 26,200,585 64,185,828 90,386,413 82,405,132 7,981,280 0 7,981,280 0.06% 0.69% 2005 19,650,439 74,883,466 94,533,904 85,204,464 9,329,440 1,411,713 7,917,727 0.06% 0.67% 2006 13,100,292 85,581,104 98,681,396 86,482,911 12,198,485 4,552,775 7,645,709 0.05% 0.65% 2007 6,550,146 96,278,742 102,828,888 87,779,715 15,049,173 8,157,056 6,892,117 0.04% 0.63% 2008 0 106,976,380 106,976,380 89,096,121 17,880,259 17,537,670 342,588 0.00% 0.61% Totals 79,996,091 48,336,876 Source: PAD "Insitutional Reform Project" * From 2005 onward, the treasurey will be able to make additional contributions.
5These projections were elaborated together with the team of the Institutional Reform Project and were presented in the Project Appraisal Document. The figures are based on linear approximations and they will be revised during the appraisal mission. The aggregate numbers should not change substantially.
Evaluation of the Overall Budget 16 Public Expenditure Review
What does the PIP spend on in terms of economic decomposition?
1.33. This breakdown provides a glimpse as to what external aid is actually financing. Table 1.6 outlines the major categories of spending. Capital goods account for 89 percent of the total PIP. Contrary to popular belief, consultant expenditures are only 1 percent of capital goods expenditures (0.9 percent of total investment).
Tasble1.6 Investment by type of Expenditure for 1997 Total General 100 200 300 400 462 Government (thousandsof % of Total Personal Non- Goods Capital o/w Bolivianos) Services Personal Goods Consultants Services Agriculture 192,576 6.96 11.3% 3.9% 4.0% 80.8% 3.3% Mining 7,789 0.28 29.6% 44.6% 8.1% 17.60% 5.7% Industryand Tourism 39,827 1.44 0.6% 13.6% 4.1% 81.7% 7.8% Hydrocarbons 160,300 5.8 0.0% 0.0%/o 0.0% 100.0% 0.0% Energy 91,348 3.3 0.5% 7.1% 0.4% 92.0% 0.89/0 Transport 973,608 35.23 6.1°o 1.5% 2.9% 89.1% 0.2% Healthand SocialSecurity 216,153 7.82 0.7% 3.2% 19.1% 77.0% 1.1% Education 315,405 11.41 0.2% 0.3% 1.2% 98.2% 0.1% BasicSanitation 449,842 16.27 0.8% 0.4% 0.1% 98.7% 1.0% Urbanand Housing 48.249 1.75 0.0% 0.1% 1.4% 98.4% 0.5% WaterResources 36,292 1.31 5.0% 0.8% 1.5% 92.6% 2.2% Multisectoral 233,070 8.43 11.5% 11.4% 4.5% 67.4% 4.7% TOTAL 2,764,461 100 4.3% 2.7% 3.5% 89.0% 1.0%
1.34. The rest of the PIP is distributed about evenly between personal services, goods, and non-personal services. There is large dispersion in the distribution of spending across sectors. The mining sector only spends 17.6 percent on capital goods, and 29.6 percent on personal services. Similarly agriculture and multisectoral projects spend the least amount on capital goods. The ratio has traditionally interpreted as a measure of
efficiency to execute investment. However, this analysis across sectors is difficult because in health and education human capital investments in training etc. are more important than building hospitals or schools. Again there is no "right expenditures mix."
1.4.5. The Aggregate Operational and Maintenance Problem
1.35. As in other developing countries with a large donor driven investment program, investment is not a residual claimant in public expenditures. Table 1.7 shows that the execution ratios of investment as a percentage of programmed investment averaged 92 percent since 1992. The next subsection illustrates that investment cuts are not made systematically and usually health suffers the largest share of the reduction. At first glance, high investment execution ratios are desirable. The problem is that coupled with execution ratios of 100 percent in wages, this has translated into substantial cuts in O&M. The true residual category in Bolivia is not investment, but O&M. The above is not surprising because the dominant criteria for the size of the budget deficit is the availability of foreign concessional funds, which require capital expenditures.
Evaluation of the Overall Budget Public Expenditure Review 17
Table 1.7: Execution Ratios of Public Sector Investment (1992-1998) (in percent) SECTORS %EXEC. %EXEC. I %EXEC. I %EXEC. %EXEC. %EXEC. %EXEC.11992-1998 1992 1993 1994 1995 1996 1997 1998 PRODUCTION 101.24% 90.86% 96.39%1 64.05% 108.91% 76.27% 78.19% 87. 9% INFRASTRUCTURE 123.07% *113.39% 110.32% 101.30% 98.06% 88.75% 76.17% 101.6% SOCIALINFRASTRUCTURE 77.84%1 71.07% 109.05% 76.53% 104.61% 93.69% 88.05% 88.7%
TOTAL%EXECUTED INVESTMENT 104.33%| 91.41%' 90.67%1 83.41% 100.95 918
Source: VIPFEE
1.36. In addition to increased O&M expenditure volatility is the fact that they have remained constant despite larger investments in health and education. Budget cuts have targeted O&M costs in order to meet fiscal constraints imposed by restricted revenues and a burgeoning pension deficit. It is not surprising that long term sustainability of investments is one of the most important public sector issues in Bolivia. The paradox is that the recurrent cost problem stems from the active development efforts of recent years. Exacerbating the recurrent cost problem is the fact that public capital expenditures have increased--albeit slightly--over the past five years. An important fault lies in the fact that none of the donors, including the World Bank, provision for the recurrent costs that will have to be financed from domestic fiscal resources once the project stops disbursing. When the project ends, there is much less need for fixed capital goods, but doctors, teachers, books, general operation and maintenance are still needed, with no external funds to pay for them. The story becomes an all too familiar one: poorly maintained roads that need to be rebuilt, hospitals without medicines, equipment or doctors; schools without teachers or books etc. The opportunity costs for making due allowance for O&M can be extremely high( see Pradhan, Kerveyn).16
1.37. There is a literature on the calculation of O&M expenditure for specific sectors and even types of project. For overall budget evaluations, the approaches are mostly ad hoc. Heller (1979) presents a methodology for calculating recurrent costs by estimating "4rcoefficients." The coefficients are defined as the O&M ratio associated with the investment cost of a project.17 This section uses this methodology as a first attempt to calculate the O&M expenditures associated with Bolivia's future investment path.
1.38. Determining the appropriate level of O&M expenditures for existing capital is not straightforward. It would involve calculating the existing public capital stock, which in turn requires another set of ad hoc assumptions. Therefore, despite the fact that the 7.1 percent of GDP in O&M expenditures is definitely too low a level given the indicators across sectors in Bolivia,1 8 it will be assumed for now that this amount is sufficient for
16 In a sample of almost 80 World Bank projects, it was estimated that new construction projects in roads had a rate of return of 24 percent while maintenance had a return of 45 percent. A recent study estimated that $40-50 billion will need to be spent on road repairs when $12 billion would have sufficed to maintain the roads. (perhaps include this as a specific example in the road section. (Pradhan 1996). For roads there is a lot of cross country experience available on appropriate allowances for routine, periodic and rehabilitation forms of maintenance 17Humplick and Faiz (1995) present a complete analysis for roads and find coefficients similar to Heller's.
18 See the following chapters for indicators of poor maintenance especially in roads and health.
Evaluation of the Overall Budget 18 Public Expenditure Review projects undertaken prior to this year. One would expect these charges to decline over time as older projeclts depreciate or are terminated from the program. Thus, using a "standard" depreciation rate of 4 percent per annum, recurrent costs associated with historical investment are estimated to decline from 7 percent of GDP in 1997 to just 3.2 percent of GDP by the year 2005.19
1.39. There are two scenarios to estimate the recurrent costs associated with new investments. The exercise assumes the same aggregate investment levels as Table 1.1 and a homothetic expansion of the functional distribution. Table 1.8 presents results from the first scenario which finds the lowest r-coefficient to maintain the current level of O&M expenditures. The resulting r-coefficient is 0.1, too low for almost all sectors.20 Nevertheless, by the year 2005, recurrent costs for new projects alone stand at 3.9 percent of GDP while total annual recurrent costs remain constant at 7 percent of GDP.
1.40. Table 1.9 presents a more realistic scenario which considers a weighted average of the r-coefficients given by Heller (1979) applied to Bolivia's investment profile. The resulting average r-ccoefficientis 0.15. Recurrent costs for new investments swell to 4.8 percent of GDP in the: year 2005, equivalent to two-thirds of expected investment outlays. The sum of recurrent cost charges related to the existing investment program plus those associated with new investments balloon to 7.9 percent of GDP by the year 2005.21
Fable LN: Public Investment Program, 1997-ZJiu and Projected Recurrent Costs t" 1 (In thousandsof constant1997 Bolivisnnos)
ACcs1 n.st Grss bo.r. Gms hItecunt Grs *bnt G. cuut Grom. rt CATtGORY 1"_tsslo stds Isootcst Mo.n I.vcoatt costs lvsosntt ots I-stscot ots -tsae.t Mst.
TOTAlSRELATtD TO 1n7-2010 INVESTMENT PROGRAM 2,927.s1S 2,764,426 292,732 2,991,942 557,513 3.292,793 533,939 4,619.987 2.46.3"9 6,039,138 4.283,19 (.. %of GOP) 7.097. 6.3% 0.7% 6.5% 1.2% 6.0% 1.7% 7.3% 3.9% 7.3% 5.29'/
:MLA I hU I u rnt-___ 1997 INVESTMENT 2.911.77X) 2. 16.752 2.699.0)4 2.581.656 1.994.916 47),177 (. %ot GDP) 7 0% 64% 5 90X. 51% 12% 7-x7
_TOTAL RCRK tEXPNDITURES 2,933,701 3,109.134 3,256S517 3.4X1,595 4.40,3 11 5.691.3 (s% of GDP 7.n% 7.1% 7.1% 7.t% 7.0%1 6.9s
11 Assum. s o X rece cos 1 .in orW In . inch SEcor 2/ C-1ihdo-s sss me nnIgIO.hnrdoprcci..on sod .25 - uf.ul 1if6 v- e.,: Cs deorsic pduu 61.917.)w 41.0771) 46729.879 00 421.412 61 28749,( 02.714.210 GDPgrio1 0,S* 47% * 9°%. 52% 5 5% 5 5%
The exercise shows that Bolivia's effort in O&M expenditures will have to improve due to the characteristics and sectoral composition of its investment program if it wants to improve the sustainability and durability of the investment effort. The above is compounded by the fact that the current 7 percent level of O&M expenditures is by all accounts too low. In short, Bolivia's O&M expenditures demand at least an extra 2
19 Whilean expectedusefil life of 25 yearsis used in the currentexample, the resultsof the analysisare extremely robust to changes in this particular assumption.
20 See Heller ( 1979) for a list of the coefficients for each sector.
21 In addition to the value of "r-coefficients" the analysis is sensitive to the rate of depreciation. If depreciation is reduced to 2 percent, then the recurrent costs go to 9.5 percent in 2010. Conversely if depreciation is 8 percent then recurrent costs abate to 6.1 percent
Evaluation of the Overall Budget Public Expenditure Review 19 percent of GDP. These demands present difficult choices given the current fiscal situation. However, failure to address them implies low productivity of investment.
[able 1.9: Public Investment Program, 1997-Z010 Sectoral Distribution and Projected Recurrent Coats"' (la toamandoof comstact1997 "ioviaasu)
AdOlu cm. t G- =- k.a Gr _b. .d G ke . Gn_ com Gl_ b.c-,. SEICTOR l rOmolm il am Iu.uca1st _ col taiugolt cowla toniuo coo loriewm tub I1sn mO oilS
rodue.1 324451 0.06 306,250 16,J20 331,45| 32,021 364,7U. 47.90| 511,814 141,517 664,921 24,06,
-00y4,oco,boo 144.059 1.111 136.775 1.449 10.1132 2.751 162.917 4411 122.5S2 12.1Sg 290.744| 21.192 .0.OioIog 19.4S4 ( 10.397.ll 195 19.911 371 21,911 55 110,745 1.639 411.S | 2.051 *lndoo0y 29.677 2SD21.111 297 10.127 565 1.,177 R45 4|6,29 2.497 61.2114 4.34
-A 9 ricltdrt .311.531 OI1 123.150 14.S79 111.186 20.313 146,570 42.'S2 2(03.658 123.192 26#.706 217.67
I.cr.Olfl.clsrO 1l'o,05,41 0.00 590.636 61,0*6 0.071.600 117.957 1,117.124 176,442 1,665,4004 521,197 2,176,3101 1106,22.1
.Trnopom 916.080 0106 065.713 5501113 936.962 1114.755 1.011.177 156.695 1.446.504 462.064 1.08%1,915| 14,79 .00100, 99.129 (I 1(5 9.706 4.966 11(1.5115 9.457 111.711 14.146 156,731 41.7S7 214.0511 72.65. .ConoOO7kaloon.i 392 1(1.3 3710 211 411 17 441 56 619 165 0110 207 -Wt, SoeppIY la.941 1 1915 36,767 1,947 19.793 1.7117 43.794 5.546 61.446 16.182 011.1it? 28.461
0.1 ~~~~~~1,517,71601.210 1.244,009 247,354 134,1 471,910i 1,460,992 7114,546 2.079.424 2,41101178 2.717,594 5.600,619
-Helth 175.1111 1.25 160,244 41.21 170.4 02,266 196,82# 121056| 276.161 161.497 3611.93 612.012 .-Ed-m60r1 4017,762 o122 305.106 09.7110 416.6Y9 1711,821 45,539 275.517 643.434 754.77S 404.942 1.312.316 -B0.i S r S,6.M,. 426,(065 11252 402.200 101,2177 4J1.319| 2w0.270 479,175 299.579 672.115 0.935 878,606 19.531.66 .U,b. o S1,.006 1 291.650 9.267 315.653 17.,45 347,394 26.394 4J7.414 77.967 61701131 115,.6
M.tlhct-or0 13011 0.05 217,453 34,175 235.241 65,076 250895 97,342 363,246 287,U0 474,748 49,9.
I997-2010 INVRSTMEL3T PROGRAM 2,927,S15 2,764,426 361.295 21"91.942 696,1171 1,292.793 1.(26.23| 4,619,907 3,031.4132 6,DJ131 S.270,0S (. %of GDP) 7.0% 6.3% 0.I% 6.95% 1.5% 6.0% 2.1 7.3% 4.8% 7.3% 6.05'
O&M ilELATED TO PRE- 1997INVESTMENT 2,913,7(1X 2.016.352 2.699,()4 2.5NI.65| 1.94.Y16 1.4110.17 (l%OfGDP) 7.0% 6 4% 5 9%/ 5311 325 17 TOTALRECURRENT EXPKNDITIRES' 2.933.790 3,176.647 3,305,175 3,078 5.026,348 6,.670.03 (I % .0 GDP) 7.0% 7.2% 7.4- 7 7.9% I.0
1/ Sa11 rwa= o eonrsn bobolon -,1o1e *r coOOie(l11 d by Hdlo i. *Tbe Uodor3o-ncingof R-(rr.n, Don,Iopm.-tCo-. 2r CIo.InlIkn, u- m irglh-linodftr-oumo md . 25 yvr fseWt,lif,
00, 4 pom0n0ePn2ducl41,9111.I61 431.079,770 46.022.S79 40.423.412 63.207.4W) S2.714.21S DPiro.,o ,it 47% 4 9% 3 2% 5.5% 5 5%
1.41. Ironically, external aid flows have contributed to the persistence of the recurrent cost problem by facilitating higher domestic investment without a commensurate increase in the growth of recurrent revenues. However, since most parties equate development expenditure with investment, and recurrent expenditure with consumption, there are both external and internal pressures to curb recurrent expenditure in order to generate "public savings" to finance investment.2 2 Donors will inevitably be confronted with the tradeoff between the sustainability of projects and uninterrupted service to the stakeholders. However, it is clear that to improve the sustainability of donor-supported projects, it is critical to modulate projects and programs to reflect sustainability concerns more realistically. For example, based upon experiences with road projects and road maintenance, the World Bank has developed a "best practice" model, involving changes
22One shouldkeep in mindthat for a givenamount of investmentexpenditure, a developmentprogram's ultimaterecurrent expenditure requirements will depend on the mix of projectsbeing implementedin eachsector. Forexample, as notedin Heller [1979],countries placing heavy emphasis on projectsin health, agriculture,and educationwill require higher recurrent outlays than countriesinvesting mainly in physicalinfrastructure. Note that this doesnot reflecton the productivityof theseprojects, but simplymeans that the characterand timingof theiroutput flows may not lead to sufficientimmediate growthin tax revenuesin orderto financetheir recurrent costs.
Evaluation of the Overall Budget 20 Public Expenditure Review in road maintenance and tax collection management with implications for a unified budget. An evaluation based upon this type of model may shed light on Bolivia's recurrent cost problem and help arrive at a long-term solution to the maintenance problem. The sector discussions will provide specific suggestions.
1.42. In short, this, preliminary numerical exercise highlights the magnitude of O&M expenditures, and is. meant to provide guidelines during future budget exercises. The Government of Bolivia should require every investment project to have clearly outlined fiscal costs of the project during and after the conclusion of the project. This is at least as important as the economic sustainability analysis of the projects. The status of maintenance should be assessed every year in order to allow adequate O&M allocations and provide incentives to insure cost effective maintenance programs.
1.4.6 Conclusionsfor Economic Distribution of Expenditures
1.43. The economricdistribution of expenditures in Bolivia seems to have "about the right" mix. Although the wage bill is perhaps on the high side, it has remained relatively constant with the average pay per employee increasing at a rate only marginally higher than average income per capita growth. The lack of increase of O&M funds is an ominous development, especially given that social sector investment increases the need for recurrent costs per dollar spent. Bolivia will need to increase its maintenance expenditures even at the expense of investments. The obvious problem is that maintenance is usually not accompanied by foreign disbursements. A tough choice. Perhaps the donor community needs to focus on maintenance. Or in some sectors the government might opt for a maintenance fund arrangement (see Shalizi ). The report will indicate specific areas where the issues are most pressing in each of the different sectors.
Evaluation of the Overall Budget Public Expenditure Review 21
1.5 Functional and Spatial Distribution of Expenditures
1.44. This section describes public expenditures by function. More so than in the economic decomposition, intemational comparisons should only be used as guidelines and/or to detect major misallocations. Decision to reallocate spending across sector is inherently difficult because benefits across sectors are difficult to compare, i.e., how many kilometers of road should be exchanged for wider primary education coverage, or a reduction in infant mortality. There are three simple criteria one should consider in discussing intersectoral allocations. (i) Decide whether there is a compelling rationale for public expenditures in a certain sector at all (i.e., is there a market failure). Bolivia has achieved great progress in diverting expenditures from production sectors where the private sector has a comparative advantage. At this point the analysis cannot single out any major sector where the public sector should not be involved except for those remaining public enterprises which will be privatized and the Misicuni project. (ii) Carry out a cost benefit analysis across alternative combinations. This task is particularlv difficult in social sectors. In place of a formal analysis, a second substitute often used is to place programs in different sectors against each other. (iii) Incidence of expenditures. Overall the task is so complicated the World Development Report 1988 (on Public Finance) stated "intersectoral allocations are inevitably based largely on intuitive judgements" and reflect political considerations. The report will provide broad recommendations.
Figure 1.4
DecisionTree for Evaluating PublicPrograms
What isthe rationab for public intervention?
No rationale There is a rationae
vnto vVhat isthe best instrument? M4zicuni ResidsalYPfF
Contrad Subsidy Regulation Publicprovision
rads Insurance l PnmnaryEducahon Wat oreeaonasrzs WaterCornesons Secuntfesand Enchange | -
IWhat are the fiscal cots?
1.5.1 Overall Public Expenditures by Function
1.45. Figure 1.5 presents the evolution of public expenditures by function of the General Government since 1990. It has two caveats: (i) The data does not include expenditures by public enterprises (discussed above). Thus as the process of capitalization progressed, the public sector gradually abandoned productive enterprises. (ii} The data for general government expenditures is unreliable. Although Central Government expenditure is more reliable, it is misleading especially after Popular Participation delegated 20 percent of revenues to municipal governments.
Evaluation of the Overall Budget 22 PuiblicExpenditure Reviewt
FIgQr. XX: F.rt,lonal DM.tnb.tion of E.pendStre. of the G.n .I Government (1990-97)
2;Xs~~~~~~~~~~~~~~~~~~~~~~~~~~~S., s.c.,,,!y
20OMF n__ z ewEoocSri*
_ *~~~~~~~~~~~~S-c Svcunr
15 _ 4
O E
*G.... PWcS..-.,...
999 19W 992 993 94 '995 996 193
Source: Contaduria Gereral de Estado
1.46. There has been a tremendous increase in General Government expenditures as a share of GDP since 1990, making comparisons complex. Table 1.10 presents the functional distribution of expenditures in 1990 and 1997 as a share of GDP, as a share of total spending to highlight government priorities, and provides a homothetic projection as a benchmark for comparison. Noteworthy facts are: (i) health increased more than the benchmark but the level is still only 61 percent of the region's average, and; (ii) education increased less than the homothetic benchmark but it is 50 percent higher than the LAC average and only 10 percent lower than the E. Asia average (consistent with high education expenditures in 1990). The three largest deviations are social security, other economic services and productive activities which are 50 percent of the LAC average--although transport expenditures double the LAC average indicating Bolivia's high road construction priority.
Table 1.10: General Government Expenditures by Function
(% of GDP) (% of Total Expenditure)
Bolivia Bolivia 1990 1997 1997 (proj.) LAC E Asia 1997 LAC E. Asia General Public Services 2.08% 3.38%/o 3.47%o 3.68Xo 4.270o 12.370o 20.89% 17.35% Defense 2.31% 1.87% 3,84% l.62°o 2.070°o 6.84%o 9.74% 10.87% Public Order 1.07% 1.87% 1.79% nW na 6.85% Education 2.95% 4.37% 4.91lo 2,77°n 4.8% 16.0% 14.85% 20.45% Health 0.38% (0.75% ().63%o 1.220o 1.75°n 2.74% 7.21% 7.03% Social Securitv 2.90% 6.07% 4.84°% 0.88% 0().66%o 22.2% 5.48% 3.09% Productive Activities* 0.47% 1.20% 0.78% 2.40(% 3.80% 4.42% 10.98%o 15,81% Transport 1.32% 2.30% 2.20(% 1.25% 2.32% 8.4% 7.58% 9.36% Other Economic Services 1.42% 3.59% 2.37% na na 13.150,, Other 1.49% 1.92% 2.48% na na 7.02% Total 16.38% 27.32% 27.31% na na 100%/8 *Energy, Mining, Constrjction, Manufacturing, Agriculture, Housing. Source: Bolivia: Contaduria de la Republica, Latin America and the Caribbean and East Asia Averages are from Sanjay Pradhan, 1996.
Evaluation of the Overall Budget Public Expenditure Review 23
1.47. There is no "right mix" of expenditures. Nevertheless, international comparisons show that by way of comparison, expenditures on health in Bolivia are way too low, education expenditures are significantly higher, the effort in roads is indicative of the high priority within the public sector, and defense spending is not out of line.
1.5.2 Investment by Function and Agencies23
1.48. The structure of public investment has been deeply affected by the process of capitalization and decentralization: (i) Whereas in 1992, 40 percent public investments were executed by public enterprises, this share shrank to 2.1 percent as public entities were transferred to the private sector. Perhaps not surprisingly, given privatization experiences, the private sector has more than compensated for this decline. Gross domestic investment increased from 16 percent to 20.7 percent of GDP in 1992 and 1998 respectively. (ii) The composition of public investment moved away from productive activities towards social sectors. (iii) The share of public investment executed by subnational entities (and by municipal governments, in particular) increased.
1.49. Figure 1.6 shows executed investment as a share of GDP by broad function. The composition of public investment moved away from productive activities as the process of capitalization progressed (productive activities where capitalization played a major role are at the top of the graph to facilitate inspection). Hydrocarbon investments diminished from a peak 2.2 percent of GDP in 1991 to 0.03 percent in 1998 as most of YPBF was capitalized; communications decreased from a peak 0.58 percent in 1993 to zero in 1996 as the public telephone company was capitalized; energy decreased from 0.98 percent in 1991 to 0.20 percent in 1998 with the capitalization of the electric utility company ENDE; mining decreased from 0.28 percent in 1988 to 0.05 percent in 1998. Similarly Table 1.12 corroborates the capitalization effect by showing the decreases in the corresponding shares of public investment by public enterprises.
1.50. Investment declines in production activities reflect a reduction in public investment due to capitalization. The observation highlights the fact that the public investment pie has shrunk although the national investment share has risen considerably; i.e. private sector investment has more than compensated.
1.51. Transport investment (mostly roads), increased from 2 percent in 1987 to about 3 percent in 1992 before declining to about 2 percent of GDP in 1998. The biggest increase in participation came from social sectors, which increased from 0.63 percent in 1987 to a peak of 3.19 percent in 1996 before declining to 2.76 percent of GDP in 1998. An undoubtedly positive development is that investment in education played the most prominent role, increasing in share from 0.08 percent in 1987 to 0.96 percent in 1997. Health investments also increased from 0.13 percent in 1987 to 0.42 percent in 1998. Basic sanitation and housing increased from 0.42 percent in 1987 to 1.58 percent in 1998 making this the second most important investment category after roads.
23 The data used in this section was obtained from the Vice Ministry of Investment in the Minister of Hacienda. There are small discrepancies with respect to the data presented in the previous section which was obtained from the Unidad de Politica Fiscal, IMF and World Bank Staff Estimates
Evaluation of the Overall Budget 24 Public Expenditure Review
hgure1.6: (stibuon ofInvesTwmtbySector(%ofGDP) * Cthers
9.00\0 * Mning /cIndustry and Tounism
8 0Y/o | sS ~~~~~~~~\ [ W~~Hdrccatxxrs 7 °/O v *KErEgy
600/o ConTnunications
50/o wAiltisectoral M . Transpos * Agnculture
a oo/o tUrban evelopfant and
200% a BasicS~anitation -Educationand Ouilture
- 0 °/O fl1-HealthandSocal Secuty 0°/O °% 1HdncResurces 1987 1988 1989 1990 1991 192 1993 1994 1995 196 1997 1998
1.52. Shifts in the composition of investment indicate positive developments which reflect the government's commitment to poverty alleviation. Moreover, they are consistent with interniational experiences in which the public sector concentrates on social activities where market failures are more pronounced.
1.53. As previouslly discussed, investment is not a residual claimant on public expenditures in Bolivia. A closer look at execution ratios shows heterogeneity across sectors and years, pointing towards random cutting of investments.2 4 Health consistently bears the largest cuts. The average execution ratio from 1992 to 1995 was 56 percent. Fortunately there have been improvements in the last three years. It is a puzzle as to why urban development and housing had such high execution averages. If the category includes water and sanitation then the development is favorable and should be investigated further and used as an example. Finally, investment execution in 1998 seems to be the lowest in the last five years. The development can be attributed to the change in administration and a tight fiscal situation which has limited counterpart funding.
24 It can be arguedthat volatilityis due to effectsof a largeproject in a particularyear.
Evaluation of the Overall Budget Public Expenditure Review 25
Table 1.11: Execution Ratios of Public Sector Investment (1992-1998) (in percent) SECTORS %EXEC. %EXEC. %EXEC. %EXEC. %EXEC. %EXEC. %EXEC. 1992-1998 1992 1993 =_ 1994 =_ 1995 1996 _ 1997t 1998_ Agricultural 111.48% 83.15% 71.60% 5246% 48.28°/ 6056% 84.82% 73.19% Mining 96874% 43194i72.69%° 112 50% 91 37% 250 15%' 73.99% 120 20% Industry and Tourism 5808% 44T33% 58.46% 52 18%! 8833% 77% 101 13% 68.03%i
0/j Hydrocarbons 99.83% 99.49%; 99.814 65.46, 209 4 7 90 37% 25.00% 9849%1 PRODUCTION 101.24% 90.86% 96.39%l 64.05%. 108.91% 76.27% 78.19%I 87.99%1 Energy 136.86% 89.59%1 90.84% 158.88%, 193.78%1 86.54% 83 79/ol 120 04%/0 Transports 124.32% 111i36% 12402% 91.336t_ 95.49i 9045/ 7840/01 10220 Communications 80.71%| 226.430/1 41.98° 213.56%5 279.01° 9659% NA 156.38% Hydric Resources 1-02 8-8%61 547N401X6 6855%14 64_63%6 -42.52% 6440 41.b01/o 65.25%i INFRASTRUCTURE 123.07% 113.39% 110.32% 101.30% 98.06%1 88.75% NAI 101.58%, Health and Social Security 72.25% 54.90% 52.25%' 4724% 86.57% 71.13%1 107.76%/ 70.30%i
Education and Culture 68.54%1 6391% 1i 8 .4 00ot io 140o 9i 26%o 99.45%t 77 35%1 88.86% Basic Sanitation 68 32% 62.45%/o 71607°/c 62.61% 1 11.230io. 83.44%ct 83 .75%/ 77o55% Urban Developmentand Housing 107.59% 128.83% 397.09%1i 365 47%j 121.74%4 128.84%ic60 9991%i 192.78%; SOCIAL INFRASTRUCTURE 77.84% 71.07%j 109.05%1 76.53%! 104.61% 93.69% 88.05% 88.69%" Multisectoral 90.65% 46.03% 23.22%1 89.46%1 85.03% 95.57% 81.31 73.04%
TOTAL% EXECUTED INVESTMENT 104.33% 91.41% 90.67% 83.41%1 100.95%1 89.76%| 84188/4 91.77%1 Source: VIPFE
1.54. The execution of investment has been decentralized since 1994 when the Decentralization and Popular Participation Laws were passed. Table 1.12 shows public investment disaggregated by level of administration from 1992 to 1998. While in 1992 71.8 percent of public investment was executed by the Central Administration, in 1998 the share declined to only 33.9 percent.25 There was a temporary shift in importance between Prefectures and the Central Administration as jurisdiction over road investment was transferred to Prefectures from 1996 through 1998.26 Subnational govemments and social funds have taken up the slack as the central ministries have maintained the share at around 30 percent depending on where road investment is considered. Regional funds have increased their share from 6.7 percent in 1992 to 19.7 percent in 1998. Departmental Administrations have increased their share moderately from 19.6 percent in 1992 to 25 percent in 1998. The most prominent increase is without a doubt local administration's importance in the investment budget increasing from 1.9 percent in 1992 to 23.5 percent in 1998, mostly due to the popular participation law.
25 For comparability and because SNC will return to the Central Administration in 1999, road investment was counted as part of the Central Administration's share.
26 The National Road Service (Servicio Nacional de Caminos SNC) which accounted for almost three fourths of public investment by the Central Administration was "decentralized" to prefectures in 1996. For 1999 SNC has become re-centralized to the Central Government. Thus, the Central Governments investment share will climb back to about 30 percent and the prefectures will correspondingly fall to about a fourth.
Evaluation of the Overall Budget 26 Public Expenditure Review
Tabie 1.12: Investment by Administration Levels (in percent) 1992 1993 1994 1995 1996 1997 1998 CentralGovernment 71.8% 72.5% 65.5% 53.4% 24.1% 18.0% 29.4%
Ministries 32.4% 38.3% 37.5% 33.3% 10.5% 11.8% 28.3% of which SNC 22.5% 278% 30.8% 22,30.o 0 00o 000,0 151%
PublicEnterprises 39.3% 34.3% 28.0% 20.1% 13.6% 6.2% 1.1% of which YPFB 220% 19.7% 20 000 II 0% 9 1°o 4.9%. 0 50D. of which ENDE 11.9% 6 5% 5 01o 7T3Y 42%. 1100 (0100
Regional Cofinancing 6.7% 7.2% 13.1% 8.8% 19.3% 19.2% 18.2% of which FIS 2.7% 3.70/D 4.8% 4 8°D 9ro 8 5%1 6.4DO of which FDC 0. 7% 0.0% 0.4% 1 6DD I t00 I .7D 2.3 of which FNDR 3 3% 3.5O 7 8 O 2 40. 12 2oD 8.40n 8.8O o
Departmental Administration 19.6% 17.9% 12.0% 13.4% 34.8% 38.0% 27.0% Prefectures 0.0% (0.% 0 0/o 0.00/D 14.0.D I 7 30 24 9D/O Corporations 19.6% 17.90/% 120% 13.40 0 0% 0°0% 0.0(% SNC0 0.0% 0.0°O 0./0 0 0%,O 19 0% 181o% 0 0% Other Reg. Entities 0.0% 0.0O ()00/n 0 0°O I 7°o 2.60o 2. 1%o Local Administration 1.9% 2.4% 9.4% 24.4% 21.8% 24.7% 25.5% Municipal Governments 02% 0.4% 7 9% 22 8% IP 9% 23.2%, 25.0% Water Enterprises I 8% 2 0% 1 f6% I 60° 1.9% l 5% 0 50/0 TOTAI. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% TOTAL (in M t'SS) 531579 480570 513288 519731 588694 548280 504689 Source: VIPFE *SNC stands for Servicio Nacional de Caminos (National Road SerNice). The entity xkastemporarily decentralized in 1996 through 1998. (See institutional issues for road sector).
1.55. Data at the mnunicipallevel is sporadic and reliability is also a problem. The decentralization section will attempt to address the quality of expenditures. Nevertheless, Table 1. 13 presents the distribution of municipal investment since 1994. The distribution is not much different from that of the public sector as a whole.
Table 1.13: Public Investment by Municipalities 1994 1995 1996 1997 Total Public Investment (in thousands of US $) 513289 519733 588692 548280 Total Investment by the Local Municip (in th. US $) 40038 118128 117436 127008 Total Share of Pub Inv by mLinicipalities 7.80% 22 73% 19.95% 23.16% Share of Pub Inv per sector by municipalities: Production 0 52% 1.75% 5.32% 8.36% Infrastructure 1.69% 5.24% 6.92% 8.51% Social Infrastructure 25.79% 55 45% 39.04% 40.92% Multisectoral 8.70% 9.37% 9 62% 9.57%
1.6 Spatial Distribution of Expenditures
1.56. Bolivia's difficult topography, poor road network, strong ethnic component resistant to emigrate from the highlands, and dualistic development pattern (first based on mining in the western highlands, and now based on non traditional crops in the north and eastern lowlands) place a heavy burden on the public sector to equitably distribute expenditures by region. This section presents a rough attempt at assessing the regional
Evaluation of the Overall Budget Public Expenditure Review 27 distribution of expenditures.27 Figures 1.7 to 1.8 provide a glimpse of how Bolivia has met the challenge of improving regional equity. The three indexes: basic necessities, health and education, are constructed such that a 100 indicates that 100 percent of the demands are unmet. Conversely, a 0 indicates that there are no unmet demands.
1.57. In examining the figures, two caveats are in order. First, the data refer to public and donor expenditures only. Thus it is possible that private participation is actively substituting for public expenditures. However, regional private markets in health and education are especially prone to market failures. Thus, it is more likely that private participation complements rather than substitutes for public expenditures. Second, figures portray a cross section of 1996/1997 expenditure levels versus service needs as estimated in 1993. The incompatibility in years is a smaller problem because social indicators have high inertia. The cross sectional properties of the data confound the analysis in a sophisticated way. An omniscient planner would allocate expenditures in a one period situation such that the highest expenditures would be go to the poorest regions. That is, expenditures would be inversely correlated with income per capita, health or education achievements. However, a cross-section of a multiple stage game implies that poor social indicators are consistent with both high and low expenditure levels. Conversely large expenditures are consistent with good and poor social indicators. The reasoning is high expenditures may be in response to poor social indicators or may have caused good social indicators. Not surprisingly, formal regression analysis of the data yielded insignificant correlation coefficients.2 8 Given these provisos, casual empiricism offers insight.
1.58. Figure 1.7.(a) presents a Lorenz curve of population vs. the percentage of total social sector spending. Santa Cruz receives an inordinate share of social sector spending. It accounts for about 10 percent of the population and about 43 percent of public social sector spending. It is not merely an issue of size since overall social expenditures per capita during 1996 were three times higher than the national average. Throughout the remaining analyses, that Santa Cruz is always an outlier in the sense that it is relatively
Fgwq 11.7(: CaiOve PoiNict *nd Soda SdormSpwrAngby FIgum 1.7.(b: Demandfor BasicServices vs. ,mriclpiaty) Per capitaSocial SectorExpenditure 12ODD 100 1200
90tOg 00000
so W~~~~~~~~~~~~~~~~~~~~.C..L.L
E~~~~ .? ...... O.___. ; A;_
0 20 40 eo eo 100 40 S0 c0 70 ao 90 100 Ca,sjavi Sodal Setor E*xMe re (%otatl) Index of Demandfor BasicNecessities
27 The section uses UDAPE's enviable regional database which includes for each of the 311 municipalities health, education, and basic necessities indicators, public expenditures, foreign financing, and income per capita.
28 Kuznet curve type of relationships were also estimated without success.
Evaluation of the Overall Budget 28 Public Expenditure Review well off with a higLhshare of expenditures regardless of the angle. This is a difficult situation. The positliveview is that the problem is not more general as expected.
1.59. The scatter plot in figure 1.7.(b) present the composite basic necessities index versus expenditure per capita. No municipality has an index lower than 45.29With the notable exception of Santa Cruz, there is a strong relationship between overall social expenditures per capita and demand for basic services. This is a great accomplishment and a surprising finding. The Government of Bolivia is actually targeting most of the social expenditures 1:o the poorest municipalities, i.e. those with the most unmet demands for basic services. In particular the largest cities (excluding Santa Cruz) which have the best social indicators--La Paz, Cochabamba, and Sucre--receive little social expenditures per capita. Resources are not enough reflected in the large number of municipalities close to 100 with little public spending. Among the big cities which are receiving too little attention are Oruro, and El Alto and Colquiri with almost zero expenditure per capita and unmet basic necessity indexes of 58, 75, and 83 respectively.
1.60. Figure 1.8.(a) and 1.8.(b) present similar plots for education and health demands versus expenditures per capita for each sector in each municipality. The two plots tell radically different stories. Educational expenditures per capita are well targeted. Education expenditures are not regressive in that expenditures per capita increase with increased needs and there are no cities with good indicators which receive much public funds (except for Santa Cruz). However, public funds do not meet all of the demand. There are many municipalities with indexes between 80 and 100 with little public expenditures. In other words, the scarce resources in education are being targeted to poor municipalities. There are no municipalities with an index of 100 indicating wide elementary school coverage. Conversely, expenditures on health present no clear pattern. Perhaps surprisingly!,the largest cities have not achieved best indicators.30 Poor regional targeting reflects the state of disarray the health sector is in. The result is not surprising and will be discussecdin more detail in Chapter 5.
Figum 1.S.(a):Demand for Education rmus Pigm 1IA(b): Dnrd ter i S r Educatian ExpendIturePr Capita kmid EV-etdh pepvrC
I !~
gS70000 ~7O/ sj so . .
5 0000 'v a2=
10000 . 5000 . L MM= . .L.v'.1* ea '
40 so eo 70 10 fiO 100 0 20 40 fiO so 100 Inde of Nmand for Educ bonal Sxrivces ihbxdnAiof mtSw ceWW
29 A more complete discussionof the levelof the indexesis not fruitfulbecause unless designed with internationalstandards one couldinterpret the averageas a surveydesign issue. 30 Although, once again,S§anta Cruz is an outlierwith high healthpublic expenditures per capita.
F,valuationof the iOverallBudget Public Expenditure Review 29
1.61. Public expenditures are not meeting all of the needs as there are many municipalities with large needs which are receiving few resources. Some of this excess demand is being met through external financing. The correlation between per capita foreign and domestic public expenditure for 1996-1997 stood at -.074 and .023 for education and health, respectively. This implies that foreign financing is complementing domestic social expenditures in education but not in health. The finding indicates that improvement in regional targeting by donors could make a difference in health impacts. Nevertheless, the implied levels of unmet needs remain excessive due to the fact that foreign funding represents only a small proportion of public expenditure in these sectors.
1.62. Santa Cruz seems to be the only candidate for expenditure cuts to increase public expenditures in the rest of the country. Given the size of Santa Cruz, a small decline in public expenditure per capita could translate into large increases for many small municipalities. The choice is difficult and only seems to be implementable if the private sector can take up the slack in areas such as water or roads.
Evaluation of the Overall Budget
Public Expenditure Review 31
2: DOMESTIC RESOURCE MOBILIZATION AND EXTERNAL FINANCING
2.1. Introduction
2.1. The present and future heavy reform agenda creates spending pressure that will require additional resources. Externally, Bolivia is approaching graduation status with many donors, resulting in lower access to concessional financing. Therefore, domestic resources will have to increasingly cover current costs and investment. The first section, which was w-ritten by International Monetary Fund staff, provides an analysis of the Bolivian tax structure. While Bolivia has admittedly made significant progress in tax administration and collection efforts, the section provides a number of suggestions for widening the tax base and for further improving the buoyancy, equity and overall efficiency of the tax system. The second section, by World Bank staff, presents an overview of external financing and suggestions to improve development impact.
2.2. Tax Policy
2.2. Bolivia has a fairly simple fiscal structure compared to the majority of LAC countries, with only about twelve taxes at the central and local level combined. However, this structural simplicity has a high cost in that it constrains the ability of policymakers to address the inequitable distribution of the fiscal burden. Consequently, the tax system needs to be modified to address: a) resource distribution, b) distortions engendered, and c) efficiency of the collection process itself, which remains inefficient despite a steady increase in tax collection as a share of GDP during the 1990s.'
2.21. Structure and collection scheme of lte tax system
2.3. Tax receipts by the Bolivian Government, including the hydrocarbon sector, grew by more than 2 percent of GDP between 1990 and 1996, and the gains were maintained in 1997 and 1998 despite the loss incurred due to the privatization of social security during those two years (see Table 2.1). Given that the dependency of Bolivia on hydrocarbons has fallen by over 3 percent of GDP during the same period, fiscal pressures on non- hydrocarbon products have risen significantly, by approximately 5 percent of GDP. It is evident that while the hydrocarbon sector has diminished as a potential source of revenue, Bolivia has made a notable effort to diversify its remaining tax base.
2.4. Using a select group of Latin American countries and dividing them into three categories ranked by non-hydrocarbon tax burden as a share of GDP - over 20 percent (Brazil, Chile, Costa Rica, Nicaragua and Uruguay); between 10 percent and 20 percent
Several Bolivian officials have commented that in recent years the GDP has probably been overestimated. Maintaining or increasing tax revenue collection in terms of GDP directly depends upon this discrepancy.
Domestic and External Financing 32 Public Expenditure Review
(Argentina, Bolivia, Colombia, Mexico and Panama); and less than 10 percent (Ecuador, Guatemala, Paraguay, Peru and Venezuela) - we find Bolivia squarely situated in the middle of the second group: around 14 percent of GDP. This represents a significant improvement considering that during the era of hyperinflation in the 1980s, Bolivia had fallen to the middle of the third group. Of the current 14 percent, around 1 percent derives from municipal and departmental taxes. In Latin American countries the share coming from sub-national governments varies widely, with strongly decentralized countries like Brazil and Argentina, for example, relying heavily on departments and municipalities, while countries like Mexico and Chile are extremely centralized.
Trable Generale.1: GovemmentTax Revenues,195O-19YU (In percentof GDP) Pro). 1990 1991 1992 1993 1994 1995 1996 1997 1998 Hydrocarbontax" 7 9 8.7 7.1 6 7 6 0 5 3 5 6 4 4 5.3 Vaiue-added tax 1 0 0 8 Consumption tax . ... 1 3... 2 2 Royalties ...... 2.1 2.3 Non-oil taxes 92 96 114 123 137 146 12.8 12.6 12.0 Earnings and dividends 0 4 0 5 0 5 0 6 0.7 0.5 0.4 0.4 0 4 RC-IVA 04 05 0.5 06 07 05 04 0.4 04 Corporate utility tax (IUE) - -- -- 0.0 0 0 0 0 Social security contributions 1.8 2.0 2 0 2 1 2 4 2 6 2 5 1 2 0 0 Domestic consumption ta>: 3.9 4.8 6 5 7.0 8.0 8 6 7 7 8.3 8.5 Value-addedtax 2 5 2 9 4 3 4 6 5 3 5.2 5.0 5.6 5.7 Domestic ...... 2.9 2.6 2.3 2.4 2.4 Imports ...... 2.4 2 6 2 7 3.2 3 3 Transactions tax (IT) 0 9 1.1 1.3 14 1.7 2 2 1.7 1.5 16 Specific consumption tax (ICE) 0.5 0 8 0 9 1 0 1 0 1.2 1 0 1.2 1 2 Beer 0 4 0.5 04 05 05 Automobile ...... 0.2 0.2 0.2 0.2 0 2 Other ... . 0.4 0.5 0.4 0.5 0.5 Property tax 09 10 1.0 1.2 1.0 1.2 0 8 0.8 1.0 Private property tax (IP13) 0.5 0.5 0.5 0 5 0 5 0.7 0 7 0.8 1 0 Corporate propertytax 'IRPE) 0.4 0.5 0 5 0.7 0 5 0 5 0 1 0.0 0.0 Mineralroyalties ------0.1 0.1 0 1 0.1 Other domestic taxes 0.8 0.2 0 1 0 1 0.2 0 3 0.1 0.4 0 2 Customstax 1 4 1 1 1.3 1 3 1.4 1.4 1.2 14 1 3 Nationalizationof automobiles ------0.5 Import value-added tax ------0.3 Consumption 0 0 Customs duties ------0 1 Minus: Fiscal reimbursement 0.0 -0.4 -0 3 -0.4 -0.9 -0.8 -0.6 -0.6 -1.3
Memo item GDP (in millions of bolivianos) 15,433 19,132 22,014 24,459 27,636 32,235 38,174 41,910 47,067 Sources:Ministry of Finance;SAFCO: UPF. SNI; UDAPE;INE; and IMFstaff estimates "Includes IVA and transactions and expenditure taxes paid by the state petroleum company (YPFB). Note: Disaggregationof transactions taxes for 1990-93 and IVA are calculated based on aggregate tax data.
2.5. As for central government taxes, like other Latin American countries, Bolivia depends on domestic consumption taxes, much more so than on income, capital or extermal trade taxes. Consumption taxes generate 8 percent of GDP, while income and utility taxes produce less than 3 percent of GDP. Yet an important difference compared to other Latin American economies is the absence of a broad-based personal income tax. With the exception of Paraguay and Uruguay, the rest of Latin American countries levy such a tax, although it usually produces scant revenues due to structural problems or poor administration. The lack of a progressive tax implies the need to carefully examine whether Bolivia should introduce such a tax for equity purposes.
Domestic and External Financing Public Expenditure Review 33
2.6. The interrelation among taxes themselves, negatively affects the efficient mobilization of resources. For example, an examination of the IVA, which boasts a wide base and an effective rate of 14.9 percent, is the most important tax in terms of collection, yielding nearly 5 percent of GDP.2 In addition, as a mechanism of control, a subsidiary 13 percent tax is levied on some personal income in the form of a Complementary Regime to the IVA (RC-IVA). Consumer purchase invoices can be used to offset this tax. In this sense the RC-IVA functions as a control mechanism for the IVA (although there is no clear empirical evidence of its effectiveness). On the other hand, one has to consider the potential losses which can be attributed to the lack of a personal income tax, currently absent in Bolivia. In practice, the RC-IVA is effectively reduced to a tax retention mechanism which is applied mostly on the interest earnings of bank deposits, while most of the rest of the tax collection is rebated through purchase invoices.
2.7. In short, the system is lacking with respect to equity impact, and collection efficiency. First, there is a lack of efficiency given that the RC-IVA is imposed only on those taxpayers subject to retention (i.e., salaries and financial savings in banks), thus discouraging the use of productive use of these resources. Second, there is a horizontal inequity based on the differential treatment for different income sources (retentions are applied only to some sectors and specific types of income) as well as a vertical inequity, as quotas of zero and 13 percent do not adequately reflect the different income levels of taxpayers. Third, the fact that purchase invoices reimburse almost the entire revenue derived from the retention is clear evidence of the collection loss and of its potential.
2.8. Besides the intricate relation between the IVA (a consumption tax) and the RC- IVA (an tax on income) there is also a complex relationship between the Transactions Tax (IT) (a tax on production) and the Corporate Income Tax (IUE) (a tax on income), which results in a number of distorted, distributive and collection effects. The IT is a tax on gross income with cascading effects. It is possible to rebate the IUE paid for the previous year against the IT in the current year. Not only does this circular relation produce distorting effects, but also the collection effect of any change in one of the two taxes would be extremely complicated and erosive. The IUE as well as the IT generate around 2 percent of GDP. If we are considering the elimination of the IT because of its distorting effects, it is necessary to find less distorting alternatives to supplement the IUE collection (e.g., a minimum tax on gross assets) and ensure the replacement of the IT revenues (through a widening of the base and an increase of the IVA quota, for example).
2.9. Finally, the system is weakened by special regimes that aimed at simplifying fiscal administration. Those regimes are for: drivers (Integrated Fiscal Regime (RTI)), minor taxpayers (Simplified Fiscal Regime (RTS)), including retailers, artisans, market food sellers, and the agricultural sector (RAU). The result is little tax collection from these regimes, inequity derived from large tax payers hiding in these regimes, and large inefficiencies due to outdated valuation tables and/or contribution rates.
2 In Bolivia it is possible to pay taxes through fiscal certificates (or, alternatively, bonds) emitted by the fiscal administration instead of restitution to the tax payers.
Domestic and External Financing 34 Public Expenditure Review
2.10. A number of discussions have taken place regarding reform of the special regimes. Authorities proposed the use of the Fixed Property Tax (IPBI) structure, a local tax on property (including rural property) levered on the value of land, in place of the RAU, an income tax. In fact, the IPBI base, which is divided by regions, is also outdated, and urgently requires recalibration. There is no doubt that there is a grave need to reform special regimes, but this does not mean simply transferring taxpayers to the general regime and hoping for problems to resolve themselves. Even in the general regime one can observe that in recent years the agriculture sector contributed less than 0.5 percent of the IUE total collection.
2.2.2 Desired Structure
2.11. Prevailing interconnections among the different taxes can provide cross-cutting controls, as in the case of the IVA and RC-IVA, or a minimum payment, as with the IUE and IT. Nevertheless, because of the way these mechanisms were designed, they tend to distort an efficient allocation of resources. Similarly, by trying to simplify tax administration, various special regimes were created, but they are in fact encouraging evasion, leading to a sub-optimum use of resources, and affecting equity. Any reform of the Bolivian tax system should focus on the objectives of cross-control, minimum payment, equity and efficiency--without undesirable linkages between consumption and income taxes, production and rent taxes, and presumed and actual income.
2.12. First, the IVA needs to become more powerfully enforced and evasion reduced, resulting in a collection increase of 1.13 percent of GDP. The cross-control provided by the RC-IVA is valuable but this tax has evolved into an inefficient fiscal tool, with half of its net collection fronminterest and much of the remainder from the retention of wages of public employees. The time has come for Bolivia to introduce a full-fledged yet simple personal income tax i(IRP) with a wide base. An exemption level equivalent to the RC- IVA of 4 minimum wages would ensure equity. This tax would be feasible in light of the recent computerization of the fiscal administration. It would at the same time enable resolution of some current difficulties within the IUE. Self-employed professionals and other taxpayers currently under the IUE regime could be transferred to the IRP, converting the IUE into a genuine tax on enterprises' income. The maximum taxation of the progressive IRP slhouldequal the IUE rate. To maintain the current cross-control, half of IVA invoices could be rebated from the IRP, so as to maintain an incentive for the buyers to ask for invoices. This structural improvement would increase collection by over 0.5 percent of GDP.
2.13. Second, the IIJE recognizes the IT as a minimum payment (although there is a circular relation, since the IT is also deductible from the IUE the following year). The sum of the IT and IUE collections has remained stable since the implementation of the IUE. Yet the IT is a cascade tax widely recognized as distortionary and needs to be abolished. The ensuing collection loss could be compensated for with an IVA rate increase from 13 to 15 percent. At the same time, in order to ensure the continuity of an IUE minimum payment, authorities should adopt a tax on assets (like the ones existing in
Domestic and External Financing Public Expenditure Review 35
Mexico or Argentina, where Congress was evaluating the possibility in December of 1998). A minimum payment based on gross assets is better than one based on transactions, as it promotes, in the medium term, the uniformity of rates of taxation of assets across all economic sectors. A combination of IUE and a minimum tax on assets of I percent would generate an additional 0.1 percent of GDP compared to the current IUE and IT combination.
2.14. Third, there is consensus between the public and private sector that special regimes for trucking, artisans, micro-enterprises and agricultural sector are arbitrary and promote the development of the informal economy without generating significant tax revenue or productive activities. There is no doubt that the tax administration had been simplified, but the negative effects on equity and efficiency are sufficient reasons to ponder whether the administrative benefits offset the damages. In the case of Bolivia, the benefits do not seem to outweigh the costs, so one might consider incorporating the upper intervals of the Simplified Fiscal Regime (RTS) and of the Integrated Fiscal System (STI) into the general regime and simply omit the rest. Current collection levels of those two groups would justify this procedure. However, the tax administration should monitor the number of the taxpayers introduced into the general regime each year in order to prevent the proliferation of evaders that are never incorporated into the general regime despite reaching the minimum income level.
2.15. The problem with the Agriculture Special Regime (RAU) is that the presumed income is based on an outdated valuation table of land going back to the 1950s. This regime is not justified without an adequate reassessment. The potential tax revenues could be substantial since agriculture tax collection has been limited under the IVA and the IUE. However, because the RAU will have an effect on rural income through property values, the central government should reach an agreement with municipal governments to collect the RAU together with local property taxes (IPBI). To preserve neutrality, it would be necessary to offer RAU taxpayers the option of being considered as taxpayers for either the IUE or the IRP. This improvement in all the special regimes would have positive effects on revenue collection.
2.16. To sum up, an overall vision of the reformed fiscal structure would show that proposed improvements would not only correct inefficiencies and inequities but also would raise tax revenues. The suitability of such an increase in tax collection would depend on associated expenditure policies. However these sources of revenue are present and will emerge as the appropriate policies are implemented. In what follows, the study provides details for each one of the main taxes
2.2.3. Value-Added Tax (IVA)
Characteristicsand conclusions
2.17. The IVA is the most important tax in terms of collection; over 6 percent of GDP if one includes the hydrocarbon sector (or about 5 percent excluding hydrocarbons and
Domestic and External Financing 36 Public Expenditure Review taking into account amounts spent on fiscal credits). Special regimes that exempt products across various sectors of the economy significantly lower the quality, coverage and efficiency of this,tax.
2.18. This mission analyzed these characteristics with the objective of estimating the magnitude of IVA evasion; the possible increase in tax collections that would result from limiting exemptions (which would also result in an improvement in the efficiency of assigning revenues); and the increase in the IVA rate necessary to replace the IT and its negative effects on the Bolivian economy.
2.19. The preliminary estimates enable us to conclude that IVA tax evasion totals almost 4 percent of GDP and that a reasonable target of the tax administration would be to reduce evasion by one quarter, thus obtaining increased tax revenue of approximately I percent of GDP.
2.20. Although difficult to achieve, this seems a reasonable target for the tax administration, as it would raise collection as a percentage of GDP to a level about half that of the IVA rate of countries with good evasion control systems. We also concluded that a moderate reduction in exemptions, together with the control of evasion, would generate additional tax revenue of 1.13 percent of GDP. If there were a concurrent increase in the IVA tax rate to 15 percent - 17.64 percent on net prices - the administration could achieve revenue sufficient to replace the IT.
Recommendations
2.21. Control of IVA tax evasion must be strengthened since the RC-IVA mechanism does not offer conclusive evidence of its effectiveness. The special regimes and other exemptions also reduce the collection of this tax, so it is also recommended that the authorities severely limit the broad application of exemptions and existing special regimes. The replacement of the IT by the IVA, an inarguably superior tax mechanism, will require an increase in the latter tax rate to a level of 17.64 percent on net prices.
2.2.4. ComplementaryRegime to the IVA and Personal Income Tax (RC-IVA and IRP)
Characteristics and conclusions
2.22. Tax revenues from the RC-IVA as a share of GDP have fallen systematically in past years, which indicates that its effective base has become eroded over time. The RC- IVA has turned into an instrument to control IVA evasion, and now serves less to generate tax revenues.
2.23. In practice, the effective base of the RC-IVA is interest paid by banks and in smaller part the remuneration from AFP affiliates. This gives rise to an inequitable situation each time certain categories of inflows pay taxes while other categories do not.
Domestic and External Financing Public Expenditure Review 37
2.24. The possibility of reducing the tax by presenting purchase invoices for amount equivalent to total income acts as a perverse incentive on savings, since upon saving one must pay tax, and on spending all revenues, contributors pay nothing. In addition, a large degree of invoices presented do not correspond to genuine transactions.
Recommendations
2.25. It is recommended that the RC-IVA be eliminated and replaced by a broad-based personal income tax. The proposed exemption amount is similar to the actual one, and considers an assessment of 13 percent. It would allow using 50 percent of the IVA contained in presented invoices for payment of at most half of the tax. This tax would cover all personal income with the exception of dividends and utility receipts. This substitution would generate additional tax revenue of 0.45 percent of GDP.
Table 2.2: Tax Eftects ot Prenicpal Recommendations (in percentof GDP)
Transform the RC-IVA into a broad-based personal income tax with a rate of 13 percent and an exemption level equivalent to four minimum salaries 0.45
Establish a second tax bracket of 25 percent for income greater than 20 minimum salaries' 0.04
Establish a capital gains tax +
Eliminate the IT - short term effect -1.73 - long term effect -1.22
Establish a minimum tax on assets at the rate of 1 percent (versus IUE) 0.11
Eliminate the STI, leaving the three lowest categories with a minimum annual payment and shift the two highest categories to the general system +
Eliminate the simplified tax regime leaving a minimum payment for those whose capital is less than Bol$ 48,000 and shifting the rest to the general regime +
Elimination of exemptions to the IVA due to special regimes and other exemption mechanisms 0.13
Reduction of evasion from the IVA to 30 percent (from the actual rate of 39.4 percent) of potential collections 1.00
Increase the IVA rate to 15 percent (or 17.64 of the net price), together with the reductions mentioned regarding evasion and exemptions indicated above 2.40 Source: IMF calculations.
2.26. If a second assessment rate of 25 percent for income greater than 20 minimum salaries were established the administration would gain an additional 0.04 percent of GDP. It is also recommended that a capital gains tax be introduced, that covers real gains on the sale of capital assets, with a reduced rate.
Domestic and External Financing 38 Public Expenditure Review
2.2.5. Corporate Income Tax (IUE)
Characteristics and Conclusions
2.27. Currently there are 17,641 corporations with a tax identification number (RUC), about 1,900 of which are large taxpayers. If one transferred 18,450 independent professionals, and informal enterprises (which are subject to IRP) from this system to the personal income tax regime, it would significantly reduce the administrative requirements in collecting this tax.
Recommendations
2.28. The IUE should be collected only from corporations and businesses which have formal accounting, vwhiletransferring independent professionals to the IRP regime. The taxable base shouldl be determined on the basis of a simplified profit and loss bookkeeping system. The estimation of profits should be avoided. Only in case of activities performed partially abroad is estimation of rent or profits justified. If an independent professional desires to pay taxes through the IUE and deduct expenses, he or she could always forrn a corporation and keep proper books.
2.2.6. Transactions Tax (IT)
2.29. The IT is a distorting tax that produces cascade effects and introduces incentives to evasion and vertical integration of the economy. It is recommended to eliminate it and to compensate for lost revenue via other taxes. Elimination of the IT generates a negative impact on fiscal revenue estimated at 1.73 percent of GDP for the first year and at 1.22 percent of GDP from the second year forward. The fiscal impact in the long run is minor due to the positive impact of this measure on the IUE.
2.2.7. Minimum tax on assets
2.30. To compensate for a possible increase in evasion of the IUE with the elimination of the IT, a tax on assets should be introduced. A minimum rate of about 1 percent would not only permit maintenance of IUE collection levels, but also generate an additional collection of 0. 11 percent of GDP.
2.2.8. Special regimes
2.31. The mission found that both the private and public sector generally believe that the three special regimes adversely affect economic activity. In spite of having been introduced to integrate small taxpayers, the practical consequence has been to introduce distortions, and to foster inequity and informality.
Domestic and External Financing Public Expenditure Review 39
2.2.9. Integrated Fiscal System (STI)
2.32. The STI is completely inappropriate as it collects 0.7 percent of what it should. It should be eliminated.
2.33. We suggest to allow exemptions from income and IVA taxes for the three lowest STI categories, in exchange for a small annual fee to the municipality. This would benefit some 12,862 taxpayers. Incorporate the two highest STI categories into the general regime. This would affects 473 taxpayers.
2.2.10. Simplified Fiscal Regime (RTS)
2.34. This regime should be eliminated and replaced by an annual Bs 80 contribution for the taxpayers falling under this category. Taxpayers with a capital over Bs 48.000 should be moved into the general regime.
2.2.11. UnifiedAgricultural System
Current situation and conclisions
2.35. Small-scale agricultural entities in Bolivia remain exempt from national taxes. Medium sized agricultural properties presumably pay taxes under the RAU regime, which is applied to land holdings without consideration of construction on it and substitutes for national taxes on both income and transactions. Although the RAU regime was created in 1996, no collection has yet been registered.3
2.36. The table used to apply RAU is outdated and does not reflect the characteristics of the agricultural sector in Bolivia. At the same time, RAU quotas do not properly correspond to the assumed income of tax payers, resulting in a small participation by the Bolivian agricultural sector in the tax collection effort (only 0.4 percent of the total).
2.37. The agricultural law facilitates the collection of the rural IPBI because it requires a payment as proof that the land has not been abandoned.
Recommendations
2.38. Because of their proximity to taxpayers, Municipalities are in a better position to collect the rural IPBI than the Central Government is to collect under the RAU. This would enable the coordination of the collection of both taxes with the double benefit of avoiding duplicate collection efforts for fiscal authorities and facilitating the compliance efforts of the taxpayers. In particular authorities should:
The agriculturalsector in Bolivia currently falls under the IPBI regime (Tax on Real Property) at municipal level. The IPBI burdens the value of the property, including land and construction. Yet, in all but a few municipalities the rural IPBI collection has been very modest.
Domestic and External Financing 40 Public Expenditure Revieuw
- Undertake the agro-technical and economic studies necessary and update the land cadastre in order to calculate the RAU, with an extension comparable to the urban sector and to update it at least every five years. Better land values will allow transferring to the general regime those entrepreneurs that unjustly choose the most favorable RAU regime.
- Maintain the RAU tax as a national tax and the urban and rural IPBI as municipal, but establish operational agreements with municipalities, as well as with other organizations as necessary, to receive legally binding tax forms and collect the RAU revenue based on cornmissions and net value transfers to the Treasury.
- As the fiscal administration and its collection capacity is extended to the rural sector, authorities should eliminate the RAU tax and substitute it by, or complement it with, fiscal regimes specifically geared to rural activity through IVA and IUE.
2.3. External Financing
2.3.1. External Fina,ncingof Public Investnentt
2.39. Bolivia is a country that enjoys strong support from the international financing community in terms of credits and grants to carry out its investment program. In 1998, external financing contributed to 42 percent of the public investment program. This share has varied from 41 percent to 59 percent during the last decade, being on average 52 percent of the public investment program. External financing has grown at an average rate of 2.3 percent during this decade-- half the rate of total public investment growth. Table 2.3 shows the evolution of public expenditures by source of financing.
-able Z.3: Public Investment Expenditure by Source of Financing, 1989-1998 (in US$thousands) Total Financing PublicInvestment Year Internal %, External % Expenditure 1989 151,755 45% 182,242 55% 333,997 1990 143,725 46% 171,653 54% 315,378 1991 227,703 54% 192,797 46% 420,500 1992 249,362 47% 282,218 53% 531,580 1993 197,144 41% 283,423 59% 480,567 1994 221,220 43% 292,066 57% 513,286 1995 249,432 48% 270,300 52% 519,732 1996 264,559 45% 324,134 55% 588,693 1997 322,900 59% 225,381 41% 548,281 1998 292,222 58% 212,467 42% 504,689 Source: Ministry of Finance
2.40. The majority of external financing is through credits, as shown in Table 2.4. On average, during the last decade, 78 percent of external financing was done through
Domestic and External Financing Public Expenditure Review 41 credits. While credits have grown at an average rate of 3 percent per year during this decade, grants have only grown at 0.6 percent per year, a decline in real terms, evidencing the more stringent international environment for availability of external grants.
Table 2.4: External Financing - Credits vs. Grants 1939-1998 (in US$thousands) Year Credit % Grants o Total 1989 1296 71 52,974 182,242 1990 132,983 77% 38,670 23% 171,653 1991 148,879 77% 43,918 23% 192,797 1992 232,433 82% 49,785 18% 282,218 1993 217,460 77% 65,963 23% 283,423 1994 237,645 81% 54,421 19% 292,066 1995 222,710 82% 47,590 18% 270,300 1996 256,428 79% 67,706 21% 324,134 1997 174,238 77% 51,143 23% 225,381 1998 159,540 75% 52,927 25% 212,467 Source: Ministry of Finance
2.3.2. Overall Levels of External Financing
2.41. As of January 1998, Bolivia had on-going contracted external financing for a total of $3.7 billion, of which 37 percent were grants, and 63 percent were credits. Of these, $2.1 billion had already been disbursed, and $1.6 billion were to be disbursed. In 1998, $311.4 were disbursed. At the rate of disbursement of 1998, the undisbursed balances will take approximately 5 years to disburse. Table 2.5 shows the composition of contracted external financing for Bolivia.
Table 2.5
BoliviaExternal Financing (milliondollars)
IotaN * /0 uisnursea uisbursea 10 De External of Total to the end in 1998 Disbursed Financing of 1997 Grants 1,3z T' 3I bV.b ¶-721.4 b/U. Credits 2,344.9 63% 1,166.9 190.0 988.0 IUIAL 3,I 10.0 IUUIJo I,O1'4.3 Ji I ,10.
PreliminaryFigures as of January1999.
Source: Ministry of Finance
2.42. These levels of external financing seem to be large for a country with the income level and size of Bolivia. Figure 2.1 shows official development assistance for 1996, both in terms of share of GNP and in dollars per capita in relation to the GNP per capita
Domestic and External Financing 42 Public Expenditure Review for a selected group of low and lower middle income countries, as well as the average for lower middle income countries. Bolivia is significantly above all the selected countries in terms of both official development assistance as a percentage of GNP and in per capita terms, and is significantly above the average for lower middle income countries. While Bolivia received 13.3 percent of its GNP as official development assistance in 1996, lower middle income countries received on average 0.7 percent, and while Bolivia received $112 per capita in official development assistance in 1996, lower middle income countries received on average $8 per capita. These levels of financial assistance to Bolivia raise the question of sustainabilitv, and a clear strategy to gradually but significantly reduce these flows is required from the Government. In the case of the World Bank, Bolivia passed the IDA per capita income cut-off point, but is not yet IBRD creditworthy and although IDA lending to Bolivia has been maintained for the CAS period, start-up of IBRD lending will be in FY02. Other donors, are also examining ways to continue concessicnal lending to Bolivia, but this is not guaranteed.
Figure 2.1
Official Development Assistance (1996) for Selected Countries
OffidalDemllopnrrt Aisist (1996) OffcialDeoprert Asstace (1996)
14 120 1314a 12 o100 __°'_100
10 -4xFa .m8 lo * - < 80 z 0.^ 28 *Gamta O ,ial ( l60
GNDper capita (dollars 1997) GtP percapita (doilars 1997)
Source: World Rank;.World Development Report 1998/99.
2.43. Due to its high indebtedness and its strong track record of macroeconomic performance and policy reform Bolivia qualified for the HIPC initiative. The completion point under the HIPC initiative for Bolivia was reached in September 1998. In net present value terms, total relief from all of Bolivia's creditors was worth about US$450 million, equivalent tcoover 13 percent of total debt outstanding at the end of 1997. IDA has front-loaded its assistance through the HIPC initiative of about US$65 million (US$54 million in net present value terms). This debt reduction initiative should provide Bolivia the necessary breathing space to consolidate its adjustment efforts, free up
Domestic and External Financing Public Expenditure Review 43 resources for investment and, in the medium term, start reducing its dependence on concessional financing.
External Financing by donors andpillarsfor 1997-98.
2.44. During the period 1997-1998, Bolivia contracted $1.2 billion of external financing (US$454 million in grants and US$736 million in credits). Table 2.6 shows the breakdown of the contracted extemal financing by donor and by pillar. This table shows that a large number of donors are active in Bolivia, although there is some concentration of aid by a few. The total number of donors that initiated new credits or grants in this period was 30, but 8 of them provided nearly three-quarters of the total external financing. During this period, IDA took the lead in terms of financing with 20.3 percent of the total, followed by IDB (15.4 percent), USAID (9.0 percent), CAF (7.9 percent), Netherlands (5.9 percent), and UNICEF (5.3 percent). Spain provided 4.9 percent of the total and agreed to provide US$80 million to finance projects under the Programa de Cooperaci6n Financiera Hispano Boliviano. The large number of donors, no doubt imposes a challenge to the Government in terms of coordinating, leading and executing external development assistance. The new proposed Comprehensive Development Framework (CDF) will provide the Government with a useful tool for not only aid coordination but also partnership work that should ease work with the multiple donors that Bolivia has.
Table 2.5: boiivia iExternal Funding - Credits and Grants Contracted 1997 - 1998 (US$ '000) (Sorted by total amount of Credit or Grant) Agency i lG Equity inatitutionallty opportunity oignuy others TOTAL TOTAL IDA r 162,800 15,0 64,700 242,500 zo 23 IDB CID 140950 2045 40390 1180 184,565 15.40% USAID 0/C 9556 10898 74950 12000 107,404 8.96% CAF CID 532 94327 109 94,968 7.92% NETHERLANDS 0 47834 23115 70.949 5.92% UNICEF D 63025 63,025 5.26% SPAIN (') CID 27.561 4,000 27,000 58,561 4.89% JAPON 0 28.305 18,050 46.355 3.87% EU D 15672 6778 23168 45.618 3.81% GTZ 0IC 6999 151 00 18702 40,801 3.40% CANADA C/D 5712 1127 33737 40,576 3.39% DENMARK D 744 26354 8000 35.098 2.93% SWITZERLAND 0 13756 2936 15843 32.535 2.71% KFW CID 16595 14381 30.976 2.58% PMA D 17181 17,181 1.43% CHINA C 1143 1929 12405 15.477 1.29% SUECIA D 9786 875 4375 15.036 1.25% FRANCE C 10414 10,414 0.87% UNFPA D 9070 33 9,103 0.76% FIDA C 8000 8,000 0.87% BELGIUM D 7435 7,435 0.62% UK D 4295 409 4,704 0.39% OPEP C 4,000 4,000 0.33% UNDCP D 3334 3,334 0.28% ITALY D 3017 3,017 0.25% UNDP 0 391 2023 396 2,810 0.23% NDF C 2,800 2,800 0.23% FAO D 30 317 257 604 0.05% OEA D 91 13 194 60 358 0.03% OMS 0 259 259 0.02% TOTAL 584,772 83,182 470,253 38,502 21,754 1,198,463 100.00% % OP TOTAL 48.79% 6.94% 39.24 % 3.21% 1.82% 100.00% :'l Un March 16, 16 8 the Progiama e coloperacion Hispano Ioliviano was signed Wi., the government Iinancieraof Spain for the amount of USS 80,000,000. which willfinance projects that will be registered individually with SISFIN once the agreements for each operation are signed. Note "Others" includes Debt Alleviation Funds, General Credit Lines, and others Source: Ministry of Finance. C: Credit; D: Grant
Domestic and External Financing 44 Public Expenditure Review
2.45. Equity is the pillar that has attracted the highest level of external financing during this period, with 48.9 percent of the total, followed by opportunity with 39.2 percent, institutionality with 6 9 percent and finally dignity with 3.2 percent. This distribution of external financing by pillar is consistent with the development strategy from the National Action plan of poverty alleviation (emphasis on equity) through sustained growth (opportunity). Equity and opportunity have also attracted the largest number of donors, while dignity has only attracted two donors during the past two years. The large differences of external financing among pillars might merit a thorough review of priorities by the Government for future external financing in each of the pillars.
2.3.3. Public Investnmentand External Financing by sector for 1997.
2.46. If we break down external financing by sector, there is a large number of donors active in each individual sector. The sector with the largest number of donors is agriculture, with 20 donors active in the sector, although it only receives 3.1 percent of total external assistance. The large number of donors with limited financing indicate that there might be overcrowding in the sector. The second sector with the largest number of donors is health, with 17, although, again, it only receives 3.7 percent of total investment. Other sectors with a considerable number of donors are education and transport, with 11 and 10 correspondingly, transport being the sector with the largest share of public investment (25.2 percent) in 1997.
2.47. In terms of external financing by sector for the major donors, the table below shows the levels of public investment and external financing for the largest 15 donors in 1997. It is interesting to note that transport shows the largest external financing by sector for the five largest dornors. Sanitation, education and health are also important sectors for the major donors. It is also interesting to note that the number of sectors in which a donor is active increases directly with the size of funding by the donor. For example, IDA which was the largest donor in 1997, had also the largest number of sectors that it funded (11), while the secondlone, IDB, had the second largest number of sectors funded (10), and likewise for the other donors. For large donors, spreading into a large number of sectors although challenging, and maybe desirable, poses the question of how division of labor should be undertaken by donors. Multilateral donors, for example, have more flexibility in terms of the sectors that they can finance, while bilateral donors have other types of flexibility, e.g., they can fund NGOs. With the CDF, it is expected that the Government will lead the donor coordination towards a more efficient division of labor making use of comparative advantages and maximizing the input of scarce aid resources.
Donor Financing and Targeting.
2.48. Donors have not been that effective in terms of targeting assistance to the poorest areas. Table 2.7 shows per capita external financing per category of municipality. The "richest" municipalities (category D), receive the largest external financing per capita, even though those municipalities have the lowest lack of services or need for services. Neither the "richest" mLunicipalities,nor the ones in category C, receive 0 donor financing
Domestic and Externai Financing Public Expenditure Review 45 per capita, while 38 percent and 11 percent of municipalities A and B, correspondingly, receive zero donor financing per capita. Although poverty alleviation is achieved through increased and sustainable growth, targeting should also play a significant role, especially for the programs under the equity pillar. From these figures, we can note that from the poverty alleviation perspective, donors should increase their focus on targeting poorer areas. This is being done by the Government through popular participation and administrative decentralization, but these figures seem to indicate that more attention could be paid to targeting the poor.
Coordination and Management of External Financing.
2.49. The Vice Ministry of Public Investment and External Financing (VIPFE) is charged with the coordination and management of external financing. It is also this Vice Ministry that has the responsibility for the efficient management of public investment. Although it depends on the National Public Investment System (SNIP) to manage public investment and external financing, the limited institutional capacity of implementing agencies poses a challenge for the effective achievement of investment policy goals.
2.50. The VIPFE ensures that the financing agreed corresponds to national priorities within the Government's overall strategy. It also makes sure that the projects are appropriately carried out. Although project execution has improved, e.g., non-disbursed financing of US$1 billion in 1986, which represented 96 percent of the financing approved up to that year, was US$1.6 billion in 1998, or 43 percent, still achievement of results might not be guaranteed. Project quality and good implementing agencies play a key role and this represents a major challenge especially at the level of decentralized agencies, prefectures and municipalities. Government and donors are working and should continue to work at strengthening the capacity at these levels.
2.51. Donor coordination has improved in recent years. The 1998 Consultative Group Meeting was prepared jointly by donors and the Government. Donors organized themselves in working groups under each pillar and under the coordination of the VIPFE they worked on the analysis and recommendations for each of the pillars. Two key issues were identified: (i) the need to establish priorities in the government policies, and; (ii) the need to develop an effective monitoring and evaluation system. Local donor groups have worked and agreed on monitoring indicators to measure the impact of projects and programs under each of the pillars. This working arrangement has also helped to organize the work to follow-up on the recommendations of the 1998 CG, and also has introduced more transparency and exchange and dissemination of information among donors. Still improvements are needed on project and program implementation4 by each
4 A survey was conducted among the donors in La Paz in January 1998 to identify the major preparation and implementation problems. The following were identified, in decreasing order of importance, as the major problems: lack of coordination among government institutions, high turnover or lack of continuity of Government personnel, delays caused by the decentralization process, lack of counterpart financing, weak project management, lack of qualified personnel, legislative or regulatory delays, slow
Domestic and External Financing 46 Public Expenditure Review of the donors and on the prioritizing of programs. Individual donors are working on the former, through development of portfolio action plans, and it is expected that the CDF become a useful tool to for this and for successfully achieving the latter.
2.52. Despite progress there are still some issues outstanding: (i) Authorities should continue to increase their leadership role in choosing projects to diminish supply driven projects. This may mean that sometimes authorities will have to reject assistance. (ii) Authorities should improve their record keeping to insure projects achieve their development objectives and the credits are well spent.
Table 2.7
EXTERNALFINANCING PER CAPITA BY CATEGORYOF MUNICIPALITY
CATEGORYOF MUNICIPALITY TOTAL A pi IL u EXI FI-NAL 1 NCIN PEK CARIIA (USg) 11 1 T 14 NUMBEROF MUNICIPAI-ILITIESFOR WHICH EXTERNALFl IANCIN PERCITA IS <=$0 36 14 1 51 $0-$14 30 79 54 9 172 $14-$28 9 19 10 3 41 -=$28 20 1 7 7 3 47 % OF MUNICIPALILITIESFOR WHICH EXTERNALFINANCIt G PER APITA IS <=$O 38% 11% 1% 0% 16% $0-$14 32% 61% 75% 60% 55% $14-$28 9% 15% 14% 20% 13% -=$28 21% 13% 10% 20% 15% OF MUNICIPALITIES 95 129 72 15 311 AVERAGEPOPULATIONI OF MUNICIPALITY 2,545 9,666 25,724 216,663 21,192 LACK OF SERVICES(100=TOTAL LACK; O=FULLYSATISFIE ) HEALTH 70 75 68 52 71 EDUCATION 86 88 85 60 85 HOUSING 92 88 85 70 88 SERVICES 98 96 90 66 94 SANITATION 95 94 87 65 91 ENERGY 96 91 82 44 88 Source: Ministry of Finance, November 1998.
processing of legal agreements or amendments, other institutional weaknesses, effectiveness delays, project accounting ancdauditing issues, disbursement problems, and procurement problems.
Domestic and External Financing Public Expenditure Review 47
Table 2.8
PUBLICbNVESTMENT BY SECTOR AND MAJORDONORS 1997 (000dolbars) TOTAL DOMESTIC 7 7 EXTERNAL FINANCING INVESTMENT SECTOR% FINANCING TOtAL DONORi CREDITS GRANTS AGRICULTURE 20,112 31% 7,574 12,537 6.002 6,536 IDA 3,178 648 2,422 19 3% 2.408 13 EUROPEANUNION 2271 342 1 928 154% 1.928 IDB 1.814 85 1,693 13 5% 1.693 - NUMBEROF DONORSIN SECTOR 20 MINING 3.649 06% 417 3.232 2,426 a05 IDA 1.286 - 1.286 39 8% 12866 KFW 1.140 - 1,140 35 3% 1,140 - GERMANY 617 144 472 14,6% 472 NUMBEROF DONORSIN SECTOR 4 INDUSTRYAND TOURISM 4.777 0,7% 562 4.214 1E955 2,259 EUROPEANUNION 2,276 85 2.191 52 0% - 2,191 IDA 1.790 32 1.757 417% 1,757 IDB 242 44 197 47% 197 NUMBEROF DONORSIN SECTOR 6 HYDROCARBONS 27.127 42% 7,911 19,216 19,216 ANDEAN DEV.CORPORATION 19,307 92 19.216 100,0% 19,216 NUMBEROF DONORSIN SECTOR ENERGY 13,931 2.2% 8.925 5s005 3 976 1,029 ANDEAN DEV.CORPORATION 4.015 827 2.285 45.7% 2,285 KFW 1,712 658 1,053 210% 1,053 SWEDEN - 903 18 % 903 NUMBER OF DONORSIN SECTOR 6 TRANSPORT 162,797 25.2% 82.298 80.499 71,361 9.138 ANDEANDEV CORPORATION 20 660 3.980 22,868 28 4% 22,868 IDA 24,315 1.242 19,087 23 7% 19058 29 IOB 26,472 3.962 17,730 22 0% 16,875 855 NUMBER OF DONORSIN SECTOR 10 HEALTHAND SOCIAL SECURITY 24,177 3 7% 10,292 13,885 10,201 3684 IDB 6.731 1.109 5,627 405% 5,627 IDA 6,539 1.441 4,417 318% 4,417 GTZ 1,333 161 1.173 84% 1,173 NUMBER OF DONORSIN SECTOR 17 EDUCATION 46,936 73% 19,329 27,607 20.693 6,914 IDB 15,049 4,258 13.008 471% 13,008 - IDA 23,023 8,574 6,942 251% 6,942 NETHERLANDS 2 304 83% - 2,304 NUMBER OF DONORS IN SECTOR 11 BASIC SANITATION 59.776 93% 30,045 29,730 24.013 5 717 IDA 19,339 5,683 13 283 44 7% 11,681 1,603 IDB 15,293 3,586 11,707 394% 9,328 2.377 KFW 4.523 2,248 2 275 7 7% 1,204 1,072 NUMBER OF DONORS IN SECTOR 10 URBANSECTOR AND HOUSING 14.902 2 3% 11 426 3,477 2625 852 IDB 3,463 631 2 833 81 5% 2104 729 IDA 804 159 645 18.6% 520 123 NUMBER OF DONORS IN SECTOR 3 WATERRESOURCES 4,108 08% 2.360 1,748 1t177 571 IDA 890 94 795 45.5% 567 230 CHINA 520 211 308 17.6% 308 IDB 399 98 300 17.2% 300 NUMBER OF DONORS IN SECTOR S MULTISECTORIAL 38.982 6.0% 14.751 24,231 10593 13,638 IDA 8,591 1,320 6,723 27.7% 6,234 490 EUROPEANUNION 4,350 886 3.466 14.3% 3,466 DANIDA 3,072 213 2859 11.8% 2.859 NUMBER OF DONORS IN SECTOR 17 TOTAL U11 1 28198 402,098 322,160 7,4 Source: Ministry of Finance, November 1998.
Domestic and External Financing 48 Public Expenditure Review
Table 2.9
PUBLIC W4VESTMENTBY SECTOR FOR THE 1 MAJOR DONORS11S7 1°°° doll&") _TOTAL fOME5TC EXTERNAL FINANCING INVESTMENT FINANCING TOTAL SECTOR % CREDITS GRANTS IDA TRANSPORT 24.315 1.242 19087 333X 19.058 29 SANITATION 19 339 5.883 13.283 23 1% I s5,81 1.803 EDUCATION 23 023 8.574 8 942 121% 8.942 - MULTISECTORAL 8 591 1.320 6 723 11 7% 8,234 490 OTHER SECTORS (T 14,523 2.394 11,349 19a% 108977 371 Total 89.791 19.203 57 384 100 % 54,892 2,493 IDB TRANSPORT 28.472 3.982 17 730 32 3% 18,875 85S EDUCATION 15.049 4.258 13 008 23 7% 13.008 - SANITATION 15.293 3.588 11 707 213% 9.328 2,377 HEALTH 8.731 1,108 5.827 102% 5.827 - OTHER SECTORS (8) 8.051 1,132 8.s87 12 5% 8.017 850 Total 71.598 14.049 54,939 10O0% 50.855 4.082 ANDEAN DEV. CORPORATION TRANSPORT 20.e80 3,980 22,8e so 5% 22.8s8 - HYDROCARBONS 19 307 92 19.218 42 5% 19,21 ENERGY 4.015 827 2.285 5 0% 2.285 AGRICULTURE . 387 0 9% 397 OTHER SECTORS (5) 149 , 497 11% 497 Total 84,131 4,899 45.283 100 0% 45.283 KFW TRANSPORT 1,181 431 4,358 428% 4.034 325 (Germany) SANITATCON 4,523 2.248 2.275 22 2% 1,204 1.072 MINING 1.140 1.140 11 1% 1.140 ENERGY 1,712 858 1.053 10 3% 1.053 OTHER SECTORS (3) 958 210 1.411 13 8% 328 1,0se Total 9,494 3U547 10.237 100 0% 7.757 2,483 JICA TRANSPORT 7,880 7880 94 4% . 7.s80 AGRICULTURE 587 122 485 58%s 485 Total 8,.47 122 8.345 500 0%, 8.345 EUROPEAN UNION MULTISECTOR 4.350 s8e 3,88 44 4% 3,.46 INDUSTRY 2.278 85 2.191 28 1% 2 191 AGRICULTURE 2.271 342 1,529 24 7% 1 928 HEALTH 70 48 137 1 8% 137 WATER RESOURCES 185 83 83 1 1% . 83 Total 9.132 1,442 7,805 1000% . 7 805 NETHERLANDS MULTISECTOR 2.814 28 2.789 407% 2.789 EDUCATION . 2.304 338% 2 304 AGRICULTURE 1.952 452 1.508 219% 1.500 WATER RESOURCES 288 29 259 3 8% 259 Total 5.054 507 8.852 10 00% 8,852 rTALY TRANSPORT 7.918 3.877 4,239 1000% 4 239 Total 7,918 3,877 4.239 ID 0% 4 239 FIDA MULTISECTOR 3,329 173 2,727 87 3% 2 727 AGRICULTURE 1,682 14 1.325 32 7% 1,314 12 Total 4,991 187 4052 1000% 4,941 12 SWEDEN EDUCATION o 5 1Es9e 51 2% 1.898 ENERGY - 903 24 4% 903 HEALTH 884 112 680 17a% e80 SANITATION I1 - 242 8 5% 242 AGRICULTURE , , 4 ,1% 4 Total 735 117 3.705 1000% 3.705 WORLD FOOD PROGRAM MULTISECTOR 1.971 430 1.543 47 3% 1.543 EDUCATION 1.180 258 949 291% , 949 HEALTH 908 285 751 23 0% , 751 AGRICULTURE 3e 19 17 05s% 17 Total 4 095 990 3.280 100 %I 3.280 DANIA -M ULTISECTOR 34072 213 2,859 100 0% 2.859 Total 3,072 213 2,859 100 0% 2.859 GERMANY EDUCATION 5.139 295 818 44.3% 818 MINING 817 544 472 258% 472 SANITATION 475 94 310 18 8% 172 138 HEALTH 249 25 203 11 0% 203 AGRICULTURE 43 40 2.2% 40 Total 2.523 828 1N841 100 0% 172 1,689 SWSS DEV. AGENCY MULTISECTOR 293 39 903 52.4% 803 AGRICULTURE 1.D85 358 729 478% , 729 Total 1.370 395 1.532 10 0% , 1,532 FRANCE SANITATION 2.209 738 5.473 1005% 1472 Total 2.208 73S 1,472 1DOO% 1.472
Source: Ministry of Finance, November 1998.
Domestic and External Financing Public Expenditure Review 49
3. A STRATEGIC VIEW OF DECENTRALIZATIONIN BOLIVIA: Advances, Issues, Opportunities and Recommendations
3.1. Political Strengths and Advances for Bolivian Decentralization
3.1.1 Diversification of Decision Making centers and Political Pluralism
3.1. Law 1551, or the Ley de Participaci6n Popular (LPP) brought about a radical institutional transformation at the local level as municipalities (particularly medium and small ones) were given both resources and responsibilities. As a result of the LPP, fiscally neglected intermediate and rural municipalities received resources and effectively began to assume responsibilities they had not previously had. New participatory institutions (Organizaciones Territoriales de Base (OTBs), and Comites de Vigilancia (CVS)) were put in place to ensure local government responsiveness and accountability to local residents.
3.2. Besides seeking to strengthen municipal governments and participatory institutions at the local level, the LPP sought to partially equalize fiscal capacity between previously forgotten municipalities and a handful of large cities and municipalities that used to gather most fiscal resources at the municipal level.' Neither efficiency in production nor inter-individual equity or poverty alleviation objectives were directly sought by the LPP. Yet the sustainability of the Bolivian decentralization process inescapably requires increased efficiency in production and allocation. Poverty alleviation could theoretically be charged to the social funds and sector programs. Yet -- as will be discussed below-- the funds too have to adjust to decentralization.
3.3. Law 1654, or Ley de Descentralizaci6n Administrativa, (LDD), was intended to complement the government structure required by decentralization. Departments were conceived as locus of deconcentration. Following the subsidiarity principle, departments were also given responsibilities in strengthening municipal development and reaching isolated municipal areas. The design, test and implementation of these two major reforms is itself a significant achievement.
3.1.2. Institutionalization of civil society participation at tie local level
3.4. Although still highly unequal across the country, the OTBs and the CVs have mobilized and organized citizens and are able to point to a number of examples of effective participation in planning and supervision.
Capitalcities-that usedto get 92 percentof the coparticipaci6nor generalrevenue sharing transfer beforethe LPP-now receive39 percentof the coparticipaci6nwhile provinces receive 61 percent. Further,the total figurefor the coparticipaci6njumped fromUS$ 76.5million in 1990to US$ 184 millionsin 1997.
Strategic View of Decentralization 50 Public Expenditure Review
Thousands of OTBs were quickly approved during the initial years of implementationof the LPP.2 The OTBs participate in municipal planning3 and choose the members of the Comites de Vigilancia that function at the municipal level.4 The Comites de Vigilan cia are responsible for plannlingannual municipal expenditures in health, education and recreation and for overseeing and ensuring accountability of fiscal transfers ordered by the LPP.
3.5. The Sub-alcaldes are demonstrating capacity to operate in rural or isolated areas of municipalities, thereby increasing state support for and strengthening participatory approaches in the entire territory of the municipalities.5 The rapid growth of municipal associations is also facilitating economies of scale for minimum uniformr coverage throughout the territory.6
3.6. As a result of growing interaction between civil society and municipalities, Bolivia is witnessinlg a few examples of partnerships between municipalities and the private sector. These partnerships take place mostly in rural areas. With the exception of cities like Santa Cruz, where there is a tradition of private sector participation in city and regional issues, decentralization in Bolivia does not seem to have stimulated the formation of public-private alliances in large urban areas.7
3.7. Attempts to promote popular participation from the departmental level have been largely ineffective.
3.2. Fiscal Advances and Strengths in Bolivian Decentralization
3.2.1. Distribution of Expenditure Responsibilities
3.8. Sub-national autonomy for the allocation of public resources and creativity in new production functions is the institutional requirement to achieve higher efficiency in
2 13,827 out of the existing 14,546 OTBs had attained approved legal status by mid 1998. Avances, Limitaciones y Visicin Estrafegica del Proceso de Descentralizaci6n y Participacion Popular en Bolivia. Viceministerio de Desarrollo Sostenible y Planificaci6n. Viceministeriode Participaci6n Popular y FortalecirnientoMunicipal. Ministerio de la Presidencia. Viceministerio de Coordinaci6n Gubemamental. Seguimiento al Grupo Consultivo 1998. Subgrupo Equidad. La Paz, Junio de 1998, pages 2-3. Community requests that cannot be introduced in the next development plan are kept for consideration for the subsequent development plan. The municipal development plan is essentially a list of projects and their estimated costs for the five years term of the plan.
4 311 municipalities for the entire country, with a median population of 8,400.
5 According to reports from participant observers, this has been the case with the Sub-alcaldes of Santa Cruz.
6 All the municipalities of' Santa Cruz belong now to some form of association of municipalities. Some municipalities in Tarija, La Paz, Cochabamba and other departments are also presently associated for either single or several purposes. 7Yet there is some latent private interest in sharing risks and benefits with municipalities and departments as witnessed by private capital representatives from Cochabamba, for instance.
Strategic View of Decentralization Public Expenditure Review 51 allocation and production. Although there are significant increases in the proportion of public resources managed at sub-national levels in Bolivia, often there is not enough sub- national autonomy to guarantee local or regional initiative or accountability. For example, in health, municipal governments are responsible for the infrastructure but not the administration of health facilities leaving no one clearly accountable.
3.9. Before decentralization, municipalities had little significance for public sector investment. Today, most public investment is either entirely decided by, or funneled through (in the case of co-financing funds), sub-national govemments. The result is that the central government is being left with few direct expenditure responsibilities: Health and education, armed forces, police, judiciary, debt service and special programs.
Both investment projects and recurrent services at subnational levels have grown in number and volume of resources since the LPP was first issued.8 In 1998, departments executed 48.4 percent and municipalities 20.1 percent of total public investment in the country. The Funds executed 14.5 percent and the central government, properly speaking, was responsible for the execution of only 15.9 percent of total public investment. In addition, larger resources at the municipal level have also enhanced the capacity of local governments to mobilize additional domestic (from funds and sector ministries, departments and communities) and foreign (grants, credit) resources.
3.10. After initial dispersion,'° municipal expenditures are increasingly focused on basic needs and local development * In education, municipalities are responsible for building and maintenance of infrastructure since 1996. * In health, municipalities are responsible for health posts (nivel primario) * In local development, municipalities play an increasing role in housing and urban development, basic sanitation, roads, agriculture and energy." I
8 New municipal investment projects registered at the Sistema de lnformaci6n sobre lnversiones, SISIN, grew dramatically to 3,717 in 1994, 9,585 in 1995 and 14,620 in 1996. (Cf. Ministerio de Hacienda - Ministerio de Desarrollo Sostenible y Planificaci6n. Primer Censo de Gobiernos Municipales. La Paz, 1998.) These are projects that municipal governments incorporated in their Annual Operative Plans (POAs) and do not necessarily reflect projects effectively executed, efficiency in allocation and production or overall intended impact. Neither do these figures imply comparisons between local provision of services at sub-national governments and the competing models of service delivery: central, privatized or public-privatealliances. Moreover, since POAs and investment allocation are legally required, it is conceivable that registered figures overestimate the actual number of investment projects or resources effectively committed to them. 9 Source: Presupuesto de Inversi6n Publica 1998. Ejecuci6n Presupuestariaal 3er Trimestre. Ministerio de Hacienda. Viceministerio de lnversi6n Publica y Financiamiento Externo. La Paz, 1998. '° More than 50 percent of municipal investment resources were allocated to urban projects during the first two years of the LPP. Beginning in 1996, agriculture, education, transportation and health projects have grown at a faster pace than urban infrastructure. The number of cases of gaspillage or corruption in municipalities might also be declining although the lack of reliable information prevents any well founded conclusion in this regard.
Strategic View of Decentralization 52 Public Expenditure Review
Table 3.1:: Sector Distribution of Municipal Investment, 1995-99"' Percentage of Total Investment Projects Sector in Municipal Development Plans Agriculture & Cattle 30.59% Transportation 27.07% Education & Culture 13.46% Basic Sanitation 11.35% Urban & Housing 6.59% Health and Social Security 3.45% Energy 2.95% Water Resources 0.82% Multi-sector 1.57% Industry & Tourism 1.71% Other 0.43% Source:Direcci6n General de Participaci6nPopular, Viceministerio de Participaci6nPopular y FortalecimientoMunicilpal.
3.11. The above sectoral distribution conceals significant differences among different types of municipalhities.Municipalities that are also capital departments tend to have significantly higher than average urban and housing expenditures, while their social expenditures are considerably lower than average. 13
3.12. As intended by the new distribution formulas for participation introduced by the LPP, municipal per capita investment aggregated by department is largely equal, the major exception being the municipalities of Potosi. Therefore, territorial equalization does not seem one of the reform priorities for Bolivia at this point in time.
Aggregatedsector categories for sub-nationalexpenditure veil sectorand inter-sectorcreativity in the allocationof publicresources. More detailed accounts of sub-nationalexpenditure are neededto capturelocal efforts towards enhanced competitiveness or new approachesto environmental upgrading. 12According to municipaldevelopment plans registered at the SPPor the Viceministeriode Participacion Populary FortalecimientoMunicipal. Roughly 75 percentof the municipalitieshave effectively submittedtheir plans to the centralgovernment year after year.These plans reflect municipal prioritiesas reconciledwith the guidelinesprescribed by the centralgovernment (SPP or Viceministeriode Participaci6nPopular y FortalecimientoMunicipal). Since development plans extendover severalyears, this sectordistribution of investmentprojects is not as accurateas the more detailedOperational Plan (POA) for a givenyear. Neitherof themreflects what wasactually executed duringthe fiscalyear. 3 For 1996the 311 municipalitiesdevoted 57.5 percent of total investmentto urbanand housingand 27.42 percentto socialservices. Capitals of departments,in turn, invested67.54 percentin urban& housing and 18.92 percent in social services. Source: Participaci6n Popular: Una evaluaci6n-aprendizaje de la Ley 1994-1997.Ministerio de DesarrolloSostenible y Planificaci6n.Viceministerio de Participaci6nPopular y FortalecimientoMunicipal. La Paz, 1998,p 122.
Strategic View of Decentralization Public Expenditure Review 53
Table 3.2: Municipal Per Capita Investment Per Department Department % of Total % of Total % of Total % of Total Population Municipal Municipal Municipal Investment 1994 Investment 1995 Investment 1996 CHUQUISACA 7.07 4.73 8.43 6.24 LA PAZ 29.60 39.55 24.70 33.31 COCHABAMBA 17.29 19.15 17.89 20.43 ORURO 5.30 4.89 5.07 5.50 POTOSI 10.06 6.21 5.76 5.39 TARIJA 4.54 3.56 3.55 3.67 SANTA CRUZ 21.25 18.59 28.87 20.45 BENI 4.30 2.98 5.25 4.42 PANDO 0.59 0.35 0.47 1 0.59 Source: Participaci6nPopular: Una evaluaci6n-aprendizajede la Ley 1994-1997. Ministerio de Desarrollo Sostenible y Planificaci6n. Viceministerio de Participaci6n Popular y Fortalecimiento Municipal. La Paz, 1998, p 123.
3.13. Departments are becoming the channel for decentralized, national level services in agriculture, roads, electricity, education, basic sanitation and health. Departments also anchor the services of the Viceministerio de Participaci6n Popular for strengthening municipalities and promotion of popular participation. Although departments have quadrupled their share in total public investment (from 12 percent in 1994 to an estimated 48 percent in 199814),most departmental investment is micro-monitored or otherwise controlled from the central government. The Ministry of the Presidency through the SNOPE has developed a plan to define the roles within Prefectures. However, the plan needs further work to be ready for implementation.
3.2.2. Distribution of Sources of Revenues
3.14. Bolivian municipalities can potentially levy the same major taxes utilized by local governments in other countries: real estate taxes, vehicle taxes and other excises.15 Municipalities can also charge-though in practice they do not apply-a Valorization Tax, or Contribucion de Mejoras.
3.15. Bolivian municipalities have traditionally had their own resources, as evidenced by the relatively low fiscal dependency rates compared to other countries of the region.'6 However, in the case of Bolivia, the design of decentralization did not incorporate clear incentives for additional fiscal effort at sub-national levels. Moreover, it could be argued
14 Source: SISIN. Cf. Programa de Inversi6n Pzulica 1990-1998. Dislribuci6npor Nivelesde Administraci6n. Viceministerio de Participaci6n Popular y Fortalecimiento Municipal. Unidad de Asuntos Econ6micos y Financieros. 15The so-called Patente de Industria y Comercio --which has been transformed into a gross sales tax in some of the Latin American countries-- is not as important in Bolivia as it is in Colombia or Venezuela.
16 Municipal taxes represented 0.8 percent of Bolivian GNP in 1997, compared with 16.6 percent for national taxes and 0.1 percent for regalias departamentales. Source: Ministerio de Hacienda.
Strategic View of Decentralization 54 Public Expenditure Review
that the LPP entailed a disincentive for local fiscal effort, as significant transfers were not imnmediatelyfollowved with effective additional responsibilities. The design of the law effectively leaves it entirely up to local initiative to decide whether or not to raise local tax incidence. As expected from the design of the LPP, decentralization did not bring about an increase in the overall rate of tax assessment for Bolivia.17
3.16. A few municipalities (usually large ones) have shown advances in the property tax.
Cochabamba is considered one of the most advanced municipalities in terms of property tax administration. Since decentralization, the city has invested US$2,700,000 in cadaster modernization. Property tax revenues grew in real terms at an impressive average yearly rate of 20 percent between 1995 and 1998. As a result, property tax revenues multiplied by 1.80 between 1995 and 1998 and are expected to grow as much as three times between 1995 and 2002.18 Yet, in the case of C'ochabamba,valuation represented only about 60 percent of commercial value as of December 1998. A combination of municipal valuation and self- reporting has stimulated the practice (and culture) of under-valuation. There are various approaches for addressing this such as appropriation by the authorities at the self-reported value. Tax exemptions, slow cadaster formnationand ineffective tax collection resulted in only 50 percent of real estate properties paying some tax. 19
3.17. The vehicle tax has not been utilized as a dynamic source of tax revenues. Whenever there are advances in the property tax administration, the share of vehicle tax revenues falls dramatically, as exemplified by Cochabamba where vehicle tax revenues fell from 40 percent in 1995 to 29.41 percent of total tax revenues in 1998. Moreover, the vehicle tax is not a good source of revenues for equalization purposes, since it only benefits a few municipalities.20
3.18. The transaction tax on the transfer of real estate and vehicles is also a significant source of revenue for larger cities, especially cities with a real estate cadaster. In the case of Cochabamba, for instance, the transaction tax has become more significant and more stable than the vehicle tax, representing 40 percent, 50 percent, 43 percent and 37 percent of the property tax in the years 1995-98.
7 Which has remained stable during the years of application of the LPP at around 17.5 percent. 18 La Paz tried combinations of cadaster-based valuation with self-reporting. Billing and collection were strengthened as well. '9 Preliminary estimates of potential tax revenues indicate that property tax revenues fall short of their potential by nearly 50 percent in the municipalities of La Paz and Santa Cruz, 35 percent in Cochabamba, 20 percent in Sucre, Oruro and Tarija. (Estimates prepared by Fernando Medina at the Viceministerio de Participaci6n Popular, Unidad de Asuntos Econ6mico Financieros. 20 Unless some equalization schemes are added to the distribution of the vehicle tax revenues, as practiced in Chile.
Strategic View of Decentralization Public Expenditure Review 55
3.19. The main sources of departmental income are mining and forestry royalties. These royalties represent a minimum portion of departmental income, as departments are less dependent on the central government than municipalities. Departments are entitled to charge a number of rather obsolete, inefficient excises and fees.
3.2.3. Inter-Governmental Fiscal Transfers
3.20. The automatic daily transfer to municipalities of 20 percent of national tax revenues is carefully administered at Cuentas Fiscales of the Central Bank. The Direcci6n General de Renta Interna of the Ministerio de Hacienda keeps records of municipal allocation of central government transfers to ensure compliance with the 85 percent investment requirement. As can be expected, smaller municipalities have higher rates of fiscal dependency than larger municipalities.2 2
Table 3.3: Fiscal Dependency Rates by Type of Municipality, 1995-96 ;' Co-participationlTotal Co-participation/Total Municipal Income Municipal Income 1995 1996 Capital cities and El Alto 29.0% 26.9% Rest of municipalities 63.3% 68.0% Source: Participaci6n Popular: Una evaluaci6n-aprendizaje de la Ley 1994-1997. Ministerio de Desarrollo Sostenible y Planificaci6n. Viceministeriode Participaci6n Popular y Fortalecimiento Municipal. La Paz, 1998, p 124.
3.21. Budget allocations to departments have increased significantly since 1996. Substantial resources have been effectively granted to departments in order to complete the two governments-three level of administration basic structure of the Bolivian public sector after decentralization. Yet transfers to departments2 4 remain highly volatile for two reasons: (i) They are heavily dependent on the international prices of oil and gas; and (ii) they are taken in practice as one of the adjustment factors in the central government
21 As expected, municipalities report investment rates higher than 85 percent with co-participaci6n funds. On the other hand, investment with other sources of income tend to be around 50 percent for the entire country. There is no substitution effect properly speaking since most municipalities made little or no investment prior to the LPP.
22 Yet compared to other Latin American countries rates of dependency of Bolivian municipalities by size group are usually lower than in other countries of the region.
23 For 1998 the resources from co-participacionesrepresented 30 percent of total municipal income for all the municipalities. Source: Ministerio de Hacienda. Viceministerio de Presupuesto y Contaduria. Unidad de Administraci6n Departamental y Gobiernos Municipales. Cuadro de Control de Recursos de los Gobiernos Municipales. Gesti6n 1998.
24 Since departments are part of the central government, budget allocation to departments cannot be classified as inter-government transfer strictly speaking. Similarly, transfers from ministries or other central agencies to departments are not inter-governmenttransfers. However, this report refers loosely to "transfers" to departments in order to construct a comprehensive view of sub-national government revenues and expenditures within total state finances.
Strategic View of Decentralization 56 Public Expenditure Review budget when cuts become necessary during the fiscal year. For instance, anticipated transfers to departments were curtailed by nearly 20 percent during fiscal year 98.25
3.22. The usual presentation of transfers to departments may be misleading since central government transfers are not limited to the transfer of the excise tax on oil and gas, IEHD. In fact, central government transfers also include non-recurrent transfers such as PASA or funds transfers, occasional or extraordinary transfers from the TGN, transfers originated in departmental agreements with central ministries for services or investment, donations that are iFunneledby the central government to specific departments and even subsidized credit. 'When all these concepts of veiled transfers are taken into account, departments, even relatively large ones such as Santa Cruz or Cochabamba, appear to be highly dependent onitransfers that are both volatile and to a large extent non-recurrent.26
3.2.4. Sub-National Borrowing
3.23. Although Bolivian decentralization by itself does not push municipalities into borrowing, scattered evidence indicates that some of the larger municipalities are feeling the pressure to raise income beyond central government transfers and their own sources of revenue. The fact is that municipalities (primarily but not exclusively large cities) have the perception that they are now in a better position to control credit and international cooperation management-and are increasingly taking initiatives in these areas. Since there seems to be no significant credit push as a result of decentralization in Bolivia, the growing demand for loans to municipalities indicates that municipal borrowing should be regulated to prevent an uncontrolled, potentially explosive growth in credit to municipalities which is largely disconnected from local priority responsibilities. On the other hand, it is neeessary to create a regulatory framework that facilitates municipal access to capital markets while stimulating fiscal discipline.
3.24. Available evidence indicates that municipal debt is growing, particularly procurement (or suppliers) debt, short-term (liquidity) debt and contingency debt originating in labor and procurement contracts.2 7 These three sources of debt- particularly the contingency debt resulting from unjustified dismissals and early retirement-are becoming also a source of corruption. Since Bolivian accounting of
25 Then again the initial 1999 budget estimates for departments were reduced by nearly 40 percent at the time of submission of the budget to congress.
26 The budget proposal of Cochabamba for fiscal year 1999 included 106 million in current income and 192 million in occasional or non-recurrent transfers. The latter included 73 million from donations, 33 million from credit and 66 million from Otpro.
27 Indirect debt (institutos decentralizados) may also be growing in large cities. Since debt accounting is ordinarily restricted to direct, medium and long term debt, direct short term and contingent debt are usually underestimaled or fully neglected.
Strategic View of Decentralization Public Expenditure Review 57 municipal debt is ordinarily restricted to direct, medium- to long-term debt, the debt service and debt stock ratios are considerably underestimated.2 8
On January 1I",1998, the accumulated stock of municipal debt of Cochabamba (excluding contingent and indirect debt) amounted to Bol$29,369,032. Short-term debt (commercial banks, suppliers) represented 38 percent while medium and long term debt (FNDR, foreign credit) represented 62 percent of the total. The debt service/revenue ratio was 39 percent in 1998.29
3.25. Municipalities and departments offer fixed assets, fiscal transfers and their own tax revenues as collateral. However, a large portion of their own revenues are pre- committed to recurrent expenditures that can hardly be postponed. And many of the non- recurrent, discretionary transfers to departments have been pre-allocated to earmarked purposes. Therefore, special care must be taken to estimate sub-national primary balance in Bolivia in order to ensure that it does reflect resources available for loan guarantees or additional debt service.
3.3. Institutional Development for Inter-Government Coordination
3.3.1. Advances which entail tte potentialfor strengtlheningcoordination.
3.26. There have been significant advances in the area of institutional developments for inter-governmental and inter-sector harmonization of priorities, mostly for the sake of public investment purposes:
* Through deconcentration of sector ministries to departmental levels, thereby creating a potential platform for the deepening of the decentralization process * Through social investment funds that articulate priorities with communities and municipalities (FIS, FDC). The Funds operate through menus of broadly defined earmarked transfers that often require money or in-kind contributions from communities and municipal governments. * Through internationally supported programs to strengthen local and regional governments and growing interaction between them and the central government, such as programs going on in Chuquisaca, Potosi, Sucre and Tarija. * Through monitoring efforts at the Ministerio de la Presidencia, the Ministerio de Hacienda, the Viceministerio de Participacion Popular and the Instituto Nacional de
28 All municipalities had an average debt service/revenue ratio of 3.6 percent and a debt stock/revenue ratio of 45.5 percent in 1996. The same indicators for the Prefecturas were 10.5 percent and 78.4 percent respectively. "9The practice of bond issuance is still restricted in Bolivia. Municipalities require the approval of the Superintendencia de Valores (national level) for bond issuance plus the approval of the Ministry of Hacienda for municipal borrowing that is protected by central government guarantees.
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Estadistica, INE.30 Similarly, the modemization of the national government accounting and budgeting systems might provide a future basis for inter-government exchanges of infoirmation. * Through the growvingrole of deputy mayors for rural areas.
3.27. The effort cf the last four years has been concentrated on developing the participatory institutions for planning and monitoring as well as strengthening the planning capacity --and reports thereof-- at the municipal government.31 Training and technical assistance have been geared to these same areas. 32 Finances and administration come second to planning.33 As a consequence of these efforts, an increasing number of municipalities are now capable of preparing their own POAs and PDMs and are effectively doing so.
3.28. What is needed today is a new phase of strengthening local governments in new areas of local management and inter-governmentcoordination:
* Coordination of the budget cycle * Exchanges of information for sector and inter-sector monitoring and evaluation * Public expenditure controls, including disclosure of information and social control * Strengthening uniform accounting, contract rules and procedures o Harmonization of POAs, and five-year PDMs * Debt limits, monitoring and controls * Strategic/Competitivenessplans and sector plans at departmental and municipal levels
3.3.2. Adjusting the central government to decentralizationand inter-government coordination
3.29. The central government has partially adjusted to its new role of data collection for supervision, evaluation and planning. As a result, the central government does some follow up of munic:lpal POAs and five year development plans. However, this
30 As exemplified by Primer Censo de Gobiernos Municipales (La Paz, 1998), a joint publication by these three agencies. 31This efforthas includedinitial testing and applicationof indicatorsat locallevel, awareness to the need of (participation,decentralization) process indicators, further consolidation of Comitesde Vigilancia, strengthening central monitoring and control of plans and project performance. See, for instance, Indicadores de Participaci6n Popular y Descentralizaci6n. Or Diagn6stico Municipal. Viceministerio de Participaci6n Popular. Unidad de Asuntos Econ6mico Financieros, La Paz 1998.
32 The SPP usually contracts NGOs or community leaders for training and promotion of community organization around participatory planning.
33 Cf. Ministerio de Hacienda - Ministerio de Desarrollo Sostenible y Planificaci6n. Primer Censo de Gobiernos Municipales, M6dulo 11,Capacitaci6n. La Paz, 1998.
Strategic View of Decentralization Public Expenditure Review 59 monitoring and evaluation is mostly based on approved plans and budgets3 4, not on actually executed budgets. It also lacks focus on the critical factors the central government may want to know in order to provide support and incentives for strengthening municipal management, enhance efficiency in local expenditure and reinforce inter-governmentcoordination.
The Sistema de Seguimiento y Evaluaci6n Municipal, SSEM, at the SPP, collects development plans and keeps records of POAs for the 123 largest municipalities. For smaller municipalities, the monitoring and evaluation is done by the Strengthening Community Unit of the Departmental Prefecturas. The SSEM has been conceived for physical and financial monitoring of municipal projects in the 123 largest municipalities. Unfortunately, this conception leads to excessive, time consuming and largely unnecessary micro-monitoring.On the other hand, when the system prepares aggregate information on municipal investment projects, it aggregates plans and projects on a sector by sector basis and provides an indication on execution of the development plan on the basis of year to year POAs. This sector classification, although of some value to central government sector ministries, provides only limited information on the critical issues of fiscal and institutional decentralization the central government should keep an eye on. These critical issues have to do with (i) the verification of actual conformity between investment projects and community preferences35 --as a first indicator of efficiency in allocation, (ii) local fiscal effort or additional mobilization of resources --as an initial indicator of ownership and sustainability,(iii) some sample measurements of cost structures for efficiency in production. (iv) some measures of actual vs. expected outcome.
3.30. As partially independent entities that operate also at the central level, the Funds are also beginning to adjust to the requirements of inter-government coordination within the frame of a decentralized state:
* Funds are increasingly trying to incorporate local, regional demands while making sub-national governments and communities more sensitive to national government policies regarding poverty alleviation. * The central government is considering proposals for a Sistema de Cofinanciamiento which will include vertical and horizontal coordination of co-financing mechanisms and negotiations of the Funds projects with (rather than imposition on) sub-national governments. The progress has been slow but the law is expected at the end of the year.
34 Since the POAs are incorporated into municipal budgets.
35 Which are often inter-sector.
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3.4. Internal Institutional Development and Administration
3.4.1. The compet,fngmodels of service delivery
3.31. Departments and municipalities are simultaneously applying four models of service delivery at sub-national levels: participation, deconcentration, privatization3 6 and client-oriented service delivery --either direct or via outsourcing.
3.32. Participatory planning is being implemented through the POAs and the PDMs. The POAs are participatory, integral planning.37 Municipalities take into account the priority demands from local residents (district residents in the larger municipalities) through the POAs and -in some cases-through strategic plans.
3.33. The two basic institutions of local participation are the ones introduced by the LPP, namely the C)TBs and the CVS. Ordinarily, mayors meet frequently with the Comites de Vigilancia38 . Besides, the larger municipalities are often divided into planning districts39
3.34. Although there is no clear evidence yet of higher efficiency through participatory approaches, participation creates additional stakeholders of decentralization and imprints stability and continuity in the whole process. Continuity is essential in the long march towards matured decentralization.
3.4.2. Strengthteningdepartments for deconcentration and delegation.
3.35. Departmental structures have been primarily conceived as regional branches of the central govemment, not as linkages between two levels of government. The delegated or decentralized nature of departments explains both the dominant sector character of the departmental structure (following the pattern of central government structure) and departmental attempls to exercise political influence and control upon provinces, sub- regions, municipalities and communities. Authorities are currently developing sectoral plans (education, health, agriculture, and basic services) to improve service delivery and technical capacity at different levels of government.
3.36. Departments have a basic administrative structure, formed by Prefectos, Directores Departamentales, Directores Tecnicos de Servicios Departamentales, Internal
36 Most departments and large municipalities these days include revenues from privatization in their yearly budget. Some of the largest sales of departmental assets have taken place in Tarija. Cochabamba has recently privatized the bus terminal and the milk processing and distributing plant. The central govemment has recently produced an inventory of municipal assets. Cf. Ministerio de Hacienda - Ministerio de Desarrollo Sostenible y Planificaci6n.Primer Censo de Gobiernos Municipales, M6dulo 11,Capacitaci6n. La Paz, 1998.
3 There are ongoing proposals for introduction of strategic development and competitiveness plans.
3 Once every month in the case of Cochabamba.
39 15 districts for Cochabamba, with an average of 35,000 inhabitants per district.
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Auditor, Departmental Council (Consejo Departamental) and Subprefectos that represent the Prefectos in the provinces.
* The Prefectos usually have a supporting staff of advisers (legal, mass media, other) and secretaries. They are also in control of a special unit for safety and security. * The Director General de Coordinaci6n Departamental is primarily responsible for planning and coordination, both internal and with the sector ministries. The Director General is also in charge of departmental services for strengthening municipalities and community development. * Other Directores Departamentales are responsible for sector coordination in agriculture, health, education, roads and infrastructure and environmental development. There are usually two non-sector directores, one for internal administration and financing, the other for legal issues. * Since the Directores Departamentales are primarily political appointees, the Directores Tecnicos Departamentales are needed to ensure technical competence and continuity. - The composition of the Departmental Council is geared towards ensuring sub- regional representation as well as linkages with the municipalities. * The Subprefectos are also intended to ensure proximity between the departmental structure and the population located at some distance of the capital of the department.
3.37. The organizational design of the departments reflects the attempts of both the national government and national political parties to keep patronage control over sub- national governments. 4 0 :
* The (president appointed) Governor appoints his cabinet from members of the ruling coalition at both the national and the departmental level. Since this procedure makes the cabinet members more responsive to their own political parties than to their Governor, there is only limited political or administrative cohesiveness within the top level of the Prefecturas.41Since political parties are the main reference group for cabinet members (in terms of their stability, political career, etc.), the latter must reciprocate to the party by expanding party support through political appointments.
40 The following observations are taken from the experience of Cochabamba, 1997-98. Similar observations are also reflected in broader studies of departmental governments. This notwithstanding, it is often claimed that smaller prefecturas-particularly those that have benefited from external cooperation programs such as the ongoing USAID or GTZ management strengthening programs-- have successfully promoted positive inter-personal relations within the Prefectura as well as more constructive departmental-municipal.relationships. These departmental administrations are likely to grow up more independent from the interference of national politics than the administrations of departments with higher fiscal capacity such as La Paz, Santacruz or Cochabamba.
41 This structural weakness could not be corrected by merely changing the nominal status of the Governor's cabinet members from "Secretaries" to "Directions".
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* Since the Director General de la Prefectura (formerly Secretario General) ordinarily represents the second major political force within the ruling coalition -and is also Secretario General of the Consejo Departamental-- the turf-battle between the Governor and his/her second within the Prefectura is acute.42
+ Governors have begun to create their own trust-worthy inner circle of government. In the case of Cochabamba, the Govemor created a mini-cabinet. This parallelism leads to lack of unity within, duplication and lack of accountability. Which in turn reinforce the circle of inter-party competition for expenditure control, clientele structure, clientele-ruled appointments and contracts.
* Most departments are in no position to prepare a strategic plan of their own.43 Likewise, most departments also lack the capacity to prepare a bud et that identifies and mobilizes available resources for financing regional priorities.4
* Due to their distrust for departmental capacity, some ministries appoint their own technical staff at departmental level. These key technical posts, paid by and/or primarily responsive to the national ministries, cannot be articulated by the Prefecto or the Directores departamentales.
* Departmental councils are political bodies and cannot help articulate demands since the consejeros have been generally ineffective in practice, the experience of departmental councils indicates that their effectiveness depends largely on the initiatives of the Prefecto.
3.38. There is growing awareness to the need of strengthening technical capacity at the Prefecturas as well as the existence of excess staff/payroll at the Prefecturas. The Ministry of the Presidency has been evaluating the technical capacity and needs of departments.45 It is also providing them with training and technical assistance.46 This
42 For instance, the conflictive relation between the Govemor and the Director General was publicly known in Cochabamba during 1998.
43 The Corporaciones Regionales --in many ways predecessors to today's departments-- prepared fairly comprehensive regional strategic plans based for the selection of their own investment projects.
44 There is a contrast between the capacity of municipalities and the capacity of departments to this effect. Although most municipalities began to have significant resources as recently as 1995, the institutional setting established by the LPP stimulated the developmentof institutionalcapacity for participatory planning and budgeting. On the contrary, the high dependency of departmental governments on central governmentpolicies, programs and projectsdiscourage the formationof a planningand budget capacity.
4 Consultants have been hired for evaluation of managementcapacity and training needs of all departments. This ccnsultancy work was already underway in the departments of Chuquisaca, Potosi and Tarijas by the end of 1998.
46 A pilot program on budgeting and public management is being implemented in the Departments of Beni, Oruro, Pando and Potosi.
Strategic View of Decentralization Public Expenditure Review 63 same Ministry has prepared a sample of 22 municipalities in four departments for evaluation of the relationships between departments and municipalities.47
3.5. Challenges & Opportunities
3.5.1. Consensus building and the reform agenda.
3.39. Bolivia is in a privileged position to capitalize on a number of features that are favorable to consensus and trust building--processes critical under decentralization. The growing involvement of the branches of the national executive, congress and political parties on decentralization issues and policies stimulate discussions on visions and strategies for strengthening participation and decentralization. Presently, stakeholders at the national level are actively discussing the reorganization of cofinancing funds and the proposed bills for a new Ley Organica Municipal or the Ley de Promoci6n Econ6mica. Although a constitutional reform of the Censura Critica could not be completely passed until year 2,007, several groups are studying alternative reform strategies such as, for instance, an authoritative legal interpretation of the Constitution.
3.40. The growing recognition of the need for strengthening the management capabilities of the prefecturas may serve as an opportunity to mobilize and involve other potential stakeholders of decentralization at the regional level. Outsourcing of departmental project preparation, for example, may link the prefecturas with regional universities, NGOs and private firms with the reduction of this bottleneck of budget execution. More civil society involvement and public-private partnerships may also help accelerate project preparation. Similarly, the widespread recognition of the lack of capabilities of the subprefecturas may reduce resistance to the formation of metropolitan areas or municipal associations for the support of less advanced municipalities.
3.41. The ground is also ready to capitalize on ongoing successful experimentation with programs for departmental strengthening and departmental-municipal coordination for investment priorities in departments such as Sucre, Potosi. The present challenge consists on adjusting and replicating these rather successful experiments and to ensure their sustainability as well.
47 Besides, Decree 25060 for the reorganization of the Prefecturasjust came into effect in January 1999. Four more decrees are being prepared on departmental responsibilities concerning health, education, basic services and strengthening municipalities.
Strategic View of Decentralization 64 Public Expenditure Review
3.6. Conclusions and Recommendations
3.6.1. For the short-term (mid 1999 through mid 2000)
At the local level. Move in the direction of strengthening municipal autonomy, fiscal creativity and fiscal responsibility.
> Strengthen mancomunidades or municipal associations, rather than trying to cover provinces-weak rnunicipalities from the sub-prefecturas. Stimulate inter-municipal support and technical assistance with a view to the informal creation of sub-regions from the bottom-up4 8
> Elaborate and disseminate models of strategic visions of municipalities that stimulate the passage from project listing plans to strategic visions of municipalities towards internal and external competitiveness. Experiment with joint departmental-municipal strategies towards increasing productivity, reducing transaction costs and enhancing competitiveness.
> Experiment with (funds) incentives towards raising local fees. Some of the potential avenues are: * Participatory discussions to increase fees for service improvement in quality or coverage.4 9 * Incentives to public-private alliances for risk sharing at the municipal level.
> Stimulate fiscal effort and emulation and allow for larger fiscal differentiation among subnational units. Equalization is left to central government programs. Inter- government transfers for both purposes, fiscal efficiency and differentiation, should obey clear, transparent formulas.
At the departmental or regional level > Given the extension and marked differentiation of the country, Bolivia needs an intermediate level of administration. Departments should be kept but their mission should be reformulated to make them more receptive and accountable to regional interests. For the short term, it is necessary to elaborate the mission and operating principles for a new role of departments. The guidelines for defining the new mission and working principles are:50
4 Experiment and evaluate technical assistance and municipal strengthening through horizontal exchanges, good practice documentation and dissemination. Horizontal exchanges may be organized in such a way that they establish the basis for strengthening municipal governments for regional development. Evaluate the experience of the two active municipal associations at the departmental level: Santa Cruz and Tarija.
49 Similar to the way contribuciones de mejoras or valorization taxes are discussed and approved in other countries.
50 The recommendationsthat follow are taken from the present orientation of departments as the focus of administrative deconcentration. Other functions of departments that appear to be contrary to local autonomy and participation have been dropped.
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* The new role is based on delegation of presidential functions and deconcentration of central public administration. However, deconcentration is restricted to those functions that can potentially be exercised more efficiently at the departmental level, as periodically determined in joint committees of the Presidencia, departments and relevant sector ministries. * The recommended operational profile of departments: * Make departments more accountable to regional interests. Departments keep regular contacts with the private sector and municipalities for identification of regional priorities as an input for sector and inter-sector investment projects (including funds projects). The Prefecto discloses regional priorities to municipal governments and regional civil society. Both municipalities and civil society produce and publish evaluations of performance and impact of departmental governments and send them to the Presidency. In order to harmonize central and regional priorities, departments become increasingly responsible for pre-feasibility studies, as delegated by the central government. * Make departments more creative and more fiscally responsible. Departments may submit projects to the funds as long as funds financing comes mostly as credit to departments --or matching contributions are required from the departments-- and the credit risk is on the Funds. Strengthen the coordinating role of departmental governments. The prefecto heads an inter-sector coordination committee for central government investments within the department. Similarly, the prefecto reports to the Presidency on the flexibility and adaptability of central government agencies to respond to regional priorities. * Outsource contract and monitor for project execution when delegated by the central government * Apply performance indicators to central government personnel when requested by the central government • Apply sector and inter-sector monitoring and evaluating indicators, as agreed upon with central government agencies. * Stimulate municipal exchanges and associations for mutual strengthening and capacity building. *: The Prefecturas must be strengthenedto comply with the new emphasis on deconcentration and delegation. This entails: * Strengthen the prefecturas for lobbying and negotiating with the central government on the basis of pre-defined criteria, evaluation indicators and procedures. * The central government dictates guidelines for and begins to establish the precedent of new, more technical profile for governors and their surrounding staff. The technical profile of the governors should be brought to the level at which they can discuss policies and actions with sector ministries. * Strengthen the prefecturas for outsourcing, monitoring and evaluation. Strengthening programs to this effect should be jointly designed and implemented by the central government together with external agencies that have developed pilot programs in departments.
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* Strengtheningprefecturas for identification of regional preferences, mobilization of additional resources and promotion of inter-municipal cooperation. Strengthening programs to this effect should be jointly developed with municipalities and the national SISIN. *: Differentiation of functions according to departmental capacity and central government action within the department. Experiment with new profile of departments as a matter of practical emphasis, through administrative measures that do not require law reform. Presidential instructions to governors should suffice.5' Begin re-training prefectural personnel for new selection and downsizing when necessary. Monitor and control non recurrent revenues of departments. Current departmental expenditures (including re-training of personnel and related expenditures for capacity strengthening) should not exceed formula driven, freely disposable transfers plus the departments own revenues. Earmarked transfers should be restricted to investment projects and capacity strengthening. Develop methodology for estimating primary balance of departments. Prepare rules for limiting departmental indebtedness in accordance with reliable measure of primary balance. Propose new organizational design and estimate the necessary current expenditures by Prefectura (differentiated by fiscal size). Propose standard models of cost- structures and civil service reform for efficient, technical competent management at different types of departments. Advance differentiation of national and departmental budgets to ensure elimination of double accounting. Credits and donations perceived by the central government and transferred to departments should be registered by departments as central government transfers, not as credits or donations. > The central government develops capacity and performance indicators to regularly monitor progress in strengthening technical capacity at the prefecturas. > Run surveys and develop consensus building processes on the representation and effectiveness as well as the desirable role and composition of departmental councils. The central government runs pilot projects on civil service reform at sub-national levels. Explore counting on OTBs and CVS as potential stakeholders of civil service reform. > The central goveranmentkeeps evaluations of the budget-execution capacity of departments.
51 During the initial days of the transition to the new emphasis on deconcentration and delegation, sectors are entitled to reassume most of the projects that have been nominally transferred to departments, then transfer them back to departments, as demonstrated capacity allows for.
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) The central government runs comparisons between cost-effectiveness of service delivery via departments as opposed to same services delivered directly from the center. Inter-government Fiscal Transfers and the transformation of the Funds.
> In the short-term, the social funds (FIS and FDC) should evolve towards conditional grants and credit under more transparent, more competitive rules of access by municipalities and departments. Conditional subsidies and different prices complement the general revenue sharing scheme by introducing mechanisms for inter-governmentcoordination of priorities and incentives for municipal development. Different prices (interest, term, matching contributions) for different departments or municipalities (equalization component) could be made explicit and publicly known. Different prices should reflect central government priorities and central government willingness to co-finance as a means for inter-government coordination of preferences. The proposed inter-agency committee for coordination of the funds policies and actions should be primarily responsible for establishing differential prices for the funds resources and evaluating the capacity of relative prices to effectively mobilize resources at subnational levels.
L FNDR should continue evolving towards credit market schemes. This evolution should help further stimulate fiscal responsibility and differentiation among regions and municipalities with larger fiscal capacity and higher fiscal effort. ) The dominant criteria for measuring the efficiency of fiscal transfers should be equalization, mobilization of additional resources and capacity strengthening. Similar criteria should be used for measuring the impact of incentives and matching grant programs when they are introduced.
3.6.2 For tlte medium (2-3 years) and long-term (more thtan 3 years)
Departments.5 2 9 In the medium term, departments should consolidate the required minimum amount of freely disposable resources at the departmental level (not earmarked, not committed to recurrent expenditures). When freely disposable resources are capable of sustaining departmental initiatives and stimulating co-financing through matching contributions or otherwise, departments can begin to have some life of their own, more receptive to residents in the region, more capable of taking their own initiatives. Therefore, the challenge for the long term is to transform departments into regional independent governments. > Make the Governor fully accountable to the region. This means full control of prefectural staff, requirements to publicly discuss budget and policy reports with private sector and civil society organizations. It also means that the central government discloses monitoring and evaluation indicators of departments.
52 It is worth noting that authorities expressed concern about these recommendations. Studies which take into account, geopolitical dimensions are needed.
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> In the long run, governors may be elected while remaining central government agents for delegation and deconcentration purposes.53 jVunicipalities. Constitutional and legal reform to eliminate unnecessary central government interference. The following have been the main avenues for attempts to re-install the hierarchy of national politics: * The so-called Censura Constructiva, introduced by the Constitutional Reform of 1995 (i.e.,subsequent to the LPP of 1994) weakened the autonomy and accountability of mayors by subordinating their stability to political coalitions.5 4 In large urban areas, these political coalitions tend to be dominated by national politics. * CVS which are dissatisfied with municipal allocation of the co-participation funds may initiate a cornplaint process through the executive branch. Then, if certain criteria are met, the complaint goes to the national Senate for decision. If the Senate upholds the CVS complain about lack of participation in the allocation of transfers, the municipality's,funds may be cut. Although rarely practiced, this provision has opened up a channel for supervision on and hierarchical interference of national politics in the relationship between local governments and communities.5 5 * The Prefectos (head of departments, the intermediate level of government) are not elected but are instead appointed by the President. The top administrative echelon at the Prefecturas follow the pattern of the central government ministries and the top secretarios are usually respond to their party, party coalition or political supporters. * Electoral laws restrain the participation of local, regional parties that lack national representation.56 * The Unidades Departamentales de Fortalecimiento Municipal supervise compliance with central government guidelines for the preparation of POAs and development plans. Moreover, these same Units have been preparing the municipal development plans of many small and rural municipalities.This practice does not only interfere
53 Following the French model, Colombian and Venezuelan governors keep these two roles without difficulty.
54 The reformed Article 201 of the Constitution is not the only source of the political instability of local governments. However, it has made political instability more acute as it stimulates the formation and destruction of political coalitions for purely personal-political interests. It also distances local government from the electorate for this Article paves the way for the substitution of elected mayors voted in the polls by a council member selected by the municipal council. According to initial studies, this Constitutional provision was utilized to change mayors in 30% of the municipalities in 1997 and in 25% of the municipalities durinig the first half of 1998. Cf. ROJAS-ORTUSTE, Gonzalo. Censura Constructiva, Inestabilidady Democracia Municipal. Descentralizaci6ny Participaci6n,No. 1, ILDIS, La Paz.
5SClearly, the alternative alpproachis to strengthen local institutions, promote alternative ways of conflict resolution and institutionalizecourt procedures when the judiciary appears to be the only way left to solve community-municipalproblems. More broadly, Bolivia seems to need a more institutionalized system for inter-jurisdictionalconflict resolution, both negotiated and litigated.
56 There are, indeed, regionally based parties that control Prefecturas and Alcaldias, as it has been often the case in the three largest cities and the corresponding departments of La Paz, Santa Cruz and Cochabamba. Yet these regionally-basedparties have representation in the national congress and are frequently important members of the coalition government at the national level.
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with the necessary local autonomy for public expenditure efficiency in allocation and production but discourages participatory avenues at the community level. * Although rarely practiced, there seem to be a few cases where the central government approval of the creation of OTBs has been delayed in cases of OTBs identified or associated with opposition parties or movements. * Municipal Development Plans have to comply with national guidelines in terms of coverage, gender goals, strategic formnulation.57 This requirement has been generally interpreted as the need to reconcile public expenditure at all levels with redistribution goals set by the central government.58 Although well-intentioned, this requirement implies another opportunity for national interference on the priorities of communities and municipalities. Inter-Government Fiscal Transfers as Incentivesfor inter-government coordination
> Re-orient the system of inter-governmental transfers towards: * Strengthening sub-national autonomy. * Establish clear incentives as primary means of priority coordination. * Two tier restructuring of the funds will separate the FNDR from the social funds. While the FNDR will gradually evolve towards strengthening Bolivia's capital markets, the social funds will increasingly become mechanisms for inter- government co-financing of poverty alleviation programs. * Specific goal-negotiationsthat include requirements to ensure ownership and maintenance of investments by municipalities and civil society. * Incentives for fiscal effort and expenditure rationalization. Sub-national borrowing Introduce safety measures for macroeconomic stability and credit efficiency: - Require debt registration, including indirect and contingency debt (suppliers and labor related debt) whether guaranteed or not by the central government - Credit rating by independent agencies - Establish prudential ratio/limits and require provisioning for contingency debt - Penalize assets of financial institutions that provide loans without debt registration - Firm, explicit, announced commitment to no- bail outs - Stimulate long-term savings, capital markets. The medium and long term transformation of the Funds In the medium term, the FIS and the FDC should gradually evolve towards earnarked, conditional grants (of a matching grant type or otherwise) while the FNDR
57 The Plan is evaluated by the Community StrengtheningUnits of the Prefecturas, which serves as departmental offices for the SPP. At the time of this first evaluation, the Plan may be retumed to the municipality for adjustment and correction. Once the municipal plan has been approved at the departmental level, it moves up to the SPP at the national level for a second evaluation. If rejected at this level, the national government may restrict the access of the municipality to the resources of the Funds or international cooperation.
58 Nearly 5 percent of the more than 200 municipal development plans submitted until late 1998 had been returned to the municipalities for corrections.
Strategic View of Decentralization 70 Public Expenditure Review would be maintained segarate, as a lending mechanism for investment, not only for urban but also for rural areas. In the medium to long term, the Funds will be split into two distinct channels, one for conditional fiscal transfers that maintain poverty alleviation programs and complement the equalization purposes of the LPP; the other one for credit to sub-national governments under competitive, market-driven conditions.
This report recommends the evolution of all the individual funds towards grants and credit with different prices and for different customers, each price reflecting the priority and the responsibility of the national government with respect to poverty alleviation, service delivery and sub-national growth.6 0
> The primary purpose of the Funds would now be to reflect the responsibilities and the priorities of the national government in terms of an offer of grants and credits to municipalities and departments. The menu offer should be based upon inter- jurisdiction distribution of responsibilities and financing as well as inter-government coordination of priorities.
> The goal of the Funds would be to stimulate the mobilization of additional resources for partnerships with local and regional actors, something the present system of inter- government fiscal relations has largely failed to do.61 The funds will be successful when they manage to effectively mobilize the share of the costs and risks that correspond to municipalities (or departments, when they become more autonomous agencies) in a given policy or sector. Municipalities will be stimulated by market-like incentives, on a voluntary basis. The way of operation of the funds is one of promotion and incentives for partnership formation rather than centrally-administered free goods. > The monitoring and evaluation indicators of the Funds should be adjusted to reflect the new emphasis on mobilization of subnational resources under transparent rules of access and different credit terms and conditions. It can be expected that the joint transformation of the Funds along these lines will lead to more transparency and higher accountability.
59 Under this proposal, the two social investment Funds (FIS, FDC) might be put together for purposes of economies of scale, particularly in view of the larger role that municipalities and municipal associations are expected to play with respect to rural areas.
60 Preparation of this reorientation of the Funds may require the combined work of the Ministry of Hacienda --insofar as it involved the policy and implementation of inter-government fiscal transfers-- and the Ministry of the Presidencia --insofar as the Funds would become key pillars of the process of decentralization. Since the proposed changes are geared mostly towards cohesive design, monitoring and evaluation, they would entail few changes in the present form of operation of the Funds. A presidential decree or inter-ministerialresolution should suffice to institutionalizethe new role of the Funds in connection with the process of decentralization.
61 There are precedents of successfulpractices with this mechanism in Bolivia. For instance, USAID has developed a program for construction of secondary roads by municipalities. The program requires contributions in money or in kind for maintenance purposes.
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The long term adjustment of the central government to decentralization > Gradually develop the impact and performance indicators the central governrment needs to monitor the efficiency of decentralization. > Inter-ministerial redistribution of roles according to each ministry interest and specialization would likely dissipate ongoing turf battles. It would also help correct one of the pitfalls of the LPP, namely the initial marginalization of Hacienda from the decentralization process. > One way of dividing the work among central government agencies is as follows:
X The inter-ministerial Consejo de la Politica Nacional de Cofinanciamiento,that is still on paper62 , would monitor the impact of the Funds on the mobilization of additional resources, ownership and sustainability at local and regional levels. Indeed, the first coordinated task of the joint committee might be the agreement on indicators of the funds' capacity to mobilize additional resources, ownership and sustainability at subnational levels. * The Ministry of Hacienda would have a definite interest in monitoring and evaluating the cost-effectiveness of fiscal incentives (as provided by the funds) towards mobilization of additional resources at the sub-national level. Evidently, Hacienda is a key stakeholder of the proposed reorganization as it aims at enhancing fiscal efficiency and fiscal stability. * The Ministry of the Presidency would be in a better position to achieve its announced interest in monitoring performance and impact of the decentralization process. * The Ministry of Planning and Sustainable Development would have an interest in the information on investment coordination that now flows through the Viceministerioas well as ensuring adequate financing, efficiency and sustainabilityof investment. * The Deputy Ministry for Popular Participation and Municipal Strengthening keeps evaluating progress in terms of effective participation. It should also identify, promote and disseminate good participatory practices. The Viceministerio could now focus on participation and municipal strengthening rather than merely checking POAs and PDMs
62 Since the creation of the CPNC requires law reform, what seems feasible in the short-term is the creation of a Consejo Interministerial para el Diseno y Organizaci6n de la Politica Nacional de Cofinanciamiento.This inter-ministerial council would coordinate and facilitate consensus building among sector (line) ministries, ministries that cut across sectors (ministerios transversales) and the Funds.
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4. EDUCATION SECTOR
4.1. This report is organized in four sections. The first section provides a brief overview of the state of the education sector in Bolivia. The second section analyzes recent trends in expenditure and notes that educational expenditures have increased dramatically over the last eight years. The third section analyzes some of the current challenges and choices facing policy makers. Finally, the fourth section summarizes the major findings in education expenditures and suggests how their distribution might be better allocated to meet the problems identified and how the Government might go about making the reallocations in the next five years.
4.1. Overview
4.2. In considering the state of human resource development in Bolivia, it is, of course, essential to assess the coverage of the formal education system and the academic achievement of students. But it is also important to examine the readiness to learn of children entering the system. If children begin with deficiencies, their academic achievement will be low even if the formal educational system is functioning well.
4.3. Bolivia also faces a legacy from past low levels of investment in education. This section, therefore, also provides some information on the educational characteristics of adults who left the fornal education system in earlier years.
4.1.1 Readiness to learn
4.4. The elevated poverty levels, low education levels of the parents and absence of reading materials in the home contribute to a preschool environment that does not adequately prepare children to learn. In addition, too many children are entering the formal educational system with a legacy of malnutrition and with other health problems. According to the 1998 National Demographic and Health Survey, the percentage of children under 3 that is considered chronically malnourished (low height for age) is 24.2 percent. This percentage has declined only slightly from the 1994 figure of 28.3. In some areas of the country the rates are much higher. For example, in Potosi some 47 percent of the children were classified as malnourished in 1998. In a study of children of Potosi, Zamora and Barrera (1998) find that 60 percent of malnourished children had levels of academic achievement that placed them in an at risk category as opposed to 41 percent of children who were not malnourished.'
4.5. A second important indicator that is related to future academic performance is the prevalence of anemia. Anemia in children is associated with a decrease in physical and mental capabilities and with reduction in resistance to infections. The same 1998 survey conducted blood tests and found a prevalence of anemia in children that was extremely high (67 percent). Forty-two percent of the children presented moderate cases of anemia.
1 Zamora, Adalid and Susana Barrera, in "Rendimiento Escolar y Estado Nutricional," Ministerio de Educacion, Cultura y Deportes, (Agosto, 1998).
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As before, the situation is much worse in some particularly poor areas. In El Alto, the percentage of children with cases of severe anemia was 17 percent. Zamora and Barrera (1998) find an even stronger relation between anemia and academic achievement than between malnutrition and academic achievement. Seventy percent of the children with anemia had levels of academic achievement in the at risk category, as opposed to 30 percent of children without anemia.
4.1.2 Coverage and academic achievement
4.6. The coverage and academic achievement can be summarized as follows:
I. Coverage rates for early education have recovered from a period of decline in the late 1980s. 2. Too many students continue to dropout of primary school without attaining adequate levels of schooling. 3. Gender disparities in educational attainment have improved considerably over the last 20 years, but some differences in attendance rates still remain. 4. The students' mastery of the primary school material that they are supposed to have covered is unsatisfactory. 5. Relative to lower middle income and upper middle income countries, coverage rates for secondary education are particularly low. 6. For a country of Bolivia's per capita GDP, there are too many low quality students in public university. This results in an excessive share of the public budget on education being spent at the tertiary level.
Coverage rates for early education have recoveredfrom a period of decline in the late 1980s.
4.7. Bolivia's coverage rates for early education have now recovered from the declines suffered in the late 1980s, as can be seen in Table 4.1. The 1996 Gross Enrollment Ratio for Bolivia is below the levels in Argentina (54.4), Brazil (58.2 percent), Chile (92.5), Cuba (87.6), Ecuador (55.6), Mexico (72.5), Panama (70.8) and Paraguay (53.0), but above those of Colombia (35.4). Domincan Republic (26.5), Guatemala (32.8), Honduras (14.6), Peru (37.5) ancdUruguay (36.1).
Table 4.1 Gross Enrollment Ratio in Pre-primary 1985 1986 1987 1988 1989 1 1990 11991 11992 1993 11994 1995-,", 1996 38.6 38.2 40.6 31.3 30.2 31.9 33.6 35.4 37.1 38.6 40.2 41.5 Source: http://unescotat.unesco.org/
4.8. In 1996, there wvere161.365 children in fornal early education (ages 4 to 6). This represented 12 percent of the population 0 to 6 years. Additionally, the Centros Integrales de Desarrollo Infantil (CIDI) attended 31.860 children (ages 0 to 6) and represented 2.4 percent of this age group and the Proyecto Integral de Desarrollo Infantil
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(PIDI) attended 11.987 children representing 0.9 percent of the age group. Thus, 15.4 percent of children 0 to 6 years were receiving some sort of early education, which is below the 1992 Latin American average of 17 percent for children under 5 years old. (Ministerio de Educaci6n, Cultura y Deportes, 1998, p. 37).
4.9. An effective early education is increasingly viewed as essential to later success in school, especially for those children who come from poor backgrounds. Medical evidence indicates that brain development is most accelerated in early life and that experiences during this period affect future learning. During the prenatal period through 6 years of age, children develop their motor, emotional, social, vocabulary and math/logic skills. At these ages, children are at high risk for malnutrition and disease.
4.10. Studies indicate that educational benefits obtained from children's participation in well conceived Early Childhood Development (ECD) programs include: i) increased preparedness for future schooling (Houlares et al 1990, Howes 1990),2 ii) improved performance in future schooling (Berrueta-Clement et al 1984, McKey et al 1985),3 iii) less likelihood for need of special education classes (Berrueta-Clement et al 1984, McKey, 1985), and iv) increased probability to graduate from high school and pursue further education (Berrueta-Clement et al 1984). In addition, ECD programs often free older children from caring for their younger siblings and therefore go back to school.
4.11. Benefits from participation in programs which incorporate strong health and nutrition components include: i) better access to health care and improved physical health (Howes et al 1990, Mc Key et al 1985), ii) reduction in the rates of morbidity and mortality in this age cohort; iii) improved nutritional status and practices (Howes et al 1990, McKey et al 1985) iv) improved behavioral and brain development, v) better reproductive health in longer term, iv) increased productivity in longer term.
4.12. Moreover there are direct and economic benefits to the implementation of ECD programs. In addition to the benefits obtained from allowing parents to work and thus engage in productive activities for their family, early childhood development programs encourage cost savings for educational systems in that they lead to reduced repetition and drop out rates of school aged children.
2 Aselaborated in bothHoulares, J., & Oden,S. 1990. A follow-up study of HeadStart's role in the livesof children and families. Interim Report. (Ypsilianti, MI: High/Scope Educational Research Foundation, High/Scope Press, 600 N. River Street, Ypsilianti, Ml 48197) and Howes, C. 1990. "Can the age of entry into child care and the quality of child care predict adjustment in kindergarten?" DevelopmentalPsychology, 26(2), pp. 292-303. For a more complete analysis, see Berrueta-Clement,J., Bamett, W., Schweinhart, L., Epstein, A., & Wiekart, D. 1984. Changed lives: The effects of the Perry Preschool Projet on youths through age 19. (Ypsilanti, MI: Monographs of the High/ScopeEducatinoal Research Foundation, No. 8, High/Scope Press, 600 N. River Street, Ypsilianti, MI 48197), and McKey, R.H., Condelli, L., Ganson, H., Barrett, B.J., McConkey, C., & Plantz, M.C. 1985. The impact of Head Start on children, families, and communities. Final resport of the Head Start Evaluation, Synthesis, and Utilization Project. (Washington, DC: CSR INcorporated for the Head Start Bureau, Administration for Children, Youth and Families, U.S. Department of Health and Human Services).
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Too many students continue to dropout without attaining adequate levels of schooling.
4.13. Table 4.2 compares Bolivia's Gross Enrollment Rates to those for other countries in 1995.4 The table suggests that Bolivia has reached the same enrollment levels as the average of lower middle income countries and is approaching the levels of other Latin American countries in primary. Bolivia has considerably lower enrollment levels in secondary school, but higher than average gross enrollment rates at the tertiary level.
4.14. Bolivia's relatiLvelyhigh gross enrollment rates in primary may not be accurate, in part due to errors in the data. Whereas looking at Bolivia's Gross Enrollment Rates might lead to the conclusion that coverage in primary is no longer a problem, an examination of Bolivia's retention rate (the percentage of students who complete each grade level) tells a
Table 4.2: Comparative Data on Gross Enrollment Rates (1995) Gross EnrollmentRates Primary Secondary Tertiary Bolivia 100.0 46.0 22.0 Argentina 113.3 76.8 41.8 Brazil 117.6 45. l_l_l_.5 Chile 101.3 74.9 30.3 Colombia 112.5 66.7 18.6 Ecuador 122.6 49.9 23.4 Paraguay 111.7 43.5 11.4 Peru 122.9 69.7 31.1 Uruguay 108.8 85.1 29.4 LatinAmerican Average 107.2 57.0 19.6 LowerMiddle Income Average 101.9 64.6 18.8 Upper Middle Income Average 100.7 73.9 19.2 Source: WorldBank, Edstats different story. Table 4.3 illustrates that only 66 percent of the students who enter primary school finish sixth grade and only 51 percent complete the full primary cycle. The drop off in secondary school is readily apparent as only 26 percent complete all twelve years of schooling. It is likely that a combination of overstating enrollment in the administrative records and, perhaps, underestimating the number of children in the relative age group accounts for the different conclusions obtained from examining Gross Enrollment Rates as opposed to retention rates.5
4For 1997, Bolivia's gross enrollment rate in primary was 101.7 percent and in secondary was 53.4 percent. 5 A comparison of enrollment data by grade between Chile and Bolivia also suggests that Bolivia's Gross Enrollment Rates are overstated. Whereas Bolivia and Chile have similar Gross Enrollment Rates, the percentage of 6th grade to Ist grade students is 45 percent higher in Chile than in Bolivia. This difference is too high to be accounted for solely by differences in rates of growth of population.
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Ia~~~~~~ 9.I XPerc e nt io f En t eri ingoh o rt thait :C ormn e t ia G K Primary I S5t 2nd 3rd 4th 5th 6th 7th 8th 100% 90.7% 84.1% 77.7% 72.0% 66.3% 58.0% 50.9%
Secondary 9__ ] 0th 1Ith 12th 44.9% 37.0% 31.9% 28.0%
Graduates 1 25.7% Source:Ministry of Education,Based on methodologyelaborated in UNESCO,Education for All
Gender disparities in educational attainment have improved considerably over the last 20 years, but some differences still remain.
4.15. That there has been notable gender discrimination in the past is clearly apparent in the pattern of illiteracy rates by gender at different ages presented later in section II.C. Fortunately, the substantial disparities of the past have not continued. According to the most recent national household survey, the Encuesta Nacional de Empleo (1997), there is currently no statistically significant difference in the proportion of boys and girls attending school between the ages of 6 and 11. This is true at the national level and for capital cities, other urban areas, rural areas and El Alto.
4.16. Between the ages of 11 and 15, there is a difference of roughly three percentage points between girls and boys in the percent that attend school (89 versus 92 percent). There is no statistically significant difference in the capital cities or in El Alto. However, there is a significant difference of 2 percentage points in other urban areas (94 versus 96 percent) and roughly 8 percentage points in rural areas (79 versus 87 percent).
4.17. Between the ages of 15 and 20, there is a difference of roughly 5 percentage points between girls and boys in the percent who attend school (64 versus 69 percent). Again, there is no statistically significant difference in the capital cities or in El Alto. There is a difference of 6 percentage points in other urban areas (74 versus 80 percent) and 13 points in rural areas (31 versus 44 percent).
4.18. These findings are consistent with the pattern of school attendance obtained in the 1998 national Demographic and Health Survey. In that survey there were minimal reported differences between boys and girls before the age of 15, but more notable differences in those aged 16-20 and 21-24.
The students 'mastery of the primary school material that they are supposed to have covered is unsatisfactory.
4.19. Despite improvements in enrollment rates there is still a significant challenge in improving the quality of Bolivian education. Recent UNESCO (1998) test scores for
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language and mathematics in third and fourth graders place Bolivian students below the Latin American average, especially in language attain-ment.6
4.20. Data from national surveys of academic achievement (SIMECAL) confirm that quality of the education is a serious problem. Table 4.4 presents indicators of academic performance at different grade levels for urban and rural areas. This data does not include results from. schools that have entered the process of transformation within the Education Reform program. Thus, the results constitute a baseline for the Education Reform.
4.21. The table clearly illustrates that there are strong differences in academic achievement between urban and rural schools. In addition, there are differences among private schools, public schools administered by NGOs and the Church (convenio schools) and public schools managed by the local government (see Table 4.5). While only 11 percent of the priva1teschool enrollment in 3 and 6'h grade are at risk, almost half of children in public schools and one quarter of children in schools under convenio are in this category. At the other extreme, while only 20 percent of students in public schools and 24 percent of students in schools under convenio are at a satisfactory level, 60 percent of students in private schools reach this level of school attainment.
Table 4.4: Academic Achievement in Bolivia Urban Rural Total 3rd Grade At risk 20.4 36.5 27.3 Intermediate 41.8 37.6 40.0 Satisfactory 37.8 25.9 32.7
6" Grade At risk 46.3 64.3 51.5 Intermediate 34.7 25.9 32.2 Satisfactory 19.0 9.8 16.4
8Ln Grade At risk 24.7 47.9 32.0 Interrnediate 36.6 36.4 36.5 Satisfactory 38.6 15.8 31.5 Source: SIMECAL,1998
4.22. The above results suggest that NGOs and the Church may be achieving better educational outcomes, presumably by providing more effective school management. A study of Fe y Alegria schools also demonstrates that there are lower repetition and
6 UNESCO,Primer estudio internacional comparativo sobre lenguaje, matematica yfactores asociadosen tercery cuartogrado. Santiagode Chile,UNESCO, 1998.
Education Sector Public Expenditure Review 79 desertion rates and higher retention and attainment rates than other public schools.' However, considerable caution should be exercised before drawing any definite conclusions. The differences in academic achievement between private and public schools could be due to differences in location. I'he majority of private schools are in urban areas, where academic achievement is higher. And convenio, private and public schools could well attract students from different socio-economic backgrounds.
Table 4.5: Academic attainment by school type (3rVand 6m grade) as a percentage of total school population At risk Intermediate Satisfactory Total Private 11 28 61 100 Public 44 36 20 100 Convenio 26 50 24 100 Source:SIMECAL, 1997
Relative to primary and tertiary levels in Bolivia and relative to other countries,coverage ratesfor secondaryeducation are particularly low.
4.23. Extending a similar type of cohort analysis as was done in paragraph 4.15 to twelfth grade, one obtains the result that out of 100 students who enter first grade only 26 would complete twelve years of schooling. While a large part of the explanation probably has to do with demand factors, it is also likely that supply factors not only in secondary but also in primary are important as well. For example, in 1996 there were roughly ten times as many public primary schools (12,358) as there were public secondary schools (1,296). The imbalance is even greater in rural areas. But of these 12,358 primary schools, there were only 1,737 that included all primary grades (first through eighth).
4.24. As might be expected, a greater percentage of students in secondary school come from those in higher income quintiles. Only 7.5 percent of the secondary students are from the lowest quintile, compared to 16.1 percent in the second lowest, 24.7 percent in the third quintile, 25.8 percent in the fourth and 25.9 percent in the fifth (the highest).
For a country of Bolivia 'sper capita GDP, there are too many low qualitypublic university students claiming an excessiveshare of the public budgeton education. 4.25. Despite the fact that only 25.7 percent of the cohort complete 12 years of schooling, gross enrollment rates for higher education (22 percent in 1995) are above the Latin American region's average (19.6 percent in 1995).
7 Swope, John, Marula Latorre and Francisco, Celed6n, "Fe y Alegria. Un sistema eficiente de educaci6n primaria en America Latina," Umbral 21. Digital. (www.reduc.cl), 1998.
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4.26. The high enrollment rates in tertiary education can be explained by the large percentage of high school graduates who attend university and the long time taken by students to graduate in university. In 1995 there were a total of 39,146 students enrolled in 12thgrade in public secondary schools and 12,190 students in 12th grade in private schools. Assuming that all (51,336) graduated, the ratio of new students in universities (in 1996 there were 39,654 new students in both public and private universities) to those graduating from secondary school is an astounding 77 percent. These new students in universities include some who are going back to school after working and (probably) includes foreign students. Still, the numbers are remarkable.
4.27. This high percentage of high school graduates entering university is due to a variety of reasons. rhree important ones are that (I) entry thresholds are very low (entry to university is not competitive), (2) the low cost of tuition, and (3) the fact that there are few alternatives-technical and non-university professional education is not well developed in Bolivia. Thus, it is widely accepted that public universities play the role of an "unemployment" buffer for many students.
4.28. Once students enter the public university system, they spend a very long time before they graduate. The average graduation rate for Bolivian public universities for the period 1990-1994 was estimated at 14.1 percent. The highest rate was in Sucre (26 percent) and the lowest in Siglo XX, Potosi (4.5 percent). Comparatively, graduation rates in other Latin American countries vary from 47 percent in Colombia and Venezuela to 10 percent in Peri. There are also long periods to graduation. Estimates of the number of years to graduation in the main public university in La Paz in 1996 indicate that 45 percent spent from 4 to 10 years in university and 55 percent were registered for more than 10 years (see Instituto Universitario Ortega y Gasset, La reforma de la universidadpubhica ie Bolivia, Santafe de Bogota, Convenio Andr6s Bello, 1998).
4.29. Despite the low graduation rates, new students continue to be accepted in ever- increasing numbers. The imbalance between the number entering and number leaving universities can be clearly seen in the table below.
Talble4.6: Enrollment data on Public Universities Year New Students Graduates Old Enrollment 1990 27,998 4,959 78,373 1991 24,566 4,516 89,355 1992 28,731 5,757 93.980 1993 28.661 6,603 102,784 1994 -24,959 7.292 109,622 1995 28,915 6,856 111,744 1996 31,203 7,867 113,113 Source: INE page 143Anuario Estadistico
4.30. The trend in Table 4.6 is alarming. As long as the number of graduates remains well below the number of new students, the number enrolled in universities will continue
Education Sector Public Expenditure Review 81 to swell putting pressure on the public budget and increasing demands to spend on university education at the expense of other educational activities.
4.31. There is a widespread perception that the quality of the students entering university is not high and the quality of the instruction is also deficient. For example, when the Universidad Mayor de San Simon introduced an entrance exam in 1998, out of 15,000 applicants only 750 were able to pass. Similar results have been found in other public universities. Public opinion surveys cited in Contreras (1998) indicate that students do not rate the public universities highly nor do employers consider graduates of public universities to be of high quality.8
4.1.3 Educational levels of adults
4.32. The average years of schooling of the entire population is 5.2 years (average of last three national household surveys), while the average of those economically active is 6.5. This relatively low level of education of the adult population reflects mainly the deficiencies of the previous educational system.
4.33. Along with the low levels of education, there are still a significant proportion of the adult population that is illiterate (15.2 percent). This figure is higher in the rural areas and for females.
Table 4.7: Percent Illiterate, Urban Rural, Male and Female (15 years and older) GeographicArea Male Female Total
Capital cities 3.4% 7.9% 4.9% Other urban 5.3% 17.1% 11.5% Rural areas 18.1% 41.5% 29.7% El Alto 2.0% 15.2% 8.7%
National 8.4% 21.6% 15.2% Source: INE, EncuestaNacional de Empleo,November 1997.
4.34. Table 4.8 indicates that the problem of illiteracy has declined dramatically over time. Those exiting the system today are much less likely to be illiterate, but that does not mean that they are leaving the educational system with the amount and quality of education that will serve them well in the years to come.
contreras,C Manuel., "Reflexiones sobre la educaci6nuniversitaria privada en Bolivia,"Cienciay Cultura. Revista de la Universidad Catl6ica Boliviana, No. 3 (julio), 1998.
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Table 4.8: Percent Illiterate by Age Group Age group Population(1999 Illiteracyrate Illiteracyrate Number estimate) (Males) (Females) illiterate 15-19 837,361 1.1% 2.3% 14,235 20-24 742,926 2.3% 5.4% 28,974 25-29 641,631 1.7% 6.8% 28,873 30-34 523,275 3.4% 12.7% 42,908 35-39 437,112 4.5% 17.9% 51,579 40-44 375,906 7.1% 26.1% 61,272 45-49 317,094 10.1% 34.6% 72,614 50-54 258,939 14.3% 38.0% 67,065 55-59 208,635 16.3% 48.1% 67,389 60+ 490,882 31.7% 62.4% 233,168 Source: Populationfigures, INE ActualidadEstadistica, No. 017-98. Illiteracyrates from INE, EncuestaNacional de Empleo,November 1997
4.35. In addition to the trend in illiteracy, an improvement in educational attainment is evident in the decline in the percentage of the population entering the labor force with less than 6 years of ediucation. Of those currently aged 28-30, 41 percent have less than 6 years of education. In contrast, of those aged 18-20, twenty-four percent have less than 6 years of education. The average years of education for the 18-20 year olds is now 8.8 years.
4.36. It is worth noting that the most rapid improvements have taken place since the major macroeconomic reforms of 1985. For example, prior to the reforms, between 1979 and 1985, the percentage of the cohort which completed fourth grade increased only slightly from 53.2 to 57.4. In contrast, between 1985 and 1992 the percentage completing fourth grade increased from 57.4 to 71.6.
4.37. Confronting illiteracy is not the only issue in adult education. Many developing countries are starting lo put in place systems to promote lifelong learning. In Bolivia, the notion that to be successful in a globalized economy requires lifelong learning has yet to take hold. The percentage of adults engaged in training is low. Only 3 percent of adults aged 20 to 60 had received technical training and little more than 0.3 percent had attended courses at an adult education center (INE, Encuesta Nacional de Empleo, November 1997).
4.38. There are some recent indications that the situation may be changing. For example, private universities are beginning to branch out and offer executive training courses. Enterprises, particularly capitalized industries, are stalting to devote more of their budgets to training.
4.39. While promoting the development of lifelong learning will become increasingly important, in the immediate future, the main concern related to the educational level of adults must be to reduce the still significant levels of illiteracy. The illiteracy among women of childbearing age is of particular concern since there is generally a positive correlation between educational status of parents and children.
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4.2. Recent Trends in Educational Expenditures
4.2.1 The Data
4.40. The trend in illiteracy rates presented above suggests that, in the past, Bolivia has not invested adequate amounts in education but that there has been a significant improvement in recent years. The actual data on expenditures presented in Table 4.9 confirms this view. Bolivia has increased substantially the amount invested in education over the last 9 years.
4.41. Table 4.9 indicates that educational expenditures have been rising significantly between 1990 and 1997, from 3.1 percent to 5.3 percent of GDP. Bolivia's public expenditure on education as a share of GDP now exceeds the average values for lower middle (4.6 percent) and upper middle income countries (4.5 percent) (World Bank, Edstats).
4.42. Mingat and Tan (1998) observe that rich and poor countries spend roughly between 13-17 percent of their public budget on education, so Bolivia does not appear at this moment to be spending too little on education.9 It is worth noting, however, that it is only recently that Bolivia has devoted such a high share of total public expenditure to education. The accumulated problems caused by the low levels of past expenditure can not be eliminated immediately.
4.43. Given the high current shares of public educational expenditures in total public expenditure, it would appear that the scope for substantial further increases is limited. Thus, there is a need to develop a strategy for how public and private finances can best be applied to improve the overall educational system.
9 Mingat,Alain and Jee-Peng Tan, "The Mechanics of Progressin Education:Evidence from Cross-Data", World Bank Working Paper, 1998.
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Table 4.9: EDUCATION SECTOR BUDGET (In millions of constant 1990 Bs.)
ITEM 1990 1991 1992 1993 1994 1995 1996 197 (p) GDP 16,920.00 17,764.00 18,075.00 18,597.00 19,587.00 20,079.00 21,079.00 22,028.00 Education Expenditures 523.60 602.30 840.10 837.20 837.20 1,039.40 1,039.40 1,157.60 MinistryofEducation 373.90 427.30 436.90 621.00 613.50 674.30 787.60 883.00 Ministry ofEducation Current 373.90 427.30 436.90 621.00 608.00 641.50 738.00 809.90 TGNInvestment 0.40 0.90 10.10 9.80 External Investment 5.10 31.90 39.50 63.30 Decentralized Institutions 2.3 2.20 2.30 2.80 0.80 0.60 0.20 0.00 Universities 147.40 172.80 170.30 216.30 222.90 235.80 251.60 274.60 Subsidy 103.30 119.90 113.20 132.00 135.90 135.80 136.50 142.50 Coparticipation 44.10 52.90 57.10 84.30 87.00 100.00 115.10 132.10 EXPENDITURES SHARE Education ExpendituresIGDP 3.09 % 3.39% 3.37% 4.47% 4.27% 4.48% 4.93% 5.26% Ministry of Education/GDP 2.21 % 2.42% 2.42% 3.30% 3.13% 3.32% 3.74% 4.01% Ministry of Education/Education 71.41% 70.90% 71.68% 73.92% 73.28% 74.04% 75.77% 76.28% Expenditures Decentralization/Education Expenditures 0.44% 0.37% 0.38% 0.33% 0.10% 0.07% 0.02% 0.00% TotalofUniversities/Education 28.15% 28.69% 27.94% 25.75% 26.62% 25.89% 24.21% 23.72% Expenditures Subsidy 19.73% 19.91% 18.57% 15.71 16.23% 14.91% 13.13% 12.31% Education Expenditures Coparticipation 8.42% 8.78% 9.37% 10.03% 10.39% 10.98% 11.07% 11.41% Education Expenditures RATE OF GROWTi1_ GDP 4.99% 1.75% 3.96% 4.24% 3.67% 3.81% 4.50% Education Expenditures 15.03% 1.20% 37.83% -0.35% 8.78% 14.13% 11.37% Ministry of Education 14.28% 2.25% 42.14% -1.21% 9.91% 16.80% 12.11% Decentralized -4.35% 4.55% 21.74% -71.43% -25.00% -66.67% -100.00% Universities 17.23% -1.45% 27.01% 3.05% 5.79% 6.70% 9.14% Subsidy 16.07% -5.59% 16.61% 2.95% -0.07% 0.52% 4.40% Coparticipation 19.95% 7.94% 47.64% 3.20% 14.94% 15.10% 14.77%
Source: Ministry of Education and Culture.
Education 'Sector Public Expenditure Review 85
4.2.2 Accountingfor the increase in educational expenditure
4.44. Table 4.9 indicates that educational expenditure more than doubled in real terms between 1990 and 1997. Roughly 69 percent of the increment is due to an increase in the number of teachers and in their compensation, 20 percent of the increase due to an increase in the amount devoted to higher education and 11 percent to an increase in educational investments.
Increases devoted to the wage bill
4.45. The number of teachers has risen from 67,092 in 1990 (http://ine.gov.bo) to 82,286 in 1998 (MECD, Indicadores Educativas), an increase of some 23 percent (2.6 percent per year). This is somewhat more than the 2.4 percent average rate of growth of primary school teachers in the Latin American and Caribbean region, but less than the 3.8 percent average rate of growth of primary school teachers in all least developed countries (http://unescostat.unesco.org) over the period 1990-96. It is also considerably less than the 4.6 percent average rate of growth in enrollment in public early, primary and secondary schools over the period 1990-1998. The total number of employees (teachers, directors and administrative staff) in the public education sector increased from 80,129 in 1990 to 104,276 in 1998. This increase was higher than that of teachers at 30 percent, which works out to some 3.3 percent per year. I
Table 4.10: Comparison of real wages of teachers Year Real wages Salary of Teachers Average Salary of Teacher Relative to Per Capita Real Wage relative to Average GDP (All salaried Real Wage (All workers,HH salaried workers, HH Survey data) survey data) Capital Rural Capital Rural Capital Rural Normalista Interino Normalista Interino Normalista Interino 1990 282 254 1.52 1.37 397.2 70.9% 63.9% 1991 296 266 1.58 1.42 388.8 76.1% 68.4% 1992 325 292 1.71 1.54 412.6 78.7% 70.8% 1993 363 327 1.83 1.65 461.5 78.7% 70.7% 1994 382 344 1.85 1.66 513.3 74.4% 67.0% 1995 393 355 1.87 1.69 503.8 78.0% 70.5% 1996 422 381 1.90 1.72 536.2 79.4% 71.7% 1997 468 422 2.06 1.85 Source: INE, EIH 1990-1995 and ENE 1996 Ministerio de Desarrollo Humano, SNE, Subsecretaria de Educacion Preescolar, Primaria y Secundaria, Programacion monitoreo y Evaluacion. "Propuesta de Modificacionesal Escalafon", reported in Murillo (1998). The deflators for all real values are those used in the Murillo study (1990 100, 1991 114.52, 1992 124.98, 1993 134.29, 1994 14281, 1995 155.39, 1996 163.39, 1997 170.89)
10 Murillo, Orlando R., Remuneracional docente frente a la realidad boliviana, Tesis de Grado, Universidad Mayor de San Andres, Facultad de Ciencias Economicas y Financieras, Carrera de Economia, La Paz, 1998.
Education Sector 86 Public Expenditure Review
4.46. Since the current expenditure in the Ministry of Education more than doubled and salaries account for 99 percent of current expenditure, it is clear that the average compensation per employee must have increased substantially. Indeed, the average compensation per employee increased by 70 percent in real terms between 1990 and 1997. This can be compared to a real increase in per capita GDP of 25 percent over this same period.
4.47. Table 4.10 illustrates how real wages have increased for two types of teachers: a) graduates of normal schools teaching in the capital cities; and b) interim teachers in rural areas. The relative real wage gains of the two types of teachers are similar and, at 66 percent, are consistent with the increases in average compensation per employee. Teachers' salaries have increased relative to per capita GDP and to average real wages of salaried workers in the capital cities.
Increases devoted to University Education
4.48. Only public universities receive public funding. Universities receive public resources from the government via two mechanisms: (I) a direct subsidy that is negotiated every year with the central govemnmentand, (2) 5 percent of custom and VAT taxes (coparticipacion). In 1996 the direct subsidy accounted for 54 percent of the total resources received by public universities. The total amount of public resources assigned to public universities in 1996 amounted to Bs 448 million ($us 88.3 million) and this represented 24.2% of the total education budget and over 90 percent of the public university's income.
4.49. Although the subsidy is still greater than the coparticipacion component, because the latter is linked directly to tax revenue and it has been rising, the absolute amount and the relative contribution of the coparticipacion component has been rising rapidly. Between 1990 and 1996, the annual rate of growth of the coparticipaci6n component (17.3 percent) contributed to the overall growth rate of university expenditure of 9.3 percent. The subsidy component is growing at a rate comparable to enrollment growth rate.
4.50. Table 4.9 illustrates that, over the last seven years, total university expenditure has been growing in real terms although its share of total education expenditure has decreased. This decline in the share of university education in total education expenditure was mainly due to the substantial rise in expenditures in the Ministry of Education. At an absolute level and relative to GDP, the rate of growth of university education was substantial. Between 1990 and 1997 public expenditures on university education grew by 86 percent in real tenns. And the share in GDP rose from 0.87 percent to 1.2 percent.
4.51. Compared to other countries in the region, Bolivia assigns a significant amount of public resources to universities (see Table 4.11). Both the percentage of the education budget (26.8 percent in 1994) and what this represents as a percentage of GDP (1.25 percent in 1994) places Bolivia amongst those countries that make the greatest effort in providing universities with a major share of available resources. These efforts are not reflected in the unit cost per student where Bolivia ranks at the end of the table and way
Education Sector Public Expenditure Review 87
Table 4.11: University expenditures as a percentage of the education budget and GDP and unit student costs, 1994 Country University Country University Country Unit cost budget as budget a % of total as a % of in $us education GDP Range Expenditure Range Range Over 40% Venezuela 43,6 Over 1.5% Cuba 1,59 Over $us 6000 Brazil 6.997 Brazil 35,5 Panama 1,40 $us 3000-4000 Venezuela 3.353 30-40% Nicaragua 33,9 Bolivia 1,25 Colombia 3.405 Guatemala 28,6 Costa Rica 1,20 $us 2000-3000 Argentina 2.670 Bolivia 26,8 1-1,5% Venezuela 1,18 Uruguay 1.902 Panama 22,7 Honduras 1,10 $us 1500-2000Chile 1.855 20-30% Costa Rica 22,1 Guatemala 1,10 Paraguay 1.776 Ecuador 21,4 Nicaragua 1,00 Costa Rica 1.516 Uruguay 20,4 Colombia 0,86 $us 1000-1500 Panama 1.247 Honduras 20,4 Brazil 0,76 Cuba 1.166 Colombia 19,9 Uruguay 0,69 Mexico 1.065 Paraguay 19,3 0,5-1,0 Ecuador 0,63 Nicaragua 945 15-20% Chile 19,1 Paraguay 0,59 El Salvador 708 Argentina 16,5 Argentina 0,58 $us 500-1000 Ecuador 699 Cuba 15,2 Chile 0,52 Bolivia 621 Peru 13,8 Mexico 0,40 Peru 610 El Salvador 12,8 0,0-0,5% Peru 0,35 Honduras 584 10-15% Mexico 10,4 R. Dominicana 0,30 $us 0-500 Guatemala 550 Rep. Dominicana 10,0 El Salvador 0,23 R. Dominicana 424 Average 21,7 Average 0,83 Average 1.689 Source: Garcia Guadilla, Carmen,Situaci6n y principales dinamicasde transformacionde la educaci6nsuperior en America Latina, Caracas, UNESCO, 1997).
Education Sector 88 Public Expenditure Reviewi, below the region's average. This implies that despite the efforts being carried out in providing resources, in light of the number of students in universities, this effort is inadequate. Thus, its not an issue of increasing public resources to improve the unit expenditure per student, but to decrease the number of students, both at intake and increasing graduating rates.
4.52. As indicated above, the internal efficiency of the public university system is not high. For 1.2 percent of GDP, the public university system is producing roughly 7,000 graduates per year.
4.53. As in other Latin American countries, university expenditure is regressive. Table 4.12 below indicates that a higher percentage of students come from the highest income quintiles. However, the incidence is not as regressive as in many other countries, owing to the fact that there is not much of a filter from secondary to tertiary education. As indicated in paragraph 4.26, some 77 percent of those graduating from secondary go on to tertiary education. Thus, the distribution of students by income quintile in tertiary will approximate the distribution of students by income quintile in secondary (see paragraph 4.24). When using overall figures for the 10 public universities one must be aware of the differences amongst them. While in one extreme in the case of La Paz or Cochabamba half the university student body comes from private schools, in Potosi and Oruro, 90 percent of university students in public universities come from public schools.
Table 4.12 Distribution of University Students by Household Income Quintile, 1990 and 1997 (Urban) 1990 1997 Quintile Public Private Public Private First 8.6 0.3 9.6 9.3 Second 13.3 1.8 9.3 4.6 Third 21.1 6.2 21.3 7.7 Fourth 29.0 22.8 30.6 6.9 Fifth 28.0 68.9 29.2 71.6 Total 100.0 100.0 100.0 100.0 Source: for 1990 dala, Miguel Urquiola, "El sistema de finaticiamiiienitode la educaci6n superior universitariaen Bolivia."UDAPSO, 1993. For 1997, calculations from INE 1997 Encuesta Nacionalde Empleo.
Increase devoted to educational investment.
4.54. This has taken two forms: a) educational infrastructure (mainly channeled through the Social Investment Fund); and b) the Education Reform Program introduced in 1994. From 1994 to December 1998, the investment related to the Education Reform has totaled US$ 61.4 million dollars. Over the same period, the investment in educational infrastructure (both the new schools and rehabilitation of old schools) has totaled US$ 81.5 million.
Education Sector Public Expenditure Review 89
4.3. Current Challenges
4.3.1 Improving readiness to learn
4.55. There are two types of programs that can be expected to improve the readiness of children to learn: a) early childhood programs; and b) formal early education. Since its establishment in the early 1990s, the publically funded early childhood programs have confronted a series of technical, financial, and institutional problems. After undergoing several costly transitions, the various early childhood programs have evolved into the current Programa de Atencion de NiniosMenores de Seis Anos (PAN). If this program is to have a significant effect on future learning, it must meet the challenges of consolidating the previously independent programs, expanding its scale of operation and improving quality of service.
4.56. Despite the problems that early childhood programs have had getting off the ground in Bolivia, there is ample evidence that continued effort is warranted. The first impact evaluation study of the World Bank financed Project, Programa Integral de Desarrollo Infantil, one of the projects integrated into the PAN, indicated an overall positive impact on children's psychosocial development. And international evidence clearly demonstrates the benefits of investing in early childhood education.
4.57. Formal early education has also faced difficulties in expanding in Bolivia. The major problems have been:
I. Lack of qualified personnel. According to the Mapa Educativo, 1993, there were only 2,700 teachers trained to teach at the formal early education level (ages 4 to 6). Thus the 0 to 4 year-old is left unattended and currently relies on mothers trained for that purpose. 2. Lack of infrastructure. In urban areas, formal early education is generally attached to primary schools and only sometimes there is specific infrastructure. There generally is adequate infrastructure. This is not the case in rural settings where the multigrade infrastructure has not made any provisions for early education. 3. The curriculum in early education has only recently been developed and will take some time to be consolidated.
4.58. The recently approved (1998) policy for early education highlights the importance of this level of education and sets forth the challenge of universalizing early education, especially at the 5 and 6 year level. It addresses the need for coordination by setting up early education units at the various administrative levels, identifies the bachilleres pedagogicos as a possible solution to personnel scarcity in rural areas, and defines curricular development for both formal and informal early education. The assignment and expenditure of sufficient resources at this level of education should be prioritized and closely monitored.
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4.3.2 Improving the Quality of Basic Education
4.59. The Education Reform program is the government's major effort in improving quality. There are six main components this program:
1. Transformation of the nature of instruction; 2. Teacher training (both pre- and in-service); 3. School improvement projects (combining infrastructure with other inputs); 4. Promotion of greater involvement of parents and the community; 5. Improved systems of personnel administration and administration in general; and 6. Enhanced monitoring and evaluation.
Transformation
4.60. This component is attempting to transform the nature of instruction, promoting more active learning and critical thinking skills in place of rote learning. The transfornation process is being extended gradually throughout the country. The process began with a transformation of the curriculum in first grade and the new approach is being extended to an additional grade each year. The process of transformation has now reached fourth grade and is planned to reach 8th grade in four more years. At the same time, the program is being extended to more schools. In 1998 approximately 47 percent of the schools (6,501 out of 13,912 primary schools) have entered into the program of transformation. When a school enters they first start in first grade and proceed with subsequent grades in different years. The plan is to reach all 13,912 schools by the year 2002.
4.61. Now that the Ministry has had a couple of years of experience in extending the transformation one grade each year, it may be time to reconsider the planned expansion path. Under the current plan of starting only in first grade in new schools and given that some schools will noltstart the transformation process for another three years, it will take eleven years to complete the transformation process in all schools in the country. The Government should consider starting in more than one grade in new schools so that the time to complete the transformation will be decreased.
Pre-service and in-service teacher training
4.62. The preparation of new teachers is not only of low quality, but is also not linked to the new pedagogical approach being promoted in the Education Reform. This means that teachers leaving the Escuelas Normales must immediately be retrained in the new system. Thus, a revision of the quality, content and efficiency of the Escuelas Normales is urgently needed. The Government recognizes that an overhaul of the Escuelas Normales is needed and has begun the process.
4.63. In addition, a revamping of the in-service training program is required. In visits to schools throughoul the country, a major complaint of District Directors and parents' groups is that the teachers have not received adequate training in the new material being used in the Education Reform. The training strategy must be developed in close
Education Sector Public Expenditure Review 91 coordination with the compensation strategy to ensure that there are adequate incentives for the teachers to partake in the training program
School improvementprojects
4.64. The program of school improvement projects was developed partly as a response to perceived limited effectiveness of investments that focused exclusively on infrastructure. Indeed, this perception was confirmed in an impact evaluation study of educational infrastructure projects of the Social Investment Fund. Despite demonstrable improvements in infrastructure in schools that received SIF investments compared to control schools that did not, there were limited or no significant impact on enrollment rates, dropouts and academic achievement between 1993 and 1997 (Newman et al, 1999).I1
4.65. The school improvement projects will encompass a more integrated approach to investment, combining infrastructure improvements (where necessary) with additional educational inputs. And they will be prepared with greater participation of parents and the Ministry of Education than was the case with the SIF investments.
Promotion of greater involvement of parents and the community:
4.66. Evidence worldwide indicates that quality improves when there is more active parental and community participation in the school. The Government is promoting the establishment of Comites de Padres to generate more active participation. The availability of funding for school improvement projects prepared by parents and school officials is also likely to stimulate more active participation.
Improved administration
4.67. In recent years, high rates of turnover in many schools and delays in the delivery of teaching materials have adversely affected the quality of instruction. In 1998, they was a turnover of more than 50 percent of the teaching force. These are essentially administrative problems and the Government has taken somc strong measures to address.
4.68. The most important step was the promulgation of a supreme decree that regulated when transfers could be made (only during vacation periods) and provided clearer directions on human resource management. It is expected that this supreme decree will eliminate the major problems of turnover of the past, but it is important to continue to monitor the nature of the problem and ensure that the regulations set forth in the Supreme Decree are being followed.
4.69. A new system was put in place to improve the timeliness of delivery of educational materials. Again, the issue is to follow through to ensure an effective implementation.
Newman, John, Menno Pradhan, Laura Rawlings and Ramiro Coa, "Impact Evaluation of Bolivia's Social Investment Fund", World Bank, Paper presented at Human Development Week, March 1999.
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Monitoring and evaluation
4.70. A major advance in the Education Reform has been the development of a very good system of assessment of academic achievement (SIMECAL). There has also been an improvement in the information systems (SIE). However, there has yet to be put in place a system that sets targets for key educational outcomes and measures results. The fact that such a system has yet to be put in place reflects a failing of the international donors as much as of the Government. Establishing such a system that would allow the Government to measure the effectiveness of the Education Reform and to take actions to improve the effectiveness should be a high priority.
Resources for the Education Reform
4.71. With the exception of the teacher training program and the system for measuring results, virtually all the elements of the Education Reform are now in place. The issue now is to implement the Education Reform effectively. A necessary but not sufficient condition is that there is adequate funding for the different activities. The projected costs for carrying out the reform are presented below.
4.3.3 Confronting the issue of teacher compensation
4.72. There is a widespread impression that teachers in Bolivia are very poorly paid. While that was true in the past, that is no longer the case. As discussed in paragraph 4.46, the rate of growth of real wages has far outstripped the rate of growth of real per capita GDP over the last eight years.
4.73. On average, teachers in Bolivia now receive roughly 2.5 times per capita GDP. Based on data from Mingat and Tan (1998), this places Bolivia in the 50 percentile of all countries in the sample. Excluding African countries (which tend to have very high teacher salaries relative to per capita GDP because per capita GDP is so low), Bolivia would be in the 70tlh percentile. That is, 70 percent of the countries pay teachers less relative to GDP per capita than does Bolivia.
4.74. Table 4.13 presents the monthly salary scale for different classes of teachers for 1998. Under the existing scale, the salary a teacher receives depends on the level of base pay (haber basico) that is negotiated every year. For teachers who managed to qualify for particular category their salary is multiplied by a fixed multiple of the haber basico. Depending on the category, this multiplication factor ranges from an additional ten percent to an additional hundred fifty percent. The multiplication factor is not negotiated every year. This table does not include a further 20 percent bonus that teachers can receive for working in a marginal area or on a border town, which is applicable to all classes of teachers. ]Nordoes it include the bono economico that is paid once a year in June and the bono pro-libro that is paid once a year in September. The amount of the bono economico is negotiated every year, while the bono pro-libro is set at the national minimum wage. In 1]998,the bono economico was Bs. 646 and the bono pro-libro was Bs. 300. Thus, the figures reported in the table represent a lower bound on the compensation. Table 4.14 presents the same information for hourly wages in place of
Education Sector Public Expenditure Review 93 monthly earnings, taking into account that the required hours of work for teachers is 72 per month.
4.75. Tables 4.15 and 4.16 present monthly earnings quintiles and hourly wage quintiles for those with at least 12 years of education and for the population in general for different age groups. The data are obtained from the November 1997 Encuesta Nacional de Empleo. Table 4.15 may be interpreted as follows. An individual those aged 30-34 and with 12 years or more of education would be in the third quintile of all those with 12 years of education or more if his or her monthly income was between 746 and 1083 Bolivianos. An individual aged 30-34 would be in the third quintile of all workers if his or her monthly income were between 500 and 800 Bolivianos.
4.76. The relative position of teachers can be determined by selecting a category of teacher from Table 5.14 and seeing where that teacher would lie compared to workers with 12 years of education or more and with the general population. For example, a normal school graduate would earn on average (depending on where the teacher worked) 702 Bolivianos per month with less than four years experience. If the teacher entered the profession at age 25, this income should be compared to incomes received by those aged 25-29. Such a comparison reveals that the teacher would be in the third quintile for both the population with 12 years or more of education and for the general public. A teacher who entered at the age of 25 and moved regularly through the categories would have reached the first category by the age of 41. The teacher's average salary of 1080.6 Bolivianos per month (depending on where the teacher worked) would place him or her in the third quintile of those with 12 years of education or more, but in the fourth quintile of the general population.
4.77. In comparisons based on hourly wages, the relative position of teachers appears more favorable because teachers work few hours per month. A normal school graduate entering the profession at the age of 25 would, with less than four years of experience, be in the fourth quintile of hourly wages of 25-29 year olds with 12 years of education or more and in the fifth (and highest quintile) of the general population. teacher entering the A normal school graduate who entered at age 25 and progressed steadily through the system would, at the age of 41, also be in the fourth quintile of hourly wages of 40-44 year olds with 12 years of education or more, but in the fifth quintile of hourly wages of 40-44 year olds in the general population.
4.78. The above comparison, together with similar comparisons for other classes of teachers, leads to the following conclusions:
* Qualified and experienced teachers are compensated quite well. * Unqualified teachers are not compensated nearly as well. * Over 50 percent of all teachers are in the lowest three categories.
4.79. The issue of teacher compensation then is not simply a matter of raising the salary of underpaid teachers. The challenge is to improve the quality of the teachers at the low end of the distribution and to link the compensation to an improvement of skills.
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Table 4.13: Teacher Salary Scale, Monthly Wages
Without Interim Fifth Fourth Third Second First Zero Merit classifica (w/o (< 4 yrs (min. 4 (min 8 yrs (min 12 (min 16 (min 20 (min 24 tion degree exp) yrs exp) exp) yrs exp) yrs exp) yrs exp) yrs exp) min 4 yrs exp)
C.~ Region______1 iap_ixif Normal school graduate 491 638.3 712 785.6 859.3 982 1104.8 1227.5
Egresado 446 579.8 646.7 713.6 780.5 892 1003.5 Il_ _ Without degree 370 407 Awarded title by 407 590.2 651.2 712.3 814 915.8 1017.5 Experience
Provincial Region Normal school graduate 540 702 783 864 945 1080 1215 1350 Egresado 496 644.8 719.2 793.6 868 992 1116 1240 Without degree 409 449.9 I Awarded title by 446 579.8 646.7 713.6 780.5 892 1003.5 1115 Experience
Rural Region Normal school graduate 590 767 855.5 944 1032.5 1180 1327.5 1475 Egresado 538 699.4 780.1 860.8 941.5 1076 1210.5 1345 Without degree 443 487.3 Awarded title by 486 631.8 704.7 777.6 850.5 972 1093.5 1215 Experience
Teachers in each group 12460 21931 20426 7762 8976 8705 7995 8682 7339 Items ineach group 14552 22445 21799 8317 9742 9346 8578 9182 7660 Note: Those teachers without a degree require four more years of experience within each category.
EducationSector Public Expenditure Review 95
Table 4.14: Teacher Salaries, Hourly Wage Without Interim Fifth Fourth Third Second First Zero Merit classifica (w/o (< 4 yrs (min. 4 (min 8 yrs (min 12 (min 16 (min 20 (min 24 tion degree exp) yrs exp) exp) yrs exp) yrs exp) yrs exp) yrs exp) min 4 yrs exp) _ _ __ Capital Region
Normal school graduate 6.8 _ | 8.9 9.9 10.9 11.9 13.6 15.3 17.0 Egresado 6.2 8.1 9.0 9.9 10.8 12.4 13.9 15.5 Without degree 5.1 5.7 Awarded title by 5.7 8.2 9.0 9.9 11.3 12.7 14.1 Experience
Provincial Region Normal school graduate 7.5 9.8 10.9 13.1 15 16.9 18.8 Egresado 6.9 9.0 10.0 I 12.1 13.8 15.5 17.2 Without degree 5.7 6.2 _ Awarded title by 6.2 8.1 9.0 9.9 10.8 12.4 13.9 15.5 Experience _ _-
Rural Region Normal school graduate 8.2 | 10.7 11.9 13.1 14.3 I16.4 18.4 20.5
Egresado 7.5 _ 9.7 10.8 12.0 13.1 14.9 16.8 18.7 Without degree 6.2 6.8 Awarded title by 6.8 8.8 9.8 10.8 11.8 13.5 15.2 16.9 Experience II III . , . Note: Those teachers without a degree require four more years of experience within each category.
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Table 4.15: Monthly Earnings of Population in General Quintile 25-29 30-34 35-39 40-44 45-49 50 + With 12 years of education or more 1 < 432 < 492 < 530 < 607 < 660 <530 2 > 432 & < 596 > 492 & < 746 > 530 & < 787 > 607 & < 900 > 660 & >995 >530 & <989 3 > 596 & < 884 > 746 & < 1083 > 787 & < 1213 > 900 & < 1400 >995 & <1487 >989 & <1700 4 > 884 & < 1470 > 1083 & < 1949 > 1213 & < 2050 > 1400 & < 2500 >1487 & <2425 >1700 & <3350 5 > i470 > 1949 > 2050 >2500 1>2425 > 3350 General population 1 < 300 < 260 < 250 < 250 < 100 < 108 2 >300&<500 >260&<500 >250&<520 >250&<500 > 100&<250 > 1088&<280 3 >500&<779 >500&<800 >520&<800 >500&<800 >250&<500 >280&<520 4 > 799 & <1299 > 800 & < 1307 > 800 & < 1500 > 800 & < 1443 > 500 & < 1000 > 520 & < 1000 5 > 1299 > 1307 > 1500 > 1443 > 1000 > 1000
Table 4.16: Hourly Wages of Population in General
Quintiles 25-29 30-34 4-4 4-49455-39 _| 50+ With 12 years of education or more 1 < 2.5 < 2.8 < 3.3 < 4.0 < 3.9 < 3.2 2 >2.5&<3.8 >2.8&<4.7 >3.3&<5.5 >4.0&<6.1 >3.9&<6.9 >3.2&<6.2 3 >>3.8&<5.8 >4.7&<7.8 >5.5&<7.9 >6.1 &<10.3 >6.9&<10.4 >6.2&<10.9 4 >5.8&<10.5 >7.8&<12.0 >7.9&< 14.4 > 10.3&< 17.1 > 10.4&<19.0 > 10.9&<23.0 5 > 10.5 > 12.0 > 14.4 > 17.1 > 19.0 >23.0 General population 1 < 1.54 < 1.43 < 1.25 1<1.28 <0.58 < 0.63 2 > 1.54 & < 2.68 > 1.43 & < 2.86 > 1.25 & < 2.89 1> 1.28 & <2.50 >0.58 & < 1.44 >0.63 & <1.56 3 >2.68&<4.33 >2.86&<4.72 >2.89&<4.81 >2.50&<4.72 > 1.44&<2.89 > 1.56&<3.0 4 >>4.33&<8.05 >4.72&<8.02 >4.81 &<8.54 >4.72& < 8.66 _>2.83 &<5.83 >3.0&<6.25 5 > 8.05 > 8.02 > 8.54 > 8.66 > 5.83 _ > 6.25 Source: Encuesta Nacional de Empleo, November 1997, INE
Education Sector Public Expenditure Review 97
Modifying the Escalafon
4.80. Notwithstanding the dramatic improvement in teachers' real wages, there have been disruptive teacher strikes in the last several years. And the perception continues that something must be done to address the issue of teacher compensation and, more generally the escalafon. It is important to recognize that the term escalafon refers to more than simply the structure of salaries. It incorporates an extensive set of rules governing administration of human resources and compensation. While a proposal for modification of the escalafon has been made in the past, it has not been implemented out of concerns for the potential budgetary impact. The government has considered two partial approaches. The first approach proposed by the Ministry of Education is a plan for a Salario al merito. The second is to reduce the number of distinct classifications within the escalafon (salary scale). These two proposals are discussed below. It now appears that the Government is turning away from the partial approaches in favor of a more comprehensive approach to the issue of teacher compensation, training and human resource management. This is an important step.
Salario al merito
4.81. The term salario al merito for the proposed program (merit pay) is a bit of a misnomer. The proposal is not, strictly speaking, a merit pay proposal as the term is commonly understood. That is, there is not an attempt to link the pay of teachers to classroom performance of students or some other indicator of performance. Rather, the proposal is to pay teachers more for additional hours of work. The merit tern is applied because teachers must also pass an exam to be eligible for this salario al merito.
4.82. There are several difficulties with the proposal. First, the offer does not appear to be sufficiently attractive for many of the teachers who are already classified in category 4 and above. Yet to make the program sufficiently attractive would imply very high budgetary costs. For teachers in category 4 and above, the marginal benefit per extra hour that they would receive from participating in the salario al merito program is low relative to the benefit they receive under the current system. For these teachers the benefit per extra hour would vary between 1.7 to 6 bolivianos per hour for those with 5 years of experience or less; 2.9 to 7.7 bolivianos per hour for those between 5 and 10 years of experience; 4.2 to 9.5 bolivianos per hour for those with 10-20 years of experience and 2.2 to 9.0 bolivianos per hour for those with more than 20 years of experience. These hourly rates can be compared to the range from 8.2 to 20.5 under the current system (see Table 4.13).
4.83. Moreover, those teachers that enter into the plan would, in future years, receive a salary indexed to the rate of inflation. This implies that they could expect a real rate of increase of zero percent, which is considerably less that the 66 percent they have received over the last eight years. The relative unattractiveness of the offer is one of the main reasons why the response to the offer was so much lower than expected. Approximately 1300 teachers instead of an expected 35,000 teachers took the government up on this offer.
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4.84. Second, there is a logistical problem involved in the giving teachers who have passed the exam more additional hours of work. In order for one teacher to receive more hours of work there has to be a vacancy in the school where that teacher is working. Failing that, the teacher would have to move to a new location where he or she could work 120 hours per month. There is no guarantee that there will be a match between the teachers who pass the exam and qualify for the salario al merito and the locations of vacancies. This logistical problem is one of reasons why the teachers who passed the exam in 1998 have not all received additional hours of work in the classroom. They are working additional hours on other activities.
4.85. Third, the Salario al merito does not solve the problem of having a high percentage of unqualified teachers. An exam can validate the skill level that the individual has, but does not, by itself, lead to an improvement in skills of the existing stock of teachers. Only if the salario al merito were accompanied by an in-service training program or if teachers were induced to undertake training on their own would there likely be an improvement in the skills of the teachers. But the incentives to improve skills should already be present in the system since to pass from one category to the next it is necessary to pass an exam. It is possible to incorporate the more innovative elements of the exarn for the Salario merito into the regular exams for passing from one category to the next
Reducing the number of categories in the escalafon
4.86. The argument for reducing the number of categories in the escalafon follows from the observation that there are over 140 different categories into which a teacher may fall and that this creates major administrative difficulties. This argument is not terribly convincing. The 140 categories are not defined in a haphazard fashion. There is a clear structure, with salaries differentiated by location of work, type of qualification and experience (see Tables 4.12 and 4.13). And it is not self evident that operating a system with 40 categories would be any less costly than operating one 140 categories. Devoting time, effort and money to reducing the number of categories could result in a higher budgetary cost without addressing the key problem -- a large percentage of teachers have low qualifications and consequently receive low pay. Paying these poorly qualified teachers more without addressing the problem of their poor qualifications would simply generate economic rents for them.
A comprehensive approach
4.87. Because modifying the escalafon has such important budgetary consequences, not only for the education budget but also for the entire public sector budget, there will not be many opportunities to make changes. Thus, it is important that the proposed modification gets it right. The Government's current approach to modifying the escalafon is on the right track. It includes six: a) the introduction of incentive mechanisms addressed at the school level; b) a plan for gradually training teachers in the lowest categories and paying them more when they successfully complete the training; c) a revision of the exams governing the promotion from one category to another (these exam should include an assessment of classroom performance; d) the introduction of
Education Sector Public Expenditure Review 99 mechanisms to get rid of teachers with consistently poor performance.; e) a revision of the rules and compensation for incorporating university graduates into the teaching profession; and f) a modification of the strategy to pay teachers more for additional hours of work. School-based incentive programs have proven fairly successful and usually meet with greater acceptance among teachers than do individual performance incentive programs. Such plans are currently under consideration by the Ministry of Education.
4.88. The speed with which the poorly qualified and poorly paid teachers can be transformed into better qualified and more highly paid teachers depends on the capacity constraints of the training program and the budget likely to be available to cover the additional costs. The costs of this are included in Section 4.4. By capacity constraints, one should not simply think of the number of teachers who could sit in a training course. Given the poor quality teacher training in the past, the more important limiting factor is probably the number of good trainers. Receiving poor training is wasted time and resources.
4.89. The teachers' unions should have an interest in raising the professionalism of its members. With a better reputation,,it would be easier for the union to argue for salary raises. One way to demonstrate increased professionalism would be for the teachers' union and the Ministry to agree on a mechanism for quality control. There could be some version of up or out advancement, linked to a training program and a revised system of exams for passing from one category to another. If, after repeated training and assessment, the teacher is still judged to be inadequate or is not able to pass to the next category, there should be some way to replace that person with someone who is more capable.
4.90. Currently, university graduates do not receive much return for their university education if they choose to enter the teaching profession. Providing a more attractive return to their education in the salary scale could greatly expand the number and quality of potential teachers.
4.91. A strategy of paying teachers more for additional hours of work is sound. As mentioned previously, the logistics of making the transition are complicated since there must be additional classroom hours available in a given school for the teacher to teach. This strategy is best pursued as part of the process of transformation and the Ministry has already taken steps to explore how this might be done. It may be necessary to change the organization of double shifts, moving from a system of lower grades in the morning and upper grades in the afternoon to one where the same grades are taught in each school in both morning and afternoon. This would make it easier to accommodate additional hours for the same teacher.
Negotiations with teachers' union
4.92. The above discussion has some implications for negotiation with the teachers union. It is important to publicize the information on the impressive real wage gains made by teachers. However, this can and should be presented in a positive way.
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4.93. In order to bring about a more rapid change among these teachers, the budgetary space must be opened by negotiating separately the salary increase received by those at the lower level from the increase received by those at the higher level. In 1999, for the first time, a differential rate of increase was applied to individuals earning different salaries. Given that those at the relatively highly paid categories are quite well off relative to the market, it is perhaps reasonable to expect them to receive relatively lower rates of real increases until this transition is completed.
4.94. Dissatisfaction with the escalafon has existed for many years. And modifying it will not be easy, given the different positions of the Government and the teacher's unions. It may be useful to ernbark on a process of negotiation with the assistance of professional firms that specialize in helping two contentious parties come to an agreement.
4.3.4 Preparing for' an imminent expansion in demanidfor secondary education
4.95. Currently, the highest priority is basic education, as it should be. The next highest priority is to reform tertiary education, given the substantial resources being devoted to the subsector and lovvproductivity of those resources. Secondary education has been a neglected area. This is apparent in the assignment of resources. The share of secondary education in current expenditure in Bolivia is roughly 10 percent. Compared to basic education, there is minimal investment in secondary education taking place.
4.96. Bolivia devotes a far smaller percentage of its resources to secondary education than do other countries. Mingat and Tan (1998) present average shares of the education budget at different levels of GDP, based on an analysis of a large sample of countries.
Table 4.17: Average shares of education budget Sub-sector PerCapita GNP 200 400 800 1,500 3,000 10,000 20,000 Primary 45 43 41 39 37 33 31 Secondary 26 27 28 29 30 32 33 Higher 17 18 19 19 20 21 21 Other 12 12 12 13 13 14 15 Source: Mingatand Tan (1998).
4.97. As has been pointed out previously and is illustrated in Table 4.18 the relative importance of both secondary and early education in the total public enrollment figures is still very low and is increasing at a slow rate. In the case of secondary education, its relative importance increased from 12 percent of total enrollment in 1990, to 13 percent in 1995, reaching 15 percent in 1997.
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Table 4.18: Enrollment distribution Subsector 1990 1995 1997 Public Private Public Private Public Private Early 8% 6% 8% 6% 9% n.d. Primary 81% 66% 79% 62% 76% n.d. Secondary 12% 28% 13% 31% 15% n.d. Total 100%I 100% 100% 100% 100% 100% Source: Ministry of Education n.d. no data
4.98. With the success of the education reform, the demand for secondary education is likely to increase in the very near future. Already there is evidence that supply constraints in secondary education in the rural areas is one factor for young people migrating to cities.12 As is argued in the paragraphs above, over the next several years the private sector can be expected to meet a significant part of the demand for secondary education. To achieve the greatest increase in coverage rates, the public sector should invest where the private sector will not.
4.99. As the Education Reformnbegins to affect dropouts and educational achievement in the upper primary grades, one can expect there to be increasing demand for secondary education. This will place greater demands on the budget, given the low supply at this time and given the tendency for secondary education to cost more per pupil than primary. It may be possible to slow the increase in expenditure somewhat by making more efficient use of existing secondary school teachers. The student/teacher ratio in secondary school is only 19. Considering that enrollment figures are probably overstated, the ratio may be lower than that. There may be some scope to raise the student/teacher ratio as secondary education is expanded.
4.100. By the year 2002, there will need to be a shift in the share of investment away from primary towards secondary education. And prior to that, there is a need to develop curricula for the secondary education that follows the approach developed by the Education Reform for primary. This should perhaps begin in the year 2000 since it will take at least two years to develop the modified curriculum.
4.3.5 Problems in decentralization
4.101. Following the passage of the Popular Participation Law and the Decentralization Law, the roles and responsibilities for delivering public educational services have changed. Municipalities now have an increased responsibility for financing educational investments. Departments are responsible for hiring teachers (but not for paying for them). The national level is responsible for allocating teacher positions and paying teachers and for carrying out the Education Reform program.
12 For example, see Myers, Charles and Miguel Urquiola, "La educaci6n intermedia y media en Bolivia: Un analisis desde la perspectiva de la demanda." Documento de Trabajo 53/97. La Paz, UDAPSO.
Education Sector 102 Public Expenditure Review
4.102. Education investment at the municipal level has increased as a result of Popular Participation, three fold between 1993 and 1995. A significant amount of municipal investment has gone into school feeding programs which are considered "very expensive interventions which have a small impact on learning".'3 In the case of the Municipality of La Paz, Bs 25.2 rnillion (approx. $us 5 million) equivalent to 5.7 percent of the total municipal budget was expended in these programs in 1998 and Bs. 32 million have been budgeted for 1999. This is five times the amount the municipality assigns to all other education investments. School breakfast programs are also popular in other municipalities such as Cocabamba were reportedly 35 percent of the total Participation Funds have regularly been used to this effect. There is a clear need to evaluate the impact and cost-benefit of these programs before they can be allowed to continue.
4.103. Municipal governments should be made aware of "almost costless but effective interventions" such as: assigning best teachers to first grade; not switching school teachers during the school year; enforcing the regulations of the official length of the school year, undertaking mass media campaigns for parents to read to children; and undertaking sample testing of children and distributing the results.1 4
4.104. The reassignment of responsibilities has given rise to a problem of accountability. No one agency is responsible for education quality. The Ministry of Education is responsible for implementing the Education Reform, but does not control whether the municipalities will make necessary investments, nor whether the teachers that have been trained in new teaching approaches will be allocated to schools where the transformed instructional program is being put into place. Departments make hiring and teacher allocation decisions wvithoutbeing responsible either for the quality of education or for being inefficient since they are not the ones paying the bill. Municipalities have responsibility for investments, but for little else.
4.105. One obvious solution would be to concentrate the allocation decisions concerning teachers, investments and educational materials at the municipal level. The national level would transfer financial resources to the municipalities following a formula, with some incentives for cost sharing. Several countries that have had a fragmentation of responsibilities across different levels of government have moved in this direction. Indonesia is a case in point.
4.106. For Bolivia, a shift in this direction may also make sense. However, the transition costs involved in making this change are not trivial. And they may be higher in Bolivia than in other countries because the teacher's unions violently oppose the municipilization process.
4.107. Thus, the Government faces a strategic decision of how hard to push for the municipalization of education. At a time when the gains from the Education Reform
13Schiefelbein, Emesto, Laurence Wolff and Paulina Schiefelbein, "Cost Effectiveness of Educational Policies in Latin America: A Survey of Expert Opinion," Washington, D.C, Inter-American Development Bank. 1998. 14Ibid.
Education Sector Public Expenditure Review 103 have yet to be consolidated and when the reform of teacher training looms as a major pending issue, it may be prudent not to open any more fronts at this time. It is perhaps preferable for the Government to continue with its plan to pilot the granting of greater municipal autonomy in some 30 municipios, but not to go much beyond that for the time being.
4.108. There are other instruments that can be used within the existing system to try to counteract the adverse incentive problems associated with the fragmentation of responsibility. For example, the national level can set conditions for the departmental government to access co-participation funds. The amount that any particular department may receive could depend on their efficiency in allocating teachers.
4.3.6 University, education
4.109. There is a need for the government to develop a policy towards university education in general and public universities in particular. So far the present administration's efforts have been focused on regulating and overseeing the rapid rise of private universities. As a result, private universities have a better sense of what is expected of them and a new policy framework for the creation of graduate schools and degrees in private universities was developed.
4.110. In the case of public universities, there are no policy guidelines. An implicit policy develops when the government has to negotiate the annual budget with the 10 public universities. This is not adequate. The diagnosis of the situation in the different public universities has improved but there has not been a parallel advance in terms of more specific policies in line with where university policy is moving: regulatory mechanisms through the development of external assessments and accrediting mechanisms. There have been advances in these areas in many public universities, but no follow-up and proposals from the government level.
4.11 1. Public universities rely on public funding to a significant extent. Public resources account for over 90 percent of total university funding and tuition rates are symbolic. In the major public university in La Paz, tuition per semester is under $US 5 when private schools are charging monthly tuition fees of $US 50 to 150 per month. Admittedly, students also pay additional "faculty fees" targeted to specific needs in each area. For example, in 1999 in the University of San Andres in La Paz, these "faculty fees" vary from over $US 100 in Engineering to under $1S 10 in Biochemistry and Pure Sciences. This is common practice in other public universities. This shows students can pay more and are willing to do so as long as the fees have a specific purpose (generally library acquisitions, hardware and software improvements or short courses) and students perceive that they are going to be used to their tangible benefit and not get lost in the "black hole" of central university finances.
4.112. The per semester fee for foreign students is $200, which is less than the average public expenditure per student. This pricing policy for foreign students only makes sense if the marginal costs of enrolling the additional foreign student (including any negative externalities on Bolivian students) is less than $200.
Education Sector 104 Public Expenditure Review
4.113. In order to mnakeroom for a needed expansion in secondary education and to improve the overall quality of tertiary education, the general direction should be towards having fewer but higher quality students. This change would not be anti-poor, since under current system poor students drop out well before university.
4.114. As part of this shift, the assignment of further public resources to universities should be tied to at least the following guidelines:
1. Tightening admissions standards, thereby reducing intake of new students. 2. Improvements in internal efficiency; reducing drop out rates and time to graduation through a combination of changes in rules which make it harder to drag out one's university education and changes in pricing policy that would raise costs after a specified number of years within the system. 3. An increase in the proportion of funds that are generated by each university. There is much room for augmenting the university's own resources by increasing tuition rates and selling services. 4. The start of self-evaluation processes and external evaluation mechanisms. 5. Greater use of competitive mechanisms for allocation of public resources for research, faculty development and other university academic activities. 6. Concerted effort to reduce the amount of the subsidy, given that the coparticipation component is steadily increasing. There have been negotiations before on this topic in 1996, but no resolution was reached. One possibility would be to restrict the subsidy to cover two main expenditure items: a) a per student contribution which would be paid to the 25,000 scoring the highest on a national entrance exam; and b) competitively awarded funds to public (and possibly private) universities.
4.115. To achieve the above there is a strong need for the government to develop a clear policy framework and guidelines for assigning additional resources to public universities. To date the allocation of public funds to the different universities has been on a discretional basis, gernerallyassociated with the individual university's capacity to enroll public and political support. This procedure has been detrimental to the promotion of university reform ancl to the effective use of the government's main policy lever: the annual university subsidy that is negotiated with each university. 4.116. It is also essential that the distortions and anti-poor nature of the university expenditures be brought more forcefully to the attention of the public. It is highly likely that within the press and public at large (and even within the government) the distortions in the educational system caused by excessive spending and insufficient attention on results is not well appreciated.
4.3.7 Private Education 4.117. Private education in Bolivia has been responsible for about 20 percent of total enrollment form 1950 to 1965. Since then there has been a steady decline to around 12 percent since the 1980s to the mid 1990s (see Contreras, Manuel, "Hacia la construcci6n del mercado de la educaci6n," Revista Unitas, no. 15 (Julio 1996)). Recent figures from the Ministry of Education confirrn this downward trend.
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Table 4.19: Enrollment in public and private education, selected years 1990 1995 Public Private Total % Public Private Total % ______L______Private Private Early Education 10.0 11.334 7.2
106.722 11.891 118.613 _ 145.578 .156.912 Primary 10.4 109.741 7.1 1.140.477 133.084 1.273.561I 1.428.713 1.538.454 Secondary 25.2 54.827 18.7 168.417 56.771 225.188 238.329 293.156 Total 12.5 175.902 8.8 1.415.616 201.746 1.617.362 1.812.620 1.988.522 Source: From figures from the Ministry of Education
4.118. As shown in Table 4.19 the relative importance of private education is decreasing in all levels of education. And the current trend indicates that private education accounts for less than 10% of total enrollment in 1995. Its major importance however is in secondary education where one in every five Bolivians still attends a privates school (down from one in four in 1990). This is one would expect, given the public investment at the secondary level is limited.
4.119. Unfortunately, there is no more up to date information on enrollment in private schools, which is a symptom of the lack of oversight of the Ministry of Education to this sector. This illustrates the absence of a policy towards private education in Bolivia. In view of the importance of the sector in increasing the supply of education in a country with enrollment rates below the Latin American averages (especially in early and secondary education), the government should provide a policy framework where the expansion of private education is not hindered. Currently, the Ministry of Education authorizes the opening of private schools and then sets limits to the fees parents must pay, setting arbitrary general ceilings for annual fee increases.
4.120. It is recommended that the Ministry limit itself to providing parents with information on the quality of these schools and let them set market prices for their services.
4.121. Although the administrative enrollment figures shown above indicate a reduction in the overall importance of private education, impressionistic data in the urban areas strongly suggests that the supply of private schools is increasing and there have been major cases of inadequate infrastructure and quality in these newly created schools. So, there is ample room for government oversight in quality issues.
4.122. Given the extensive coverage of public schools at the basic level, one would expect there to be a niche for private education only at the top end of the quality scale. Yet there appear to be low quality private schools that coexist with public schools in places like adult education. The explanation most commonly advanced for this phenomenon is that bad as the private school may be, the private school can at least guarantee that classes will be held. With yearly teacher strikes in the public sector, this guarantee cannot be given in the public sector. If the disruptive strikes in the public
Education Sector 106 Public Expenditure Review system could be eliminated, one would expect private primary schools at the low end of the quality spectrum to disappear.
4.123. The recommendations at the different levels are as follows:
I ) At the primary level there is no a compelling argument for the extensive regulation at the upper end of the quality spectrum. T here may be some advantages to sharing some of the benefits of the Education Reform with the private sector, provided the private sector is willing to pay for the incremental costs this may imply. At the low end of the quality spectrum, probably the most important action that could be taken could be to try to eliminate disruptive teacher strikes and ensure minimum quality.
2) At the secondary level, it is important to recognize that demand will undoubtedly outstrip the supply available from the public sector. Thus, the growth of private supply should be encouraged. There will be a need to regulate quality because market forces will not necessarily drive out schools with inadequate quality. An important instrument to inform consumers would be to make public the results of the academic achievement tests. This is done in several countries and the parents have found this to be quite useful. The government should adopt as a strategy to invest in those areas where the private sector is unlikely to do so. This would imply that public funds be used in rural areas and urban poor marginal areas first.
3) At the tertiary level, the primary role for government would be to provide regulation of private universities and information to potential consumers. There should be some minimal level of permissible quality. Below that level, private universities should be closed. The Government has taken important steps in this direction and should now pursue plans to develop its accreditation system.
4.4. Conclusions and Recommendations
4.4.1 Summary of Findings
4.124. Over the last several years education expenditures have risen sharply to the point where the share of educational expenditures in GDP compares favorably to other countries. The increase is due to substantial increases in teacher salaries (starting from a low base), increases in university spending and new investments in infrastructure and the Education Reform.
4.125. The current structure of educational expenditures in 1998 is presented in the second column of Table 4.20. This structure is not well aligned with the nature of problems identified in this report. One possible relative allocation of expenditure that would be more consistent with the problems is presented in column 3. This alternative is, of course, not the only relative allocation that would be better than what is present today. In debates about the direction of education in Bolivia, it is rare that the interested party specifies what he or she thinks should be the relative allocation. It is useful to be explicit about this, for it forces one to specify allocations that add up to no more than 100 percent of the available budget.
Education Sector Public Expenditure Review 107
Table 4.20: Structure of Educational Expenditures ActualStructure 1998 A RelativeAllocation Better Aligned with Natureof Problems Early 2.82% 6.0% Primary 46.09% 40.0% Secondary 9.78% 21.0%
Investment 4.93% 6.0% Other Sup no univ. 2.70% 2.0%. Alternativa 2.68% 1.5% Tecnica 0.91% 1.5% Centraladmin 1.22% 1.0% Dir dept. 4.41% 3.0%
University 24.45% 18.0% 100.0%
4.4.2 Recommendedfuture expenditures and constraints
4.126. If the current misalignment between problems and structure continues, it will hinder Bolivia's ability to prepare its citizens for challenges of the next century. However, it is not feasible to leap immediately from the current structure to the proposed structure. The structure must be changed gradually and a strategy must be developed.
4.127. This report suggests that up until the year 2002, the following are the priority actions that will directly affect the budget:
- Increasingresources to early education. * CompletingEducation Reform in Basic Education. * Training 5,000 teachers a year and moving them out of the lowest salary levels. * Introducingschool-based incentive programs for teachers. * Limitedexpansion of secondaryeducation. * Limitingannual base salary increases of teachers. * Settingthe total rate of growth of Universityexpenditures to an annual rate equal to expected inflation minus a specifiedpercent. This will require that the Government modify the subsidy rate (which is undertheir control) to offset the increases in the coparticipationcomponent (which is outside of their control).
4.128. There are other priority activities for the Education Sector over the next several years that may not have major budgetary consequences. For example, reforming the Escuelas Normales to better prepare teachers is an extremely high priority. However, given the extensive inefficiencies in the current system, it is probably possible to bring about the needed improvements without major increases in expenditure.
4.129. Table 4.21 presents estimated projections of the likely costs of the above priority actions added to the existing base costs. The base costs were provided by the Ministry of Education. Only for the above priority actions has this report made changes from the
Education Sector 108 Public Expenditure Review
Ministries figures. In the projections, university expenditures are assumnedto increase at a nominal annual rate of 6 percent. The total amount of the recommended future expenditures can be compared to the amount of resources likely to be available for public educational expenditures. The availability of resources depends upon the rate of growth of GDP, the share of total public expenditure in GDP and the share of educational expenditure in total public expenditure. Below we simulate the resources likely to be available for education based on GDP growth that is assumed to be distributed uniformly between 4 and 5 percent in 1998, 1999 and 2000 and between 4 and 6 percent in 2001 and 2002. The share of total public expenditure in GDP is assumed to be distributed uniformly between 26, and 29 percent and the share of educational expenditure in total public expenditure is assumed to be uniformly distributed between 16 and 20 percent.
Table 4.21: Recommended Future Expenditures (Bs million, nominal) 1998 1999 2000 2001 2002 Current exp I I__ X______Early 67.2 85.0 105.0 120.0 134.0 (3.71%) Total Primary 1099.3 1176.3 1309.1 1414.9 1521.5 (42.08%) Base costs 1258.6 1346.7 1441.0 Increasedcosts for 10.7 24.5 39.3 Trained primary Teachers School-based 39.8 43.7 41.2 Incentive programtT Secondary 233.3 260 300 350 420 (11.61%) Central Admin. 29.2 26.9 28.7 30.6 33.4 (0.92%) DepartmentalAdmin. 105.2 116.4 124.6 133.3 146.6 (4.05%) Other current Superiornon-univ 64.3 65.8 70.5 75.4 83.0 (2.30%) Alternative 63.9 66.8 71.5 76.5 84.1 (2.33%) Technical 21.8 20.5 21.9 27 35 (0.97) Investment 117.5 EducationReform 303.7 282.0 241.6 250.8 (6.93%) Secondary 0 56.8 125 171.8 (4.75%) University 583.0 618.0 655.1 694.4 736.0
______~~~~(20.35%) Total 2384.7 2739.3 3025.1 3288.6 3616.2 ______.(100%)
Education Sector Public Expenditure Review 109
4.130. Given these assumptions, the mean values of nominal educational expenditures obtained from a Monte Carlo simulation with 1,000 draws are as given Table 4.22.
Table 4.22: Mean Values of Public Funds likely to be Available for Education (Nominal) 1998 1999 2000 2001 2002 Mean 2331 2584 2836 3087 3395 Std. Dev 170 186 205 232 248
4.131. The Monte Carlo simulation produces a distribution of values of educational expenditures. The percentiles from the simulation are presented below. The reported figure of 3632 for the 80thpercentile in 2002 means that, given the assumed probability distributions, 80 percent of the simulated values were equal to or less than Bs 3632 million (current value).
Table 4.23: Distribution of Public Funds likely to be Available for Education (Nominal) Percentiles 1998 1999 2000 2001 2002 0 % 1962 2187 2368 2556 2829 20 % 2173 2401 2650 2867 3166 40 % 2276 2528 2774 3012 3308 60% 2379 2639 2893 3147 3465 80 % 2488 2765 3029 3299 3632 100 % 2721 3001 3357 3670 3946
4.132. The total recommended expenditures for 2002 (Bs 3616.2) in Table 4.21 is already near the 80 percent percentile of the amount likely to be available (from Table 4.23). This assumes a 7 percent annual nominal rate of growth in base salaries of teachers and an assumed 6 percent annual nominal rate of growth in total public expenditures in Universities. Any slippage in limiting increases to teachers and Universities could put Bolivia still further away from a structure appropriate to its educational challenges.
4.133. This analysis that projects future expenditures and compares it with resources likely to be available should be refined in future work with the Ministry of Finance, UDAPE, Ministry of Education and the international cooperation. To the extent possible in this report, an estimate of the recurrent cost implications of the investments was included. But this is an area where more profound analysis is required. And it would be useful to repeat a similar exercise of comparing projected future expenditures and likely resource availability as part of the preparation of the recently introduced Municipal Educational Development.
Education Sector I Public Expenditure Review 111
CHAPTER 5: HEALTH SECTOR
5.1. This report is organized in four sections. The first section provides a brief overview of health conditions in Bolivia and compares health outcomes in Bolivia to those of other developing countries. The second section analyzes recent trends in expenditure and notes that, in contrast to education, health expenditures have stagnated. The third section analyzes some of the current challenges and choices facing policy makers and identifies some high priority initiatives that are underway. Finally, the fourth section adds up the costs of the different initiatives and suggests how the distribution of expenditures might be better allocated within the budget likely to be available.'
5.1. Overview of Health Conditions
5.2. Bolivia is a country where health conditions are heavily influenced by poverty. A high percentage of deaths are due to water-borne diseases and infectious diseases to children weakened by malnutrition. As is common in many developing countries, there are more deaths of young children than there are of old people. This reflects not only the high mortality risks facing children, but also the very young populations that result from high fertility rates.
5.3. The high mortality rates are apparent in Table 5. 1, which presents the key findings from the last three National Demographic and Health Surveys. These surveys take considerable care to use the same approach each year so that one can be confident that comparisons of results across different years reflect true changes.
5.4. This table shows that infant mortality declined dramatically between 1989 and 1994, but did not register much of a decline between 1994 and 1998. Fertility rates are declining steadily as the use of modern contraceptives grows, both in urban and rural areas. Good progress is being made in prenatal care and in the percentage of births occurring in medical facilities. These increases suggest that some of the cultural barriers that have led to low usage are slowly being overcome. However, there is still considerable room for improvement as the demand for these services remains low even though the Government has expanded the supply. Over the last four years the percentage of children with moderate malnutrition was halved.
5.5. The areas where the least progress has been made is in immunizations and in coverage of severe diarrhea. Immunization rates have shown little improvement and remain far below what they should be.
5.6. By virtually any comparison with countries of similar levels of GDP per capita, Bolivia's infant and child mortality figures are high. Among the 57 low and middle
'Among sources used as background for this chapter, and not cited elsewhere are: Tania Dmytraczenko, Scarlet Escalante Carrasco, Katherina Capra Seoane, John Holey, Wendy Abramson, Antonio, Saravia Valle, lain Aitken, Marilyn Aparicio, "Evaluacion del Seguro Nacional de Matemidad y Ninez en Bolivia", Informe Tecnico No. 28, Partnerships for Health Reform, September, 1998, and UDAPE, Bolivia: Gasto Social y La Iniciativa 20/20, Ministerio de Hacienda, La Paz, Abril, 1999. Health Sector 112 Public Expenditure Review
income countries, Bolivia's infant mortality is the 5th highest. Among a more restricted group of 24 countries with 1995 GDP per capita in PPP terms closer to that of Bolivia (between US$1,500 and US$2,500 compared to Bolivia's 2,250). Bolivia has the 3rd
Table 5.1: Health Indicators from Demographic And Health Surveys, selected years Indicator 1989 l 1994 1998 Infant Mortality Rate (per 1,000) 99.01 75.0 67.0 Under 5 Mortality Rate (per 1,000) 130.0 116.0 92.0 Gross Fertility Rate (Births per woman) 5.6 4.8 4.2 Maternal Mortality Rate (per 100,000 births) 416 390 NA Percent of births with some prenatal care by 44.0 49.5 65.1 trained medical personnelr Percent of women who use modern 12.2 17.8 l 25.' contraceptives Urban 17.9 25.3 332.3 Rural 5.2 6.9 11.3 Percent of children less than 5 years old with 13.3 15.7 7.6 moderate malnutrition % of children w/complete vaccinations for: DPT3 28.3 42.8 48.6 Measles 57.5 55.7 50.8 Polio 37.8 47.5 39.1 % of births occurring in medical facilities 37.6 42.3 52.9 Percentage of cases of Acute Respiratory 28.7 43.4 NA Infections (cough with fast breathing) treated by medical personnel Percentage of severe diarrhea cases treated by 24.0 32.4 36.4 medical personnel l highest infant mortality. The countries that have infant mortality figures similar to those of Bolivia (between 60 and 80) are Bangladesh, Comoros, Eritrea, The Gambia, Guyana, Haiti, India, Lesotho, Namibia, Nigeria, Papua New Guinea, Senegal, Sudan and Swaziland. Comparisons based on under-five mortality yield similar conclusions.
5.7. A further indication of Bolivia's poor health situation can be observed by comparing Bolivia to low and high performing countries on key indicators that are related to infant mortality. A country is considered to be a low (or high) performer if its infant mortality rate is considerably higher (or lower) than would be predicted given its per capita GDP. The specific approach followed to identify low and high perforning countries was as follows. First, infant mortality in 1995 was regressed on values of GDP per capita from 1990 to 1995 for all countries with 1995 GDP per capita between $1,000 and $5,000 in 1987 PPP dollars (a total of 75 countries). The GDP variables alone accounted for about 49 percent of the variance in infant mortality. Based on the regression results, the difference between predicted and actual infant mortality was calculated. The 20 countries with the largest positive values of the differences were
Health Sector Public Expenditure Review 113 defined to be high performing countries. The 20 countries with the largest negative values of the differences were defined to be low performing countries.
5.8. The results of the comparisons are shown in Table 5.2. Out of all 75 countries between $1,000 and $5,000 per capita GDP (1987 PPP dollars), Bolivia has the 14th greatest positive difference between actual infant mortality and predicted infant mortality given its per capita GDP. This places Bolivia in the group of low performing countries. Note that there are no significant differences in GDP per capita between the low and high performing countries and little difference between Bolivia's GDP per capita and that of the low and high performing countries. However, there is a sizable difference between the values of key indicators for low and high performing countries. With the exception of access to safe water of the total population and malnutrition, Bolivia's values are worse than the average of the low performing countries. The gains in access to safe water are relatively recent, reflecting the impressive effort of the last several years (see Chapter 6).
Table 5.2 Key Indicators for Low and High Performing Countries and Bolivia Indicator Low High Significance Bolivia Performning Perforning Level for test of differences Infant Mortality 68 27 .00 69 1995 GDP Per Capita 2309 2272 .45 2250 (1987 PPP $) ___ Access to Safe Water (% 63 71 .14 72 of total pop) Access to Safe Water (% 53 61 .21 37 or rural pop) Child malnutrition (% 21 15 .06 16 under 5 years) Immunization rate (% 65 88 .0001 49 under 12 months with DPT) Percent of deliveries 58 82 .002 29 attended by trained personnel Percent of children 67 80 .05 60 reaching grade 5
Sources: World Development Indicators 1998 CD-Rom, World Bank, www.unicef.org/statis, www.who.int/whosis,Ch 6.
5.9. The differences in these key indicators are more pronounced if one compares across low and high performing countries the differences (or percentage difference) between the actual values of the indicators and their predicted values based on their GDP per capita. Table 5.3 presents this information.
5.10. The data presented in this table are interpreted as follows. Low performing countries have, on average, immunization coverage rates that are 14.7 percentage points Health Sector 114 Public Expenditure Review
Table 5.3 Indicator Low High Significance Bolivia Performing Performing Level for Test of differences Infant Mortality 24.6 -18.1 .00 18.8 (0.71) (-0.40) (.00) (0.375) Access to Safe Water (% -7.1 6.7 .01 -7.7 of total pop) (-O.I0) (0.10) (.02) (-.11) Access to Safe Water (% -6.4 7.8 .04 -28.4 or rural pop) (-.09) (.13) (.08) (-.51) Child malnutrition ( 4.6 -1.5 .02 -2.2 under 5 years) (.94) (10) (.07) (-.12) Immunization rate (°o% 5.11. We turn now from a comparison of Bolivia relative to comparable countries to a look at the variation in the health outcomes across different identifiable groups. Here the message is that the national figures presented in Table 5.1 mask the significant variation that is present across different groups. For the 1994 survey, Table 5.4 illustrates how the key variables differ across national income quintiles. The income quintiles are constructed based on family assets reported in the survey. 5.12. Across the board, health conditions are much worse for the poorest as compared with the richest quintile. Infant mortality rates and child mortality rates are twice as high. Malnutrition is three times as prevalent. Prenatal care is much less prevalent, while virtually all of the births of those of the lowest quintile occur at home. Vaccination rates are lower for the poorer households, although there remain significant deficiencies among the richest quintile. And, while prevalence rates are not substantially different across income quintiles, children in the poorer quintiles are less likely to receive medical attention for diarrhea and acute respiratory infections. Health Sector Public Expenditure Review 115 Table 5.4: World Bank Poverty Fact Sheets Bolivia 1994 Indicator 1 Deflnition Quintiles Total Low/High Conce I_Lowest 2nd 3rd 4th Highest 20% Ratio tration HNP StatusIndicators Infant Mortality Rate DeathsUnder Age 12 months 111.13 70.58 66.97 66.04 52.42 75.30 2.12 -0.13 per thousandBirths Under 5 Mortality DeathsUnder Age 5 years 172.04 118.08 107.70 92.67 68.47 115.60 2.51 -0.17 per thousandBirths Total Fertility Rate Births per Woman 6.76 5.92 5.03 3.85 3.00 4.77 2.25 -0.16 AdolescentFertility Rate 109.00 135.00 105.00 78.00 60.00 94.00 1.82 -0.13 PercentStunted Below -2 sd z-scorefor 41.00 30.80 25.30 18.90 14.00 26.80 2.93 -0.20 for Age, childrenunder 5 years PercentUnderweight Below -2 sd z-scorefor | 23.80 14.10 13.30 12.60 9.30 14.90 2.56 -0.17 for Age, childrenunder 5 years Low Mother'sHeight Height< 145cm 17.00 12.80 14.00 10.70 9.30 13.00 1.83 -0.11 Low Mother'sBMI 2.80 1.50 2.00 1.90 4.00 2.40 0.70 0.09 HNP Services ModernCPR % of currentlymarried 3.50 890 16.90 25.00 32.00 17.80 0.11 0.34 usinga modem method Knowledgeof Knowssexual transmission 33.30 42.50 56.40 68.40 79.40 58.20 0.42 0.17 routesof HIV/AIDS Antenatal Visits Medically trained Doctor, Nurse,Nurse 26.20 43.20 55.00 69.30 79.90 52.50 0.33 0.20 Doctor 19.50 39.20 52.80 68.70 79.40 49.50 0.25 0.23 TrainedNurse, Nursesand Nurse-Midwives 6.70 4.00 2.20 0.60 0.50 3.00 13.40 -0.45 2+ visits 19.00 37.00 47.30 63.50 76.70 46.30 0.25 0.23 Delivery Attendance MedicallyTrained Doctor, Nurse,Nurse 13.30 34.70 510.40 69.40 81.60 56.40 0.16 0.27 Doctor 10.30 29.40 45.30 64.40 77.80 32.20 0.13 0.30 TrainedNurse, Nurseand Nurse-Midwives 3.00 5.30 5.11) 5.00 3.80 24.20 0.79 0.02 PctPublic 8.30 23.00 31.90) 43.40 49.70 29.60 0.17 0.26 PctPrivate 1.30 5.8() 13.50) 19.50 29.30 12.70 0.04 0.40 PctatHome 89.50 71.1(0 54.10 37.00 20.20 57.30 4.43 -0.25 Immuni:ation Children 12-23months Measles by VaccinationCard or 44.40 50.40 55.51) 63.90 72.00 55.70 0.62 0.10 DPT3 Mother'sReport 34.91) 36.20 36.90 50.60 65.40 42.80 0.53 0.13 All vaccinations 29.30 32.2(0 29.80 42.90 57.70 36.60 0.51 0.14 No vaccinations 26.30) 21.0)0) 10.70 8.10 2.40 14.90 10.96 -0.35 Medical Treatmentof Illness Diarrhea: Prevalence in preceding2 weeks 29.60 27.51) 34.4(0 31.50 23.50 29.60 1.26 -0.02 Oralrehydration ORS,RHForincreased 34.50 27.50 43.00 43.10 44.90 38.30 0.77 0.08 Medicallytreated Broughttoahealth facility 24.10 25.60 34.50 39.70 41.50 32.40 0.58 0.12 PercentPublic Amongthose medically 73.03 89.06 69.57 65.49 62.65 70.99 1.17 -0.05 Pct pub Among all 17.60 22.80 24.00 26.00 26.00 23.00 0.68 0.07 ARI: Coughwith fast breathing Prevalence in preceding2 weeks 17.80 17.20 18.50 18.80 16.70 17.80 1.07 0.00 Medically treated Broughtto a health facility 23.80 29.30 43.00 52.20 55.70 39.70 0.43 0.17 PercentPublic Amongthosemedically 81.51 83.96 76.05 65.33 49.37 69.77 1.65 -0.09 Pct public Among all 19.40 24.60 32.70 34.10 27.50 27.70 0.71 0.07 N. of HH members 8050 8052 8051 8049 8044 40246 1.00 0.00 Health Sector 116 Public Expenditure Review 5.13. Table 5.5 compares the pattern across income quintiles in Bolivia with those of a few other countries that have also had a DHS survey and where a similar procedure could be employed. The table illustrates that other countries face similarly large discrepancies in mortality rates and immunization coverage across income quintiles. The table also shows that Bolivia ,does somewhat poorer than the other countries in both the level and the pattern of acute respiratory infections that are medically treated. Table 5.5 Country Comparisons of Health Outcomes by Income Quintile Country Quintile Quintile Quintile Quintile Quintile Ratio 1 2 3 4 5 Low/High (poorest) (richest) Under 5 Mortality Bolivia 94 172 118 108 93 68 2.51 Malawi 92 230 239 243 245 210 1.09 Cote d'Ivoire 172 162 139 141 121 1.42 94 India 92-93 138 131 107 92 61 2.25 Tanzania 96 119 151 161 129 118 1.01 Morocco 92 99 87 77 57 37 2.71 Peru 96 90 67 43 39 32 2.79 Philippines 93 74 60 47 48 36 2.02 Vietnam 97 51 43 42 24 19 2.69 = ARI Medically Treated Bolivia 94 24 29 43 52 56 .43 Malawi 92 51 52 54 51 61 .84 Coted'lvoire 94 30 25 35 52 56 .53 India 92-93 61 65 72 73 78 .79 Tanzania 96 70 68 69 63 80 .88 Morocco 92 = .. 1 35 26 Peru 96 36 42 52 56 67 .54 Philippines 93 42 52 54 59 53 .79 Vietnam 97 57 65 73 74 82 .70 All Immunizations Bolivia 94 29 32 30 43 60 .51 Malawi 92 81 77 82 83 87 .92 Coted'lvoire94 16 31 41 5 1 54 .29 India 92-93 20 25 34 47 60 .33 Tanzania 96 59 65 70 80 81 .72 Morocco 92 54 69 85 921 95 .57 Peru96 56 65 65 66 67 .84 Philippines 93 64 75 69 76 75 .85 Vietnam 97 I 45 43 59 52 54 .83 Sources: WorldBank PovertyFact Sheets Health Sector Public Expenditure Review 117 5.2. Trends in Recent Public Expenditures 5.14. The poor health outcomes detailed in the previous section suggest that Bolivia's level and/or efficiency of public expenditure on health have been inadequate. In this section, recent trends in public expenditure of the Ministry of Health are presented, along with the pattern of a more expanded set of investments. It is important to consider not only what is spent on hospitals, health clinics, immunization and health outreach but also what public and private investments have been made in water and sanitation and what progress has occurred in nutrition. At high levels of mortality, the investments in other sectors have a strong influence on mortality. As mortality declines, experience suggests that the relative importance of investments in hospitals, health clinics, immunization and health outreach on mortality is likely to increase. 5.15. Recent trends in nominal expenditure on health (narrowly defined) that are channeled through the Ministry of Health are presented in Table 5.6. The trend in real expenditure is presented in Table 5.7. Three features stand out. First, Ministry of Health expenditures are low, on an absolute level and relative to GDP. Second, there has been little absolute increase in real terms since 1990. Third, Ministry of Health expenditures as a share of total public expenditure have fallen by 50 percent since 1990.2 5.16. Table 5.6 illustrates how the Ministry of Health expenditures have been allocated across personnel costs, materials and other expenditures. This table reveals some disturbing facts. First, a significant portion of what is counted as health expenditures is not really health expenditure at all. By accounting convention, pensions paid to widows of the Chaco War of the 1930s are counted as health expenditure, as well as payments to ex-presidents and others designated by the Bolivian Congress to receive a pension.3 5.17. Second, personnel costs have risen from 19 percent of total Ministry of Health expenditure in 1990 to 54 percent of the total in 1998. The combined effect of increasing personnel costs with continued responsibility for pensions from the Chaco War and for eminent persons has squeezed out other expenditures. Whereas in 1991 60 percent of all expenditures was devoted to non-personnel, non-pension activities, by 1998 only 6 percent of all expenditure was devoted to these activities. 5.18. As mentioned previously, looking at expenditures of the Ministry of Health does not tell the whole story. As a result of the transference of responsibilities for maintaining existing infrastructure and cofinancing new infrastructure, the expectation was that municipal expenditures on health would have partly compensated for the decline in non- personnel, non-pension activities of the Ministry of Health. While the information on municipal expenditures is sketchy, there is some evidence to suggest that this compensation has not taken place. To date, municipalities have not spent a high percentage of their coparticipation funds on health. Table 3.1 of this report suggests that 2 TheStudy, Bolivia: Gasto Social y La Iniciativa20/20 presents a muchlower decline of 26 percentas a shareof totalpublic expenditure. However, the definition used in thatstudy includes as health expenditurepensions paid to ChacoWar veterans and their widows and to eminentpeople. 3 Expenditureson pensionsfrom the Chaco War are surprisingly high considering the war concluded over 60 yearsago. Apparently,some veterans married younger women who continue to receivepensions. Health Sector 118 Public Expenditure Review health investments represent about 3.5 percent of all municipal investments (equivalent to approximately 0.6 percent of total public expenditure). Municipal expenditures would have had to be equivalent to 10.5 percent of coparticipation funds in order for 1997 total public health expenditures to reach 1.44 percent of GDP (the 1991 figure for Ministry of Health expenditures alone). 5.19. Tables 5.8-5.10 provide a more complete picture of all health expenditures as it also takes note of health expenditures made through the Social Investment Fund and departmental and rnunicipal governments. The municipal government expenditure consists primarily of counterpart financing to Social Investment Fund projects and to contributions made to maternal and child health insurance. It is quite likely that the figures for municipal governments are underestimated because reporting of municipal expenditures is incomplete. The 1996 figures on municipal expenditures are probably the most accurate because they are based on a special survey of municipalities conducted by INE. However, the effect of the underestimation of the municipal expenditures in total public health expenditures is relatively small. 5.20. These tables show that total public health expenditure has fallen by 20 percent in real terms from US$ 77.9 million in 1995 to US$ 61.3 million in 1997. Both figures are in 1995 dollars.4 This is equivalent to a reduction from 1.19 percent of GDP in 1995 to 0.96 percent of GDP in 1997. This expenditure is low relative to the average of Latin American and Caribbean countries of 2.8 percent and the average of all lower middle income countries of 2.6 percent. 5.21. The tables also show that nongovernmental organizations and international programs have a significant presence in Bolivia and contribute to total expenditure. This reflects a positive response to the shortfall in nonpersonnel expenditure coming from public funds. But having such a high percentage of the nonpersonnel expenditure come from different actors does complicate the planning and implementation of health services. 4 The underestimate in municipal expenditurescreates some uncertainty about the exact magnitude of the fall, but it is clear that real public expenditures in health have fallen. Health Sector Public Expenditure Review 119 Table 5.6. Nominal Expenditure of the Ministry of Health by Category (US dollars '000) Category 1991 1992 1993 1994 1995 1996 1997 1998 Personnel services 23,431 29,317 35,540 38,775 45,422 49,280 52,897 55,991 Materials/nonpersonnel services 8,641 29,155 18,877 24,918 13,781 10,818 7,765 3,053 Real assets 22,644 1,076 6,849 6,650 5,916 4,386 2,730 2,036 Pensions from Chaco War and 33,541 34,497 36,144 36,595 40,567 42,197 43,881 42,398 Notable People Other transfers 20,195 30,408 26,803 1,033 1,019 240 537 Other expenditures 1,956 61 64 125 89 121 123 89 Total 1 10,408 124,514 124,277 108,096 106,794 106,802 107,636 104,104 Total (excluding pensions) (1) 76,867 90,017 88,133 71,501 66,227 64,605 63,755 61,706 GDP (2) 5,343,262 5,643,893 5,734,677 5,974,656 6,532,179 7,124,799 7,968,061 8,573,560 (as % GDP) (1)/(2) 1.44 1.59 1.54 1.2 1.01 0.91 0.8 0.72 Table 5.7: Real Expenditure of the Ministry of Health (1990 US dollars '000) 1991 1992 1993 1994 1995 1996 1997 1998 Personnel services 19,028 23,808 28,861 31,489 36,886 40,019 42,957 45,469 Total 89,661 101,116 100,923 87,783 86,726 86,732 87,409 84,541 Total (w/o Chaco pensions) 62,422 73,101 71,571 58,065 53,782 52,465 51,774 50,110 Non-personnel, nonpension 43,395 49,293 42,710 26,576 16,895 12,445 8,818 4,641 expenditures of MOH MOH Exp/ Total Public Exp 8.0% 7.9% 7.9% 6.8% 6.2% 6.0% 5.5% 5.1% (w/o Chaco Pensions) 5.6% 5.7% 5.6% 4.5% 3.8% 3.6% 3.3% 3.0% MOH Exp/GDP 2.1% 2.2% 2.2% 1.8% 1.6% 1.5% 1.4% 1.2% (w/o Chaco Pensions) 1.4% 1.6% 1.5% 1.2% 1.0% 0.9% 0.8% 0.7% Exchange rate 3.58 3.90 4.26 4.62 4.81 5.08 5.26 5.5 Deflator Public Admin 123.14 145.65 163.96 182.28 199.46 222.28 249.48 272.55 Source: From Table 5.6. Health Sector 120 Public Expenditure Review Table 5.8: Structure of Health Sector Expenditures for Bolivia, 1995 (Thousandsof CurrentUS dollars) _ Government Institution/Company Household External Total PUBLIC SECTOR 54,493 830 22,470 77,793 (18.81%) (0.29%) (7.76%) (26.85%) Ministry of Health 52,778 13,466 66,244 (18.22%) (4.65%) (22.87%) Prefectures/Corporation 176 455 630 (0.06%) (0.16%) (0.22%) Municipalities 493 467 959 (0.17%) (0.16%) (0.33%) Social Investment Fund 391 8 5,635 6,033 (0.13%) (0.003%) (1.95%) (2.08%) Others from the Public Sector 657 822 2,448 3,926 (0.23%) (0.28%) (0.84%) (1.36%) INSURANCE 109,640 201 109,740 (37.81%) (0.07%) (37.88%) Publics 94,721 201 94,835 (32.66%) (0.07%) (32.73%) Private 3,529 3,525 (1.22%) (1.22%) Military 5,806 5,800 (2.00%) (2.00%) University 5,585 5,580 ______(1.93%) (1.93%) PRIVATE INSURANCE 3,714 3,520 7,227 (1.28%) (1.21%) (2,49%) Insurance 1,342 1,162 2,502 (0.46%) (0.40%) (0.86%) Prepaid 2,372 2,358 4,726 (0.82%) (0.81%) (1.63%) NGO 's 4,563 7,082 11,634 (1.57%) (2.44%) (4.02%) HOUSEHOLD 83,395 83,318 (28.76%) (28.76%) TOTAL 54,543 114,184 91,478 29,773 289,713 (18.81%) (39.38%) (31.55%) (10.27%) (100.00%) GDP 6,532,179 TOTAL (%GDP) (0.83%) (t.74%) (1.40%) (0.45%) (4.43%) Source: CNGS Study - Bolivia Health Sector Public Expenditure Review 121 Table 5.9: Structure of Health Sector Expenditures for Bolivia, 1996 (Thousandsof Current US dollars) Government Institution/ Company Household External Total PUBLIC SECTOR 61,969 738 19,799 82,506 (18.12%) (0.22%) (5.79%) (24.12%) Ministry of Health 51,204 13,404 64,608 (14.97%) (3.92%) (18.89%) Prefectures/Corporation 781 782 (0.23%) (0.23%) Municipalities 8,951 220 9,171 (2.62%) (0.06%) (2.68%) Social Investment Fund 155 4 3,182 3,341 (0.05%) (0.001%) (0.93%) (0.98%) Others from the Public Sector 877 735 2,993 4,605 (0.26%) (0.21%) (0.88%) (1.35%) INSURANCE 148,216 286 148,502 (43.34%) (0.08%) (43.42%) Publics 123,829 286 124,115 (36.21%) (0.08%) (36.29%) Private 5,917 5,917 (1.73%) (1.73%) Military 12,195 12,195 (3.57%) (3.57%) University 6,275 6,275 (1.83%) (1.83%) PRIVATE INSURANCE 1,220 1,056 2,276 (0.36%) (0.31%) (0.67%) Insurance 1,220 1,056 2,276 (0.36%) (0.31%) (0.67%) Prepaid nd nd nd NGO's 4,973 8,517 13,490 (1.45%) (2.49%) (3.94%) HOUSEHOLD 95,231 95,231 (27.84%) (27.84%) TOTAL 61,969 150,175 101,260 28,602 342,006 (18.12%) (43.91%) (29.61%) (8.36%) (100.00%) GDP 7,124,799 TOTAL (%GDP) (0.87%) (2.11%) (1.42%) (0.40%) (4.80%) Source: CNGS Study - Bolivia Health Sector 122 Public Expenditure Review Table 5.10: Structure of Health Sector National Expenditures for Bolivia, 1997 (Thousandsof current US dollars) Government Institution/Company Household External Total PUBLIC SECTOR 59,027 1,139 16,467 76,633 (15.93%) (0.31%) (4.44%) (20.68%) Ministry of Health 55,972 7,785 63,757 (15.10%) (2.10%) (17.20%) Prefectures/Corporation 1,282 17 1,300 (0.35%) (0.00%) (0.35°/o) Municipalities 889 2,181 3.069 (0.24%) (0.59%) (0.83%) Social Investment Fund 735 410 5,761 6,905 (0.20%) (0.11%) (1.55%) (1.860) Others from the Public Sector 149 729 723 1,601 (0.04%) (0.20%) (0.20%) (0.43%) INSURANCE 4 170,800 248 171,052 (0.00%) (46.09%) (0.07%) (46.16%) Publics 4 116,427 248 116,679 (0.00%) (31.42%) (0,07%) (31.49%) Private 7,026 7,026 (1.90%) (1.90%) Military 34,435 34.435 (9.29%) (9.29%) University 12,912 12,912 (3.48%) (3.48%) PRIVATE INSURANCE 4,374 3,995 8,369 (1.18%) (1.08%) (2.26%) Insurance 3,488 2,971 6,458 (0.94%) (0.80%) (1.74%) Prepaid 886 1,024 1,910 (0.24%) (0.28%) (0.52%) NG 's 5,860 8,719 14,580 ______(1.58%) (2.35%) (3.93%) HOUSEHOLD 99,947 99,947 (26.97%) (26.97%) TOTAL 59,031 176,312 109,802 25,434 370,580 (15.93%) (47.58%) (29.63%) (6.86%) (100.00%) GDP 7,968,061 TOTAL(%GDP) (0.74%) (2.21%) (1.38%) (0.32%) (4.65%) Source: CNGS Study - Bolivia Health Sector Public Expenditure Review 123 As noted in the section on water and sanitation, Bolivia has made substantial progress in improving access to piped water supply and sanitation between 1992 and 1997. The improvement has been due to a substantial increase in public investment that can be seen from Table 5.11. It is important to note that this level of investment has not been sustained for a long time, but would need to be sustained in order to continue to make a strong impact on coverage rates. Table 5.11: Investments in the Water and Sanitation Sector (including Misicuni investments in US$ millions) Year Total WSS Total WSS Percentage Percentage WSS Percentage WSS investment investment WSS investment as % investment as % planned implemented investment as of social of GDP (US$ mln) (US$ mln) % of total investment investment 1990 32 38 12.1% 0.8% 1991 54 13 3.1% 0.2% 1992 46 32 5.9% 0.6% 1993 55 34 7.1% 0.6% 1994 50 36 7.0% 0.6% 1995 44 46 8.8% 0.7%,o 1996 61 84 14.3% _ 1.1% 1997 88 79 14.6% - 1.0% Average 54 45 9.1% 0.7% 1990- 1997 l______ 5.22. It is difficult to know how much is spent on maintenance since the responsibility for maintenance is decentralized. However, an impact evaluation study of a sample of water and sanitation projects financed by the Social Investment Fund suggests that necessary maintenance on water and sanitation projects are not taking place. 5.23. The third main category of expenditure that could be expected to affect health outcomes is nutrition. Unfortunately, there is not readily available information on expenditure over time on publicly funded nutrition programs. For 1995 an estimated Bs 11.1 million and for 1996 an estimated BS 16.9 million was spent on nutrition programs. 5.3. Challenges 5.24. Given the poor health outcomes and the declining trend in public expenditures, there are a number of key actions that need to be taken. Two relate to the level and targeting of expenditures. Two relate to how the expenditures are to be financed and how investments will be cofinanced across different levels of government and two relate to institutional limitations to a more efficient implementation. These are discussed below. 5.3.1. Reverse trend of declining health expenditures as a share of total public expenditure 5.25. The previous section indicated that the share of Ministry of Health expenditure in total public expenditure has fallen during the 90 this decline has not been offset Health Sector 124 Public Expenditure Review completely by an increase in expenditures by municipalities. To improve health outcomes, this trend needs to be reversed. More incentives need to be introduced to induce municipalities to spend more or more money needs to be allocated to the central level or some combination of the two needs to be put in place. While expenditures on water and sanitationrand nutrition are important, what happens to expenditures on health clinics and on supplies also makes a difference. At the macro level, while the data do not establish a conclusive causal link, the limited reduction in infant mortality between 1994 and 1998 is certainly consistent with the fall-off in effort on public expenditure on health during the 1990s. 5.26. At the micro level, there is evidence that when investments are made that lead to a significant improvement in the quality of the infrastructure and the availability of supplies that there is an improvement in utilization rates. In an impact evaluation study of the Social Investrnent Fund, utilization rates doubled between 1993 and 1997 (from 20 to 40 percent of those ill) in the area of influence of those health clinics that received SIF investments. In the area of influence of health clinics in a control group that did not receive investments, utilization rates in 1997 remained at the same level as in 1993 (20 percent, equal to that of the intervention group prior to the intervention, Newman et al, 1999). 5.3.2 Ensure expenditures are targeted and that problems of low utilization of services in poor comnmunitiesare addressed. 5.27. The considerable variation in health outcomes by income quintiles suggests that it is important for public health expenditures to be targeted to the poor. The main mechanism that the Government will be using is the introduction of a Basic Health Insurance Program. All municipalities are being asked to contribute 6.4 percent of the coparticipation funds that they receive from the central government to finance a basic set of health services for its residents. This program represents an important advance that is likely to have a subst.antialimpact on health outcomes. 5.28. The Basic Health Insurance Program will be targeted to the poor because it provides reimbursement for basic services that are provided by public providers and by limited number of private providers. The private providers will be selected by the Ministry of Health and will be those serving poor, marginal areas- not clinics serving a wealthy clientele. 5.29. The introduction of a Basic Health Insurance Program, while helpful, may not be sufficient to increase utilization of health services in poor municipalities. A municipality may not be able to spend the amount it has allocated for Basic Health Insurance if there is a limited availability' of public and qualified private health facilities serving the poor communities in that municipality. To counteract this supply problem, it would be worth considering directing the investment budget to those municipalities which are not able to spend all of the money they have allocated for the Basic Health Insurance Program Failure to use the money provides a signal that more effort is needed. This can take the forn of more public provision in poorer rural areas or, alternatively, public money could be used to try to provide incentives for private providers to deliver services in those areas. Health Sector Public Expenditure Review 125 5.30. Low utilization of health services in poorer municipalities may occur even where public and private services exist and the Basic Health Insurance Program provides these services at a zero out-of-pocket cost. Because of indirect costs, ignorance of the benefits or cultural barriers utilization of health services (particularly of preventive care) could be lower than what is needed to bring about improvements in health outcomes. When there is insufficient demand for the service at a zero price, it may be necessary to generate a negative price for those services to be consumed. This can be done by providing a rebate for services where there is demand at a positive price. 5.31. A second option that may improve utilization rates would be to design incentives for groups. For example, the community could be eligible for receiving a remodeling of the health clinic if all mothers receive prenatal care and participate in nutrition education programs. The reward would only be given if all members of the group undertake the desirable activity. The strong influence of group pressure has been used to good advantage in microfinance projects, particularly among women. It has not been used very often to elicit positive health behavior, but there is a possibility that group pressure could be powerful in this case as well. Moreover, if there is a benefit that accrues to the group, some women may be more inclined to take care of another woman's older children so that she could take her children to the health clinic. 5.32. Finally, it is important to recognize that if investments are targeted to the poor, then recurrent costs must also be well targeted. This is an obvious point, but one that is not always taken into account. If investments are targeted but recurrent costs are not, then in a short time one will find that there are more health facilities in poor communities but there are not enough funds available to operate them. 5.3.3 Correct predictable intplementation difficulties associated withi Basic Healtit Insurance 5.33. While the Basic Health Insurance Program represents a significant advance, there are likely to be some negative aspects that result from the way in which the program is being implemented. As these negative aspects are entirely predictable, it is worth taking some steps in the near future to counteract them. 5.34. Some of the likely consequences can be inferred from the experience in implementing the National Mother Child Health Insurance Program, a precursor to the Basic Health Insurance Program. On the positive side, the introduction of the program resulted in an increase in utilization rates, with many of the additional users being ones who had not previously made use of modem health services. However, an evaluation of the experience with this program was that the removal of price considerations resulted in patients seeking more care at more costly facilities, especially tertiary-level facilities. Referral and counter-referral mechanisms among primary, secondary and tertiary health facilities are "deficient and virtually non-existent" (Dmytracenko, T. et al, 1998). 5.35. While the Presidential Decree creating the Basic Health Insurance Program suggests that care should be delivered at the primary level, there are still no strong incentives or referral systems that will guarantee that most care is delivered at the primary level. This suggests that there would be in underutilization in health posts and Health Sector 126 Public Expenditure Review any investments made over the last several years in improving the conditions of the health posts would have a much lower return. 5.36. A further set of potential implementation problems in Basic Health Insurance Program arises fromnthe way it is proposed to finance the Program -- from municipal funds. One potential problem is that the municipalities are autonomous and could choose not to provide the financing. The Decreto Supremo of the Seguro Basico allows municipalities that voluntarily join the scheme to earmark a fraction of the transfers received from the Treasury to pay for recurrent costs. There could be a problem if the mayor of the municipality changes. Since the earmarking is based on a voluntary agreement, the next mayor could voluntarily choose not to carry out the earmarking. Moreover, the amount to be transferred through Popular Participation has the force of a law and carries precedence over a Decreto Supremo and an agreement signed under that Decreto Supremo. Thus. it is unlikely that an agreement to earmark could be binding on the new municipal government. Ensuring the financing would require struggles over 311 separate agreements and could involve high transaction costs. 5.37. A second pcitential problem is that ensuring that funds of one municipality are used only to reimburse expenses of residents of that municipality would be costly to administer and enforce. And it is not clear what would happen if one municipality exhausts the amount of money that it had set aside to reimburse providers well before the end of the year. Would no further basic services be provided? Would funds from one municipality where there is a surplus be used to cover the expenses of those where there are not enough resources? This could result in an anti-poor transfer where funds from a municipality in Potosi are used to cover additional expenses of the city of Santa Cruz. Would central government resources be used to make up the difference? Or would providers simply not be paid? 5.38. The above problems are unavoidable if the Basic Health Insurance Program is going to be financed out of Municipal Funds. In the best of circumstances, the system would be administratively more expensive to operate with this type of financing. In the worst of circumstances, the system would be anti-poor and extremely difficult to manage. 5.39. For these reasons, the Report recommends that the financing of the Basic Health Insurance Program be shifted to the central government within the near future. The cost of this shift is easy to calculate since municipalities are being asked to contribute 6.4 percent of their coparticipation funds (20 percent of total Government revenue). Thus, the cost of having the central Government finance the Basic Health Insurance Program would be equivalent to 1.28 percent of total Government revenue. Covering this cost would partially make up for the losses suffered by the health sector over the 1990s. 5.3.4. Establish a National Cofinancing Policy and address adverse incentive problems in assignment of responsibilities at different levels of government 5.40. Government efforts over the last five years to increase the extent of decentralization in the health sector as in other sectors are to be applauded. However, there are some issues related to the financing of activities in the health sector and the assignment of responsibilities that need some further clarification. Health Sector Public Expenditure Review 127 5.41. While there has been discussion among different government agencies, there has yet to be defined a national policy guiding how projects might be cofinanced. This is important for health as well as for other sectors because all three levels of government have their own source of financing. It is useful to highlight how a National Cofinancing Policy might wish to distinguish among three types of programs: cofinanced projects (financed out of a combination of national and local funds), national programs (financed out of national funds) and local programs (financed exclusively out of local funds). With cofinanced projects, the national government presents the local government with a set of cost-sharing ratios for different types of projects. Projects that the national government would consider to be of high priority (perhaps, health clinics) would receive a high share of national funding. Projects of lower national priority might have low shares (sports facilities). Purely national and purely local projects represent opposite ends of the spectrum. National programs financed out of national funds would be implemented when there is an overriding national interest to see the program implemented, when there are substantial externalities and where there is little need for positive incentive effects from having municipalities place some of their funds on the line. Immunization campaigns and programs directed towards Malaria, Chagas disease and Tuberculosis fall into this category. This paper has argued that the Basic Health Insurance Program should also be financed as a national program rather than one co-financed with the municipalities 5.42. The approach to cofinanced projects that has the national Government set the cost ratios but lets the local government pick which projects it would like to finance represents one approach to reconciling the interests of the national level with the local level. An integral part of this approach is that it involves some freedom of choice on the part of the local government. An incentive is presented to them, but they are not forced to make any particular choice. 5.43. The Basic Health Insurance Program (and also of the major nutrition program, the PAN) proposes to finance the project as a cofinanced project, but without the critical element of choice. All municipalities are to provide a mandatory, fixed contribution - 6.4 percent of their coparticipation funds. The municipalities play a passive role. Instead of having the national government supply the financing, the municipalities supply the financing but with higher administrative costs. It would be more efficient for the national government to provide the financing so that more health services could be delivered for the same amount of money. 5.44. Arguing that a national Basic Health Insurance Program should be financed out of national funds does not imply that the Government would or should reverse its trend towards greater decentralization in the health sector. It would still make sense to cofinance investments in the health sector because local authorities have greater knowledge about what health investments are needed. When local money is on the line, there is greater incentive for them to avoid building health clinics where there is no demand. 5.45. There are also important measures that could be taken to make the management (not the financing) more effective in the current decentralized system. In the health system as in education, there is a serious problem of fragmentation of responsibility. The Health Sector 128 Public Expenditure Review infrastructure was decentralized to the municipalities, whereas the responsibility for managing human resources was delegated to the prefecturas. The national government has the responsibility for paying the health workers. There is no one agency responsible for quality of healthlcare provision. And those responsible for making investments are not responsible for managing recurrent costs. 5.46. The problem of just where the responsibility should lie is more complicated in health than in education. Whereas it could be reasonable to assign responsibility for managing health clinics to municipalities, a hospital may serve a wider community than a municipality. Thus, the separation may not be as clean as with education, but there is still a need to clearly define where the responsibilities lie. 5.3.5. Government must exercise strong leadership in coordinating activities of international cooperation 5.47. Partly as a result of the decline in the share of nonpersonnel costs borne by the state, there are a large number of NGOs and international agencies supporting the health sector. In 1997 there were 17 international cooperation agencies financing roughly 60 percent of the investment budget. There are several risks in depending on outside actors for such a high percentage of expenditure in health. One is that actual expenditures may reflect priorities of the funding agencies rather than government. A second risk is that implementation will not be as effective because the large number of actors makes coordination difficult. 5.48. To reduce these risks, the Government needs to be proactive in defining priorities for investment and to use the forum provided by the Equity Pillar and the organizing framework of establishing key performance indicators to ensure that effective coordination among the international agencies is achieved. 5.3.6 Overhaul Human Resource Policies 5.49. The distribution of public health workers is not appropriate for the health needs of the country. There are too many administrative personnel relative to health personnel and far too many doctors relative to nurses. The ratio of doctors to nurses is 2 to 1, when the recommended ratio is to have I doctor for every 2 nurses. When there is a doctor in the rural areas, it is typically a person completing his or her obligatory year of service and will not stay. The system is heavily reliant on auxiliary nurses to run the system. And there are some specialties that are not present in the public system. Table 5.12 illustrates the mix of employees over the last four years. 5.50. A further problem is that the administrators do not have effective controls over the management of human resources. It is difficult for them to know where the health workers are distributed and whether those who are being paid as a doctor are actually medical doctors. Health Sector Public Expenditure Review 129 Table 5.12 Human Resources in Health (Number of workers) 1995 1996 1997 1998 Doctors 1,973 2,038 2,353 2,395 Nurses 1000 1054 1147 1164 Auxiliary nurses 3,131 3,232 3,511 3,616 Nutritionists 42 42 42 64 Dentists 247 260 276 282 Technical personnel 1,272 1,307 1,304 1,313 Pharmacists 185 190 205 207 Administration 4,024 4,132 4,298 4,328 Unspecified 93 227 943 Total 11,874 12,348 13,363 14,312 Source: Unidad Reforma de Salud based on information provided by Ministry of Health 5.51. In the past, health workers have been very poorly paid, but that situation is changing. In 1991 the average compensation of health workers was Bs 7,571 for the year. By 1997, expressed in the same 1991 Bs., average compensation had climbed to Bs. 12,283. This is a 62 percent increase, very close to the real wage gains realized by teachers and considerably more than the 25 percent increase in real GDP per capita registered over this period. The real wage gains have slowed between 1995 and 1997 as can be seen in Table 5.13. Over this same period, there was a 22 percent increase in the number of health workers (from 11,080 to 13,363). Given the rate of growth of population, this does not appear excessive. Table 5.13 Index of Evolution of Annual Real Salaries in Ministry of Health l ______(1995 Bolivianos) 9ii______1 1995 1996 1997 Doctors 100 104 102 Nurses 100 105 105 Auxiliary nurses 100 110 110 Nutritionists 100 100 100 Dentists 100 105 105 Technical personnel 100 112 111 Pharmacists 100 101 99 Administration 100 123 123 Unspecified Na Na Na Total 100 110 111 Source: HealthReform Unit, Ministry of Health Health Sector 130 Public Expenditure Review 5.4. Possible Future Expenditures 5.52. Table 5.14 presents Ministry of Health projections of future health expenditures over the immediate future. To achieve greater health impact, one would also want to factor in an additional US$18 million a year to increase sanitation coverage in the rural areas (see Table 6.14). Unfortunately, at this time there are not good estimates available of the likely cost of needed nutritional interventions (over and above the PAN project). However, a World Bank nutritional sector study is under way and a clearer idea of the costs is likely to be available within a few months. Table 5.14 Projected Future Health Expenditures (Current Bolivianos) 1999 2000 2001 2002 Health 1.5 24.0 34.1 12.7 Improvement Projects (MAR) AIEPI 4.8 6.5 7.9 9.2 Endemic 8.7 10.9 13.6 16.9 Diseases Hospitals 123.0 129.1 135.6 142.3 Other Health 230.8 287.3 347.4 412.6 Interventions Expanded 0.7 2.5 6.4 6.4 Immunizations Mother Child 7.8 10.5 12.4 15.0 Program Basic health 57.3 65.0 72.7 81.1 Insurance Health 0.7 1.1 0.7 0.7 information system Total 435.3 536.9 630.8 696.9 Source: HealthReform Unit, Ministryof Health 5.53. Along with the task of projecting future expenditures, the Government has gone through an extensive process of setting targets for key indicators that are consistent with projected expenditures. Some of the important targets set for the year 2002 are as follows. Infant mortality rates are expected to decline to 61, while the percentage of births attended by trained personnel are expected to climb to 46. The percentage of children vaccinated under the expanded immunization program is projected to reach 85 percent by the year 2002. Finally, the estimated incremental costs of $18 million a year for rural water systems would be expected to generate coverage rates of 70 percent by the year 2002. Health Sector Public Expenditure Review 131 5.54. It is difficult to judge in the abstract whether these targets and projected expenditures make sense for Bolivia at this time without putting the figures in some context. A context can be provided by comparing the projected expenditures to the resources that would likely be available for public health expenditures (in much the same way as in the education chapter) and by comparing the targets to the values of the key indicators that Bolivia would have if Bolivia were a high performing country. Table 5.15 presents the distribution of public funds likely to be available for health, using the same assumptions about the rate of growth of GDP and the share of public expenditure in GDP as was made in Chapter 4. Those assumptions were that GDP growth will be distributed unifornly between 4 and 5 percent in 1998, 1999 and 2000 and between 4 and 6 percent in 2001 and 2002. The share of total public expenditure in GDP was assumed to be distributed uniformly between 26 and 29 percent. The share of health in total public expenditure is assumed to follow a triangular distribution between 4 and 8 percent, with the most likely value at 5 percent. Thus, the most likely value of the projection places health at roughly 1.25 percent of GDP,while the maximum value would be roughly 2 percent of GDP. Comparing projected expenditures with this distribution suggests that Bolivia is not being very ambitious in trying to increase its health expenditures to respond to the pressing problems. Table 5.15: Distribution of Public Funds Likely to be Available Percentiles 1999 2000 2001 2002 0 574 597 653 727 20 700 766 845 913 40 758 837 908 996 60 827 919 1005 1098 80 921 1008 1103 1220 100 1180 1283 1398 1520 5.55. Finally, Table 5.16 illustrates that Bolivia's targets for key indicators still would lie considerably below the values that would prevail if Bolivia were a high performing country. The value if Bolivia were a high performing country is determined by adding the percentage by which high perforning countries exceed their predicted values to Bolivia's predicted value of the relevant indicator. Again, the predictions are made based on 1990 through 1995 values of GDP per capita, expressed in constant 1987 PPP dollars. Health Sector 132 Public Expenditure Review Table 5.16: Comiparisonof current values to those that would prevail if Bolivia were a high performing country Key Indicator Predicted Value if Current value Target set for value Bolivia 2002 in followed the Document for pattern of high Consultative performing Group meeting countries Infant Mortality 50.2 30.1 69.0 61 Access to Safe 1 67.7 74.0 72.0 Na Water (% of total pop) Access to Safe 55.4 < 63.0 37.0 Na Water (% or rural pop) Child 18.2 16.0 16.0 Na malnutrition (% under 5 years) Immunization 80.0 88.0 49.0 85 rate (% under 12 months with DPT) Percent of 63.0 79.0 29.0 46 deliveries attended by trained personnel P'ercent of 78.0 73.0 (to 4"f Na children grade) reaching grade 5 i 5.56. The above table is only suggestive. There is no guarantee that if Bolivia were to reach the values of these indicators that it would achieve the desired reductions in mortality. Still, it does point out that Bolivia lags behind in immunizations, rural water coverage and deliveries attended by trained personnel. These indicators are strongly associated with lower mortality. It also suggests that Bolivia should be more ambitious both in reaching for higher targets and in devoting the resources to help achieve the targets. The one caveat to that assessment is that it will be necessary to overcome some of the institutional constraints discussed in section three to ensure that expanded health interventions could be implemented. Health Sector Public Expenditure Review 133 6. WATER AND SANITATION 6.1. The water and sanitation sectors in Bolivia are important both due to health and environmental externalities and the fact that they account for the second largest share of public investment after roads. Recent work suggests that efficient allocation of public spending in areas such as water supply is perhaps ten times more effective in addressing causes of child mortality than public spending on health.' This note looks at key issues the sector must address in the near future. Section 6.1 reviews access to water and sanitation highlighting improvements albeit with an uneven distribution. Section 6.2 discusses institutional issues. Section 6.3 evaluates current and planned investment programs in the sector. Investment requirements will remain large. Technical standards are overly ambitious resulting in high costs, and past neglect of preventive maintenance will require rehabilitation of existing infrastructure. Furthermore, large investment is required in urban areas due to population migration, while investments in rural areas are needed to improve low coverage. Finally, the chapter provides suggestions to lower investment requirements through incentives to decrease per capita costs, and increased private participation in the provision of services. 6.1. Water Supply and Sanitation Coverage: Improvement but Inequitable 6.1.1. Water Supply Coverage 6.2. The lack of safe water and sanitation services causes waterbome diseases, which in 1992 was the most frequently reported illness in Bolivia. In 1992, Bolivia had one of the highest rates of infant mortality in Latin America -- 75 per 1,000 live births. The importance of water supply and sanitation coverage is underscored by the infant mortality rate differential between urban and rural areas. In 1992, infant mortality in urban areas ranged from 46 in Santa Cruz and Tarija to 103 per 1,000 live births in Oruro. In rural areas, infant mortality ranged from 74 per 1,000 live births in Tarija to 129 in Potosi. 6.3. Table 6.1 shows that Bolivia achieved major progress in improving access to piped water supply and sanitation between 1992 and 1997.2 Water supply coverage increased from 58 percent in 1992 to 72 percent in 1997. Sanitation coverage increased from 43 percent in 1992 to 61 percent in 1997. These data has yet to be confirmed, as there is significant variation between different sources. Nevertheless, this progress is impressive, and Table 6.2 indicates that the water supply coverage rate in Bolivia is no longer among the lowest in Latin America. Filmer Deon, Pritchett Lant, Child Mortality and Public Spending on Health, Policy research Working Paper no. 1864 ,World Bank, Dec. 1997. 2 See the last paragraph of Section 6.1 for a discussion about the reliability of coverage rates. For instance, in 1997, water supply coverage rates in La Paz, Santa Cruz and Cochabambawere 84 percent, 80 percent and 57 percent respectively, while the water supply coverage rates for "ciudades capitales" were estimated at 95 percent by INE Water and Sanitation 134 Public Expenditure Review Table 6.1: Sector Objectives Sector 1976 1992 1997 Urban Sector WaterSupply 74% 81%(75%) 93% Capital cities 95% Other urban areas 89% Sanitation 47% 36% (35%) 44% Rural Sector WaterSupply 9% 24%(30%) 37% Sanitation 4% 18%(15%) 33%/. TotalWater Supply 390/o 58% 72% Total Sanitation 22% 43% 61% Source: INE Table 6.2: Bolivia's Performance in an International Context Country Access to Piped Water Supply Access to Sewerage Argentina 72% 38% Brazil 87% 49% Chile 87% 85% Mexico 89% 50% Nicaragua 56% n.a. Peru 63% 58% Bolivia 72% 28% Source: Speech prepared for Sanitation and Health and the Environment in the Third Millenium. Conference organized in Iortaleza, November 26, 1998. Brazil's Water and Sanitation Sector Challenges and Opportunities by Abel Mejia (World Bank). Nicaragua's data are from SAR Nicaragua Water Supply and Sanitation Project (daled February 1997). 6.4. A closer look at the coverage levels, however, reveals large disparities between urban and rural areas, between the rich and the poor and between regions within the country (Tables 6.1, 6.3, and 6.4). Water supply coverage in the urban areas increased from 81 percent in 1992 to 93 percent in 1997. Piped water supply coverage is higher in the big cities ('ciudades capitales ) than in other urban areas. In rural areas, water supply coverage increased from 24 percent in 1992 to 37 percent in 1997. The growth in rural water supply coverage was higher than that of the sector as a whole, due to its increased emphasis in the government's investment program, with almost all of the incremental resources to water and sanitation destined to the rural sector. Table 6.12 shows that investmenl:sin rural areas increased from US$8 million in 1992 which was equivalent to 16 percent of investment in the sector to US$32 million in 1996 equivalent to 42 percent of investment in the sector. 6.5. There are large regional differences in the provision of piped water. In Santa Cruz, 83 percent of the population has access to piped water, while Pando's coverage rate is only 31 percent (Table 6.3). Urban water supply coverage is lower than average in Cochabarmba,Beni and Pando. Rural water supply coverage shows wide disparities between departments, with coverage rates ranging from 30 percent in Pando to 78 percent in Santa Cruz. Moreover, differences exist in service quality level i.e. in Potosi, about 13 Water and Sanitation Public Expenditure Review 135 percent of the population has access to standpipes, compared to only 1 percent in Santa Cruz and Tarija. Table 6.3: Water Supply Coverage per Department, 1997 TotalCoverage UrbanCoverage RuralCoverage % of Urban Department Population Chuquisaca 52% 95% 29% 36% Cochabamba 66% 82% 46% 55% La Paz 80% 98% 44% 67% Oruro 74% 96% 28% 67% Potosi 52% 95% 29% 35% Tarija 73% 97% 39% 59% SantaCruz 83% 97% 36% 78% Beni 57% 73% 17% 72% Pando 31% 80% 10% 30% Total 72% 93% 37% 61% Source: INE,November 1997. 6.6. Access to piped water supply is directly linked to poverty level (Table 6.4). The poor are largely left out from public water supply services. Only about 32 percent of the poorest quintile of the population has access to piped water supply while 93 percent in the richest quintile does. Perhaps surprisingly, the poverty link within Bolivia is different between urban and rural areas. In rural areas, 27 percent of the poorest quintile has access to piped water contrasting drastically with 60 percent in the richest quintile. The link is urban areas is weaker. In cities 87 percent of the poorest quintile has access to piped water and 97 percent of the richest only a 10 percent difference. The relationship is expected a priori. It would be interesting to have comparable international data, as in the health chapter, to determine if the poverty link was particularly acute in Bolivia. Table 6.4: Water Supply Coverage and Income Distribution, 1997 Quintiles TotalCoverage UrbanCoverage RuralCoverage ______32% 87% 27% 2 ______67% 91% 38% 3 ______83% 92% 52% 4 88% 94% 55% 5 93% 97% 60% Source:INE, November 1997 6.7. There are wide disparities in service quality levels (Table 6.5). On one hand, about 88 percent of urban population has access to either house or yard connections with the proportion of house connections increasing with income level. Conversely, only 29 percent of the rural population is covered through these types of connections. Given the rural poverty level, house connections make up a very small fraction of connections. An idiosyncratic characteristic of rural coverage in Bolivia is the large proportion of yard connections compared to the low prevalence of the cheaper alternative, standpipes. Although the health externalities of standpipes are lower because the water can be contaminated during transportation, authorities should encourage their use because they could provide a temporary alternative to insure that the remaining 71 percent of the rural Water and Sanitation 136 Public Expenditure Review population does have access to safe water. The preference for yard connections arises because of institutional and incentive structures to be detailed in the next subsection. Table 6.5: Water Supply Coverage by Type of Supplies and Residence, 1997 Type of Supplies Total Coverage Urban Coverage Rural Coverage House Connections 20% 31% 2% Yard Connections 46% 57% 27% Standpipes 6% 5% 8% Other 28% 7% 63% Total 100% 100% 100% Source: INE, November 1997 6.8. The quality oi water supplied varies across the country. In 1995, only 47 percent of the drinking water received any treatment. The FIS impact study shows that new systems in rural area<'do not supply higher quality water than old systems.3 In the small survey sample, virtually none of the small water supply systems had a bacteriological quality of drinking water that met the Ministry of Health standards due to lack of chemicals, lack of maintenance, inappropriate water supply technological standards and the absence of a water quality monitoring program. There is wide debate on this issue because, as in technical standards, many argue that the quality standards set for Bolivia are too ambitious fir the country to afford, and that there should be a gradual improvement in qualily. Section 6.2 and 6.4 present suggestions on the issue. 6.1.2. Sanitation Coverage: Lagging Behind Water Supply 6.9. As in most Latin-American countries, water supply coverage exceeds sanitation Bolivia. The gap is a more important issue in urban areas due to environmental pollution and public health hazards. Figures in Table 6.6 indicate enormous progress in sanitation coverage in Bolivia but Tables 6.7 and 6.8 also reflect large disparities between urban and rural areas, between rich and poor households, and between departments. Overall, access to sanitation services increased from 43 percent in 1992 to 61 percent in 1997. In urban areas, sanitation coverage increased from 63 to 79 percent. Note that 53 percent of the population in capital cities have access to sewerage, compared to only 23 percent in other (smaller) urban areas. Table 6.6: Sanitation Coverage between 1976 and 1997 Accessto Sanitation WithoutAccess to Sanitation 1976 1992 1997 1976 1992 1997 Urban areas 47% 63% 79% 53% 37% 21% a capitalcities 82% 18% b. otherurban areas 71%o_ 29% Rural areas 4% 17% 33% 96% 83% 67% Total 22% 43% 61% 78% 57% 39% Source: 1976,1992 data are from the census of 1976,1992;the data from 1997 are from INE. 3World Bank, ICR for the impact of the Social Investment Fund. Water and Sanitation Public Expenditure Review 137 6.10. Regional disparities in sanitation services are even more pronounced than in water supply. In the Altiplano (Chuquisaca, Oruro, Potosi, and parts of La Paz and Cochabamba,), sanitation coverage is low, while in the lowlands (Santa Cruz, Beni and Pando), sanitation coverage is much higher. It is remarkable that departments such as, Beni and Pando which are not particularly rich or urbanized have achieved a high coverage rate. Table 6.7: Regional Distribution of Sanitation Services, 1997 Department Total Coverage Urban Coverage Rural Coverage % of Urban Population Chuquisaca 37% 80% 14% 36% Cochabamba 66% 87% 39% 55% La Paz 57% 66% 37% 67% Oruro 34% 46% 9% 67% Potosi 24% 60% 6% 35% Tarija 70% 96% 31% 59% SantaCruz 88% 93% 69% 78% Beni 82% 96% 46% 72% Pando 69% 97% 56% 30% Total 61% 79% 33% 61% Source: INE, November 1997 6.11. Again, the relationship between access to sanitation services and income levels is strong (Table 6.8). In rural areas, only 17 percent of the population in the lowest quintile has access to sanitation services compared to 72 percent in the richest quintile. In urban areas the contrast is less pronounced, with 56 percent of the poorest quintile having sanitation access versus 94 percent of the richest quintile. Overall only 20 percent of the population in the lowest income quintile has access to sanitation services compared to 92 percent in the highest quintile. As in water coverage it would be interesting to compare the degree of income access internationally. Disparities within quintiles between rural and urban areas are large. In urban areas, 56 percent of the population in the lowest income quintile has access to sanitation services, compared to only 17 percent in the rural areas. The disparities remain large, even for the richest quintile of the population, with 94 percent of the population having access to sanitation services in the urban areas and only 72 percent in the rural areas. Note that except for the richest quintile in the rural areas, in every other income group (rural and urban) water coverage exceeds sanitation. Table 6.8: Sanitation Coverage by Income Distribution, 1997 Quintiles Total Coverage Urban Coverage Rural Coverage 1 20% 56% 17% 2 53% 65% 37% 3 65% 71% 48% 4 82% 85% 66% 5 92% 94% 72% Source: INE, November 1997 Water and Sanitation 138 Public Expenditure Review 6.12. In rural areas, not only is access to sanitation services low, but the service level associated with that service is lower than in the urban areas (Table 6.9). When rural households have access to sanitation services, it is mainly with pit latrines. In urban areas, the service level is generally greater due to higher income levels and higher population densities. The discrimination in service levels between urban and rural is expected and may even be desired in the short term to keep costs down. Table 6.9: SatnitationCoverage by Type of Supplies and Residence, 1997 Type of Supplies j TotalCoverage UrbanCoverage RuralCoverage Sewerage 28% 44% 2% Septic Tanks 11% 15% 4% Pit latrines 23% 20% 27% With Service 61% 79% 33% WithoutService 39% 21% 67% Source: INE, November 1997 6.13. Only four (urban) water companies have wastewater treatment plants. Only part of the wastewater that gets collected is treated before final disposal, and hence sewage is often discharged into the natural drainage system without any controls. The problem is exacerbated by the lack of access to solid waste services. This can result in a deterioration of environmental and public health conditions. In Santa Cruz, La Paz and Cochabamba the situation is serious. In La Paz, sewerage is discharged at various points to the Rio Bajo. The contamination of the river has prevented safe farming downstream. Implementing sewerage treatment will require major infrastructure efforts to consolidate the various partial discharges. Nevertheless, except for some cities with severe problems, sewage treatment could be postponed because of the topography of the country, and the purification capacity of the rivers can limit the negative impact of raw sewage discharges. Investments in treatment could be limited to those areas where there is a clear negative environmental impact or the existence of public health hazards due to wastewater flows. However, it should be noted that although sewage treatment will become a heavy burden only in the medium term, precautionary planning may be in order at this point. 6.14. Sewage collection, however, is crucial in urban areas because of the environmental and public health impacts in densely populated areas. In Santa Cruz only 21 percent of households have sewage collection. The rest have septic tanks. As a result, contamination has been documented at a depth of 70 m. The water level is at 120 m. If the situation is not reversed, the water level could be reached in five to ten years. Experience in other Latin-American countries and in Bolivia shows that people are willing to pay for the collection of sewage. The current sewage tariffs are low in that they do not reflect the cost of service and, therefore, provide utilities little incentive to invest in sewerage. Research needs to be undertaken to investigate the willingness to pay for sewage collection services, the possibility to fully cover the cost of this service, or the need for investment subsidies in this sector.4 4 Authorities asked the external cooperation and the World Bank for support. Water and Sanitation Public Expenditure Review 139 6.15. There is a question about the reliability of the coverage rates for Bolivia obtained from INE and reported here as well data on sector performance. The data differs from source to source. There was agreement that at this stage, the information reported from INE was the best available and was a good base. The Ministry suspects coverage rates may be overstated by as much as 10-15 percent, although some of this discrepancy may be due to illegal connections. The Ministry and INE are taking steps to improve the quality of the data, including parameters in addition to coverage such as quality of service. The qualitative result about progress will remain the same but if the coverage rates are indeed lower, investments in the sector may need to be larger than estimated by the document. In addition, access to a timely database will assist the MHBS in developing proper sector policies and, by enabling the monitoring performance, in the efficient, effective and equitable allocation of public funds. 6.2. Institutions and Regulation 6.2.1. Background 6.16. In the mid 1990s, the Government took the first steps in a long-lasting reform process in the water and sanitation sector. At the heart of this program was the recognition of the new role of the central government as a regulator rather than a service provider, the consolidation of policy formulation and oversight in the Ministry of Housing and Basic Services (MHBS), and the creation of an, albeit weak, Superintendence of Water. The institutional environment of the sector is still evolving, there are still too many players acting in an uncoordinated fashion, and fuirther adjustments are necessary. In particular, this administration is formulating the regulatory framework with the corresponding institutional changes necessary. The future agenda will have to enforce the regulatory framework and define a national subsidy policy. 6.17. Central Government Institutions and Policy Oversight. In 1991 the central government removed itself from service delivery functions, previously under the Corporaci6n de Agua and the Directorate of Environmental Sanitation of the Ministry of Health. It transferred most activities related to construction, human resource development and service administration to the private sector, municipal companies, and cooperatives. In 1997, the government consolidated policy formulation and oversight, preparing national plans and investment programs, coordinating investment programs, and promoting institutional development under the MHBS. The Directorate for Water and Sanitation (renamed to DIGESBA) was elevated to the Vice-Ministry of Basic Services in this MHBS. The Ministries of Environment and Health both have responsibilities for setting and overseeing water quality standards. The Ministry of Finance plays a role in the formulation of investment programs for the sector. 6.18. Superintendence of Water. In 1994, the SIRESE law proposed the creation of an independent regulatory institution. In 1997, along with the consolidation of policy oversight under the (MHBS), a Supreme Decree established the specific powers and responsibilities for the Water Superintendence. Its mandate is to regulate public water supply and sanitation services. In particular, its functions are to oversee the quality of service provision, to approve tariffs according to sector regulations, to grant concessions for the provision of water supply and sanitation services, to process complaints from Water and Sanitation 140 Public Expenditure Review customers and apply fines to utility operators, to advise the government on sector laws and decrees, and to prepare technical norms which fall under its jurisprudence. 6.19. The Regulatoiy Framework. In 1992 national regulations for water and sanitation services in urban areas were developed but the sector lacked an overall regulatory law. This is the area where least progress was made in the first steps of the reform but where the current administration has made great strides. Section 6.2.2. discusses the new law. In addition, authorities have already prepared 4 sets of bylaws (reglamentos). 6.20. Departmental Administrations. Although the role of the departments in financing the sector has decreased in the past decade, they remain important in financing pre- investment studies for small municipalities and rural areas. In 1997, departments provided almost 5 percent of investment resources. Under the PROSABAR project, the departments generated 1,425 subprojects in less than 4 years. However, due to lack of funding and high staff turnover, a major part of this success was attributable to consultants financed under the project to provide technical assistance to UNASBAs. 6.21. The Role of the Funds. Over 40 percent of public funds for the sector are handled through two financial intermediaries, the Social Investment Fund (FIS) and the National Fund of Regional Development (FNDR). The FIS is responsible for administering government transfers to communities with fewer than 5,000 inhabitants. FNDR finances investment projects in larger urban areas through loans to municipalities and municipal utilities, often with guarantees from the departmental governments. FNDR loans are often combined with government matching grants. 6.22. Service Providers. the role of Municipal Governments, Cooperatives and Private Companies. The Popular Participation Law and the Law on Municipalities transferred ownership and operational responsibility for the provision of water supply and sanitation services to the municipalities. Currently, there are three types of institutional arrangements: private concession (La Paz - El Alto is the only one), cooperatives (there are 320 cooperatives cf which the most important are in Santa Cruz and Tarija), and a large number of autonomous municipal water companies (of which the largest are in Cochabamba, Sucre, and Potosi). Of the 9 largest water companies , one is a private concession, five are cooperatives and the remainder are municipal enterprises. In rural areas, water and sanitation committees (called CAPYS) are being established to administer, operate and maintain rural water supply and sanitation systems. Authorities are piloting the creation of a network to ensure these committees have access to technical assistance. 6.23. Other Stakeholcders. There are still too many uncoordinated efforts in the sector. The Vice-Ministry of Public Investment has over 20 projects in the sector but only in two is the MHBS involved. Moreover, there are grant projects which are directly implemented without the knowledge of either VIPFE or the Ministry. There is a need to have an agency, the MI-BS, to coordinate the investment efforts in the sector. 5 Thesecompanies are Aguas del Illimany (La Paz), SEMAPA (Cochabamba), SAGUAPAC (Santa Cruz), ELAPAS (Sucre), AA1:OS(Potosi), SeLA (Oruro), COSAALT (Tarija), COATRI (Trinidad), COSMOL (Montero). Water and Sanitation Public Expenditure Review 141 6.2.2. Institutions: An UnfinishedAgenda 6.24. This subsection highlights the key institutional issues in the sector and proposes tentative alternatives. The role of the various actors in the sector needs to be clarified and strengthened to ensure that sector policies are implemented effectively and the government will have to increase its efforts to monitor sector performance. 6.25. Lack of Capacity for Sector Policy Formulation in the Ministry of Housing and Basic Services. Because of lack of qualified staff in the Ministry, little capacity is available for the definition and monitoring of sector policies. Monitoring of the sector's performance is still weak and severely impedes the development and enforcement of sector policies. The Ministry has 10 executives, 34 technical and 48 administrative staff to cover water supply, sanitation, energy, gas, and housing. 6.26. The MHBS should be strengthened to enable it to analyze and recommend policies and strategies for the sector, and to ensure consistency in the rest of other central government activities. The MHBS should improve its capacity to evaluate the financial and economic implications of alternative investment policies and to develop a coherent investment plan. The MHBS should review its current organization and staffing profile and adjust them to the requirements of a more decentralized sector organization. Areas that require special attention are: * define sector policies and priorities * define target mechanisms to ensure an equitable provision of services * establish and monitor performance standards * establish a sector-wide infornation system to monitor sector performance * develop and assist in the implementation of training programs to strengthen the human resource capacities within the sector. e develop and implement water usage, and health/sanitation educational programs. 6.27. Issues in Implementing Regulatory Functions. The MHBS recently submitted a proposal to Congress of a modern Ley de Servicios de Agua Potable and Alcantarillado Sanitario (Drinking Water and Sanitation Service Provision Law). The new law provides a good the regulatory umbrella in the sector. Issues in the law worth highlighting include: (i) The law explicitly establishes that for all systems in the country, tariffs should cover O&M costs entirely and that revenue from water collection can only be used in the sector. These are great features. The difficulty will now lie in enforcing the issue since it is common practice to cut corners in rehabilitation expenses until it is too late (see Section 6.3). Nevertheless, its is an achievement to have it in the law in a developing country. (ii) The law establishes that for cities with a population greater than 10,000 concessions should be awarded and no subsidies are permitted.6 This translates to 41 cities which will be concessioned within the next 12 months. For smaller cities and rural 6 This issue has already sparked a debate within Bolivia about the definition of subsidy. In other words, whether funding from the FNDR which lends at market rates is allowed. See discussion on the role of the funds below. Water and Sanitation 142 Public Expenditure Review areas, licenses are awarded with less strict performance criteria, and subsidies for investment are permitted. Given the heterogeneity in size and technical capacity in municipalities, a single institutional structure is not appropriate and authorities are right in focusing on the larger cities (See Section 6.4). The law permits awarding concessions to cooperatives, municipal water utilities, and private companies. This important step forces an arms-len.gth relationship between Municipal Water companies and local government. It will improve service delivery by introducing verifiable performance criteria. And more importantly, municipal water companies will have to perform without political interference, have low costs, and the appropriate service quality. Otherwise. the concession will be revoked and awarded to a private company through a competitive bidding process. (iii) The law is flexible in the criteria for awarding concessions. Also a good feature, since, as coverage rates increase, authorities will have the flexibility to move to performance criteria other than coverage rates as the basis for awarding concessions.7 In the short term, regulation should focus on creating incentives to increase efficiency bv sett[ing tariffs, supervising performance, and specifying service quality standards. In some areas, the practice of awarding concessions based on water supply coverage rates despite having other minimum criteria is not an effective tool to promote efficiency in the sector; i.e. in urban areas where coverage is high, tariff levels as the basis for awarding the concession coupled with minimum coverage rates may be more appropriate to promote efficiency. (iv) In the Bolivian context, the mandaite of the Superintendence is ap)propriate. The Superintendence is currently only monitoring the concession contract for La Paz-El Alto. The Superintendence will grant concessions for the provision of water supply and sanitation services in 41 cities and the supervise performiiatncein the near future. In other countries, the regulator is not involved in grantitlngconcessionis because of the conflict of interest that is generated; i.e as the grantor of conicessionis. the Superintendent becomes a participant in the contracting process hamiiperinigits abilitv to regulate. H3owever, this institutional arrangernent has worked well in other sectors in Bolivia because, among other things, the Superintendence is politically indepcndenit, autonomous, with high technical capacity, and in this case, with greater resources thani the Ministry itself. (v) Initial guarantees and prilvate concession termination gu1idelines. This is an outstanding issue which international expericnce shows does not have an easy solution specially in countries with faulty judicial systems. Investmenitsin the sector require long amortization. If the concession is revoked, the operator is only compensated if it is not "his fault." The problem is that it will be difficult to determine in practice. The issue comes up more often in the water sector because of the high book value/cash value ratio of investments and "creeping exportation" in the form of lower than promised tariff increases. The bylaws should attempt to address this issue especially given the state of the judicial system in Bolivia. Giventhe unreliabilityof coveragerates, connections will increaseby the rate of populationgrowth in the first year. For subsequentyears, specifictargets will be set. s Thereis a WaterSuperintendence in SIRINAREin chargeof waterresource management issues. Water and Sanitation Public Expenditure Review 143 6.2.3. Decentralization has Created Some Problems. 6.28. Political Interference in Water Utility Management. The potential advantages of local water companies are that they are closest to beneficiaries and thus more likely to reflect local needs. Local service provision also enforces greater transparency and accountability. But these advantages can not be fully realized unless the institutional framework protects the utilities from political interference at the local level. Although the law provides for autonomous companies, political interference by municipal governments is more the rule than the exception9. As discussed above, the law takes a solid first step in resolving this situation in the 41 largest cities by establishing concessions in which municipal companies can participate and by mandating that water collection revenues can only be used in the sector. 6.29. Financial Viabilityof Water Utilities. Currently, many towns and cities have their own water utility. However, the question is whether these companies can be financially viable in the long run. Most water utilities in Bolivia are small, and hence more research is needed to determine the financial viability of water utilities of these small utilities. Unfortunately, international experience provides little guidance on the minimum viable system: a sample of urban water companies in Peril suggested a minimum size of at least 50,000 users, while private small-scale water supply operators in Paraguay mention a minimum size of about 5,000 users to ensure full cost recovery. 6.30. Neither of these problems are easy to solve. Most of the experience in Latin America, with notable exceptions, has shown that as long as companies belong to municipalities -autonomous or not- political interference will continue. There is little reason to believe Bolivia will be the exception. The issue is analogous to more traditional public enterprises where the directors are political appointees which more often than not do a poor job. Bolivia has taken an important first step by requiring by law that concessions be awarded in the largest cities. In many cases, municipal water companies will win the concession but will have to perform according to verifiable criteria. It is an intermediate step before awarding private sector participation which is appropriate because it gives municipal companies a chance to perform. The following section describes the pro's and cons as well as implementationissues of introducing PSP. Rethinking the Role of Investment Funds: Financing Sustainable Investments 6.31. Funds, specifically the FIS and the FNDR, have become the major channel of investment resources for the sector (see Table 6. 10). Authorities have been working on a national cofinancing policy which will redefine their role (See Chapter 3 for advances and delays). Any solution proposed for the sector should fit within the national cofinancing umbrella which has yet to be defined. This section highlights issues pertaining to the water sector. While the previous section recounts much achieved progress in terms of coverage, an Impact Evaluation Study carried out under the Bank- financed FIS II project has shown that the institution is not very well geared to provide water supply and sanitation infrastructure (as opposed to education where it is effective). 9 It is unclear,due to lack of data,whether there are significantdifferences in the operationaland financial performanceof cooperativesand municipalwater companies. Water and Sanitation 144 Public Expenditure Review, In a sample of 18 water systems, only four were still operating after four years in service. FIS' lack of succes,s is due to a number of factors: (i) over ambitious technical design standards; (ii) lack; of community participation in delivering infrastructure to rural populations; (iii) inappropriate evaluation and approval procedures which disregard the financial and economic viability of projects; (iv) inappropriate institutional procedures, which centralize most investment decisions in La Paz; (v) high administrative costs, whose calculation leads to bias against small-size projects and the use of low-cost technologies; (vi) insufficient quality of supervision of works; and (vii) insufficient coordination with the sector ministry regarding sector policy implementation. Unsustainable water supply and sanitation service is not limited to rural areas. 6.32. Insufficient coordination exists between the sector ministry and the financing agencies. Because the Sector Ministry has limited capacity to enforce its rules and regulations, the financing agencies tend to apply their own regulations and procedures (including differenr technical design standards, and their own set of investment priorities). Hence, MHBS should enforce its policies and ensure that the policies of the investment funds are consistent with the sector strategy. MHBS should monitor the performance of these funds (investment cost per capita of service provided, overhead cost of these funds, application of design and quality standards set by the MHBS, the tumover of projects, etc.) carefully. The incentive structure under which the investment funds work, should be adjusted to ensure that these funds will deliver services more promptly, efficiently, and be a:imedat their long-term sustainability. The incentive structure should not be biased against small-size projects and the use of low-cost technologies, nor should it give investment funds the incentive to increase costs. 6.33. Financial and Economic Evaluation of Investment Projecls is Done Ad-Hoc. In the evaluation of investment projects, little emphasis is given to economic and financial considerations. Planning capacity at the national and local level is underdeveloped. The FIS and FNDR pay scant attention to the financial and economic evaluation of investment projects resulting in an inefficient allocation of resources. 6.34. Inappropriate Technical Standards and Designs in rural areas is probablv the biggest problem that the Funds have created. Technical standards have been too ambitious in Bolivia. Engineers and managers of water utilities, and financial institutions such as FIS and FNDR, continue to cling to technical standards and designs that are more appropriate for high-income countries. Their reluctance to use more appropriate low-cost technologies has been fueled by standards set in internal FIS procedures. 6.35. For instance: the perverse financial incentive structure governing investment funds. The government provides a maximum per capita subsidy of US$70 for water supply and US$65 for sewage systems. A disadvantage of subsidy ceilings is that they often bias communities to accept the most expensive capital cost option with the highest level of service to ensure capturing the maximum subsidy. In addition, the fund itself has a bias against small projects because its overhead charge is a percentage of the investment cost. As a result, the Funds prefer large investments to spread their true overhead costs more widely. Both of these results run counter to the rationale underlying the Fund's existence. There are wide disparities in the investment cost of water supply infrastructure. Data from the Vice Ministry of Basic Services show that the per capita Water and Sanitation Public Expenditure Review 145 investment cost of a water supply system with standpipes can range from US$55 to US$102, while these costs range from US$95 to US$141 for systems with yard connections. Data from the Prosanear project in Brazil shows that per capita costs vary from US$27 to US$100 with an average of US$84. The following section argues that these costs are prohibitively high to fulfill the expansion in coverage that is envisioned. 6.36. Measures to increase efficiency could include the following change in incentives: (i)administration costs could be calculated as a fixed amount or fee per investment project or a batch of investment projects in order for fund to have a greater incentive to execute smaller projects;'0 (ii) at least a part of the administration cost of the investment funds should be made dependent on their performance in delivering sustainable services, which will require strict monitoring by MHBS; (iii) competition among the different funds and with other institutions in the country (e.g., with NGOs in small, dispersed rural areas) should be introduced to ensure that the funds become more cost-efficient; (v) contracting out services should be taken into consideration, especially with regard to project evaluation; and (v) evaluation and approval methodologies currently used by the funds should be revised by MHBS as they are time consuming and do not provide meaningful information about the sustainability of the subprojects. 6.37. Perhaps the simplest solution for investment subsidies to increase coverage is for authorities to finance the cost of standpipes or US$70 subsidy per capita, whichever is lower, to reach those which do not have access to piped water as much as possible and have communities pay for any higher level of service if they desire. This scheme would improve sustainability of investments, allow Bolivian authorities to expand rural coverage at lower cost, and take into account cost heterogeneity due to hydrological conditions, access to and community density. 6.3. Operational and Maintenance Policies 6.38. For most countries in the region, the major operational issue is that water utilities are money losing ventures. In Bolivia, a 1992 Supreme Decree laid out cost recovery principles. More recently the proposed Water Services and Sanitation Law explicitly establishes cost recovery principles for O&M. This accomplishment should not be understated because few countries have publicly established cost recovery principles over universal access to water. Public subsidies for operation have been reduced substantially but the issue of enforcement still remains outstanding to some degree. 6.39. Poor Financial Performance of the Water Utilities. The lack of operational efficiency adversely affects the financial performance of the water utilities. The major source of inefficiency is the high level of unaccounted-for water and unpaid bills. In the biggest 8 water utilities only 61 percent of the water produced was actually billed and paid for in 1997. Water losses deprive the water utilities of an important source of revenue. The loss of revenues due to high water losses usually translates into lack of maintenance that affects the reliability and quality of water services. A second source of low operational performance is the high number of employees per water and sewage connection. In most utilities, employment productivity is ranging from 4 to 7 employees '° A more sophisticated two part tariff could be devised; i.e., a fixed plus a variable cost. Water and Sanitation 146 Public Expenditure Review per 1000 connections (with the 3 major cities having values of about 3). International experience shows an efficient company has an employment productivity of about 2 per 1000 connections. 6.40. In practice, current tariffs usually do not cover full cost of service. Financial and operational information on water utilities is not available, yet anecdotal evidence shows that at current leve]s of operational efficiency, water rate levels result in a neglect of rehabilitation, and depreciation is usually not properly taken into account. Only Aguas de Illimani and SAGUAPAC have the capacity to finance their own investments. The solution in most cases is not to raise tariffs but to improve operational efficiency by reducing unaccounted-for water and improving employment productivity. 6.41. The tariff structure provides little incentives to service the poor. As shown in the previous section, there are large disparities in service coverage between rich and poor, and consequently rural and urban. Higher costs to reach the poor, and poor operational efficiency translates into regressive water policies. Perhaps paradoxically, the sector policy for rural areas has a transparent cost recovery/subsidy policy, and promotes community participation to ensure demand-driven and sustainable investment. Communities have to pay the operation and maintenance cost of the service, while contributing part of the investment cost. 6.42. Such an expl]icitfinancial policy, however, is missing for the poor in urban areas. The cross-subsidy system that is embedded in the current tariff structure creates serious distortions. The subsidy system does not target the poor, but a very broad range of residential customers many of whom may not need the subsidy. In La Paz, the water rate for residential consumers using less than 30 m3 per month (which constitute of a large majority of all residential customers) is US$0.22 per cubic meter, while the average water rate for industrial consumers is US$0.65 (and the marginal cost is US$1. 18). 6.43. In short, authorities should continue to withhold public funding for operational losses in water utilities, but steps should be taken to improve efficiency and to replace current flat water rates with a rising tariff structure linked to volume of consumption. Both of these actions have proven difficult to implement in the context of private and public enterprises, both municipal or not. 6.4. Financing Investments in a Proper Policy Framework 6.44. As highlighted above, much progress has been achieved in reducing public subsidies for operational expenditures. Thus, public expenditures are concentrated in investments to increase coverage. Public investment expenditures in water have increased in recent years and are second in magnitude only to roads. Outcome results presented in Section 6.1 show sizable improvements in coverage. However, as shown in section 6.2, there is heterogeneity in connection costs per capita and technical standards appear overly ambitious due to faults in institutional incentives. This section first discusses past investments. Then presents future investment plans. And finally discusses alternatives to improve coverage and/or lower investment requirements. Water and Sanitation Public Expenditure Review 147 6.4.1 Past In vestments 6.45. Available data suggests that in the 1990s considerable investment resources have been allocated to develop water supply and sanitation infrastructure. The pace of investment growth has been rather erratic (Table 6.10). In 1991 only 3 percent of the total government investment expenditure was assigned to water and sanitation, while in 1997 the sector accounted for about 14 percent of the total investment expenditure. Between 1990 and 1997, the average investment in water supply and sanitation sector was ranging between 0.6 and 1.1 percent of GDP which has resulted in a sharp increase in coverage rates. However, if the investments for the Misicuni project are excluded from the water and sanitation sector investments in 1997, sector investments amounts to 12 percent of total investment expenditure, and 0.8 percent of GDP (compared to I percent with Misicuni investment included). Table 6.10: Investments in the Water and Sanitation Sector (including Misicuni investments in US$ millions) TotalWSS TotalWSS Percentage PercentageWSS YEAR investment investment WSS investmentas % planned executed investmentas of GDP (USSmil.) (USSmil.) % of total investment 1990 32 38 12.1% 0.8% 1991 54 13 3.1% 0.2% 1992 46 32 5.9% 0.6% 1993 55 34 7.1% 0.6% 1994 50 36 7.0% 0.6% 1995 44 46 8.8% 0.7% 1996 61 84 14.3% 1.1% 1997 88 79 14.6% 1.0% Average1990- 1997 54 45 9.1% 0.7% Table6.11: Distributionof Investmentsin Waterand Sanitation,by Sourceof Funding(selected years) Sourceof Funding 1990 1997 Central Government 0.4% 1.4% Investment Funds: 0.0% 41.9% FIS 14.3% FNDR 27.6% Departments: 56.1% 20.9% Misicuni 16.3% Other 4.6% Municipalities: 43.4% 35.7% Local Water Companies 10.6% Other 25.1% Total 100% 100% 6.46. The pattern of financing investments in the sector has changed over the past decade (Table 6.11). In 1990, only departments and municipalities invested in water and sanitation. In 1994, the Popular Participation Law decentralized financial resources and Water and Sanitation 148 Public Expenditure Review political power, tranisferringownership of infrastructure and responsibility for providing service. Paradoxically, the share of the local governments in financing water and sanitation services, essentially a local service, declined from almost 100 percent of total investments in 1990 to just 56 percent in 1997. The remainder of investments is financed mainly through the investment funds (FIS and FNDR). Hence, decentralization of responsibi!ity for the water and sanitation sector has been accompanied by a centralization of funding in the sector through the use of investment funds. 6.47. The investment pattern shows large disparities per department (Table 6.12). In 1996, the investment expenditure per capita in Tarija was only US$1, while in Santa Cruz expenditure was US$35. The bulk of this difference can be explained by the total investment expenditure available per department, the priority setting of the government in assigning resources to the water and sanitation sector, and the absorption capacity within the department. In relative terms, Cochabamba and Beni spend about 9 percent of their investment resources on water and sanitation, compared to only 1 percent in Tarija. Table 6.12: Total Investment Expenditure per Department, 1996 Department TotalPer Capita TotalPer Capita Per CapitaWSS Absorption Investment WSSInvestment Investmentas % capacity* Implemented implemented of TotalPer (1993- 1996, (1996, US$) (1996, US$) Capita Investment average) Chuquisaca 41 2 6% 69% Cochabamba 68 13** 19% 95% La Paz 50 8 15% 62% Oruro 35 5 14% 70% Potosi 78 18 24% 81% Tarija 20 1 5% 79% SantaCruz 204 35 17% 105% Beni 55 12 21% 70% Pando 68 4 5% 25% Note: * Investmentimplemented as percentageof investmentplanned for the period1993 and 1996 -* Theseinvestments are likelyto includeinvestments related to the Misicuniproject 6.48. The 1990s has seen an increased priority to the provision of rural water supply and sanitation services to correct the imbalance in coverage rates between rural and urban areas. As a result, the proportion of rural investments in total sector investments increased from only 16 percent in 1992 to 44 percent in 1996.11 Table 6.13: Rural vs. Urban Distribution of Investments Urban Rural % Rural 1992(US$______mil.) (US$mil.) 16 1992 41 8 16 1993 47 10 18 1994 41 13 24 1995 27 15 36 1996 41 32 44 "The investmentdata presented by the Ministryof Housingand BasicServices do not completelymatch with thoseof the Ministryof Finance. Thedifference in 1996is due to the impactof the Misicuni financing. Water and Sanitation Public Expenditure Review 149 6.49. A large, but declining part of the sector investments is financed by external donors. In 1992, 69 percent of sector investments were financed by external donors, while in 1996 they reduced their share to 61 percent. In addition, the terms of external financing have been changing over the past years. In 1992, about 52 percent of the external financing consisted of grants. In 1996, the grant component of external financing had dropped to only 21 percent. Table 6.14: Investment and Financing in the Sector InternallyFinanced ExternallyFinanced TotalInvestrent (US$million) (US$million) (US$million) 1992 15 34 49 1993 16 41 56 1994 13 41 54 1995 19 23 42 1996 29 46 75 6.50. Lack of Incentives to Finance Sewage Investments, It is important to insure in future concession contracts that the gap between water supply and sewerage coverage does not widen. As previously argued, construction of water networks without sewage disposal can result in serious environmental and public health impacts.]2 6.5 Future Investment Requirements: Using past performance as a Benchmark 6.51. Past investment patterns show wide variance in the per capita investment cost and that the government should provide incentives for a more cost-effective approach in delivering services through the creation of viable utilities. The performance of public investments in the water and sanitation sector shows the need for lower connection costs per capita through lower administration costs by the social funds, lower technical standards, and better targeting mechanisms to ensure inclusion of the poorest. This section, presents fiscal investment costs to carry out the expansion plans using past performnanceconnection costs. Investment levels need to remain relatively high even in the moderate expansion scenario. Given operational efficiency of water companies, tariffs can only cover operation costs. Thus, most investment in the sector is financed through public and external funds. Section 6.6 presents suggestions to lower the magnitude of public funds needed. 6.52. Investment Requirements. The information on service coverage should be corroborated to make a more accurate estimate, especially with regard to rehabilitation needs. Hence, only a rough, back-of-the-envelope calculation has been employed to provide an indication of investment level requirements to meet coverage targets. Table 6.15 presents three scenarios: (i) the base case scenario illustrates investment requirements to maintain current coverage levels. (ii) a moderate growth scenario that assumes constant urban water supply coverage, moderate increases in urban sewerage, 12 A study needs to be undertaken to deterrnine user's willingness to pay for sanitation services both in urban and rural areas. This will aid in the design of an appropriate tariff structure which properly takes into account environmental and health externalities. Water and Sanitation 150 Public Expenditure Review rural water supply and sewerage coverage. And (iii) an optimistic scenario that foresees large increases bolthin urban and rural coverage. 6.53. Investmen: requirements are surprisingly large for all three scenarios. The estimated annual requirement (including rehabilitation) over the next ten years for the base case scenario is estimated at about US$83 million, while the optimistic scenario would require USS112 million per year. The amounts exceed previous investment levels which reached US$75 million in 1996. 6.54. The assumptions in Table 6.15 deserve some discussion. Population growths were taken from historical series from INE. Total population growth was assumed at 2.4 percent per year and urban population growth was taken as 3.5 percent. Rural population was the residual of' these two. Investment costs to maintain urban coverage are high due to significant rural-urban migration. Given the urban costs for expansion obtained from data from the Vice Ministry of Basic Services the estimated cost of connection per capita used for calculation was US$100. Similarly, expansion costs in rural areas are also high at US$100 per capita although under current policies rural communities have to pay for 20 percent of investment costs. Although it is difficult to come up with comparable international experience, indicative costs from Brazil suggest that these costs are high due in part to the perverse subsidy policy provided by the funds. Note that the financing disaggregation has a line for the private sector due to the fact that increased coverage in La Paz will be carried out by Aguas del Illimani and not through public funds. Finally, despite high magnitudes, these investment levels may prove conservative for two reasons: (i) as suggested earlier, urban coverage rates may actually lower than the data from INE indicates. (ii) According to MHBS, Aguas del Illimani has observed average connection costs of the order of US$200. 6.55. Financing Alternatives. While there appears to be appropriate coverage for rural water supply, there is an shortfall in funds for urban expansion. The major sources available for financing investments are (i) internal cash generation; (ii) private financing; (iii) government financing; and (iv) international financing. 6.56. International financing is a major source of finance in the rural sector. External agencies committed US$ 230 million to the sector for the period between 1997 and 2002, of which US$ 177 million went to the rural sector. Requirements in the rural sector in the optimistic growth scenario would lead to total investment over the next ten years of about US$182 million. Hence, the current availability of funds will enable the Government to accelerate the increase in rural water supply and sanitation coverage. 6.57. At this point in time, most urban water utilities are unable to generate sufficient funds to finance their own investments. Full cost recovery principles are being introduced through the new law but utilities will inevitably need time to adjust. An exception is La Paz where Aguas del Illimani will invest about US$362 million over the lifetime of the concession, of which US$72 million are planned for the first 5 years of the concession. Even in this case, public funds may be needed to ensure coverage in poor neighborhoods. Water and Sanitation Public Expenditure Review 151 Table 6.15:. Investment Requirements 1998 - 2010 (US$ million) Sector Base Case Moderate Growth Optimistic Growth Scenario Scenario Water Supply (1) Coverage 93% 93% 95% Rehabilitation 34 34 34 Expansion 16 16 17 Sewerage Coverage 44% 55% 75% Rehabilitation 16 16 16 Expansion 9 16 27 Total Urban WSS 75 82 94 Water Supply Coverage 37% 55% 70% Rehabilitation 8 8 8 Expansion 0 5 8 Sanitation Coverage 33% 45% 60% Expansion 0 1 2 Total Rural WSS 8 14 18 TOTAL WSS 83 96 112 Expansion 25 37 54 Rehabilitation 58 58 58 FINANCING 83 96 112 PrivateSector (2) 12 . 12 12 PublicSector 71 84 100 Assumptions: Unitcost of urbanwater system rehabilitation 15 Unitcost of urbanwater expansion (network cost) o00 Unitcost of urbansewerage system rehabilitation 15 Unitcost of urbansewerage expansion (network cost) l00 Unitcost of ruralwater systemrehabilitation 15 Unitcost of rural waterexpansion 100(PROSABAR experience) Unit cost of rural sanitationexpansion 23 Annualpopulation growth rate 2.4% Annualurban population growth rate 3.5% Note: I Accordingto the Regulationof 1992,the only service levelapproved in urban areas is house connections. Changing all current yard connectionsand standpipes into house connectionswill require additional investmentsfrom the waterutility and the consumer. 2 The investmentplan of Aguas de Illimaniforesees a total investmentif US$362million over the 30-year horizon. Becauseof lack of moredetailed information on the concession,it is assumedthat investmentcost are proportionallydistributed over the 30-yeardistributed. An alternativecalculation involved determining the populationin La Paz and assuminginvestment per capita are evenly distributedin urban areas. The resultingmore plausibleinvestment levels are US$million 20, 21, and 25 respectively. 3 Rehabilitationneeds are estimatedat US$15 percapita. However, it is assumedthat becauseof the impressive growthin coveragerates in the past decade,only 50 percentof the existinginfrastructure needs rehabilitation. This assumptionshould be validatedwith operationaland financialdata from the utilities. Water and Sanitation 152 Public Expenditure Review Box 1: The Misicuni Water Supply Project For more than two decades the Government and private sector have been studying alternatives to address the water supply problem of the city of Cochabamba. Presently about 60 percent of its population is connected to the water supply network and receive rationed supply. On June 11, 1999 the Council of Ministers accepted the final offer of the private "Consorcio Aguas de Tunari" and set the basis to finalize, within sixty days, the contracts and concessions to implement the Multipurpose Project of Misicuni. The total project costs are estimated at US$252 million and have four main components: * TUNNEL, US$70 million. The tunnel, now under construction, will be 19.2 km long and 3.5 m in diameter and will bring the water through the mountains of Tunari. This part of the project is being fully financed by the public sector and about US$30 million have already been spent. * MISICUNI WATER SUPPLY, US$67 million. Provides capacity to supply 3.9 m3/sec of water, should be completed by July 2002 and is fully financed by the Consorcio. * MISICUNI ELECTRICITY GENERATION, US$30 million. Provides capacity to produce 40 MW, should be completed by July 2002 and is fully financed by the Consorcio. * SEMAPA WATEIRDISTRIBUTION, US$85 million (during the next five years). Provides for 57,569 and 58,200 new connections for water and sewerage, respectively, by June 2004. This will increase coverage rates to 96.5 percent in water and 91.4 percent in sewerage, and is fully financed by the Consorcio. The concession for water distribution is for 40 years and the Consorcio is required to invest an additional US$129 million (years 6-40) to attain 100 percent coverage by year 2034. The Consorcio is contributing US$52-60 million of own capital and will finance the rest. Instead of paying rent for the use of the tunnel, the Consorcio is required to deliver, starting the third year of the concession, 500 Its./sec. to Empresa Misicuni. In turn this water will be used for irrigation 3 purposes and sold to farmers at an estimated US$0.08/ m . This would generate US$9.2 million in net present value, which will more than cover the net present value of the external debt of Empresa (US$6.4 million), and will help recover a small part of the US$70 million of public funding. Given the magnitude of the investments, this has been and will continue to be a very controversial project. The use of US$70 million of public funding is certainly questionable, given the existing resource constraints a:nd alternative uses of funds. Along the way, the decision was taken to discard another projecit(Corani) that could have provided a less costly and fully private financed alternative. Looking forward, there are still important risks in the implementation of the Misicuni project: * Tunnel cost overruns, which would require additional public funding. * Cochabamba Valley farmers' willingness to pay for irrigation water is still to be tested and the US$0.08/ m3 may not be realized. * The sharp increase of water tariffs of an average of 38 percent at the beginning of tlhe project and another 20 percent once the project is fully operational, necessary to attain the negotiated 16 percent rate of return on equity, will not be easy to implement and political pressures will be exerted for the CGovernmentto provide public subsidies. So far the Governmeni:has made the clear decision that there would be no public subsidy (in addition to the tunnel) and that users will pay in full for the services. It is critical the Government maintains this position. Water and Sanitation Public Expenditure Review 153 6.58. There is a large investment requirement in the urban sector. Annual investment requirements to maintain current coverage would require US$83 million.13 Yet, only US$40 million is available from external donors up to 2000. The annual financing from the public sector without new concessions will be US$71 million to keep urban water and sewerage coverage constant. Moreover, the actual amount of public funds required to fill this requirement will depend on the ability of water utilities to charge full cost recovery and access to private financing. Authorities are appropriately looking to grant concessions in the largest 41 cities since external funds for urban areas are limited. 6.6 Increasing the Benefits of Investment in the Sector 6.59. This section argues that in the degree to which connection costs can be lowered, private participation increased, and targeting improved, the need for public funds will be abated. In particular, the MHSB - as the sector head - needs to (i) develop and implement a transparent and clear cost recovery and subsidy policy. This is a non trivial issue which needs to be addressed in the context of the national cofinancing policy. (ii) Develop appropriate target mechanisms to ensure that the poor will also gain access to services. (iii) Promote community participation to ensure demand-driven and sustainable investments. (iv) Encourage the use of appropriate low-cost technologies. (v) Improve the mobilization of local financial and human resources. (vi) And, ensure well-designed PSP contracts that address the issue of serving the poor through service coverage targets, subsidy mechanisms, and flexibility in service obligations. 6.60. Increase Rural Sector Emphasis to Improve Targeting. A related observation is the low cost of increasing rural vs. urban coverage. The moderate scenario which increases rural water supply coverage by almost 50 percent only requires US$15 million despite using historically high technical specifications which result in high costs. Doubling water investment in rural areas has a small cost of only US$15 million and the externalities are enonnous. Under current cost assumptions coverage could surpass 85% if investment in the sector was US$30 million. However, the government should adopt some targeting mechanisms to ensure that the gap between service coverage rates between rich and poor is reduced. 6.61. Capital Cost Recovery and Subsidy Policy in Urban Areas. Three suggestions are: (i) Urban water companies should reduce unaccounted-for water flows which show very large variations across water companies. Reducing water losses will reduce rationing, and will thereby increase the supply of water available for wider coverage. (ii) Rehabilitation of infrastructure should receive increased emphasis to postpone investments to increase capacity. (iii) The government should define a proper urban expansion subsidy policy to ensure the poor have access to services. Subsidies should be limited since contributions from communities and local governments increase sustainability. Experience from the PROSANEAR project in Brazil showed that the urban poor are willing to pay up to 30 to 40 percent of the investment cost requiring a government subsidy of about 60 to 70 percent of investment cost. As stated before, a 13 The financing need from public investment funds will be US$12 million less due to the fact that the investment plan in La Paz and El Alto will be financed by the private sector. Water and Sanitation 154 Public Expenditure Review study is needed to determine the willingness to pay for these services as input for the subsidy policy for the sector. 6.62. The subsidy policy for rural areas includes some of the above-mentioned principles. In theory communities pay the O&M cost of the service, while contributing part of the investment cost although there are serious problems with financing rehabilitation. Subsidy ceilings have the disadvantage that they bias communities to choose the most expensive capital cost option to ensure capturing the maximum subsidy, but they are an important tool in reducing the per capita total investment costs. Community participation and the use of appropriate technologies in rural and poor urban areas assist in ensuring better cost recovery and hence the sustainability. Evidence from an Impact Evaluation Study, for the PROSABAR project, emphasized the importance of community participation in the provision of water supply infrastructure. 6.63. Improve Targeting Mechanism. The government should link the allocation of public investment ftnds for water utilities to their operational and financial perforrmance. Establishing such a link will provide strong incentives for water utilities to improve their performance. An example of how to link the availability of investment funds to the performance of water utilities is given in Table 6.16. Table 6.16: LinikingAvailability of Funds to Performance Indicators-Examples Type of Investment EligibilityCriteria Technical Assistance Open to all water utilities regardless of their financial and operational perfornance Operational Development (including investments Open to all water utilities that meet a minimum to develop and implemrientunaccounted for water level of financial and operational efficiency control projects) Rehabilitation Investments Open to all water utilities that demonstrate a higher level of financial and operational efficiency Expansion Investments Open to all water utilities that show proper ("level 2") levels of financial and operational efficiency 6.64. Another tool for a more equitable allocation of public investment funds is to improve targeting mechanisms. The government could define an indicator (based on indicators such as infant mortality, deficits in water and sanitation coverage and income levels) to ensure that at least a minimum percentage of public investment funds are targeted to the poorest municipalities. Within the departments, funds would be allocated on a first-come first-serve basis to ensure demand-driven projects. The remaining funds could be allocated competitively. The government could link the allocation of available funds to proven performance in targeting the poor. The details should be developed as part of the study on willingness to pay and subsidies for water and sanitation services. 6.6.1. Prospectsfor Private Sector Participation 6.65. Perhaps the best way to increase poverty impact in the sector is to increase private sector participation (PSP) and leverage public investment funds. Authorities are moving in that direction, the water law mandates all cities larger than 10,000 be concessioned (although not necessarily to the private sector), subsidies to these cities are Water and Sanitation Public Expenditure Review 155 outlawed, regulations are being enacted, and the water superintendence is functioning. The government should aim to maximize benefits to society (Boxes 2 and 3). 6.66. The strategy proposed to implement PSP is simple: start with the largest cities gradually progressing towards smaller ones. Eventually, private bidders will require a subsidy in order to participate. The preferred mode of PSP is a concession which does not require public investment funds for expansion, but authorities should become flexible as smaller systems are transferred and promote least subsidy schemes in awarding concessions.1 4 As discussed before, international experience does not provide reliable guidelines on the minimum size of a financially viable system. The safe approach is to Box 2: The ConcessionContract of LaPaz and El Alto In July 1997,the Governmentof Boliviaawarded a concessionfor the operationand expansionof the waterand sewerage service in the La Paz - El Alto metropolitanarea to Aguas de Illimani,a consortiumled by Lyonnaisedes Eaux. The concessioncould have been improvedbut it was a good start for what is to come. Only one private operator finally submitted a bid for this concession which along with certain specifications,may have not maximizedthe gainsto society.The bid was basedon improvements in watersupply coverage with few specifictargets for servicingthe poor, these investmentsare likelyto be implementedonly in the lateryears of the concession. Neverthelessthe concessionalso had importantside effects that outweigh the drawbacks.It highlightedthe importanceof a modem regulatoryframework which has been elaboratedtaking domesticand internationallessons. The frameworkwill also correct some issues from the concessionin La Paz. Notably, tariff structurewill be modifiedto increasethe impact on the poor. The concession"liberated" public fundsfor the sector in La Paz. And it placedauthorities in a very solidposition to moveforward to concessionother cities. begin with the larger cities and with the concession modality. In the short run, the Government should focus its efforts on introducing PSP in Cochabamba, Santa Cruz and other medium-sized cities such as Sucre and Tarija. In principle, there is no objection to the concept of awarding a concession in Cochabamba, yet the Misicuni project has complicated the bidding process (Box 1). The strategy is consistent with the new Water and Sanitation Services Law. However, the suggestion is that out of the 41 cities of over 10,000 inhabitants which will be concessioned, authorities should concentrate in introducing PSP in the largest ones, perhaps over 100.000 in population where the greatest interest from the private sector will reside. 6.67. In addition to the well known increased efficiency effects due to private participation documented internationally, introducing PSP in urban areas liberates scarce public funds; i.e. large investment volumes needed to maintain coverage can come from the private sector. Thus the public sector will be able to channel these large funds to other areas characterized by greater poverty incidence. Purely as an example, under the cost assumptions in our scenario, a concession awarded in Cochabamba, Sucre and Tarija 14 Experiencewith leastsubsidy policies in Chileprovided positive surprising evidence for muchhigher efficiencylevels in private operators (See Bjom Wellenius, World Bank, 1997) Water and Sanitation 156 Public Expenditure Review (which together account for 10 percent of the population of the country and 16 percent of the urban population) could result in liberated public funds of the order of US$13 million and US$15.5 million in the moderate optimistic scenarios respectively--nearly enough to double investments in rural areas or in municipalities with much lower coverage. All of this without increasing the amount of investment in the sector! A private concession could solve the rural water access problem entirely by liberating enough public funds. There is a question, about the ability to reassign funds in this manner. On one hand, Central Government officials think the ability to reassign funds is limited because most of the investment finds come from the water utilities themselves. While in Table 6.11. data indicates that 42 percent of investment funds in the sector is executed bv the FIS and the FNDR which in principle should be able to reassign the funds. There is no hard evidence in either direction but the matter should be looked at further. 6.68. It will become increasingly important to take into consideration the impact of PSP on the poor by: establishing service coverage targets for the poor. and defining subsidy mechanisms. The importance of such measures is underscored by experience in Argentina which shows that - depending the concession contract - the poor do not necessarily benefit from PSP (Box 3). Authorities are aware of these issues. The new law considers them and care should be taken to resolve them convincingly in the bylaws. Box 3: Private Sector Participation in the Water Utility Sector - Winners and Losers Introducing competition in the water and sanitation sector through PSP is expected to increase efficiency, and thereby adding to the utilities' financial resources to invest in poor neighborhoods. The general perception is that the poor are the main beneficiaries of PSP. Yet, a distributive analysis on some proposed concession contracts in Argentina15 found that in fact the poor can become losers from PSP depending on how these contracts are structured. These studies revealed that (i) initial tariff reductions tend to benefit the rich customers; (ii) concession contracts awarded on the basis of license fees (or canon payments) can make the government the largest winner at the expense of the customers, notably the poor; and (iii) any benefits to the poor because of environmental benefits and access to improved services can be offset by the large costs of secondary network and connection costs to be borne by the poor. These findings highlight the following policy lessons in designing PSP contracts. In preparing PSP contracts, the government should (i) Identify the poor and the subsidy level required to service the poor as part of the preparatory activities for PSP; (ii) Develop a clear strategy to address poverty issues and incorporate then in the PSP contract design or in the nrgulatory framework (iii) Pay special attention to the capital cost subsidy, if new customers are expected to pay for secondary and network expansion costs as the majority of the new customers will be poor (iv) Set explicit targels for service expansion to the poor; (v) Include transparent mechanisms to provide subsidies to the poor 5 Caroline van den Berg and Yoko Katakura, Winnersand Losersfrom Argentina 's Water Utility Reform: An Analytical Economic and Financial Framework. InformnalNote. World Bank, March 1998. Water and Sanitation Public Expenditure Review 157 6.69. In metropolitan areas, where PSP arrangements are not a viable option, the water utilities should develop a more efficient management culture based on financial and managerial autonomy and accountability. The government will have to develop a toolkit to provide these companies with an incentive structure that induces efficiency. Such a toolkit should consist at least a proper cost recovery policy and an investment policy that will link the allocation of public investment to the company's operational and financial performance. In the medium-term, with full cost recovery implemented investments should be targeted to the poor and aimed at reducing adverse environmental impacts or public health hazards. Table 6.17: Strategy Matrix SectorIssues Strategy Consolidate * There has been good consolidationof policyoversight in the MHBS but it and Deepen needsto be strengthenedto increaseits technicalcapacity. Institutional * Elaborationof the regulatoryframework. Need to approvenew Water Reforms and Sanitation Services Law to promote competition,efficiency, and addressequity and customerprotection issues. * Consolidationand clarificationof the role of the superintendence.The superintendentof water needsto be appointed The concessionsshould be awardedby the Superintendentand MHBSshould approve them * Decentralizationhas moved service provision closer to the user but furtheradjustments are necessary: MunicipalWater utility companiesare subject to politicalintervention and operational efficiency is low. The only solution is to introduce PSP througha concessionor an arm-lengthrelationship such as a management contract. The Water and SanitationServices Law providesa solution for the largest municipalities. * The role of the Fundsneeds to be re-examineddespite a high capacityto executeprojects: (i) Eliminatesmall projectbias by changingthe overheadcharge scheme currentlyin place from a percentageof investmentcost to a fixed fee or a two-parttariff. (ii) The investmentsubsidy scheme needsto be re-designedto eliminate the bias towardsexpensive technologies. Finance the cost of standpipesor the maximumsubsidy which ever is lower,and have the communitypay for any betterservice. (iii) Increase communityparticipation and improve financial viability studies. Improvecoordination with MHBS. Future * Increase efforts to enforce the Law and eliminate public subsidies for Expansion operationalpurposes. Performnstudy on willingnessto pay for water and Plans sanitationservices and use it to developa coherentsectoral subsidy policy. * Increasingcoverage levels requiresincreasing resources to the sector on the orderof 30 to 40 percent. * Promote PSP and other forms of new institutionalset up for service provisionnot only to increaseefficiency but to liberate public funds to invest in rural areas to the degreepossible. * (i) If concessionsare awarded in Cochabamba,Santa Cruz, Sucre and Tarija, rural public investment could be doubled without increasing resourcesfor the sector. * (ii) Care shouldbe taken to improvetargeting with PSP. Water and Sanitation 158 Public Expenditure Review 6.7. Conclusions 6.70. In the early 1990s, the Government initiated reform process of the water and sanitation sector. 'Significant progress has been made, but there have been large and inequitable increases in regional coverage (urban vs. rural) and with a certain degree of bias against the poor. The reforms consolidated institutions and elevated the hierarchy of the sector. The current administration has formulated a modern regulatory framework which will promote PSP. The challenge ahead lies in implementing the regulatory framework. Further adjustments are necessary and Table 6.17 summarizes major sector issues and the strategy proposed to address these issues. Water and Sanitation Public Expenditure Review 159 7. ROAD SECTOR 7.1. Background 7.1. In Bolivia, receives the largest share of public investment by a big margin. Public officials and private executives perceive it as a bottleneck for Bolivia's development, in which they would keenly invest their extra dollar. The road network system in Bolivia has reached a crossroads: massive resources have been invested on it, and yet the maintenance effort is insufficient and the gap is still enormous. 7.2. Bolivia boasts a wide variety of climates and region types, from the 6,500 m above the sea level of the Andean region to the 200 m on of the Amazon basin. The country is landlocked, with the port of Arica in Chile as its only direct access to the sea. At the same time its vast territory (one million of square kilometers) and its small population (eight million inhabitants) result in large distances between cities, low population density and traffic levels, and lack of access to the consumer markets due to high transport costs. The country's difficult topography and climate put greater pressure on maintenance of the road network. 7.3. When comparing the 1970s to the 1990s, one notes the increasing prominence of roads within the public investment in the transport sector. While the Investment Plan of the Ministry of Transports for the 1976-1980 period allocated 56 percent of its budget to roads, 23 percent to railroads and 21 percent to air transport, the preliminary proposal for the current Transport Master Plan foresees an allocation of 95 percent to roads. This prominence of roads in public investment is largely due to the privatization of the railways companies and the national air carrier. The importance of roads in Bolivia is also reflected in external trade figures. In 1997, 44 percent of Bolivian exports were delivered by road, 21 percent by train, 19 percent by air and 9 percent by river; conversely, 66 percent of imports were introduced by road, 26 percent by air, 7.5 percent by train and 0.5 percent by river. Table 7.1: Transport Public Investment (millions of US dollars) Transportation Form 1987 1988 1989 1990 Railroads 15 22 19 8 Roads 63 65 68 70 Civil Aviation 2 17 16 4 Fluvial Transportation 6 10 15 0 Transport Public Investment 86 114 118 82 Source: Ministry of Transportation and World Bank Staff Estimates. 7.4. Table 7.2 compares the road network of Bolivia with similar and neighboring countries. In most LAC countries, paved roads account for 10-15 percent of the network (except for Argentina with 29 percent), while in Bolivia only 6 percent of the network is Road Sector 160 Public Expenditure Review paved. Only 21 percent of paved roads are in good conditions, again the smallest figure, about half of the LAC average. Peru, with a similar territorial extension, but three times the population, has a paved road network four times more extensive and in better conditions. Paraguay, with 40 percent of the territory and 70 percent of the population, has a paved road network almost twice as long, while it had only half of the Bolivian network in the 1960s. Thus, by most measures, the extension of the road network is insufficient, as is the percentage of paved roads. and roads are comparatively poorly maintained. Incorme level is not an issue: countries with a smaller GDP but similar extension and population, like Niger or Mali, have twice or three times more paved roads and about three times a larger percentage in good conditions. Table 7.2: Cross Country Road Selected Indicators COUNTRY [1] [2] [3] [41 [5] [6] [7] [81 [9] Popul. Extens. GDP Density % network % in Km paved b/ 1997 Th. Percapita paved Good million Kms2 US$ 1996 Condition Inhab. Km for 60's 90's For Million Km2 Inhab l BOLIVIA 8 1,099 950 7 198 6 21% 569 2,933 PERU 25 1,285 2,460 19 347 10 24% 4,016 7,500 BRAZIL 164 8,512 4,720 19 704 9 30% 12,703 161,503 PARAGUAY 5 407 2,010 12 10 254 3,000 ARGENTINA 36 2,767 8,570 13 858 29 35% 22,712 57,280 CHILE 15 757 5,020 19 753 14 42% 2,604 10,983 ECUADOR 12 284 1,590 41 336 13 53% 719 6,322 COLOMBIA 38 1,139 2.280 35 309 12 42% 2,998 10.329 NIGER 10 1,267 200 7 383 8 60% 4000 MAL1 10 1,220 260 8 308 12 63% .. 5959 Source: 1994 World Development Report on Infrastructure and World Development Report 1998/9. 7.2. The Road Network 7.5. The road network comprises three levels: (i) the national network, connecting seven capital cities and serving as the main linkages to other countries; (ii) departmental network connecting regions within the country departments; and (iii) municipal or local, connecting towns an(dvillages within a province. The existing road infrastructure is more developed in the western part of the country, as it had been built to export minerals. Presently, brighter perspectives of economic growth and development are in the valleys and lowlands of the east. It is in these eastern agricultural regions where non traditional export crops are cultivated where the demand for roads is greater. Table 7.3 shows the distribution of the road network by department and by level. In 1996, of the 7,602 Km composing the national network, 2,409 Km (32 percent) were paved, 4,027 Km (53 percent) gravel and 1.166 Km (15 percent) dirt tracks, most of it is located in the west. Road Sector Public Expenditure Review 161 Table 7.3: Bolivian Road Network as of December 1996 (Km.) National Network Departmental Municipal Total Network Network Road Network Paved Gravel Dirt Total ______West and South Departments La Paz 302 351 96 749 1077 7213 9039 Chuquisaca 159 662 94 915 374 4664 5953 Tarija 217 550 61 828 74 1770 2672 Cochabamba 556 357 0 913 219 4995 6127 Oruro [88 242 0 430 585 3542 4557 Potosi 133 404 0 537 1409 9395 11341 East and North Departments Santa Cruz 785 642 412 1839 1400 5776 9015 Beni 67 728 410 1205 663 1302 3170 Pando 2 91 93 186 290 803 1279 Total 2409 4027 1166 7602 6091 39460 53153 Source: SNC 7.6. Table 7.4 shows the expansion of the Bolivian road network from 1987 to 1996. Bolivia made substantial progress as the road network augmented about 11,700 Km, an increase of about 30 percent. In December 1996, a total of 53,153 Km of roads were built. In 1998, with the re-centralization process of the SNC the national network was redefined to cover 9,020 Km of which 2,532 Km are paved, 3,853 Km are gravel, 505 Km are dirt tracks, 185 Km are urban routes and 1945 Km are under construction (see Table 7.9 for a breakdown by department). Table 7.4: BolivianRoad Network RoadsLength per type of Surface(In Km) Type of YEARS Surface 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Paved 1,645 1,760 1,776 1,824 1,865 1,943 2,029 2,451 2,871 2,933 Gravel 9,880 10,384 10,942 11,621 12,010 15,170 16,257 16,383 16,159 16,380 Dirt Tracks 29,910 29,490 28,968 29,266 28,953 29,198 32,133 33,239 33,186 33,840 Total 41,435 41,634 41,686 42,711 42,828 46,311 50,419 52,073 52,216 53,153 Source: SNC 7.3. Public Investment and Maintenance of the National Road Network 7.3.1. Public Investment on Roads 7.7. Transport has always weighted heavily in public investment. Between 1992 and 1997, an average of 33 percent of the executed public investment was devoted to the transport sector, mostly in roads. Has resources allocation for road construction and maintenance been efficient in administrative and technical terms? Overall, a comprehensively developed road network has been among the top priorities of the Government development strategy for the last decade. Yet authorities have failed to value the importance of maintenance. As result, substantial resources are required in rehabilitation and reconstruction. Road Sector 162 Public Expenditure Review Table 7.5: Approved and Executed Expenditures of the SNC (in millions of US dollars) 1993 1994 1995 1996 Average Approved 5 126 142 120 126 Executed 164 186 145 118 153 Source:SNC 7.8. Table 7.5 shows the executed expenditures of the SNC, institution mostly responsible for road construction and maintenance'. On average, the SNC spent US$ 150 million per year. About 75 percent of this amount was allocated to the national network This implies that were are approximately US$ 40 million per year left for the departmental networks which extend about 6,000 Km. About US$6,700 per Km per year. a dismal amount. For simplicity, this paper will concentrate on the national network. 7.3.2. Expansion of the Road National Network 7.9. From 1990 to 1996, the SNC invested about US $ 100 million in construction, reconstruction, rehabilitation or improvement of existing roads per year. This resulted in an increase in paved roads of about 1100 Km, from 1824 Km in 1990 to 2933 Km in 1996 (see Table 7.4), from where ensues the maximum cost figure of US$0.6 million per Km. More detaileci documentation suggest pave roads cost about US$0.5 million per Km. Gravel and dirt roads could cost as low as US$0.3 million. The difference is due to expenditures in reconstruction, rehabilitation or improvement. These construction cost estimate allow the calculation of the quantity of Km Bolivia can build in per year. Table7.6: Road NationalNetwork Executed Investment (Maintenance and New Investment) (in millionsof US$ constantdollars of 1997) Execution 1993 1994 1995 1996 TOTAL % Annual Av. Maintenance 13 13 133 15 98 13% 14.057 Investment 109 131 103 80 656 87% 93.717 Total ]122 144 117 96 754 100% 107.775 Source:Estadisticas Viales 7.10. Table 7.7 shows how the financing of road investment evolved during the 90s. While at the beginning 56 percent of the investment was externally financed, in 1997 the external contribution amounted to 93 percent. Initially domestic financing oscillated around US$ 25 million per year, dropping dramatically from 1995 onwards (US$ 17.4 million in 1994, US$ 5.8 million in 1996 and US$ 4.1 million in 1997). External financing has become increasingly significant, a trend that is likely to persist in the near future. The CAS for Bolivia itself foresees to allocate a growing share of funding to roads. This engenders two problems: (i) the Government relying on cooperation and Before the decentralization, the SNC was responsible for the national and departmental network. During the decentralization period, all the responsibilities of the national and departmental network were transferred to the prefectures, and the SNC was responsible only for road projects externally funded and under execution. After the recentralization process SNC is responsible for the newly defined national network, and prefectures for the departmental network. Road Sector Public Expenditure Review 163 therefore not feeling accountable; (ii) the bias favoring new road investment against maintenance, a typical trait of largely donor driven programs, disclosed by the existence of high execution ratios (see Pradham 1996, also see Chapter 1). Table 7.7: SNC Executed Investment in Roads (in millions of US$) Year Domestic Foreign Percentof Total Exchange Financing Financing External Financing Rate 1990 28.0 33.3 54% 61.3 3.4 1991 27.7 65.8 70% 93.5 3.8 1992 25.3 = 110.5 81% 135.8 4.1 1993 24.1 116.7 83% 140.8 4.5 1994 26.2 135.6 84% 161.8 4.7 1995 17.4 102.8 86% 120.2 4.9 1996 5.8 85.1 94% 90.9 5.2 1997 4.1 58.8 93% 62.9 5.4 Note: Average Execution US$ 108.9 million Source: SNC 7.3.3 Maintenance 7.11. Table 7.6 indicates a yearly average of US$ 14 million was devoted to maintenance. For the 1996-1998 period it is estimated that this percentage may have dropped to 10 percent, due to the confusion engendered by the decentralization of the national road network2 . Table 7.8 compares executed to the required routine! maintenance effort estimated using the SAM system4 . These estimates show extremely low levels of maintenance execution. About half of the programmed routine maintenance and an even smaller share of total maintenance expenditures required, see Section 7.4 below. The routine maintenance gap amounts to about US$ 10 million per year, with the 2 At the beginning this was due to the fact that the SDCs directly subordinated to the Prefectures had recently been given the responsibility and funds and were lacking pertinent experience; at the end, on the other hand, since it had been announced that the national road network would become again responsibility of the central Government, Prefectures stop investing in the national network, and while the SNC lacked the resources and the competence,the network suffered serious consequences induced by this neglect. (See Jose Maria Alonso Biarge and Alejandra Ortiz, World Bank 1999 for a detailed account of the effects of decentralization on the road network in Bolivia and other LAC countries) 3 Routine maintenance does not include periodic maintenance or rehabilitation. Both are necessary to keep roads in good conditions. See a fuller discussion of the definition of maintenance in section 7.4 4 A computerized system to control and program maintenance activities was introduced in Bolivia in the 80s and updated in the 90s. This system called maintenance administration system (SAM) is the basis for maintenance programming , control of implementation of maintenance works, and maintenance costs (see decentralization of road network management in LAC for an evaluation of SAM performance). The computing system takes into account the historic financing of routine maintenance, SAM cost are lower if routine maintenance increases (see Humplet, 1997). The implementation of the SAM was done with aid from The World Bank. Road Sector 164 Public Expenditure Revieu, worst performance recorded in 1997 when the SNC was in the process of re- centralization. This figure improved in 1998 in some departments. Besides the donor driven investment bias presented above and in Chapter 1, there are three additional reasons for this outcome: (i) changes in technical and engineering staff within the SNC; (ii) budget restrictions; and (iii) decay of the road equipment'. Improvements in 1998 are due to increased resources from the 1997 privatization of tolls in Santa Cruz and Cochabamba. Table 7.8: RoutiineMaintenance Costs Requiredand Executedin SelectedDepartments (in millions of US$) 1994 1995 1996 1997 1998 Average La Paz Required 4.67 6 .76 6.62 5.34 4 .81 5.64 Executed 3 .02 3.91 3 .87 4.96 3.31 3.81 Percent 65% 58% 58% 93% 69% 68% Chuquisaca Required 2 .00 3.09 3.11 2 .34 3.24 2 .76 Executed 1 .65 2 .30 2 .56 2 .09 1 .54 2 .03 Percenl 83% 75% 82% 89% 47% 74% Cochabamba Required 2 .53 2 .40 2 .82 4 .27 4 .65 3 .33 Executed 1 .12 1 .80 1 .92 1 .47 1 .94 1 .65 Percent 44% 75% 68% 34% 42% 50% Santa Cruz Required 4 .03 4 .14 4 .19 4 .78 3 .79 4 .18 Executed 1 .59 1 .59 1 .34 1 .26 1 .74 1 .50 Percent 39% 38% 32% 26% 46% 36% Oruro Required 1 .45 1 .36 1 .67 2 .10 3 .63 2.04 Executed 0 .96 1 .28 1 .53 1 .24 1 .12 1 .22 Percent 66% 94% 92% 59% 31% 60% Beni Required 1 .48 0.61 2 .19 2.62 1 .72 Executed 0 .54 0 .86 1 .01 0.49 0 .72 Percent 36% 141% 46% 19% 42% Total Required 16 .14 18 .35 20.60 21 .45 19 .14 Executed 8.87 11 .74 12.22 11.51 11 .09 Percent 55% 64% 59% 54°/ 58% Source: SDC 7.12. The percentage invested in maintenance is far from acceptable. Thus it is not surprising to find poor road conditions in Bolivia. The results of an 1999 SNC assessment of the condition of the newly defined national road network appear in Table 7.9. Road condition vary from 1 (extremely bad) to 5 (very good). Only about 20 percent of the national network falls in the top categories (4 and 5), 45 percent is in moderate condition (3) and 35 percent is in poor or extremely bad condition (I and 2). In six out of nine departments there are no roads in top condition at all. A high 22 percent of the network is under construction, which means with restricted or no use. 5 According to SAM estimations, betwveen1996 and 1998, the out of order equipment increased from 15 percent to 27 percent in Cochabamba and from 23 percent to 48 percent in Santa Cruz. Road Sector Public Expenditure Review 165 Table 7.9: Condition of the Newly Defined National Road Network 1998 Departments Km % Kmi Km in BuiltKm by Condition construction urban areas ______Total 1 2 3 4 5 LaPaz 775 8.6 103 24 646 2.1% 11% 61% 24% 0 .11% Chuquisaca 731 8 . 1 112 24 594 0.2% 17% 65% 17% 0.00% Tarija 689 7 .6 86 27 574 0.4% 6% 68% 24% 0.00% Cochabamba 816 9 80 17 717 5.1% 33% 29% 32% 0 .00% Santa Cruz 2676 29.7 1234 35 1407 10.6% 23% 37% 27% 1 .69% Oruro 722 8 203 20 498 0.00% 27% 13% 53% 5 .58% Potosi 1084 12 36 26 1021 0.4% 40% 58% 0.29% 0.00% Beni 1200 13.3 85 2 320 0.00% 89% 10% 0.00% 0.00% Pando 322 3 .6 0 5.15 1109 0.6% 52% 46% 0.86% 0.00% Total 9020 100 1944 185 6890 3 .1% 31% 45% 18% 0 .76% Source: SNC 7.4. Prospects of Maintenance and Expansion of the Network6 7.13. The road section of the Master Transport Plan, appears overly ambitious. The Government still needs to clearly elaborate a consistent and realistic road development strategy. This strategy has to be outlined along the following two priorities: (i) ensuring adequate maintenance fully financed with domestic resources (ii) completing the construction of the export corridors connecting Bolivia to its neighbor countries and completing the integration between the most important cities of the country. 7.4.1. Maintenance 7.14. The SNC maintenance program aims at improving the current condition of the national network by: (i) improving roads evaluated 1 and 2 to level 3; (ii) bringing roads evaluated 3 to level 4; (iii) maintaining roads evaluated 4 and 5 in the same condition. Only the 6890 built Km of the national network are scheduled to receive maintenance (see Table 7.9). According to SAM estimates, routine maintenance expenditures required total about US$21 million. Authorities have committed themselves to spend this amount on maintenance every year as part of the World Bank Abapo-Camiri loan.7 7.15. Nevertheless, roads requires periodic, seasonal, and rehabilitation maintenance to maintain a road in good condition indefinitely. (See Humplick, World Bank, 1997 for a fuller discussion of road maintenance). Preliminary calculations used three methods for estimating the required "steady state" maintenance and rehabilitation broadly defined and produced very high and surprisingly similar numbers. That is, the total expenditures 6 It is important to stress that the analysis that follows focuses on the national road network and thus does no consider the departmental and municipal network. Submitted data, particularly those related to maintenance and planning are excerpt from SNC documentation, as until the distribution of the Master Transport Plan of the Vice-Ministry of Transport the only available information is contained in a draft document. 7Decree 25134 establishesthat 70 percent of toll earnings are to be invested in national road network maintenance (30 percent in departmental and municipal roads). For 1999 toll payments are expected to generate about US$15 million. The rest of the funds will come from the Treasury. Road Sector 166 Public Expenditure Review necessary per year to keep the network in good condition indefinitely assuming major rehabilitation and reconstruction had been perforned: (i) A World Bank study in the Dominican Republic suggested a total maintenance/recurrent expenditure of US$15,000 per Km per year for that network. Bolivian roads in general have lower specifications which require less maintenance. An optimistic reduction lowers the estimate to US$10,000 per Km per year. The total amount of maintenance funds "broadly defined" for the 6,892 Km of national roads which are scheduled for maintenance would result in US$ 69 million per year. (ii) The second alteimativeuses infrastructure depreciation calculations. An average road construction cost in Bolivia of US$0.3 million per Km results in a book value of US$2,070 million for 6,892 Km of roads. Using a "standard" road life of 30 years results in a depreciation rate of 3 percent. Thus finding a similar amount of US$61 million per year in required maintenance and rehabilitation costs.8 (iii) Using the lower bounds of Heller's (1979) and Humplick's (1997) "r" coefficients, given the road characteristics in Bolivia, a cost per Km of US$0.5, 0.4, and 0.25 for paved, gravel and dirt respectively, and the lengths given in Table 7.3 results in US$73 million per year. 7.16. The conclusion is that the "commonly' understood sum for adequate maintenance of US$20 million per year is only for routine maintenance. Bolivia has spent US$14 million per year on average since 1993. Achieving a truly sustainable level of maintenance (broadly defined) is much higher. Authorities' commitment to fully fund routine maintenance is commendable but unfortunately it will most likely not be enough. Seasonal and periodic maintenance will be postponed turning into rehabilitation and rehabilitation will turn into reconstruction. Each postponement substantially raises the cost. The choice is difficult because the analysis suggests that given the current allocation of public :funds to the sector, the majority of them would have to go to maintenance when the country suffers from a lack roads. 7.17. Authorities have taken some steps in resolving the deficit maintenance. The SNC was re-centralized, made responsible for the National Road network and 70 percent of toll collections (about US$15 million) are earmarked for maintenance of the network. Ortiz and Alonso Biarge document extensively the progress made due to the recentralization and in detail the institutional reorganization of the SNC.9 In addition, authorities made a commitment with the World Bank to assign US$22 million a year on routine maintenance. 'This represents a 60 percent "guaranteed" increase in the amount spent on maintenance and will prevent fast deterioration of roads. For periodic and rehabilitation maintenance progress is less certain but a plan which concessions close to 30 percent of the network for private administration is being implemented, and a road 8 Estimating the average cost per Km of road is non trivial. Documentedpast road construction of paved roads cost about US$0.5 million per Km. Gravel and dirt roads could cost substantially less and thus an optimistic valuation would be US$0.3 million. 9Alonso Biarge Jose Maria and Alexandra Ortiz "Decentralizationof Road Network Management, Lessons from Bolivia and Other Latin American Countries." Road Sector Public Expenditure Review 167 fund which includes users is being defined. Finally, a weight and measures law was approved to prevent premature damage. Table 7.10: lrtemtica- jmdine"1 eW Rimes he1spIitre Local Currency Exchange US Dollars xnry Date (A.+~ ci-as Lus Rie -I+a U0 V B U * e Prg3fna Jur 0.74 0 93 0 40 1 0005 $0.74 $0.40 EbMa Jar9 2.40 2 70 2.40 0.1823 $0.44 $0.44 Bal JLI-96 0.84 0.89 # N/A 0.41 0.8610 $0.72 $0.35 Peu .Jur- 1 34 1.92 1.08 03509 $047 $0.38 LhtedSaes Jn-8 not sold 0.29 not sold 0.27 1 0000 not sold $0.27 sIcu V\ld M< Stf sates Financing Maintenance" * In Bolivia,as in mostother countriesroad maintenance is a problem. Thereis a broadbody of analysis at the internationallevel, which suggeststhat for everydollar of maintenancedeferred the cost to the vehicle owner be in the range of US$2 to US$4. In most countries where investment and maintenance are funded through similar channels there is a systemic bias against maintenance. In Bolivia where donors are a major player in financing road programs, this bias is acute. Maintenance is funded primarily from the central government budget implying that: (i) it is subject to political interference specially given the problems with the budget process and institutions (See Section 2a in the main report) b) there is not a secure core of funding available. When cuts are required at the central level, maintenance is an easy target because it does not reduce external financing. * In a number of countries one approach has been to propose a road fund. While this has a number of advantages there are also some problems that need to be addressed. In the longer term one might seek a commercial road agency which would be supervised by the authorities. There is also a need for a reform of the budget process. Presently these two are absent in Bolivia so this diffuses traditional arguments who oppose road funds because of undesirability of earmarking or off budget procedures. * A road fund for Bolivia could be structured so that it would be tied to supplement allocations for road maintenance. This would provide a secure core of funding for maintenance. It would also enable maintenance contracts to be made at a decentralized level. Again international experience suggests that contracting out maintenance is more effective. * The management of the road fund should be broad based and at least include representatives of government, road users (trucking and personal), and civil society. Accounts should be transparent and subject to auditing by an outside firm. * There is a need for political commitment but at the same time a lack of political interference. this also desirable to build in a sunset arrangement so that afler each five year period, for instance, a review could detemine whether the budget reform was adequate on the long-term objective of a commercial road operation was in place. This would signal the need to discontinue the road fund. * It is desirable that the road fund should be viewed as supplementary to other central government expenditures. While it could best be funded through a supplementary charge on gasoline and diesel it is important that it should be small enough so that it does not disturb these major sources of government revenue, Table I shows fuel prices in selected countries. Presently gasoline consumption in Bolivia is approx. 160 million gallons per annum A surcharge of about I cent per gallon would yield an estimated US$.6 million per annum for gasoline alone. The inclusion of diesel would increase this to about US$ million per annum. "This draws heavily on draft paper Gwilliam K. and Shalizi Z. (1999), Road Funds, User Charges and Taxes, World Bank, forthcoming. Road Sector 168 Public Expenditure Review 7.5. Expansion of the Road Network: Current Plans 7.18. Authorities' five year expansions plan appropriately concentrate in completing export corridors ancdconnections between large cities. A paved connection to Chile - via Patacamaya - Tambo Quemado exists, the connection to Peru, via Guaqui - Desaguadero is almost completed, and the connection to Paraguay has been delayed The remaining segments are (i) to pave the Abap6 - Camiri (150 Km), to secure a paved connection to Argentina with a total cost of US$120 million; (iii) to pave the connection Santa Cruz - Puerto Suarez (600 Km) which links Bolivia to Brazil at a cost of US$240 million; and (iv) to construct the stretch Ventilla-Tarapaya (86 Km) to accede to complete an internal circuit with a cost of US$64 million. In addition, ongoing projects totaling 180 million are expected to be finished in the next three year resulting in US$60 million per year on average. With adequate maintenance and rehabilitation, expenditures in the sector in the first three years would total US$210 million. 7.19. The costs are alarming. Consolidating the basic export corridors, and a "steady state" maintenance plan requires resources for the sector to be more than doubled. The roughly US$150 mi;llionincrease in resources is equivalent to about 2 percent of GDP. Unfortunately, it is not only a problem of financing. Even if all of the financing were available on concessional terms, carrying out the plan would imply raising public expenditures by 2 percent of GDP which without an increase in revenues would translate into an unacceptable fiscal deficit of 5.9 percent of GDP. 7.20. A tough choice from the following three alternatives will need to be made decisively i.e. it canrot be overemphasized that shirking in maintenance will only turn out to be more expensive: (i) Lower the number of new Kilometers per year and consolidate the three remaining export corridors at a later date. (ii) Lower road specification to complete the corridors as fast as possible. Allow traffic levels to rise and then concession the upgrade and operation of the roads to private contractors. (iii) Obtain private sector financing from the outset. 7.21. Table 7.11 summarizes a more feasible expansion plan based on past execution capacity which nevertheless contemplates higher resources than the past years' average. With current road specifications, by the year 2004 the Argentinean export corridor will be finished, and the Brazil and Paraguay corridors will be less than 50 percent completed. Authorities have to decide whether the conclusion of the export corridors to Brazil and Paraguay can wait three more years or opt for the second option described below. 7.22. Overcoming obstacles to private participation in roads is imperative. The choice is no doubt difficult. In maintenance, authorities must find ways to lower costs without cutting corners, i.e. through private sector concessions in maintenance tied to toll collections and/or some sort of road fund which is monitored by users. For the expansion of the network, the report recommends following the second alternative. First, insure the geometry, size and foundation of the road bed are adequate to meet eventual road specifications. Lower some of the remaining road specifications (narrower paved roads, gravel instead of pavement etc) to complete export corridors within five years. Allow Road Sector Public Expenditure Review 169 Table 7.11 Summary of Investment and Maintenance Costs for the National Road Network YEAR 2000 2001 | 2002 1 2003 2004 USS MILLION MAINTENANCE 60 60 60 60 60 Routine 21 21 22 23 24 Rehabilitation 39 39 38 37 36 EXPANSION 92 100 115 129 129 Export Corridors 32 50 86 119 119 Abapo Camiri (Argentina) 22 34 35 19 10 Ventilla-Tarapaya 10 16 18 10 10 Sta Cruz-Pto Suarez (Brazil) 33 60 60 Ongoing Projects 60 50 30 20 20 TOTAL 152 160 175 216 216 Source: World Bank Estimates and SNC. traffic to increase, and then concession the upgrading and operation of roads to private financing and construction. It is important to note that to obtain public approval, authorities must explicitly state that roads will be built with lower specifications but that they will be upgraded in the future. 7.23. In June 1998 the Bolivian Congress approved the Public Works Concession Law and the related regulations were approved in December 1998. This law is important because, a least subsidy concession for maintenance, or to expand a road network to interested exporters could tip the balance in favor of private participation at any time. In addition, the Government is analyzing alternatives for new institutional frameworks to implement concessions in the transport sector and has set aside resources to offer technical assistance for the creation of a concession management unit to establish a possible road concession. Private sector's participation does appear limited due to the current low traffic levels.10 But the concession unit is analyzing the innovative schemes along the lines of the second recommendation; i.e.. The unit is considering concessioning upgrading and operating already existing roads for almost 3,000 Km within the next two years which seems ambitious.. In addition, it is important to make a small study to determine whether the level of tolls and the degree of toll collection is adequate. 7.24. Be that as it may the Government has to find alternative ways to efficiently reduce maintenance and construction costs, and find private financing. In this light, private sector participation has to be administered carefully, and without creating large contingent liabilities. 10 For the Abapo-Camiri road, traffic was estimated at less than 250 vehicles per day! Road Sector Public Expenditure Review 171 Statistical Appendix Table A. 1: National Income, by Expenditures (Current prices) Table A.2: National Income, by Expenditures (Constant 1990 prices) Table A.3: National Income, by Sector of Origin (Current prices) Table A.4: Balance of Payments (US$ millions) Table A.5: External Debt Stocks and Flows (US$ millions) Table A.6: Monetary Survey Statistical Appendix 172 Public Expenditure Review Tatie Al: Nkl IWnm, tbyExpmuitwm (0entpnics) 1990 1991 1992 1993 1994 1995 1996 1997 1998 uintlliuz qcf 1w,?) Ca n eqetttLze 13,68517,2D1 2,322 22,684 25,194 2,701 33A855 37,69B 42,675 Garal Gwem 1,815 2310 2833 3,270 3,750 4,375 4,805 6,9 7,244 Pnvatescatr 11,870 14,891 17,489 19,413 21,444 24,325 29,051 31,M 36,432 Grss dckrc irwesn art 1,935 Zg9 3,677 4,061 3,9T2 5029 6,299 7,837 9849 (xedfied cpWfrebcn 1,99 Z771 3,592 4,076 4,104 5,122 6295 7,194 8849 hai inir toes -4 20O 85 -25 -133 -93 33 643 0 (his dru ce tire 15,621 18 24 OD 26,736 29,166 33,729 40,155 46,535 51,624 'dxrn se= (G8-FS -177 -1,050 -1,986 -2,Z' -1,52 -1,494 -1,981 4625 -4457 E fxtgdsandniacserv. 3,517 4,1C9 4,413 4,667 5,987 7,269 8,366 8636 7,249 1nt d goc andrcfasav -3,69 -55159 -6,398 -,943 -7,516 -8,764 -10,337 -12261 -11,705 GCPatmnknc3s 15443 19,132 2014 24,469 27,636 32,235 38,175 41,910 47,067 (1npq6GLC (XP atnnp,s 100.0 100O 100.0 100 1000 100.0 100.0 100.0 100O Ca- Tptmn apa,bte 88.6 89.9 g23 927 91.2 89.0 887 899 90.7 CG-fneGGrrrwt 11.8 121 129 134 136 1a6 126 15.2 15.4 PrvAeesecac 76.9 77.8 79.4 79.4 77.6 75.5 76.1 74.8 75.3 GtxsscbTr cinrae rt 125 15.6 16.7 16.6 144 15.6 16.5 1V7 1a8 rDied fixEatal brraon 126 14.5 16.3 16.7 14.9 15.9 164 17.2 18.8 OC inirvtcone 0.0 1.1 0.4 -0.1 -0.5 -0.3 01 1.5 0.0 Gsd,restie 101.1 105.5 1C060 109.3 1055 1046 1052 1086 1095 Erdter Se= (G8NM -1.1 -45 -60 -93 -55 -46 -52 46 -95 csdgcooar afctora 228 21.5 20.0 19.1 21.7 226 21.9 2D.6 15.4 lIn dgood ad rrtac i -23.9 -27.0 -291 -2B.4 -27.2 -27.2 -27.1 -293 -249 S,Xxmn?:I%Jil Jnsje i (A aMWMHd&tWe&5*4 Statistical Appendix Public Expenditure Review 173 TWi%eA2N11 hmm ly dtml (Omtt(M )pim) 990 1991 1992 199 1 1995 1997 19 pnliaieqadte 136, 14140 14646 15117 MA, 16098 16A8 17,D 13S, (3w (mrrertn 1,815 1,8;/6 1,95 1,5 2057 2193 2216 23DD 2416 RjWlB'eb 11,87012T54 1Z700 13^13 1=8i 1?9M 14,2421250 15,0 i3sckisin kiwnut 1S ZSR Z6M Z633 Z34 Z644 32196 A 70 ctQfornl 1,939 23C 2 26F 2443 2780 3:124 A275 ?783 Owgs ininrmIai& -4 193 47 -22 -89 -136 72 Z23 -@3 GmsdckicedUze 4621 16643 17,M1 17,751 17,919 18744 1f6i4 21,0B 22044 a ogos a d oGFF -17 -3 -757 -0 115 134 -3 -5 -MB Botxs g adu ibs,517 t 3774 3,816 4,018 4,6 5047 5388 5,35 5,723 IntSdgm adra ds e -465 4,1) -4,573 -4,540 -4,510 -4913 -53) -4943 -6331 aanr1dip "A3 1162% 16S4 17,230 1034 18877 1661 q474 21A; uiw1iaieprdtu 29 33 36 32 3a0 4 22 66 44 GarlA xerrrert -01 33 37 25 31 66 1.0 38 50 RiPesecr 34 a3 36 33 29 29 24 71 43 Osiici,bs-art 17.7 293 53 -41 -1Q6 123 X19 98 60 Cai fara, 136 191 121 26 -0 138 124 48 155 Cginirnetaies 04 1.3 -09 -04 -04 -03 1.1 08 -1.4 (mdsces q e.dbn 45 65 38 27 (9 46 49 7.1 47 Nteq,sv a41 -1A -23 IA a7 a1 -a7 -ao 411 Bqorsogfx g t1rrafacrsv. 0 7.3 1.1 53 151 9.1 67 -05 68 Inrptscfagoa fflacrsv. 0 126 99 -07 -06 a9 9.7 103 65 apaiutrmpuem 16443 16S 1X 17230 1804 1877 196S1 Z1474 216 v/ Aicnd APgonoh Statistical Appendix 174 Public Expenditure Review TableA3: NationalIncome, by Sectorof Oiigin (CLumt prices) 1990 1991 1992 1993 1994 1995 1996 1997 1998 (in nulizonsof Bdzvianws) GDPatmaiwtprices 15,443 19,132 2214 24,459 27,636 32,235 38,175 41,910 47,067 cAricLie 2,378 2965 3,170 4,036 4,643 5,254 6,184 6,831 7,318 Industry 4,679 5,472 6,0S4 8,023 9,037 10,831 12,674 13,788 15,334 Ca,trudicn 479 593 682 905 995 1,193 1,489 1,676 ... Mningand wanying 1,575 1,492 1,607 2,690 3,012 3,610 4,047 4,275 ... MaNufaduirg 2,625 3,386 3,764 4,427 5,030 6,028 7,139 7,837 ... Services,etc 8,386 10,696 12,790 12,401 13,956 16,150 19,317 21,290 24,416 (as a/percentage of GD') ' GDPat nva1wtprices 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agrtcultire 15.4 15.5 14.4 16.5 16.8 16.3 16.2 16.3 15.5 Irdustry 30.3 28.6 27.5 3Z8 327 33.6 33.2 3Z9 3Z6 Caontrdion 3.1 3.1 3.1 3.7 3.6 3.7 3.9 4,0 ... Mningand quarying 10.2 7.8 7.3 11.0 10.9 11.2 10.6 10.2 ... Muaurirg 17.0 17.7 17.1 18.1 18.2 18.7 18.7 18.7 ... Services,etc 54.3 55.9 58.1 50.7 50.5 50.1 50.6 50.8 51.9 S,ce: NbinaI tnsbtuteof S=aistics Statistical Appendix Public Expenditure Review 175 TableA.4: Balame of Payments 1990 1991 1992 1993 1994 1995 19% 1997 1998 (inrnilions of US dollars) Curet accout -195.7 -256.0 408.7 -418.7 -218.9 -333.7 -83.8 -553.9 -6738 Tradebalanoe -117.8 -193.4 -452.7 -443.9 -278.4 -300.7 -446.6 -685.0 -879.9 Exports 845.2 776.6 637.6 709.7 998.0 1074.9 1132.0 1165.8 1103.8 Irports -963.0 -970.0 -1090.3 -1153.6 -1276.4 -1375.6 -1578.6 -18E50.8 -1983.6 Non-fator services (net) -11.8 -2.3 -11.7 -8.6 -31.0 -36.8 -14.5 35.7 33.9 InpNoofs iSces -167.6 -180.7 -186.9 -1931 -190.0 -200.6 -200.3 -211.0 -217.4 Exportsof SeVices 155.8 178.4 175.2 184.5 1590 163.8 185.8 246.7 251.3 Fador incaxe -241.1 -242.8 -193.0 -204.6 -188.0 -219.8 -168.0 -196.3 -157.5 Transfers 175.0 182.5 248.7 238.4 278.5 223.6 245.3 291.7 329.7 G3ital andfinancal accourt 164.0 157.8 259.9 341.2 208.5 257.3 725.7 656.6 777.2 Nbt dficialcapiWgrants 0.0 0.0 0.0 0.0 0.0 10.5 45.4 25.3 9.9 ottotal pwateinvestrnet inflAs 31.9 49.3 121.7 259.9 182.7 220.5 373.7 571.6 498.4 of W etdiretinrestrertinflms 35.0 50.0 860 121.6 90.1 177.0 426.0 598.9 623.0 NtLTborroing 101.2 77.7 151.7 90.2 151.0 108.8 257.2 303.9 268.9 DsbuAserts 335.2 300.0 384.7 319.2 359.9 379.4 394.5 370.6 312.9 Ppeprrerts due 234.0 222.3 233.0 229.0 234.9 300.6 155.3 145.8 168.0 hetwLTinrafi, net 0.0 0.0 0.0 0.0 26.0 30.0 18.0 79.1 124.0 Adjustrentsto scheduleddebt service 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Errorsand Omssions 30.9 30.8 -13.5 -8.9 -125.2 -82.5 49.4 -244.2 -229.6 Orall balance -31.7 -98.2 -148.8 -77.5 -10.4 -76.4 341.9 102.7 103.4 Changeinintemaboalr eves -98.9 -89.8 -30.5 -138.7 -123.3 -123.2 -341.9 -102.7 -129.3 Exceptonalfinancing(nd.wcPcass) 130.6 188.0 179.3 61.2 133.7 199.6 0.0 0.0 25.9 31.7 98.2 148.8 -77.5 10.4 76.4 -341.9 -102.7 -103.4 Md x1deis (ae dGDL Tradebalance -2.4% -3.6% -8.0/ -7.80/% 4.6%/o -4.5% -6.0% 98.6%o -10.3% Exports 17.4% 14.6% 11.3% 12.4% 16.60/o 16.1% 15.1% 14.7%/o 12.90/o Inports -19.8% -18.2% -19.3% -20.2% -21.2% -20.6% -21.0% -23.3% -23.2% Currertac=Yft -4.0% -4.8% -7.2% -7.3% -3.6% -5.0% -5.1% -7.0% -7.9% tc: Central bink oj Bolrvia Statistical Appendix 176 Public Expenditure Review, TableAS: ExternalDebt Stocks atd FHows ,1.SS nilltor) lY9Z 1993 iM 19 19%---- 19- / 19 A Gomsdicbrsunrts M.thc&pbiclygunarateed 3913I 'S t.2t 4118 34Th 378 3724 *1ve a rditorsnngianteed 24 5tlh67 249 X! 0() Otl Tnal LTah nwditsrserrts 393' 3.94 '875 487 5 "85 3780 17 3 NtSTSbcreht 350 282 776 7104 621 0t 1111 awngs fion1IvF 51 1 ()0 43h 2' 5 489 (10 011 Toal dsburs(Lr TtsT-TlW. 479.8 3976 513 5284 9411 378(0 3723 11 Aimrt1abtion RPilc&pulclyguaateed 1 59 (594 154.0 1544 1544 2140 1811) Prive crfeditorsnoguaru eed 41 65 18 8 1X1 44 0 29(1 4h1 Tcta4IT xrtaiawx, 1'0 S169 121778 12'5 (984 2430 7229( Rep,ntotsto I 370 288 149 2f1,I MI ( t.() 4A)!) Total arnratin (TIMF) 1670 1947 1877 198( 2'01() 7'() 709.1 ( Net di^usents Ptbic&ptilv mtci-wiecd 265.4 1594 2l'Sh 2614 19132 16()1 (13 Pnvatecrcitrs ncgreed -1 7 441 61 486 4 9 -27 -461 Tdai LTblan netdisbrsert 2637 2(115 2147 310( 7240 1350 1411 Toai netdsltAsaetsets(1.TST-5l) 3128 2029 3161h 3217S 3195 990 1W133 n1 Exteemaldebt (DOD)c RPi"Jcc&piblidygypamiteed 3669.3 31.148 41i(7 44598 41384 4539.3 43343 PrivAe recnditlsnoti/umand 141)3 1844 (915 23' 1 285( 2570 416(1 Total ITDOD 180 6 38702 4(112 41819)1 45234 47%93 4750)1 STcac 176(1 21772 '11 I 1747 4()17 246.7 4291 Us OfINV di 27491 22115 2(13t. b 8 2 77-7 1 2740' 2118( Total DD 3(LTST+ IMF ofAil8d 4247 4366') 4X709 52874 52)112 528311 53871 Pimpal aears 181 "313 (117 ''8 64.4 64.0 17 0 Interem t s 1( 8 1'8 '4 1 2( 3 257 26 0 0 F. DrN ariddebt burden imdicators Totaldeistice(USSiilios) 287') 3.341 '474 171. 4125 453 435 rIntest (l.T +ST+ IMF)b 12() ) 1'9 4 I S)7 112- 1825 174 0 Itf.( Pnnipal (LT' (I') 167(1 1(47 1837 ('Q81' 21() 279.0 2690 Toal DODc andFDSd DOD/ eaqxwls(XGSe) raio 4177 4813 4(7') 4(11 3754 3560 3908 DOtD/CDPra3tio 792 754 814 787 ('93 (814 63.0 fDSI/ e IBRD eNsrre nclcatcs. IBRDDSf/pubcic loai 3112 117 11.5 ((3 95 64 44 RefeTodcreditrDS/pbliclXi 778 71 1 71 1 77h0 81)9 775 842 IBRDDS ie:qorts(XCS) 4 1 18 2') 2 8 2 3 1 8 1.2 a ftascaicajcar nurn Lwn lsqaitmg xsai)di (Iuiir9; (110) (1a (N11(a0)I Pn Q1.UMr9 (ThIIOQI 11111t(n iO.stu b. "LT denotes"og-4emn."sr' dnoes 'si-t4-tin" c "W 'dwaes de outsandingaid bkr%ed d4TDIS d'( es tota dei) sdice f DStdotes t debsice kStatistical Appendix Public Expenditure Review 177 Table6.1: MonetarySurvey 1992 1993 1994 1995 1996 1997 1998 (in millions ofBolivianos) Totalassets 7,092 9,675 11,767 12,880 18,430 22,039 25,118 InternationalReserves 843 917 1,141 1,711 3,382 3,725 5,153 Domesticassels (net) 6,2.50 8,758 10,627 11.169 15,048 18,314 19,966 Net creditto the publicsector 1,911 2,483 2,632 405 394 '775 811 Credittotheprivatesector 7,992 11,129 13,800 15.538 19.924 24,251 29.913 Longand nediumrterrnliabilities -3,461 4,104 -5,184 -3.862 -3,841 -3.933 4.286 Other -193 -749 -622 -912 -1,430 -2,779 -6.472 Broadmoney (M3) 7,092 9,675 11,767 12,880 18,430 22,039 25,118 Broadmoney (M2) 1,364 1,555 2,132 2,520 2.983 3,526 3.766 Moneysupply (MI) 1.236 1,417 1.890 2,333 2.580 3,061 3.276 Quasi-money 128 138 241 187 402 464 490 Foreignexchangedeposits 5.728 8,120 9.636 10.360 15.447 18,513 21,352 (percentagechange) Broadmoney (M3) ... 36.4 21.6 9.5 43.1 19.6 14.0 Broadmney(M2) 14.0 37.1 18.2 18.3 18.2 6.8 Moneysupply(MI) ... 14.6 33.4 23.4 10.6 18.6 7.0 Quasi-money ... 8.0 74.8 -22.6 115.2 15.4 5.6 Foreignexchangedeposits ... 41.8 18.7 7.5 49.1 19.9 15.3 (percentageof GiPV) Broadmoney (M3) 32.22 39.56 42.58 39.96 48.28 52.59 53.37 Broadtnoney (M2) 6.2 6.4 7.7 7.8 7.8 8.4 8.0 Moneysupply (Ml) 5.6 5.8 6.8 7.2 6.8 7.3 7.0 Quasi-money (J.6 (1.6 0.9 ().6 1.I I 1 1.0 Foreignexchangedeposits 26.0 33.2 34.9 32.1 40.5 44.2 45.4 A kmorandum items: Inconevelocity of M3" 2.9 2.6 26 2.4 2.1 2.0 Inconevelocity ofM2 16.8 15.( 13.9 13.9 12.9 12.9 Incomevelocity ofMIl" 18.4 16.7 15.3 15.5 14.9 14.9 .Sozrce:C entral Bank oJBolivia "NorninalGDP/average of end-of-year nmoney stock at tinest and1-1. Statistical Appendix