Nicaragua - Public Investment Review

Report No.: 16478 -NI CONFIDENTIAL 16478-NI NICARAGUA Public Investment Review May 29, 1997 Central America Department Latin America and the Caribbean Region (Green Cover) FILE COPY Vice President Shahid Javed Burki Director Donna Dowsett-Coirolo Task Manager Violeta Rosenthal Goverment Fiscal Year January 1 - December 31 Currency Equivalents Currency Unit = Córdova US$1.00 = C$8.92 (Dec. 1966) ACRONYMS AND ABBREVIATIONS BANADES - Banco Nacional de Desarrollo BANIC - Banco Nicaragüense de Industria y Comercio BCIE - Banco Centroamericano de Integración Económica BCN - Central Bank of Nicaragua BCP - Banco de Crédito Popular CEA - Council of Economic Advisors CENIS - Certificados Negociables de Inversión CERCs - Corporaciones de Empresas Regionales de Construcción CNE - Comisión Nacional de Energía CNRH - National Comission on Water Resources CONACES - Consejo Nacional de Coordinación Económica y Social CTI - Technical Committee of Public Investment DAR - Dirección de Acueductos Rurales DGIP - General Directorate of Public Investment DGP - General Directorate of Budgeting DGTAc - Dirección General de Transporte Acuático DGTAE - Dirección General de Transporte Aeronáutico EAAI - Empresa Administradora del Aeropuerto Internacional EMP - Empresas Medicas Previsionales ENACAL - Empresa Nicaragüense de Acueductos y Alcantarillados ENAP - Empresa Nacional de Puertos ENEL - Empresa Nicaragüense de Electricidad ENITEL - Empresa Nicaragüense de Telecomunicaciones ESAF - Enhanced Structural Adjustment Facility FNI - Financiera Nicaragüense de Inversión FISE - Social Investment Fund HIPC - Highly Indebted Poor Countries IDB - Inter-American Development Bank IMF - International Monetary Fund INAA - Instituto Nicaragüense de Acueductos y Alcantarillados INE - Instituto Nacional de Electricidad INSS - Instituto Nicaragüense del Seguro Social MARENA - Ministry of Natural Resources and Environment MAS - Ministry of Social Action MCT - Ministry of Construction and Transport MCE - Ministry of External Cooperation MED - Ministry of Education MEDE - Ministry of Economy and Development MIFIN - Ministry of Finance MINSA - Ministry of Health NGO - Non-Governmental Organization PAHO - Pan-American Health Organization PIP - Public Investment Program PNDR - Programa Nacional de Desarrollo Rural RMF - Road Maintenance Fund SIGFA - Integrated Financial Management and Auditing System SILAIS - Departamental Health Units SNIP - National Public Investment System TELCOR - Telecomunicaciones y Correos UFW - Unaccounted-for-Water INIFOM - Instituto Nicaragiense de Fomento Municipal USAID - United States Agency for International Development This report was prepared by Violeta Rosenthal (LADCN) based on a series of missions to Nicaragua during late 1996-early 1997 and reflects joint efforts by the Government (Ministry of Economy, Finance, Education, Health, Construction and Public Works, the Energy Utility, the Water Utility, and Central Bank), Swedish Cooperation, Danish Cooperation, and the World Bank. Contributors to the report were: Clive Harris (LASLG, Energy and Chapter III), Luis SuArez (Consultant, institutional issues), Philip Gray (Consultant, privatization), Jerker Soderlung and Nils Ostrom (SIDA, health), Fernando Montenegro (LASLG, transport), Gustavo Arcia (Consultant, education and social funds), Stig Trommer (LADCN, Statistical Annex), Karen Helveg Petersen (Consultant, decentralization), Rodrigo Chaves (LASLG, rural finances), Horacio Rose (Consultant, agriculture). The Department Director is Donna Dowsett-Coirolo and the Acting Lead Economist is Ian Bannon. Peer reviewers were: Suhdir Shetty (AFTMI) and Frannie Humplick (SAllN) Report processing was handled by Stig Trommer, Sonia C. Molina and Stephanie Sheldon. TABLE OF CONTENTS EXECUTIVE SUMMARY. ..... . . . ... .... . I RESUMEN EJECUTIVO.. ... ... .... .. . . VIII 1. MACROECONOMIC FRAMEWORK AND FISCAL SUSTAINABILITY.. I I INTRODUCTION ... ... .... .... .. .... I. .... .. I II. THE MACROECONOMY, SAVINGS AND INVESTMENT. .. 1 III FISCAL POLICY ... ........ ....... .. .... 2 Revenues . ... ... ... . .... 3 E xpenditures .... .. ..... ....... .... . .. .... .... ..... 4 Debt. ..... .. ..... ... ........ .. . ....... .. ... ........ 6 IV A SUSTAINABLE FISCAL DEFICIT. .... . ... .. . .... . .... 7 V. CONTINGENT LIABITIES8.. . ... . ..... . ... .... .8 VI. RECOMMENDATIONS.. ......... . ..... .. . ..... . . ......... ..S... 8 2. PUBLIC INVESTMENT PLANNING AND BUDGETING 9 I. B A CK GRO U N D .... ......... ... ...... .................. . ............ . .... . .... . . 9 II MACROECONOMIC FRAMEWORK AND STRATEGIC PLANNING .. 9 III. BUDGET COVERAGE AND PROJECT SELECTION . . ..... .... . .... ..... 11 IV . A ID C OORDINATION ............... ........ . ... .............. ... . . ... ....... ......... . . . 12 V. THE NATIONAL SYSTEM FOR PUBLIC INVESTMENT AND THE INTEGRATED SYSTEM OF ADMINISTRATIVE AND FINANCIAL MANAGEMENT AND AUDITING ...... .. 13 V I. RECOM M ENDATIONS ...... .............. . . . .. ............... . . ..... . ..... .. ..... .., . . 14 3. IN FR A STR U C T U RE........... ......................... ... ....................... ........ ... . ... . 15 I. IN TRO D U CTION ....................... ............. . ................... .. ......... . .... . . 15 II. INFRASTRUCTURE SERVICE PROVISION IN NICARAGUA- ORGANIZATION AND P ER FO R M A N C E .................... ........ ............................................... ... . . ..... .............. . 15 Sector Structure....................................... . 15 Infrastructure Service Provision- Quality, Coverage and Efficiency 16 III INTRODUCING THE PRIVATE SECTOR - CROSS-SECTORAL AND STRATEGIC IS SU E S .............................. .................................. . ......................... . .. . .... .... . 18 IV. REFORMING THE INFRASTRUCTURE SECTORS - CHALLENGES AND SOLUTIONS . 19 R o ad s ...................... ................. . .......... . . ....... 19 E lectricity ..... ....... .. ...... . .. ....... .. ............... .. . ...... .. .. .. .. . ..... .. .. ..... 2 0 Water and Sanitation Services - Initiating Reform. ...... ..... .. . .. .. .... 22 P o rts ..................................... .......... ..... ...... . ............ .... .. ...... 2 3 A irp o rts..... ............... . ................. ..... . .. . ..... . . ... .... .. .. . 2 4 T elecom m unications...................... .......................... . .. ... ..... . .. .... ...24 V. PUBLIC INVESTMENT IN THE INFRASTRUCTURE --CURRENT PRIORITIES AND FUTU RE P LA N NIN G ................................................. ...................... ....... ..... . . . .... 25 R o ads .............. ...... ........ ............... ... . . . .... .. ... . ..... ...... 2 5 P o rts ......... ................ ......... ................... . .. .. .... . . .. ....... .... 2 5 Airports. ........ .... ... . 25 Electricity. .... .. ........ . .... 26 W ater ...... . . .... .. .. . .. .. ... ..... 26 VI. RECOMMENDATIONS . ... .... .. .27 General ... . . ... . ... .. .... . .... ..27 Roads .... . . . ... . ..... . .27 E lectricity... .. .. ... . .. . .... .... . . ............. .27 Water and Sewerage....... . ... ... . ......... . . ... .......... . 27 P o rts .............. ...... ... ..... ...... ............ ..... . ... ........... .. ..2 7 Telecommunications. ... ......... . .... . ....... ... ..27 4. SOCIAL SECTORS.... ..... ...... ...... ..... ... . ............. . . ... . ..... . ............. . 28 I O VER V IEW.. .... ...... .... .............. . .... . ... ........... ..... 28 II HEALTH .... ..... . ... .... .... ... . .... .. ...... 28 Strategy and Main Issues. .. ...... ... ... .... 28 R esou rces.. ..... ...... .............. ........... . ............ . .. . .. ........ ........ .... 2 9 C ost R ecovery .. ........ ..... ........ .... .. . .... . . .. . ..... .. . . ......... ...... 3 1 T he P rivate Sector ....... ..... . ..... ............. . . ............... . .. . . ...... . .. .. .33 C o o rd in atio n ..... .......... ...... . ..... .................... .... ............................... ....... ..3 3 III. E D U CA TION................. ................ .. ...... .. . .... .. .... ................ . .. .... ..... .33 Strategy and Issues........................... ........... ................. ....... .......... . . . . ..33 R esources....... . ............... . ...... . .. ........ ..... ... 34 M aintenance...... ................ .. .................... ........ ........ .. ... ...... 35 Decentralization and Cost Recovery ...... .. .............................. . .. . ...... . 36 C oordination ....... .................... .. .......... .. ... . . ....... . . . .....37 IV. SOCIAL SAFETY NETS.. ................................................... . . ....... ..... .... ...... . . 37 The Social Investment Fund (FISE)....... .. . ...... .............. . ............................ 37 The Ministry of Social Action (MAS)...................... .. ................................. ..... 38 V. RECOMMENDATIONS .................. ................... .. .............. ............................. .. ... 39 H e a lth .............. ..................................... . .. ....... . ................... ... .......3 9 E ducation................. .. ............ .. .. ............ .. . ... . ..... . .... .. 39 Social Safety N ets ............... . ................. . . .. ........ . . ... .. .. ................. 39 CHARTS 1-1: PUBLIC AND PRIVATE INVESTMENT .. .. .......... ....... . .... .. ........... . .. . .....2 1-2 1995 - TOTAL REVENUE OF THE NFPS....................................... ..... ............. ....... ..3 1-3 1995 TOTAL EXPENDITURES OF THE NFPS ................. ........................ ....... ........ . .4 1-4. FUNCTIONAL DISTRIBUTION OF TOTAL ExPENDiTuREs .. .... .. ......... .. .. . .4 1-5: PUBLIC INVESTMENT BY ECONOMIC SECTORS.......................................... ........ .. .. .5 3-1: INFRASTRUCTURE SERVICE PROVISION IN CENTRAL AMERICA.... . . ............... 17 3-2. BREAKDOWN OF LOSSES 1995...... .. .................... . ............... .. .. ........ ......... .. 21 4-1 DISTRIBUTION OF SOCIAL EXPENDITURE 1996 . .. .............. .. .28 4-2 HEALTH INDICATORS FOR CENTRAL AMERICA ................. ... . . .............. .. 29 4-3: DISTRIBUTION OF EXPENDITURE AND NUMBER OF STUDENTS.. .... .............. . 34 TABLES 1 1 INVESTMENT AND SAVINGS 1995. . 1.2 CONSOLIDATED NON-FINANCIAL PUBLIC SECTOR.... 3 1 3. PUBLIC INVESTMENT PROGRAM 1995 . 5 1 4. PROJECTED PUBLIC SECTOR INVESTMENT 1997-2000 6 1.5- SELECTED ECONOMIC INDICATORS .... 7 3-1. SUMMARY OF EXISTING SITUATION IN MAIN INFRASTRUCTURE SECTOR . .... 16 3-2- OPTIONS FOR INVOLVING THE PRIVATE SECTOR, AND THEIR BENEFITS 18 3-3. PUBLIC INVESTMENT IN TRANSPORT ...... . ........ 25 3-4 SUGGESTED INVESTMENT PLAN FOR THE ELECTRICITY SECTOR . 26 3-5. PUBLIC INVESTMENT IN WATER SUPPLY AND SANITATION .. .. .... . 27 4-1: MINISTRY OF HEALTH 1996 BUDGET ........ .. ..... ..... 30 4-2: CENTRAL AMERICA PUBLIC EXPENDITURE ON EDUCATION . 34 4-3 MINISTRY OF EDUCATION 1996 BUDGET. .. .. 35 4-4. PUBLIC INVESTMENT PROGRAM FOR FISE .. . 38 TEXT BOXES 2-1. COST-BENEFIT ANALYSIS IN THE CLINTON ADMINISTRATION 12 3.1 REDUCING LOSSES--LESSONS FROM THE REGION ........ . . . ....21 3 2 COMMUNITY PARTICIPATION IN RURAL WATER PROJECT IN PARAGUAY . ...22 3.3. PORT PRIVATIZATION IN LATIN AMERICA . . . .......... . ..23 4 1 FINANCIAL ASPECTS OF AUTONOMY ............... .. .. .. 36 ANNEXES I :MATRIX OF POLICIES AND ACTIONS 2.: STATISTICAL TABLES 4 EXECUTIVE SUMMARY MACROECONOMIC FRAMEWORK AND FISCAL SUSTAINABILITY Higher savings is key to sustained investment and growth 1. Nicaragua has one of the lowest savings rates and the highest investment rates in Latin America (second only to Chile). Between 1990 and 1995 a greater availability of foreign resources allowed public sector investment to rise from 9 to 16 percent of GDP, whereas private sector investment stagnated at 11 percent. Nicaragua's reconstruction needs will remain great well into the next century while its access to foreign aid will decline. To meet its investment requirements Nicaragua will have to increase public savings, enhance the efficiency of public investment, and reactivate private investment. This will require the implementation of tax reform (currently underway) and of a far-reaching public sector reform, prudent management of domestic debt and containment of public sector contingent liabilities --especially those stemming from the state banks. With continued structural reform, fiscal discipline and greater private sector investment, Nicaragua could achieve growth rates of 6 to 7 percent in the next four years. External viability will require exceptional debt relief through the Highly Indebted Poor Countries Initiative. The shares of social sector and rural areas in public of expenditures should be further increased 2. At present, the largest share of public expenditures goes to the social sectors. Economic infrastructure, and administration and public safety, are next in importance. To break the poverty trap and to satisfy the demands of a rapidly growing population (3.2 percent per year), the Government will have to maintain high levels of social spending - in face of falling aid and tight budget constrains. To protect social spending, while total public expenditures fall relative to GDP, resources will have to be reoriented from infrastructure and productive activities need to be redirected from other areas such as economic infrastructure towards the social sectors, particularly education. With an appropriate strategy, it is feasible to attract the private sector to invest in telecommunications, power and ports. It will be more difficult to direct private capital to water and sanitation and the social sectors. In these areas, Government's direct intervention in partnership with NGOs and local communities will continue to be required. The share of resources destined to rural areas -- where extreme poverty is concentrated -- should be increased. At present urban residents obtain 7 times more public investment per capita than those living in rural areas. Data issues hamper the analysis of the adequacy public investment levels and allocation 3. In 1996 public investment was 16 percent of GDP and 40 percent of total public expenditures. Data problems, however, suggest that the level of investment is actually lower than reported. First, it is widely recognized that the national accounts underestimate Nicaragua's national output by a significant margin. Second, a large portion of the expenditures classified as capital outlays are actually recurrent costs or deferred maintenance. And while as much as one fourth of public expenditures go unreported -- mainly expenditures funded with foreign aid without local counterpart requirements-- it is unlikely that these represent investment outlays. Improvements in data are essential to provide policy makers with a reliable base for economic decisions. PUBLIC INVESTMENT PLANNING AND BUDGETING Lack of strategic planning and fragmentation of the budget process impedes efficient resource use 4. The institutional set-up for public investment management faces a number of issues: an overall strategic framework for investment planning is lacking; sectoral planning is also lacking and therefore ii Nicaragua - Public Investment Review there is no linkage between sectoral targets and specific investment programs; investment programming is not embedded in a medium-term expenditure framework which would allow the explicit consideration of recurrent costs; project selection is donor-driven, resulting in fragmentation, duplication and inconsistencies; and the institutional capacity to design and execute investments is weak. The key problem is the fragmentation of responsibilities for public investment management among four institutions (Ministry of Economy-MEDE, Ministry of Finance-MIFIN, Ministry of External Corporation-MCE and Central Bank-BCN). Given that more than 80 percent of public investment is funded by foreign sources, improved aid management is critical to improve the efficiency of public resource use. Aid management should be concentrated in a single agency and fully integrated to the budgetary process. All budgetary functions currently carried out by MEDE and MCE should be integrated within MIFIN to avoid duplications and ensure coordination of the development budget and the recurrent budget. 5. The main criteria for inclusion in the investment program is the availability of foreign financing. The problem arises not from the heavy dependence on foreign aid per se but from weaknesses in the strategic-priority setting process, weak accountability and the fact that a significant portion of resources do not pass through the budget. The crucial task of strategic priority setting is not being addressed because a clear institutional locus for this activity is lacking. For investment expenditures, prioritization falls on the DGIP of MEDE supported by a Technical Committee of Public Investment (CTI). The CTI, however, does not meet on a regular basis and its decisions are not based on rigorous analysis and should not be institutionalized as proposed in the draft SNIP law. The priority setting function should be the responsibility of an entity at the highest level of economic authorities endowed with a full time high level staff, with a mandate to define the public investment plan within a macroeconomic framework. This could be an entity such as the national commission for coordination of economic and social council (CONACES) that has been proposed under the public sector reform. Sectoral priorities should be left to line ministries, who have better information on how to best allocate resources within their sector, but who must be held accountable for their performance. Limited budget coverage and weak project screening results in poor investment decisions 6. As a result of the limited budget coverage there is no global picture of the distribution of resources and no rational basis for their redistribution in response to changing priorities. The majority of investment projects financed with external aid not requiring counterpart funds, such as technical assistance, are excluded from the budget. There appear to be two reasons for this. One is the donor- government relationship; some donors prefer to bypass the budget for expediency and control. A second reason is that the Government limits budget coverage because 6 percent of the budget has to be allocated to the universities. While politically difficult, the best solution would be to change the constitutional provision. To succeed the Government would have to mount a major campaign to build consensus among Nicaraguans that the 6 percent provision is inequitable and inefficient. 7. At present the screening process for public investment projects is weak. The rationale for public provision of the goods and services to be produced by proposed projects is not always established, and projects are not subject to economic evaluation. With few exceptions, such as the Ministry of Construction and Transport (MCT), sectoral agencies are unable to develop cost-benefit analysis, and the recurrent costs implications of projects are not assessed. The SNIP is developing a standard methodology for project evaluation which will be required for any project to be included in the PIP. This tasks should be given a very high priority as economic evaluation of projects has the potential to significantly raise the efficiency of public resources. Executive Summary lit INFRASTRUCTURE 8. Nicaragua's infrastructure sectors suffer from low productivity, inadequate user charges and high losses, more than a decade of inadequate maintenance of capital stocks, and poor incentives for operating efficiency. The lack of investment planning also means that scarce public resources are frequently misdirected. If these deficiencies are not corrected, the poor quality of infrastructure service provision will be a brake on economic growth. It will also be difficult to tackle poverty alleviation if the coverage of certain basic services cannot be increased. In areas such as roads, where the Government will continue to be the main investor, it needs to improve the quality of planning and the efficiency with which investments are directed. In the utilities, the Government needs to redefine its role to be a policy-maker and regulator, and allow the private sector to take an increased share of investment and operation. To do so, it will have to establish within each sector an appropriate legal and regulatory framework which will provide a secure footing for private sector participation. It should also revise the Foreign Investment Law to eliminate discrimination against foreign investors and thereby encourage foreign participation in infrastructure service provision. Roads - Improving planning and placing maintenance on a secure footing 9. Given the expected volumes of traffic, it is anticipated that virtually all investments in the road network will be undertaken by the public sector. The MCT must therefore improve its capacity for policy formulation, coordination and investment prioritization. As part of this, it should reorient its role from an executor of works to a planning one, and should develop the road inventory which will assist in the prioritization of future investments. 10. Only 17 percent of Nicaragua's roads are classified as being in good condition. The Government has been unable to provide sufficient funds under the regular budget to undertake the required maintenance. Therefore Nicaragua is considering the development of a road maintenance fund which will provide a secure and stable source of funds for this activity. The private sector is now involved in major rehabilitation works and accounts for about 15 percent of regular maintenance. The MTC should accelerate this trend, continuing to reduce the role that the state-owned regional construction companies (CERCs) play in maintenance, in part by privatizing them. Electricity - harnessing the potential of the private sector 11. The chief problem facing the sector is the high level of losses, which at over 30 percent are the highest in Central America, and are chiefly due to non-technical factors associated with illegal connections, fraud, lack of or broken meters, mostly in Managua. This high level of losses places ENEL on a weak financial position. Experience in the region indicates that it is difficult to reduce levels of non-technical losses within publicly-owned enterprises, and therefore the Government should consider allowing private sector participation in distribution. The first step would be to undertake a study evaluating options and modalities (sale of assets, concession etc.) and the extent to which distribution within the country should be divided up. 12. A 30 MW IPP has recently started production and future generation investments will be made by the private sector. ENEL is discussing the leasing of the Momotombo geothermal field to a private company and expects to put out to tender other contracts for generation to the private sector. Using private funds and expertise to build and operate generating plans is the correct policy choice for Nicaragua. However, it makes it imperative that losses are reduced at the distribution level; if not, ENEL will have difficulties paying for the power under the contracts with the IPPs and the Government will most likely have to transfer funds to cover these obligations. 13. In line with the introduction of the private sector, the Government should act to ensure the passage of the Electricity Law, as well as the legislation that will provide the sector regulator, INE, with the authority to set tariffs. As far as public investments are concerned, there is no further need IV Nicaragua - Public Investment Revew for investment in generation, nor in a substantial way in distribution. In transmission, the Government should concentrate on developing a plan of core investments that are relatively independent of the location of future generation. Water -new ways to improve operating efficiency 14. This sector has made little progress in terms of delineating responsibilities for policy, regulation and operations among the different parties, although legislation has been introduced to the Assembly that would split INAA into a regulatory agency, a service provider and, in addition, establish the regime for concessioning. The level of water losses is relatively high, at 46 percent. Almost half of the population lacks access to safe water and more than two thirds lacks sanitation services. INAA is in a weak financial position, with tariffs sufficient to cover operating costs but not to meet the sector's maintenance needs nor to significantly contribute to its investment program. The potential scope for private sector involvement is limited at present by the weak financial situation of INAA, the poor state of its physical infrastructure, and the absence of a clear regulatory framework. It may not be feasible to expect the private sector to be responsible for financing a significant part of new investment while tariffs remained below cost-recovery levels. However, a stepwise approach to private sector involvement beginning with a management contract and building up to a concession or divestiture may be appropriate for Nicaragua. Management contracts would at least provide a way of obtaining improvements in operating efficiency. 15. Given the current state of the sector, the Government is likely to continue to be a provider of investment funds in the medium term. In these plans, it should give greater priority to the provision of water supply to low income urban areas and to rural areas. With an appropriate institutional structure, such as a well structured community participation program, it should be feasible to achieve more ambitious rural water coverage targets by the year 2000 than the current target of 40 percent. To improve the efficiency of investments, INAA should develop a least-cost expansion plan for water supply and sewerage and a mechanism to coordinate on-going projects. Ports and Telecommunications - improving links to the world 16. The ports are inefficient with most of the cargo going through ports in neighboring countries. Future investments in ports should be undertaken by the private sector. To initiate the process of privatization, the Government should first attempt to concession the terminal operations at Corinto and Rama; if the Government assumes the debt service obligations, it should be able to obtain a positive sum of money for the concession. If this does not result in success, it should instead undertake a strategy of partial privatization/concessioning, through the creation of competing stevedoring companies and the selective concessioning of other services within the ports (e.g. piloting, storage etc.). In tandem, the Government should transfer: (i) local ports to the municipalities; and (ii) secondary activities to the Direccidn General de Transporte Acudtico, which can then concession them. ENAP would then cease to function and its regulatory activities could be transferred to a transport regulator. 17. It is vital that ENITEL be successfully privatized if the telecoms sector is to be developed, and the new Government should make this one of its main targets in the infrastructure sector in 1997. To do this, it will have to re-launch the bidding process, opening the field to consortia composed of recognized telephone companies, acting as the "technical partner" in the consortium, capable of managing the company and other investors. This will increase competition for the bid and the likelihood of a deal. The Government should also revisit some of the concession obligations regarding quality of service and expansion targets. &eculwe Summary SOCIAL SECTORS 18. Despite major Government efforts over the last 20 years, Nicaragua's social indicators continue to be poor. Life expectancy is low and infant mortality and fertility rates (4.6 children per women) are the highest in the region. At current fertility rates, the population would double every 26 years. Malnutrition among children continues to be a major problem particularly in the rural areas. Illiteracy rates remain high at 23 percent, and while basic education coverage is high, its quality is low. Only 20 percent of the relevant age-group attends secondary school and the university/primary student expenditure ratio of 14.5:1 is two times the Latin American average. While a large share of Government resources are allocated to the social sectors, in absolute terms per capita expenditures, both in health and education, are well below the regional average. Given budgetary constrains, expenditures must be better targeted, their efficiency increased and more resources should be mobilized through cost-recovery and redirecting foreign aid. The Government is aware of these challenges and has embarked on a successful decentralization strategy aimed at improving the delivery of basic health and education services to the most vulnerable groups. The decentralization process, however, has proceeded without the necessary legal backing. The establishment of a legal framework defining the role, authority and accountability of the different levels of Government and of private agents is urgently needed. Health Improved knowledge on resource use is essential for rational planning 19. Weaknesses in available health expenditures data limit the ability to analyze the adequacy of resource allocation. The MINSA budget excludes more than two thirds of the foreign aid to the health sector representing 30 percent of the sector's official resources; and there is no information regarding NGO or private sector contributions. To improve health expenditure data MINSA should include all public expenditures in the budget and develop the National Health Accounts, which have already been started under a regional PAHO/Harvard initiative. 20. There is no explicit investment strategy or ex-post evaluation of investments, and the ex-ante evaluation is poor. As in other sectors, the deciding factor for project inclusion in the PIP is whether financing is available or not. The distribution of investments between primary and secondary levels appears adequate. There is, however, an emerging concern about the increasing share of funds allocated to the construction of new hospitals because of their high recurrent cost implications and because resources are diverted from primary care. MINSA needs to formulate a consistent investment strategy for the sector as a whole to align interested donors with national priorities. 21. MINSA does not incorporate estimates of recurrent costs in its investment decisions, not even for the new Granada hospital or for the other two new hospitals for which funding has yet to be finalized. MINSA should implement a recently-developed model to incorporate recurrent expenditures in investment analysis. The Nicaraguan Health System has not been allocating sufficient resources to the maintenance of buildings, installations, industrial and medical equipment. This has resulted in premature deterioration, loss and unreliability of equipment, which leads to low productivity and low quality of health care. At present, maintenance expenditures represent 1.3 percent of the budget on average, whereas needs are at least 1.9 percent. Cost recovery with clear exemptions for the poorest groups needs to be promoted 22. Cost recovery through user fees has only been initiated at the secondary health care level and above. MINSA is now billing hospital services to INSS affiliates, charging user fees to patients in private rooms, and requiring co-payments for selected services from patients not affiliated with INSS. While cost-recovery practices should be encouraged, the present system raises equity and accountability concerns. To address them, it is important to develop clear exemption guidelines for the Nicaragua - Public Investment Review poorest groups and at the same time, to enforce a costing system. Increased coverage of the insurance system should also be pursued. Collecting minimum charges for consultations and care not connected with priority programs could also generate some income at the primary level and help create greater cost awareness. 23. There are some 32 Empresas Medicas Previsionales (EMP), which (two are public and the rest private) provide basic medical services, including contracting of public and private hospitals for hospital care to INSS affiliates. The EMPs should be further promoted. However, the quality of service is uneven and MINSA needs to introduce regulation such as a quality control/assurance accreditation system to protect users. Clear progress has been made in deconcentrating the management of primary services to the SILAIS level, and in some cases even to the municipal level. But only 20 percent of the budget has been decentralized and the rest (salaries and medicines) remains at the central level. Education 24. Despite severe resource constraints, Nicaragua has achieved a comparatively high coverage in public education. The main issue is the low quality of basic education, followed by the low coverage of pre-school/early childhood development programs and of secondary education. The Government's strategy seeks to address these problems by: increasing financing of basic education (mainly through voluntary contributions), improving resource allocation in the sector, concentrating resources in the first four grades, decentralizing school management and improving teacher competencies. Expenditure bias toward universities further limits resources for basic education 25. A disproportionate share of resources, 33 percent, goes to university students, who represent only 3 percent of the student population. Furthermore, 60 percent of the university students belong to the 30 percent highest income group whereas merely 3 percent of them belong to the 30 percent lowest income group. This clearly implies that cost recovery at the university level must be a priority to improve the allocation of resources within the social sectors. However, even if resources were to be reallocated to basic education, spending per student would still be significantly below the region's average. Therefore, it is also necessary to mobilize additional resources through voluntary parents' contributions and by negotiating with donors so that a larger share of aid is directed to education. 26. About 75 percent of 1996 education PIP total investment concentrated on rehabilitating primary level schools. The PIP for 1997-2000 consists entirely of on-going projects without any new projects. The resources currently programmed are insufficient to achieve MED's school rehabilitation targets, furthermore they do not include investments in new capacity which will be needed to achieve MED's increased grade completion targets. This is because MED has yet to develop a strategic planning capacity. MED needs to prepare a realistic investment plan with the aid of a planning model that estimates investment needs under alternative quality improvements assumptions which is currently under preparation. Also better maintenance planning and more resources for maintenance are required, even after accounting for the resources assigned under FISE and IDA projects. Improving quality through effective decentralization 27. MED has implemented a very successful decentralization strategy and has mobilized private resources. More than 90 percent of the 154 secondary schools are under an autonomous management structure governed by School Councils (composed of parents, teachers and students), and now MED is pursuing the decentralization of primary schools. Parents' voluntary contributions now represent 15 and 20 percent of the recurrent costs per student in autonomous secondary and primary schools respectively. An initial evaluation of the first two years of the reforms showed positive results in terms of increased participation of directors, teachers and parents in school management. An impact assessment on quality of service will be available shortly. While the decentralization process must be Executive Summary V11 promoted further, a supervision system that ensures accountability in the use of resources and the preservation of equity considerations is needed. A system to exempt the poorest students from voluntary contributions is in place but a systematic evaluation of its effectiveness is still needed. Social Safety Nets 28. The FISE has been very successful in attracting donor funding and setting up a good project management system. Until recently, administrative costs have been 10 percent of total disbursements, but during 1996 there was a significant deterioration in administrative efficiency, which appears to be related to the unusual circumstances of an election year and to the fact that FISE was entering into new areas. It is important not to overextend FISE as this may hurt its efficiency. There are two areas where FISE needs to improve: coordination with and capacity building of municipal governments, and ensuring the sustainability of sub-projects. FISE is aware of these issues and is considering the implementation of measures to address them. 29. The MAS was created in 1993 with a mandate to improve social sector planning and coordination and to monitor the implementation of the Government's social policy and programs. The MAS has succeeded in organizing local communities, and in developing a modern management information system to track project financing from different sources at the municipal level. However, the MAS has not performed its planning and coordinating function and instead has been mainly dedicated to the implementation of projects and programs. There continues to be an urgent need to fulfill MAS' planning and coordinating mandate. This could be achieved by transferring the MAS project portfolio to the appropriate line agencies or INIFOM; closing MAS and creating in its place a social policy formulating and coordinating body at the highest level of Government with a full time technical secretariat. Alternatively, MAS could retain ministerial rank without portfolio, with limited staff and without authority to execute projects. RESUMEN EJECUTIVO CONTEXTO MACROECONÓMICO Y SUSTENTABILIDAD FISCAL Mayor ahorro como elemento clave para la inversión y el crecimiento 1. Nicaragua tiene una de las tasas más bajas de ahorro y más altas de inversión de América Latina (solo después de Chile). Entre 1990 y 1995, la mayor disponibilidad de recursos externos permitió que la inversión del sector público aumentara de un 9 por ciento del PIB a un 16 por ciento, mientras que la inversión del sector privado se estancó en 11 por ciento. Las necesidades de reconstrucción de Nicaragua permanecerán siendo enormes hasta bien avanzado el próximo siglo, en cuanto que su acceso a la ayuda externa disminuirá. A fin de satisfacer su demanda de inversión, Nicaragua deberá aumentar el ahorro público, mejorar la eficiencia de la inversión pública y reactivar la inversión privada. Para este efecto, será necesario aplicar la reforma tributaria (actualmente en curso) y una reforma del sector público de vasto alcance, realizar un manejo prudente de la deuda interna y contener los pasivos contingentes del sector público, especialmente aquellos procedentes de los bancos estatales. Con una continua reforma estructural, disciplina fiscal y mayor inversión del sector privado, Nicaragua podría alcanzar tasas de crecimiento entre un 6 y 7 por ciento durante los próximos cuatro años. La viabilidad externa requerirá un alivio excepcional de la deuda otorgada a través de la Iniciativa para los Países Pobres Altamente Endeudados. El gasto público debe aumentar aun más en el sector social y las áreas rurales. 2. En la actualidad, la mayor parte del gasto público está destinada a los sectores sociales. La infraestructura económica, administración y seguridad pública le siguen en importancia. Para romper la cadena de la pobreza y satisfacer las demandas de una población en constante aumento (3,2 por ciento al año), el Gobierno deberá mantener los altos niveles de gasto social, aún cuando enfrente una disminución de la ayuda y fuertes restricciones presupuestarias. Para resguardar el gasto social en un entorno de reducción del gasto público total como proporción del PIB, los recursos deberán reorientarse desde otras áreas como infraestructura económica hacia los sectores sociales, particularmente educación. Con una estrategia adecuada, es factible atraer al sector privado para que invierta en telecomunicaciones, energía y puertos. Será más dificil orientar el capital privado hacia el sector agua potable y servicios sanitarios y los sectores sociales. En estas áreas, continuará siendo necesaria la intervención directa del Gobierno en conjunto con las ONG y las comunidades locales. También debe aumentarse la proporción de los recursos destinados a las áreas rurales, donde se concentra la extrema pobreza. En la actualidad, los residentes de áreas urbanas obtienen 7 veces más inversión pública per capita que los que viven en áreas rurales. Problemas en los datos dificultan el análisis de la suficiencia de los niveles y adecuada asignación de la inversión pública 3. En 1996, la inversión social fue un 16 por ciento del PIB y un 40 por ciento del gasto público total. Sin embargo, problemas en los datos parecen indicar que el nivel de inversión es en realidad inferior al informado. En primer lugar, un hecho ampliamente reconocido es que las cuentas nacionales subestiman el producto nacional de Nicaragua por un margen significativo. En segundo lugar, gran parte de los gastos clasificados como gastos de capital son en realidad gastos ordinarios o de mantenimiento diferido. Además, si bien más de un cuarto del gasto público no se presupuesta (fundamentalmente gastos financiados con ayuda externa sin requisitos de contraparte local), es muy poco probable que representen gastos de inversión. Perfeccionar los datos es esencial para que los encargados de diseñar las políticas cuenten con una base confiable al tomar decisiones económicas. Resumen Eecutivo IX PLANIFICACIÓN Y PRESUPUESTACIÓN DE LA INVERSIÓN PÚBLICA La ausencia de una planificación estratégica y la fragmentación del proceso de preparación del presupuesto impide un uso eficiente de los recursos 4. El marco institucional para la administración de la inversión pública se enfrenta con una serie de problemas, a saber: (a) no existe un marco estratégico global para la planificación de las inversiones; (b) no existe una planificación sectorial y por lo tanto no hay conexión entre las metas sectoriales y los programas de inversión específicos; (c) la programación de la inversión no está inscrita dentro de un esquema de gasto a mediano plazo, lo que permitiría considerar explícitamente los gastos recurrentes; (d) la selección de los proyectos está dirigida por los donantes, por lo que resulta en fragmentación, duplicación e incoherencias; y (e) la capacidad institucional de diseñar y ejecutar la inversión es inadecuada. El problema clave es la fragmentación de las responsabilidades en la administración de la inversión pública entre cuatro instituciones, Ministerio de Economía y Desarrollo Económico (MEDE), Ministerio de Finanzas (MIFIN), Ministerio de Cooperación Externa (MCE) y el Banco Central de Nicaragua (BCN). Dado que más del 80 por ciento de la inversión pública se financia con fuentes externas, un mejor manejo de la ayuda es fundamental para mejorar la eficiencia en el uso de los recursos públicos. La administración de la ayuda debería estar concentrada en un solo organismo y estar totalmente integrada al proceso de preparación del presupuesto. Todas las funciones presupuestarias que actualmente realizan el MEDE y el MCE deberían quedar integradas en el MIFIN, para así evitar las duplicaciones y asegurar la coordinación entre el presupuesto de desarrollo y el presupuesto ordinario. 5. El criterio principal de incorporación en el programa de inversión es la disponibilidad de financiamiento externo. El problema surge no de la alta dependencia en la ayuda externa per se, sin no más bien de la debilidad del proceso de determinación de las prioridades estratégicas, el inadecuado marco de responsabilidad y el hecho de una parte considerable de los recursos no pasa por el presupuesto. La importante tarea de la determinación de las prioridades estratégicas no se está efectuando debido a que no existe un lugar institucional definido para esta actividad. En cuanto a los gastos de inversión, la determinación de prioridades recae en el DGIP del MEDE, apoyado por un Comité Técnico de Inversión Pública (CTI). Este Comité, sin embargo, no se reúne regularmente y sus decisiones no se basan en análisis rigurosos y por lo tanto no se debe institucionalizar, como se propone en el proyecto de ley del SNIP. La función de definición de prioridades debe ser responsabilidad de una entidad al nivel más alto de las autoridades económicas, dotada con personal de alto nivel con dedicación exclusiva, con un mandato para definir el plan de inversión pública dentro de un marco macroeconómico. Esta podría ser una institución como la Comisión Nacional de Coordinación del Consejo Económico y Social (CONACES) que fué propuesta en el marco de la reforma del sector público. Las prioridades sectoriales se deben delegar a los ministerios del ramo, quienes cuentan con mejor información sobre cómo asignar los recursos en su sector de la manera más adecuada, pero que sin embargo deben asumir la responsabilidad de su gestión. Una limitada cobertura del presupuesto y una inadecuada selección de los proyectos se traducen en malas decisiones de inversión 6. Como resultado de la limitada cobertura del presupuesto, no existe un cuadro global sobre la distribución de los recursos y tampoco una base racional para su redistribución en respuesta al cambio en las prioridades. La mayoría de los proyectos de inversión financiados con ayuda externa y que no requieren fondos de contrapartida, como la asistencia técnica, no están incluidos en el presupuesto. x Nicaragua - Public Investment Rev7ew Esto parece tener dos motivos. Uno es la relación gobierno-donantes: algunos donantes prefieren evitar la inclusión en el presupuesto por motivos de rapidez y control. Un segundo motivo es que el Gobierno limita la cobertura del presupuesto, porque un 6 por ciento del total debe ser asignado a las universidades. Sin bien políticamente es complicado, la mejor solución seria cambiar la norma constitucional. Para lograrlo, el Gobierno debería lanzar una fuerte campaña para formar consenso entre los nicaragüenses de que la disposición del 6 por ciento es poco equitativa e ineficiente. 7. En la actualidad, el proceso de selección de los proyectos de inversión pública es inadecuado. No siempre se establece la justificación por la cual el sector público debería suministrar los bienes y servicios que serán producidos por los proyectos propuestos y estos proyectos no están sujetos a una evaluación económica. Con unas pocas excepciones, como el caso del Ministerio de Construcción y Transportes (MCT), los organismos sectoriales son incapaces de llevar a cabo análisis efectivos en función de los costos y no se evalúan las implicancias de los gastos corrientes de los proyectos. El SNIP está creando una metodología estándar para la evaluación de proyectos, la que será necesaria para la inclusión de cualquier proyecto en el PIP. Esta tarea debe tener la más alta prioridad, ya que la evaluación económica de los proyectos tiene el potencial de aumentar significativamente la eficiencia de los recursos públicos. INFRAESTRUCTURA 8. Los sectores de infraestructura pública de Nicaragua adolecen de una baja productividad, inadecuadas tarifas a los usuarios y altas pérdidas, más de una década de mantenimiento poco apropiado de capital nacional y bajos incentivos para la eficiencia operativa. La falta de planificación de la inversión también implica que los escasos recursos públicos a menudo son mal asignados. Si estas deficiencias no se corrigen, la mala calidad de la infraestructura pública será un freno para el crecimiento económico. También será dificil arremeter contra la pobreza si no se puede aumentar la cobertura de ciertos servicios básicos. En cuanto a los caminos, donde el Estado continuará siendo el principal inversionista, es necesario mejorar la calidad de la planificación y la eficiencia con que se administran las inversiones. En cuanto a los servicios públicos, el Gobierno debe redefinir su función como diseñador de políticas y ente regulador y permitir que el sector privado participe en mayor grado en las inversiones y operaciones. Para ello, deberá establecer un marco normativo y legal adecuado para cada sector, el que proporcione una base segura para la participación del sector privado. También deberá revisar la Ley de Inversión Extranjera para eliminar las discriminaciones contra los inversionistas extranjeros y con ello estimular su participación en el suministro de servicios de infraestructura. Obras viales - Mejorar la planificación y asegurar el mantenimiento. 9. Dado el volumen esperado de tráfico, se prevé que casi la totalidad de la inversión en la red vial será emprendida por el sector público. El MCT por lo tanto debe mejorar su capacidad de formulación de políticas, coordinación y definición de las prioridades de inversión. En este marco, debe reorientar su función como ejecutor a planificador de las obras, preparando un inventario de las obras viales que ayude a definir prioridades para la futuras inversiones. 10. Dentro de los caminos de Nicaragua, sólo un 17 por ciento está clasificado como en buenas condiciones. El Gobierno no ha sido capaz de suministrar fondos adecuados en el marco del presupuesto regular para realizar el mantenimiento necesario. Por lo tanto, se está considerando la constitución de un fondo de mantenimiento vial que proporcione una fuente estable y segura de fondos para esta actividad. Actualmente, el sector privado participa en importantes obras de rehabilitación, Resumen Ejecutivo XI representando aproximadamente un 15 por ciento del mantenimiento regular. El MTC debe seguir esta tendencia, reduciendo aun más la función de mantenimiento que cumplen las compañías estatales regionales de construcción (CERC), en parte a través de su privatización. Electricidad - Aprovechamiento del potencial del sector privado 11. El problema principal que enfrenta el sector es su alto nivel de pérdidas, el que con más del 30 por ciento es el más alto de América Central. Estas pérdidas mayormente son pérdidas no técnicas, relacionadas con conexiones ilegales, fraudes, medidores rotos o inexistentes, principalmente en Managua. Este alto nivel de pérdidas pone a ENEL en una posición financiera muy delicada. La experiencia en la región indica que resulta dificil reducir los niveles de pérdidas no técnicas dentro de las empresas públicas y por lo tanto, el Gobierno debería tomar las medidas para incorporar al sector privado a las tareas de distribución. El primer paso en este sentido sería emprender un estudio para determinar la mejor vía para hacerlo, las posibles modalidades (venta de activos, concesiones, entre otras) y en qué grado se debería dividir la distribución dentro del país. 12. Recientemente ha entrado en funcionamiento una central de energía IPP de 30 MW y el sector privado hará futuras inversiones en generación. ENEL está analizando el arrendamiento del campo geotérmico Momotombo a una empresa privada y espera licitar otros contratos de generación al sector privado. El uso de los fondos y la experiencia del sector privado en la construcción y operación de centrales generadoras es una opción de política adecuada para Nicaragua. Sin embargo, es imperioso disminuir las pérdidas a nivel de distribución; de no hacerlo, ENEL enfrentará dificultades para pagar la energía en el marco de los contratos con las IPP y es muy probable que el Gobierno deba transferir fondos para cubrir estos compromisos. 13. En consonancia con la incorporación del sector privado, el Gobierno debe asegurar la aprobación de la Ley de Energía Eléctrica, así como la legislación que constituya el ente regulador del sector, el INE, con la autoridad para fijar las tarifas. En lo que respecta la inversión pública, no es necesario seguir invirtiendo en generación y tampoco mucho más en distribución. En transmisión, el Gobierno debe concentrar sus esfuerzos en la elaboración de un plan de inversiones básicas, las que deben ser relativamente independientes de la ubicación de la futura generación. Agua - Nuevas formas de mejorar la eficiencia operativa. 14. En este sector se ha avanzado poco en la delineación de las responsabilidades de políticas, regulación y operaciones entre las distintas partes involucradas; empero, se ha presentado ante la Asamblea una legislación que dividiría a la INAA en un organismo regulador y un proveedor de servicios, además de establecer un régimen de concesiones. El nivel de pérdidas de agua es relativamente alto, un 46 por ciento. Casi la mitad de la población no tiene acceso a un agua limpia y más de dos tercios no cuenta con servicios sanitarios. El INAA está en una débil posición financiera. Sus tarifas cubren los costos operativos, pero no satisfacen las necesidades de mantenimiento, ni contribuyen de manera significativa a su programa de inversión. Las posibilidades de participación del sector privado se ven actualmente limitadas debido a la delicada situación financiera de la INAA, el mal estado de su infraestructura fisica y la falta de un marco normativo bien definido. No es dable esperar que el sector privado se haga cargo de financiar una parte significativa de las nuevas inversiones mientras las tarifas sigan por debajo de los niveles de recuperación de costos. Sin embargo, una opción adecuada para Nicaragua puede ser un método de participación gradual del sector privado, inicialmente con un contrato de gestión hasta llegar a una concesión o traspaso de intereses. Los contratos de gestión por lo menos significarían una manera de mejorar la eficiencia operativa. Xil Nicaragua - Public Investment Revew 15. Dado el estado actual del sector, es probable que el Gobierno continúe siendo el proveedor de fondos de inversión en el mediano plazo. En los planes de inversión, debería otorgar máxima prioridad al abastecimiento de agua a áreas urbanas de bajos ingresos y áreas rurales. Con una estructura institucional adecuada, por ejemplo con un programa de participación comunitaria bien estructurado, debería ser factible cumplir con objetivos de abastecimiento de agua en sectores rurales antes del año 2000 que sean más ambiciosos que las actuales metas de un 40 por ciento. Para mejorar la eficiencia de las inversiones, el INAA debe elaborar un plan de expansión de costo mínimo para el abastecimiento de agua y alcantarillado y un mecanismo para coordinar los proyectos en marcha. Puertos y telecomunicaciones - Mejorar los vínculos con el mundo 16. Los puertos son ineficientes y la mayoría de la carga pasa a través de los países vecinos. La futura inversión en los puertos debería ser asumida por el sector privado. Para iniciar el proceso de privatización, el Gobierno debe intentar, en primer lugar, entregar en concesión las terminales de Corinto y Rama. Si el Gobierno asume las obligaciones del servicio de la deuda, debería ser capaz de obtener una suma de dinero positiva por la concesión. Si esto no resulta exitoso, en su lugar debe emprender una estrategia de privatización/concesión parcial a través de la creación de compañías de estibadores de carga y la concesión selectiva de otros servicios dentro de los puertos (por ejemplo, pilotaje, almacenamiento, entre otros). Al mismo tiempo, el Gobierno debe transferir (i) los puertos locales a las municipalidades y, (ii) las actividades secundarias la Dirección General de Transporte Acuático, las que a su vez pueden entregarlas en concesión. ENAP entonces dejaría de funcionar y sus actividades reguladoras se podrían transferir a un ente regulador del transporte. 17. Si se desea desarrollar el sector de las telecomunicaciones, es vital que ENITEL sea privatizada. El nuevo Gobierno debe hacer de esta privatización una de sus principales tareas en el sector de la infraestructura pública durante 1997. Para este efecto, debe relanzar el proceso de licitación abriendo la participación a consorcios compuestos de compañías telefónicas de renombre y actuando como el "socio técnico" del consorcio capaz de administrar la compañía y a otros inversionistas. Esto aumentará la competencia por ganar la licitación y la posibilidad de concretar la transacción. El Gobierno además debe reconsiderar algunas de las obligaciones de las concesionarios respecto a la calidad del servicio y las metas de expansión. SECTORES SOCIALES 18. A pesar de los considerables esfuerzos gubernamentales durante los últimos 20 años, los indicadores sociales de Nicaragua continúan siendo deficientes. La esperanza de vida es baja y las tasas de fertilidad (4,6 niños por mujer) y mortalidad infantil son las más altas de la región. Con las actuales tasas de fertilidad, la población se duplicaría cada 26 años. La desnutrición infantil continúa siendo un problema de gran envergadura, particularmente en las áreas rurales. Las tasas de analfabetismo siguen siendo altas (23 por ciento) y si bien la cobertura de la educación primaria es elevada, su calidad no lo es. Sólo un 20 por ciento del grupo de edad pertinente asiste a la escuela secundaria y la relación de 14.5:1 entre el gasto por estudiante universitario y por estudiante de primaria es dos veces el promedio de América Latina. Si bien una gran parte de los recursos estatales son asignados a los sectores sociales, el gasto per cápita en términos absolutos, tanto en salud como en educación, está muy por debajo del promedio de la región. Dado las restricciones presupuestarias, es necesario focalizar mejor el gasto, mejorar su eficiencia y movilizar más recursos por medio de la recuperación de costos y la reorientación de la ayuda externa. El Gobierno está consciente de estos desaflos y ha emprendido una exitosa estrategia de descentralización que busca mejorar la prestación de los servicios básicos de salud y educación a los grupos más vulnerables. El proceso de Resumen Ejeculivo Xil descentralización, sin embargo, ha avanzado sin el respaldo legal necesario y es de extrema urgencia establecer un marco legal que defina la función, autoridad y responsabilidad de los distintos niveles del gobierno y de los agentes privados. Salud Un mejor conocimiento del uso de los recursos es básico para una planificación racional 19. La poca confiabilidad de los datos disponibles sobre los gastos en salud limitan la capacidad de analizar la idoneidad de la asignación de los recursos. El presupuesto del MINSA excluye más de dos tercios de la ayuda externa al sector salud, lo que representa un 30 por ciento de los recursos oficiales del sector; y no se dispone de información respecto a las contribuciones del sector privado o las ONG. Para mejorar los datos del gasto en salud, el MINSA debe incluir todos los gastos públicos en el presupuesto y poner en práctica las Cuentas Nacionales de Salud, las que ya se han iniciado bajo una iniciativa regional PAHO/Harvard. 20. No existe una estrategia de inversión explícita ni una evaluación a posteriori, y la evaluación previa es deficiente. Como en otros sectores, el factor decisivo para la incorporación de los proyectos en el PIP es si se dispone o no de financiamiento. La distribución de las inversión entre niveles primarios y secundarios parece ser adecuada. Sin embargo, existe una creciente preocupación respecto a aumentar la participación de los fondos destinados a la construcción de nuevos hospitales, dado las implicancias de sus elevados gastos corrientes y que los recursos se desvían de la atención primaria. El MINSA necesita formular una estrategia coherente de inversión para el sector en su conjunto, a fin de encauzar a los donantes interesados hacia las prioridades nacionales. 21. El MINSA no incluye las estimaciones de los gastos recurrentes en sus decisiones de inversión, ni siquiera para el nuevo hospital Granada ni tampoco para los dos jiuevos hospitales para los que aún se está consiguiendo el financiamiento. Este organismo debe poner en práctica un modelo recientemente desarrollado para incorporar los gastos recurrentes en el análisis de la inversión. El Sistema de Salud nicaragüense no ha destinado suficientes recursos al mantenimiento de edificios, instalaciones, equipos médicos e industriales. Esto ha causado el deterioro prematuro, pérdidas y falta de confiabilidad de los equipos, lo que se traduce en una baja productividad y mala calidad de la atención de salud. En la actualidad, el gasto en mantenimiento representa un 1,3 por ciento del presupuesto como promedio, en circunstancias de que se requiere al menos el 1,9 por ciento. Es necesario promover la recuperación de costos, con exenciones claras para los grupos más pobres 22. La recuperación de costos a través de cobro de derechos a los usuarios sólo se ha iniciado en los niveles secundarios y superiores de la atención de salud. El MINSA está ahora cobrando los servicios hospitalarios a los afiliados al INSS, aplicando cobros a los pacientes en cuartos privados y exigiendo co-pagos para servicios seleccionados a pacientes no afiliados al INSS. Si bien es necesario estimular las prácticas de recuperación de costos, el actual sistema trae a colación cuestiones de equidad y responsabilidad. Para responder a estos problemas, es importante establecer directrices de exención claras para los grupos más pobres y al mismo tiempo aplicar un sistema de contabilidad de costos. También se debe buscar una mayor cobertura del sistema del seguro social. El cobro de cargos mínimos por consulta y atención no relacionada con los programas prioritarios también podría generar algunos ingresos a nivel primario y ayudar a crear una mayor conciencia sobre los costos. xiv Nicaragua - Public Investmeni Review 23. Existen unas 32 Empresas Médicas Previsionales (EMP), dos públicas y el resto privadas, las que proporcionan servicios médicos básicos, incluyendo la contratación de hospitales públicos y privados para la atención hospitalaria de los afiliados al INSS. Las EMP se deben promover aun más. Sin embargo, la calidad de los servicios no es pareja y el MINSA debe introducir reglamentos como el sistema de acreditación y control, y garantía de calidad para proteger a los usuarios. Se han logrado avances claros en la descentralización del manejo de los servicios primarios a nivel de los SILAIS y, en algunos casos, incluso a nivel municipal. Pero sólo un 20 por ciento del presupuesto se ha descentralizado y el resto (salarios y medicamentos) sigue en el nivel central. Educación 24. A pesar de la grave escasez de recursos, Nicaragua ha logrado una cobertura comparativamente alta en la educación pública. El problema principal es la baja calidad de la educación primaria, seguido de la baja cobertura de los programas de la educación pre-escolar/primera infancia y de la educación secundaria. La estrategia del Gobierno busca abordar estos problemas aumentando el financiamiento de la educación primaria (fundamentalmente a través de contribuciones voluntarias), mejorando la asignación de los recursos en el sector, concentrando los recursos en los primeros cuatro niveles, descentralizando la administración de las escuelas y mejorando la capacidad de los profesores. El gasto sesgado hacia las universidades limita aun más los recursos para la educación primaria 25. Un porcentaje desproporcionadamente alto, el 33 por ciento, es asignado a los estudiantes universitarios, quienes representan sólo el 3 por ciento de la población estudiantil. Más aún, el 60 por ciento de los estudiantes universitarios pertenece al 30 por ciento de ingresos más altos, mientras que sólo el 3 por ciento pertenece al 30 por ciento más bajo en la escala de ingresos. Esto claramente implica que la recuperación de costos a nivel de las universidades debe ser una prioridad, con el fin mejorar la asignación de los recursos en el sector social. Sin embargo, incluso si se reasignaran estos recursos a la educación primaria, el gasto por estudiante todavía estaría muy por debajo del promedio de la región. Por lo tanto, también es necesario movilizar recursos adicionales a través de contribuciones voluntarias de los padres de familia y negociando con los donantes de modo que una proporción mayor de su ayuda sea encauzada a la educación. 26. Aproximadamente un 75 por ciento de la inversión total del PIP en educación para 1996 se concentró en la rehabilitación de las escuelas del nivel primario. El PIP para el período 1997-2000 consta casi exclusivamente de proyectos que ya se están llevando a cabo y sin ningún proyecto nuevo. Los recursos programados actualmente son insuficientes para cumplir con los objetivos de rehabilitación de escuelas del MED; aun más, no incluyen inversiones en nueva capacidad, necesarios para lograr las metas de completación de niveles del MED. Esto se debe a que el MED aún debe desarrollar su capacidad de planificación estratégica. El MED debe elaborar un plan de inversiones realista, para lo cual podría utilizar un modelo de planificación, actualmente en elaboración, que estima las necesidades de inversión bajo diferentes supuestos de mejora de calidad. Además, se requiere una mejor planificación del mantenimiento y más recursos para llevarlo a cabo, incluso después de considerar los recursos asignados bajo los proyectos del FISE y la AIF. Mejoramiento de la calidad a través de una descentralización efectiva 27. El MED ha implementado una estrategia muy exitosa de descentralización y ha movilizado recursos privados. Más del 90 por ciento de las 154 escuelas secundarias están bajo una estructura de administración autónoma regida por Consejos Escolares (compuestos por padres, profesores y Resumen Ejecutivo XV alumnos) y el MED busca ahora la descentralización de las escuelas primarias. Las contribuciones voluntarias de los padres representan en la actualidad entre un 15 y 20 por ciento de los gastos corrientes por estudiante en escuelas autónomas secundarias y primarias, respectivamente. Una evaluación inicial de los dos primeros años de la reforma arrojó resultados positivos en términos de una mayor participación de los directores, profesores y padres en el manejo de la escuela. Pronto estará disponible una evaluación del impacto en la calidad del servicio. Si bien el proceso de descentralización debe ser promovido aun más, se necesita un sistema de supervisión que asegure la responsabilidad en el uso de los recursos y el respeto a los principios de equidad. Ya existe un sistema para eximir a los estudiantes más pobres de las contribuciones voluntarias, sin embargo aún falta una evaluación sistemática de su efectividad. Redes de Seguridad Social 28. El FISE ha tenido mucho éxito en atraer fondos de donantes y en establecer un buen sistema de manejo de los proyectos. Hasta hace poco tiempo atrás, los costos administrativos correspondían al 10 por ciento del total de los desembolsos, pero durante 1996 se produjo un deterioro considerable en la eficiencia administrativa. Este hecho parece estar relacionado con las inusuales circunstancias de un proceso eleccionario y al hecho de que el FISE estaba incursionando en nuevas áreas. Es importante no aumentar excesivamente su área de cobertura, por cuanto esto puede ir en desmedro de su eficiencia. Existen dos áreas en las que este Fondo necesita mejorar su gestión, a saber, la coordinación y el fortalecimiento de los gobiernos municipales, y la sustentabilidad de los subproyectos. El FISE conoce estos problemas y está considerando la aplicación de medidas para enfrentarlos. 29. El MAS fue creado en 1993 con un mandato para mejorar la planificación y coordinación del sector social y para supervisar la aplicación de los programas y políticas sociales del Gobierno. El MAS ha tenido éxito en la organización de comunidades locales y en la creación de un moderno sistema de manejo de la información, a fin de rastrear el financiamiento de los proyectos de distintas fuentes a nivel municipal. Sin embargo, el MAS no ha realizado sus funciones de planificación y coordinación y en cambio se ha dedicado fundamentalmente a la ejecución de programas y proyectos. Continúa existiendo una urgente necesidad de cumplir con su mandato de planificación y coordinación. Esto se podría lograr transfiriendo la cartera de proyectos a los organismos sectoriales adecuados o a INIFOM, cerrando el MAS y creando en su lugar un ente formulador y coordinador de políticas sociales al más alto nivel del Gobierno, con un secretariado técnico con personal de dedicación exclusiva. Como alternativa, el MAS podría mantener su rango ministerial sin cartera, con un personal limitado y sin autoridad para ejecutar proyectos. 1. MACROECONOMIC FRAMEWORK AND FISCAL SUSTAINABILITY I. INTRODUCTION 1.1 At the beginning of the 1990s, the Nicaraguan economy was characterized by an overextended public sector, a small and over-regulated private sector, and an obsolete and deteriorated physical infrastructure that reflected the effects of the conflict and a decade of misdirected investment and lack of maintenance. Exports and GDP per capita had declined to 40 percent of the levels attained in the mid 1970s, and major macroeconomic imbalances such as a non-financial fiscal deficit of 33.2 percent of GDP (18.4 after grants), had resulted in hyperinflation and a massive external debt of more than 5 times GDP. In March 1991, the Government began to implement a comprehensive stabilization and reform program. The program has been remarkably successful in stabilizing the economy. Since 1992, inflation has been below 12 percent per year and in 1994-95 the economy grew at an average of 4.2 percent per year -- the first significant growth since the early 1980s. In 1996 growth accelerated to 5.5 percent -- one of the highest growth rates in Latin America. The cornerstone of the successful adjustment has been a major improvement in the fiscal stance and a reduction in transfers to the private sector through the financial system. The non-financial fiscal deficit has shrunk by 19.8 percentage points over the period and the share of the state banks in total credit has been reduced to 35 percent. 1.2 This chapter reviews the overall level and composition of public spending, with emphasis on public investment. It presents a medium term fiscal framework that preserves macroeconomic stability and argues for a reorientation of public investment toward the social sectors. The analysis is based on official data provided by the authorities. However, the fact that data on national accounts -- currently being revised -- is believed to underestimate Nicaragua's GDP by a significant margin, may distort some of the relations discussed. Nevertheless, this would not change the main thrust of the discussion nor the recommendations. II. THE MACROECONOMY, SAVINGS AND INVESTMENT 1.3 Despite substantial progress over the last few years, Nicaragua continues to face enormous challenges. Approximately half of the Table 1-1: Investment and Savings 1995 population are poor and 20 percent are extremely poor, with the majority of the Country Fixed Capita Private Fixed Domestic National Formation Cap. Formation Savings savings poor living in rural areas. Population (as percentage of GDP) growth, at 3.2 percent per year, is one of the highest in Latin America; infant Nicaragua 26 5 11 4 4 5 1 8 mortality and malnutrition are high and Costa Rica 18.3 20 7 23.5 23.3 almost half of the population lacks access to Guatemala 154 7.8 130 12.0 safe water. The economic recovery remains Honduras 24 8 15 4 25.8 20.5 fragile and Nicaragua's extreme dependence El Salvador 18.7 15.2 0.1 136 on foreign aid (representing 20 percent of Panama 23.3 193 19.9 17 5 .GDDP) is of concern. Large economic Central America 19 3 14.8 15.6 17.4 imbalances remain. In 1996 the current ExdI Nicaragua account balance excluding interest was 17.2 Source IMF, and Bank staff estimates. percent of GDP, scheduled foreign debt service was 37 percent of GDP and the non financial fiscal deficit was 13.4 percent of GDP. Key to achieving long term sustainable growth will be the reduction of macro imbalances by increasing public and private savings and improving the efficiency of investment. 2 NICARAGUA - Public Investment Review 1.4 Nicaragua has one of the lowest savings rates and the highest investment rates in Latin America (second only to Chile). After many years of negative levels, domestic savings turned positive in 1995, but at less than 5 percent of GDP it is one of the lowest in the region (Table 1-1). Investment levels have increased substantially since 1990 (Chart 1-1) and the private-public shares have changed dramatically. This reflects the sharp increase in public investment from about 9 percent of GDP in 1990 to just over 16 percent in 1995 while private investment stagnated at less than 11 percent of GDP.' The expansion of public investment was made possible by a much greater availability of foreign resources. In 1995 these represented 13 percent of GDP or 80 percent of the public investment program (Chart 1-1). Nicaragua's reconstruction investment needs will remain large well into the next century while its access to foreign aid will decline. To meet its investment requirements Nicaragua will have to increase public savings, enhance the efficiency of public investment, and reactivate private investment. Chart 1-1: Public and Private Investment Public and Private Investment Public Investment-Sources of Financing 30 (As percentage of GDP) 350 (US$ milhons) U Intemnal Resources L 13 Pnvate Investment 300 M Extemal Resources 25 _t_tl Extemal Resouce I Pubhc Investment 250 20 200 115 10 100 5 s0 0 0 1990 1991 1992 1993 1994 1995 1996 1990 1991 1992 1993 1994 1995 1996 Source. SNIP, Public Investment Program. III. FISCAL POLICY 1.5 Nicaragua continues to face large fiscal imbalances. Both the overall balance and the primary balance show that a major fiscal improvement was implemented in 1991 but there has been some deterioration since. However, with the exception of 1995, fiscal deficits have been fully funded by foreign grants and avoid this concessional loans, without recourse to domestic financing. The main focus of the Government's fiscal efforts has been to increase public savings which improved steadily until 1995. In 1996, however, public finances deteriorated due to a drop in revenues and expenditure overruns. The reduction of fiscal imbalances will require a combination of revenue enhancement and expenditure reduction. I In Chile, in contrast, private investment is 24 percent while public investment is only 3 percent. Chapter 1. Macroeconomic Framework and Fiscal Sustainabdity 3 Table 1-2:Consolidated Non Finacial Public Sector' (As percentage of GDP) 1990 1991 1992 1993 1994 1995 1996 Current Revenues 18.2 24 8 28 5 29 0 29 3 28 7 28 6 Current Expenditures 49.2 27 4 27.1 25 9 27 0 25 0 25 4 Budgetary Savings -31 0 -2 5 1 4 3 1 2 4 3 7 3 1 o/w Interests 0 1 1.2 2.9 3 9 5 2 4 8 3 7 Budgetary Savings (excl. interest) -30 9 -1 4 4.3 7 0 7 6 8 6 6 8 Capital Revenue 0.1 0 2 0 2 0 6 0 3 0 5 0 3 Capital Expend. (incl Net Lending) 2 4 5 4 10 0 12 4 15 0 15 3 16 8 Primary Balance -33.1 -6.5 -5.5 -4.9 -7.2 -6.4 -9.9 Overall Balance -33.2 -7.7 -8.4 -8.8 -12.4 -11.1 -13.4 Sources of Financing: Official capital grants 14.8 11 9 4.9 8.5 6 5 6 0 8 1 Net External borrowing 8 1 0.4 10.2 1 3 8.5 4 2 5 7 Domestic financing 10.3 -4 7 -6 7 -1 0 -2.6 0 8 -0 3 Memorandum items: Government Debt (LDOD) 683.6 611 9 603.7 583 0 597 6 553 3 320 6 External Debt 683.6 611 9 603 7 583 0 597 6 533 6 300 3 Domestic Debt 0 0 0 0 0 0 0 0 0 0 19 7 20 2 'Includes the General Government and the public utility enterprises a Public and publicly-guaranteed debt. Source IMF and Bank staff estimates. Revenues 1.6 Fiscal revenues have been strengthened significantly since 1990 but there is still much room to improve the efficiency and equity of the tax system. Revenue expansion in the early 1990s was due to an increase in the VAT rate from 10 to 15 percent, the Chart 1-2: I99 Total Revenues orthe NFPs broadening of the base, and the introduction of a (As percentage ofGD) tax on luxury goods. In the last few years revenue a c... performance has continued to improve, but at a """'")( slower pace. Improvements have been due to the ... introduction of specific consumption taxes and Nmruau. better tax administration (particularly in 1995). Current levels of taxation are relatively high o. Lcompared to other Central American countries (Chart 1-2). The tax incidence is uneven and the Hondura DTaWRevern,: tax base is relatively narrow. Furthermore, the H IIITax Reven=s system suffers from several deficiencies including: (i) dependency on a few consumption-based taxes resulting in more than 50 percent coming from a 0 s a 20 25 3o 35 few products (oil, tobacco, alcohol and other beverages); (ii) extensive price distortions and high protection levels generated by special incentive schemes; (iii) widespread evasion and exemptions; and (iv) an inefficient and non-transparent tax administration system with inadequate protection of taxpayer rights. The Government has recently passed legislation that would address several of these deficiencies and is expected to yield 2 percentage points of GDP on an annual basis. 4 NICARAGUA - Public Investment Review Expenditures 1.7 Nicaragua's exceptionally high level of expenditures is explained mainly by the public investment2 which is 4 times the Central American average (Chart 1-3). The share of capital in total Carp-r1eTtagens expenditures, at 40 percent, is also considerably (AspercentageofGD) above that of other Central American countries with -9a w the exception of Honduras. However, actual public investment is likely to be lower because a signicant portion of expenditures classified as capital expenditures are in fact recurrent expenditures or deferred maintenance. Also, if GDP is indeed Hondmas understimated, the relative importance of public BSalvador D3Tot PubhcEPcnd&ur investment in the economy may be somewhat Bmlau lower. However, even accounting for such factors, QPubbinvenft resources allocated to public investment remain very significant and well above the regional 0 10 2 30 4 5o average. Furthermore, the very lage imbalance between current and capital expenditures suggests that budgeted recurrent expenditures are insufficient to cover the operation and maintenance needs of the capital stock. 1.8 The functional distribution of budgeted public expenditures3 for 1996 excluding interest payments (Chart 1-4) is shown below. The largest share goes to the social sectors (health, education and social infrastructure). Economic infrastructure, and administration and public safety account for 25 percent each (the Ministry of Defense represents 5 percent). There are significant extra-budgetary expenditures, funded with foreign resources not requiring counterpart funds. An attempt to estimate such expenditures by combining information from the Ministries of External Cooperation, Finance and Economy, revealed that total public expenditures for 1996 could have been 24 percent higher than budgeted. The sectors that had significant extra-budgetary expenditures were PNDR, INAA, Health, INTA and MAS (Table 6, Annex 2). Including these expenditures, the overall composition does not vary significantly (Chart 1-4). Both sets of figures confirm that an important share of resources is allocated to the social sectors; nevertheless, the Government should increase this share even further. Chart 1-4: Functional Distribution of Total Expenditures Functional Distribution of Expenditures Functional Distribution of Expenditures (includes extra-budgetary) Others Economic Admin and 5% Infrastructure Admin and Others Economic Pub Safety 24% Pub Safety 5% Infrastructure 25% 21% 26% Social Infrastructure Prdcie9% PrdcieSocial 8% 11% ifatutr Health and Health and I 1% Education Education 29% 26% Source SNIP, Public Investment Program. 2 Worldwide only North Korea is reported to have a public investment level higher than Nicaragua. 3 Defined as Central Government total expenditures plus capital expenditures of the main utilities (ENEL and INAA) and decentralized agencies (INTA, FISE, INE, CONAGRO, PNDR). Chapter 1. Macroeconomic Framework and Fiscal Sustainability 5 1.9 Public Investment. The public investment program (PIP) is overly complex and highly concentrated on economic infrastructure. In 1996, the PIP was composed of 650 projects, financed by 39 donors and implemented by 27 agencies. It represented 16 percent of GDP and 86 percent was financed by donors. Only three institutions, ENEL, INAA and MARENA, finance part of their investment with their own revenues, representing 4.5 percent of the total PIP. ENEL finances one fifth of its program, INAA and MARENA about 8 percent. The evolution of the PIP since 1990 is presented in Chart 1-5. The figures have to be interpreted with caution as the coverage of the PIP has improved over time, particularly since 1994 when the SNIP (National Public Investment System) became operational.4 Chart 1-5: Public Investment by Economic Sectors Allocation of Investment by Major Sectors Allocation of Investment by Major Sectors (As % of public inYestmaen (As percentage of GDP) 100% 1 100%* OProdctiv Sector 80% H and Education agE1conornic lnfra.tructure 12 40% 20% :Productve Selor WHealth ond Edu,t.on OSorsal Sector 2 CE conomic Infrastructure 0% I I I I0 1990 1991 1992 1993 1994 1995 1996 1990 1991 1992 1993 1994 1995 1996 Searre: SNIP, Publik itment Prorao 1.10 In order to reconstruct an economy devastated by war, about half of the PIP or 8 percent of GDP has been allocated to economic infrastructure. Three institutions are responsible for these investments; MCT with 20 percent of the PIP, INAA with 20 percent and ENEL with 12 percent. The social sectors represent one third of the total, with the Ministry of Health alone representing 12 percent while the Ministry of Education only represents 5 percent and the Ministry Table 1-3: Public Investment Program 1995 of Social Action 6 percent. Productive investments are (By geographical location) 12 percent of the PIP, and mainly go to agriculture and the rural development program (PNDR). The latter m US$ % of Tot. per-capita gets 6 percent of the PIP, which is larger than the Total Investment 303 100.0 70 amount allocated to MED. With regard to the National 122 40 3 geographical distribution of the PIP, a disproportionate Managua 68 22.4 79 part of the investments are directed to Managua. Table 1-3 shows that in per capita terms Managua Cities > 50,000 82 27 0 57 residents received 30 percent more than those residing Cities < 50,000 31 10 3 34 in other cities, and 7 times what was allocated to rural areas. Given that poverty is concentrated in rural areas, a redirection of resources away from Managua and toward rural areas should be considered. 4 Preliminary 1996 capital expenditure estimates prepared by SNIP differ considerably from those of MIFIN. In Chart 1-5 the source is SNIP except for 1996 infrastructure expenditures where the source is MIFIN. .5 NICARAGUA - Public Investment Review 1.11 The high rate of public investment demands that projects be subject to a careful economic evaluation (Chapter 2). Most projects continue to be donor driven without a proper evaluation of their contribution to economic growth and to poverty reduction, and their future implications for fiscal policy. Some progress on this front has been made, particularly at the MCT. However, MCT, INAA and ENEL are reformed, the efficiency of public investment will not be improved. These agencies are discussed in detail in Chapter 3. The Government aims to increase investments in the social sectors, including heath and education, and employment generating programs. The main agencies involved are the FISE and the Ministries of Education and Health. Although this is appropriate, as discussed in Chapter 4, better targeting of social investments is needed. As for the productive sectors, many of the programs need to be reoriented in line with the Government's strategy of private-sector led growth. In particular, the programs under the PNDR need to be reformulated. 1.12 As foreign aid levels fall, maintaining current levels of social expenditures will demand reallocating resources from other uses. The share of economic infrastructure and productive investments should be reduced. The private sector can be attracted to invest in infrastructure (Chapter 3) particularly in the energy and ports sub-sectors, and can substitute Table 1-4: Projected Public Sector Investment: 1997-2000 for Govrnet in an lso (U prcmw of DJ)for Government investment and also 1"7 of % 19) 2000 increase the efficiency of total investment. 1997 1998 1999 2 The Government's direct role in Ecnmanic Infrastmcture 6.5 5.4 5.4 5.4 productive activities should be revalued, MC 2.3 2.3 2.6 19 the effectiveness of rural development INAA 2.2 2.0 1.8 1.6 program needs to be carefully assessed. ENEL 2.1 1.1 1.0 0.9 Social expenditures, including water and Health and Educatim 1.7 1.9 21 2.2 sanitation and rural roads, will remain an Health 1.1 1.1 1.1 1.1 area where it will be more difficult to Educabon 06 0.8 10 11 attract private capital, and where Government's direct intervention or partnerships with NGOs or communities Other 40 as 2.5 1.9 will be required. Table 1-4 illustrates the Total ExpMden ite 145 13.2 1.1 11.4 implications of such policy for the level Some. Bank staff estima& and composition of the investment program. The Government would gradually withdraw from investment that have low social impact, such as providing financial and technical services which could be carried out by the private sector. In infrastructure public investment would concentrate on road rehabilitation. The Government would continue to invest in water but would reduce its participation in the energy sector where private sector investments would be sought. In the social sectors, investments in education would be increased concentrating on the first four grades while health would be maintained at current levels. The overall levels are consistent with the medium-term fiscal framework presented below. Debt 1.13 At the end of 1996 foreign debt had been reduced from about US$11 billion in 1990 to about US$6 billion or 300 percent of GDP. This was a result of successful negotiations with bilateral and commercial creditors on highly concessional terms (in many instances with discounts of over 90 percent). Even so, Nicaragua will require further debt relief, as the debt service burden for the next three years will average 55 percent of exports of goods and non-factor services. 1.14 Domestic debt was practically non-existent in 1990 but now represents some 20 percent of GDP. While consolidated figures for domestic debt are unavailable, by and large the most important source of domestic public debt are the compensation bonds issued to pay for expropriations under the Sandinista Chapter 1. Macroeconomic Framework and Fiscal Sustainability 7 regime. Up to now approximately US$600 million in bonds have been issued, of which US$200 million have been redeemed in payment for privatized public enterprises and payment of other public debts.5 At present the service burden of these bonds is about 1 percent of GDP. However, the Government has promised to resolve all pending claims with adequate compensation. This will certainly require the issuance of additional bonds. Although there are no reliable estimates on additional requirements, the most quoted figure is US$400 million which would double the amount of bonds, and would have an important impact on public finances. A large increase in domestic debt could jeopardize the Government's fiscal adjustment efforts, therefore the fiscal impact must be carefully analyzed when deciding on a compensation policy. The domestic debt of the Central Bank has been rapidly expanding, but is still relatively modest The main instruments are CENIS, zero coupon bonds. As of December, 1996 there were US$48 million outstanding with an average return of 20 percent and maturity of one year. IV. A SUSTAINABLE FISCAL DEFICIT 1.15 To maintain macroeconomic stability and to sustain growth, Nicaragua will need to strengthen domestic savings. This would help maintain a high level of domestic investment while dependence on official external flows is gradually reduced. Table 1-5 below shows the evolution of key macroeoconomic variables under a scenario of steady reduction of fiscal imbalances. The projections assume an increase in domestic savings of 10 percent by the year 2000 with 4.8 percent coming from the public sector. The overall fiscal Table 1-5: Selected Economic Indicators Actual Estimate Projection 1991 1995 1996 1997 1998 1999 2000 Real GDP (annual change) -0.2 4.2 5.5 6.0 6.3 6.5 6.7 Consumer price index (averg.) 7,755 11.2 12.0 9.6 74 54 4.0 As percentage of GDP: External Current Account' -48.9 -37.5 -32.5 -23.8 -20.8 -18.3 -15.7 Gross Domestic Savings' -8.2 4.1 5.1 9.0 11.1 13.3 154 Gross Domestic Investment 20.1 26 9 27.6 28.1 28.5 29.1 29.4 Private 15.0 10.6 13.4 14.6 16 5 18.0 19.0 Public 5.1 16.3 14.2 13 5 120 11.1 10.4 Public Sector Deficit (before grants) -7.7 -11.1 -13.4 -8.7 -7.1 -5.0 -4.3 Public Sector Deficit (after grants) 4.2 -5.1 -53 -1 9 -1.5 -1 1 -0.6 Debt Outstanding (end of year) 611.8 537.4 300,3 269.4 243.2 216.6 193.9 Debt Service 64.7 46.7 41.8 26.7 20 5 17.5 15.5 Debt Service Paid 16.3 16.8 11.6 14.0 16.2 144 130 'Excludes official grants; 2 Estimated as the difference between Gross Domestic Product and Total Consumption Source: Central Bank of Nicaragua and Bank staff estimates. deficit would decline to 3.3 percent of GDP, a level that could be accommodated with concessional funding. To achieve these targets the public sector would have to increase revenues and reduce expenditures through the implementation of a far reaching public sector reform program. Gross domestic investment would reach 29 percent by the year 2000, with private sector investment being the main engine of growth and representing about two thirds of total investment by the end of the century. With fiscal discipline and greater private sector investment Nicaragua could achieve growth rates of 6 to 7 percent over the next 4 years. The bonds have a maturity of 15 years with partial payments starting year 11 and carry an interest rate of 4.5 percent. Although denominated in domestic currency, the bonds are adjusted for changes in the exchange rate. -8 NICARAGUA - Public Investment Review 1.16 The balance of payments position, however, would continue to be fragile over the medium-term because of the still narrow export base and the high level of debt service obligations. Even with export growth at 18 percent per year and rescheduling of bilateral debt on concessional terms, the external current account would be at 16 percent of GDP by the year 2000, with interest payments accounting for 7 percent. To achieve external viability Nicaragua will need to maintain a strong structural adjustment effort, continued access to external financing on highly concessional terms, high levels of debt reduction from the Paris Club and non-Paris Club official creditors and the restructuring of debt with multilateral institutions, particularly 6 of debt to BCIE. Implementation of the Highly Indebted Poor Countries (HIPC) initiative will be important for Nicaragua's attainment of external viability. V. CONTINGENT LIABILITIES 1.17 In addition to the future obligations that are reflected in the public debt, the public sector also accumulates contingent liabilities which must be paid in the future but which are neither recognized nor provisioned for. It is necessary to assess these liabilities in order to realistically determine the need for fiscal adjustment. Normally the largest sources of quasi-fiscal deficits are the social security system, public sector banks and other public guaranteed funds. In Nicaragua the most important source is the state banks. 1.18 There are three state banks (BANADES, BANIC and BCP), one second tier financial institution (FNI), and a housing agency (Banco de la Vivienda) in Nicaragua. While the importance of the state banks in the financial system has diminished considerably over the last 5 years, in 1996 the state banks represented 56 percent of the financial system's assets and held 36 percent of the system's deposits. The State Banks have traditionally depended on FNI and the Central Bank as sources of funding, mobilizing less than 50 percent of their funds through deposits. The banks have not published audited accounts, and their portfolio is weak; in 1995 it was estimated that half of their loans were non-performing. 1.19 The state banks represent an important liability to the Government and are a source of monetary disequilibrium. The FNI was restructured in 1995 into a second tier institution. As a first tier institution it accumulated a loan portfolio of US$170 million which is largely unrecoverable. Despite being recapitalized in 1992, and again in 1996, BANADES is technically bankrupt. Losses associated with the state banks are equivalent to US$40 million per year or 2 percent of GDP. This is larger than the combined capital expenditures of the Ministries of Health and Education. The size of the Government's liability depends on the ability of BANADES to recover its loans. Should BANADES be unable to recover any of its loans, the Government would be forced to pay the depositors US$115 million plus other liabilities (workers' benefits for example) minus liquid and physical assets. Therefore, it is vital to stop BANADES' access to additional public and private resources, as these are surely to result in quasi-fiscal losses. VI. RECOMMENDATIONS * Strengthen fiscal adjustment by deepening reform of the public sector. * Reallocate investment resources from economic infrastructure and productive sectors to the social sectors, particularly education. Promote private sector investment in infrastructure. * Continue foreign debt restructuring and comply with pre-requisites to benefit from the HIPC initiative. 6 A detailed discussion of Nicaragua's foreign debt is included in IMF's report "Nicaragua - Staff Report for the 1996 Article IV Consultation - Medium-Term Prospects and Debt Sustainability". 2. PUBLIC INVESTMENT PLANNING AND BUDGETING I. BACKGROUND 2.1 The current institutional set-up for public investment management dates to 1991 when the then newly created Ministry of Economy and Development (MEDE) was given the mandate to lead the process through its General Directorate of Public Investment (DGIP). At that time, it was noted that the MEDE faced a very difficult task because of: (i) direct links between donors/creditors and executing agencies; (ii) lack of experience in investment prioritization in the executing agencies; and (iii) confusion about the roles of he Ministry of Finance (MIFIN), Ministry of External Cooperation (MCE) and the Central Bank (BCN) regarding public investment. Furthermore, MEDE did not control domestic or external resources for project financing and therefore, lacked the power to manage the public investment program without the collaboration of MIFIN and MCE. As a result, the process of project selection was determined by funding availability and donor interest without a coherent strategy. 2.2 Despite a significant improvement in the institutional framework for public investment planning, budgeting and execution, many of the issues identified in 1991 remain a major concern today. In particular: * an overall strategic and macroeconomic framework for investment planning is lacking; * sectoral planning is also lacking, therefore the link between sectoral targets and specific investment program is absent; * investment programming is not embedded in a medium-term expenditure framework which would enable the explicit consideration of recurrent cost implications; * project selection is donor-driven, resulting in fragmentation, duplication, and inconsistencies; and * institutional capacity to design and execute the public investment program is weak and projects are not subject to economic analysis. 2.3 Some of the issues listed above will be significantly alleviated once the Integrated Financial Management and Auditing System (SIGFA) and the National Public Investment System (SNIP) become fully operational. These systems described in greater detail below, will increase transparency and accountability in budget administration and will improve the Government's ability to evaluate the PIP. However, because the responsibilities for public resource and expenditure management are divided among four institutions (MIFIN, MEDE, MCE and CBN), and the crucial task of strategic planning is not being adequately addressed, the efficiency gains will be limited without a major restructuring of institutional responsibilities. II. MACROECONOMIC FRAMEWORK AND STRATEGIC PLANNING 2.4 The budgetary process in Nicaragua is an incremental one, with little planning or analysis of programs. MIFIN provides ministries with a ceiling on current expenditures for the year, based on estimates of the available resources and the ministry's budget for the previous year. The ministry then allocates budgets to each program or directorate on the basis of "last year plus or minus x percent". The investment budget is prepared by the DGIP of MEDE. The criteria for inclusion in the budget is driven by the availability of foreign financing, which in turn is coordinated by MCE, and by the need to comply with political commitments of the executive and the legislature. The effect of the budgeting systems is fragmentation of expenditures and the lack of incentives to actively reallocate resources at the sectoral or program level. The heavy dependence on foreign aid and the nature of the donor-government relationship in which some ministries negotiate directly with donors, further exacerbates the problems. However, the problems arise not from the external funding per se but from weakness in the strategic priority-setting process, weak accountability, and the fact that a significant portion of externally funded resources do not pass through the budget. There is, therefore, no global picture of the distribution of resources among sectors and programs, no rational basis for their redistribution in response to changing priorities, and inconsistencies in accounting for resources used. 10 Chapter 2 Public Investment Planning and Budgeting 2.5 An expenditure management system should seek to achieve three objectives: (i) instill overall fiscal discipline; (ii) facilitate strategic prioritization of expenditures across programs and projects; and (iii) encourage technical efficiency in the use of budgeted resources.' In Nicaragua fiscal discipline has been a problem as is evidenced by the fact that deviations from fiscal targets have been the main reason for the inability to comply with the ESAF program. These problems are not unique to Nicaragua, as all countries face obstacles in achieving fiscal discipline because there are many claimants to the budget, e.g., interest groups, legislators, line ministries. Meeting the demands of disparate claimants results in unsustainable budget deficits with negative effects on growth. This problem can be mitigated by embedding the budget discussion into a medium-term macroeconomic framework, by granting central ministries (MIFIN) a dominant position concerning aggregate spending, and by establishing formal constraints on spending and borrowing. At present there is no entity responsible for developing a medium-term macroeconomic framework. A partial framework is provided by international institutions in the context of an ESAF program. This is unsatisfactory. It is of utmost importance that a Government entity be given the mandate and technical resources to develop such a framework to support economic policy decision-makers. Another important element for effective fiscal discipline is that all public expenditures be included in the budget. To ensure that in practice fiscal discipline is achieved, it is important to introduce a mechanisms that will increase the accountability and transparency in budget execution. These include: (i) reconciliation between ex-ante and ex-post aggregated spending and deficits; (ii) sanctions against overspending; (iii) publication and dissemination of the results to the public; and (iv) integration of all expenditures within the budget. As many of these elements are foreseen in SIGFA, it is important that SIGFA be implemented as soon as possible. 2.6 Strategic prioritization is the second challenge. The crucial task of strategic priority setting and programming are not adequately addressed because a clear institutional locus for this activity is lacking. The systems of "Gabinetes", which is designed to plan and coordinate the activities of sectoral ministries, in practice does not work as it should, partly because professional and technical capacity for analysis remains in the sectoral ministries, rather than being available as a resource to the Gabinetes. For investment expenditures, prioritization falls on the DGI of MEDE supported by a Technical Committee of Public Investment (CTI) composed by staff from MEDE, MIFIN, BCN and MCE. The CTI, however, does not meet on a regular basis and its decisions are not based on rigorous analysis. As a result, the investment program is determined according to donor interests and views rather than national priorities. The draft SNIP law proposes to institutionalize the CTI's role in planning and coordination. This is a mistake. The priority setting function should be the responsibility of an entity at the highest level of economic authority endowed with a full time high level staff, with a mandate to define the public investment plan within a macroeconomic strategic framework. The creation of a national commission for coordination of economic and social policies (CONACES) has been proposed as part of the public sector reform effort. This entity should establish intersectoral priorities and should articulate medium term strategic outcomes and link them to expenditure allocation. Sectoral priorities should be left to line ministries who have better information on how to best allocate resources within their sector but who must be held accountable for their performance (through reconciliations and ex-post evaluations). To achieve an effective prioritization, all expenditures must be incorporated into the budget, as the existence of extra budgetary funds and/or exclusion of certain expenditures categories weakens the ability of decision-makers to allocate expenditures to achieve strategic outcomes. It is also important that there be objective rules for evaluating the relative importance of programs and projects, e.g., of economic cost-benefit analysis and incidence analysis. The discussion of expenditure management principles draws on The Impact of Budgetary Institutions and Outcomes - Binding Governments to Fiscal Performance by Ed Campos and Sanjay Pradhan, Mmeo, 1996 NICARAGUA - Public Investment Review 11 III. BUDGET COVERAGE AND PROJECT SELECTION 2.7 Budget Coverage. As mentioned above, comprehensive budget coverage is needed for overall fiscal discipline as well as for strategic prioritization. Unfortunately, in Nicaragua budget coverage is limited The majority of the investment projects financed with external aid not requiring counterpart funds, such as technical assistance grants, are excluded from the PIP. A conservative estimate of extra-budgetary expenditures places them at approximately 24 percent of budgeted expenditures (Chapter I). There appear to be two reasons for this. One is donor-government relations, as some donors prefer to bypass the budget in order to expedite and better control funds. Another reason is that the Government intentionally limits budget coverage in order to avoid the constitutional mandate to allocate 6 percent of the budget to university expenditures. The universities claim that the base for estimating the 6 percent should be total budgeted expenditures, while the Government contends that the base should be expenditures funded with the Government's own sources excluding foreign grants and loans. The solution to this problem is changing the constitutional provision. To do this the Government will have to work with the Assembly and will also have to launch a campaign to build consensus that the 6 percent provision is inequitable and an inefficient use of scare public resources (Chapter IV). 2.8 Project Selection and Evaluation. The first question that needs to be addressed is whether the project should be in the public sector. This is not an easy question to answer particularly in an economy in transition like Nicaragua. Nevertheless, some principles can be invoked. First, if the project is producing a good and is profitable at market prices, there is good reason to believe the private sector can undertake it. Second, at the other extreme, there are the pure public goods, where there is no prospect of private provision. But pure public goods are rare. The third possibility is the case of market failure arising from externalities, indivisibilities, information failures, etc. or the need to redistribute income to the poorer members of society. In these cases there will be a case for government intervention. However, this intervention need not be government provision but rather taxes, subsidies or regulation, as in most cases some (sub-optimal) amount of private provision can take place. This is the case of secondary education, curative health services, agricultural research and extension, etc. Once the rationale for public provision is established the projects should be subject to economic evaluation. 2.9 At present, the screening process for public investment projects is weak. As mentioned above, the DGIP is in charge of preparing the public investment program. Projects are not subject to an economic evaluation process. This is partly due to the uneven capacity at different agencies to evaluate projects. In most cases, sectoral agencies only provide a cost profile (annual and total costs) to the DGIP and are unable to develop cost-effectiveness or cost-benefit analysis. Some Ministries, such as MCT, can perform sound technical evaluations; but the analysis of recurrent cost implications is always lacking. 2.10 To improve project selection it is essential to create project evaluation capacity within the sectoral ministries and public enterprises. The DGIP should not evaluate individual projects but rather focus on compiling the evaluations carried out by the sectoral ministries, estimate the total amount of desired investment, and determine sectoral investment amounts according to the country's priorities. The National System for Public Investment (SNIP), described below, is currently developing standard project appraisal methodology. The application of such methodology will be a pre-requisite for inclusion in the PIP and its development should be given top priority (Box 2-1). The methodology will include guidelines for estimating recurrent costs and shadow prices to be used in economic analysis. As major economic reforms have already eliminated most distortions and market prices reflect economic costs, financial analysis requires only a few adjustments to reflect economic costs and benefits. The estimation of shadow prices by the DGIP should be 12 Chapter 2. Public Investment Planning and Budgeting limited to the exchange rate, the discount rate, shadow price for unskilled labor and a premium on government funds to account for the distortionary costs of raising public revenues.2 Box 2-1 . Cost-Benefit Analysis in the Clinton Administration At the beginning of the Clinton Administration, the Council of Economic Advisors (CEA) was given the task of producing a document that would describe how to address a number of technical issues in cost-benefit analysis. To ensure that government agencies would abide by the principles stated in the document, the CEA had to persuade officials in all branches of government that cost-benefit analysis was a useful tool. To do so, the CEA established committees, representing every agency, to work through the issues involved in any practical application of cost-benefit analysis. Because it was important to get commitment at the top as well as at the working level, a political appointee at the top of each agency as well as a mid-level career person, who would be applying the techniques, were involved in the process. The cost-benefit implementation document was discussed at the cabinet level in several occasions - signaling the importance that the Administration attached to it. The costs have to justify the benefits and the benefits have to justify the costs. While cost-benefit analysis has limitations -- there are a range of benefits and costs that may not be quantifiable and it may be difficult to integrate important equity concerns into the analysis--it is still better to use analytical tools than to ignore them. Cost-benefit analysis can have a major impact in improving the quality of public decision making. Source Adapted from Joseph Stiglitz, Economist and public sector efficiency, DEC Note No 19, September 1996 IV. AID COORDINATION 2.11 In 1996 total foreign aid disbursements for Nicaragua were estimated at 20 percent of GDP. A large portion of that aid was channeled to the PIP financing 85 percent of the program. Donor assistance has the potential to undermine fiscal discipline because it is in the interest of line agencies and "sectoral" donors (i.e., bilateral donors or sector managers in multilateral agencies) to enter into bilateral deals for projects. However, this can result in excessive demands for counterpart funds, or future demands for recurrent costs and/or debt service requirements which are inconsistent with the macroeconomic framework. Furthermore, bilateral deals with line agencies for individual projects fragment the budget; uncoordinated assistance from multiple donors leads to duplication and inconsistencies; and donor-driven priorities undermine the Government's own articulation of strategic priorities and the composition of investment becomes biased according to donor preferences rather than country requirements. This unfortunately is often the case in Nicaragua. 2.12 Foreign aid is managed by four institutions. The Ministry of External Cooperation (MCE) was created to manage foreign aid but does not have exclusivity in its management. MIFIN is the interlocutor of the World Bank and MEDE of the IDB; the Central Bank also manages multilateral debt, and some bilateral donors deal with users directly. Thus, a certain amount of foreign aid bypasses MCE. There is clearly duplication of functions and lack of coordination with the budget. To increase the efficiency of the public sector, reduce transaction costs and eliminate duplication of efforts, the consolidation of MCE with a core ministry should be considered. While there are no rules on where aid management should be, in some countries it is located in the Ministry of Foreign Affairs, in others it is attached to the Office of the President. It would appear that MIFIN' would be the appropriate locus as the proceeds obtained from external cooperation would have to be integrated with overall resources and needs within a realistic budgetary process and MIFIN is the entity responsible for the budget. A possibility is an aid and debt management Vice-Ministry located within MIFIN. The office would be the sole focal point of contacts with donors and users whether the assistance is technical or financial, or whether it involves loans or grants. The entity 2 For estimates of acceptable values for these prices see Pedro Belli, Consideraciones sobre la Evaluact6n de Proyectos de Inversi6n Pliblica, Ayuda Memoria, June, 1996. The marginal cost of public funds has been estimated at between 1.17 and 1.56 for the Umted States. It is expected that the cost would be higher for developing countries. For a detailed discussion of project evaluation methodologies see the World Bank's Handbook on Economic Analysis of Investment Operations. 3 For a thorough institutional analysis of the MCE see Institutional Diagnostic and Restructuring Study by Coopers & Lybrand, November, 1994 NICARAGUA - Public Investment Review 13 would coordinate aid with different donors and would also perform a function of sectoral coordination to assure the effective integration of investment/assistance projects within and across sectors. The guidance on general economic policy and priority setting would emanate from a higher authority such as CONACES. The management of bilateral and multilateral debt would become a treasury function of MIFIN, with the Central Bank continuing to perform banking functions in relation to debt payment. V. THE NATIONAL SYSTEM FOR PUBLIC INVESTMENT AND THE INTEGRATED SYSTEM OF ADMINISTRATIVE AND FINANCIAL MANAGEMENT AND AUDITING 2.13 The National System for Public Investment (SNIP). Since 1994 the Government, with donor assistance, has been developing the SNIP, located under the DGIP, which aims at creating capacity within the Government to identify, formulate, evaluate, prioritize, program, execute and monitor public investment projects. The system would include all the projects to be implemented by the Central Government, decentralized agencies, and non-financial public enterprises. It includes three sub-systems that cover the entire project cycle: (i) pre-investment, (ii) programming, and (iii) monitoring and ex-post evaluation. The SNIP has developed an excellent information system and has a good core of professional staff. It has also installed investment project databases in five institutions but the systems are yet to be incorporated in their investment management process. 2.14 In general, the technical design of the SNIP is sound and its full implementation should be a priority. However, there are two issues that need to be addressed. The most important issue is that SNIP needs to be inserted in a strategic macroeconomic framework provided by the highest level of economic authority (again the establishment of a CONACES-like entity), and second that its location under the MEDE violates budgetary integrity, duplicates monitoring and programming functions with MIFIN and MCE, and makes it more difficult to integrate recurrent cost implications in budgetary analysis. As currently designed the SNIP would be governed by the Council of Ministers but managed by the Ministry of Economy (MEDE) through the DGIP. The DGIP in turn would coordinate its activities with MIFIN through the General Directorate of Budgeting (DGP), with BCN through the Directorate of Financial Programming, with the Ministry of External Cooperation (MCE) through the General Directorate of Programming, and with the Ministry of Natural Resources and Environment (MARENA) through the General Directorate of the Environment. An institutional set up where the DGIP has to coordinate with so many other institutions threatens its success. A simpler structure integrating budgetary functions currently carried out by MEDE and MCE within MIFIN would avoid duplications and result in a better coordination of the development budget with the recurrent budget. 2.15 The Integrated System of Administrative and Financial Management and Auditing (SIGFA). The main objective of SIGFA, financed by four donor agencies, is to create the capacity within the public sector to: (i) program, organize, execute and control the effective and efficient collection and expenditure of public funds; (ii) provide timely and reliable information to policy makers; (iii) establish transparency in the use of public resources; and (iv) facilitate surveillance of the public administration by linking the operational and administrative systems to the internal and external control systems. SIGFA is an integrated financial management and control system comprising all aspects of public funds management: budgeting, accounting, treasury, public credit, hiring and asset management; plus strengthening of internal and external auditing systems. It also includes administrative systems for personnel, goods and service contracting and administration of inventories, raw materials and supplies. MIFIN is responsible for implementing financial management and internal controls, and the General Comptroller is responsible for implementing external auditing controls. SIGFA will be mandatory for the central administration, decentralized entities and public enterprises and it may be extended to municipalities and universities. 2.16 The implementation of the system will be fundamental to improve the technical efficiency, transparency and accountability of the public sector. However, for SIGFA to operate as envisioned and avoid duplications and overlaps, it is urgent to link SIGFA with other administrative and financial systems 14 Chapter 2 Public Investment Planning and Budgeting under implementation, such as, the civil service system, the internal revenue system (Integrated Taxation Administration System), external debt system (SIGADE) and the SNIP (see below). SIGFA is a complex system and the time and training requirements for its full implementation should not be underestimated. 2.17 Unclear delimitation of roles of SIGFA and SNIP and lack of legal framework. Both SIGFA and SNIP have modules for budgeting and monitoring of public investment. There is a very serious risk of duplication and overlap of functions. While there are clear roles for SNIP particularly in the selection and evaluation of projects, there are areas, such as monitoring financial performance, where the primary responsibility for data collection should be in SIGFA who in turn would provide the data to SNIP. These issues should be clarified in the respective laws that would support each system. At present there are draft laws for both systems at different degrees of readiness. The SIGFA draft law has been approved by CERAP and is part of the reorganization of the state law. The SNIP draft law has yet to be approved by the MEDE. It is urgent to clarify the legal status of SIGFA and SNIP, since without a clear definition of responsibilities turf battles and/or lack of ownership will hurt both systems and impede the achievement of the shared objective of improved efficiency in the use of public resources. Again, the integration of both systems within MIFIN would help avoid the coordination problems indicated here. VI. RECOMMENDATIONS * A high level entity, such as the proposed CONACES, should be established to develop the country's macroeconomic and social strategy. The strategy would provide the basis for defining public investment priorities, facilitate coordination of external aid and would thus eliminate the need for the CTI. * All revenues (whether domestic or from donor-funded capital or technical assistance projects) and expenditures must be channeled through the budget and all budgetary functions must be concentrated in a single entity, MIFIN. This requires that the control of all external technical and financial assistance, grants and loans be centralized in MIFIN and the investment program and planning function performed by MEDE be transferred to MIFIN. 3. INFRASTRUCTURE I. INTRODUCTION 3.1 For the most part, Nicaragua's infrastructure sectors suffer from low productivity, inadequate user charges and high losses, more than a decade of insufficient maintenance of capital stocks, and poor incentives for operating efficiency. Moreover, the lack of investment planning also means that scarce public resources are frequently misdirected. Given the importance of infrastructure in the development of the economy and in the total PIP, it is vital that these deficiencies, related to both investment planning and operations, are corrected. It will be difficult to sustain high economic growth without an improvement in the quality of service provision, or to address poverty issues without an improvement in the coverage of basic services. 3.2 For those sectors where the public sector is expected to remain the main service provider, in particular roads, the Government needs to find ways of improving planning and the efficiency with which investment is undertaken, and ensuring adequate maintenance of the existing and future stocks of capital. In those sectors where the private sector can be more readily introduced, the Government should seek ways to reorientate its role toward one of regulator and policy-maker rather than service provider. Currently only a fraction of infrastructure services are being provided by the private sector (Table 3-1). 3.3 The previous Government recognized the need for a reorientation of the state's role in infrastructure, and in the National Strategy for Sustainable Development 1996-2000 (June 14th 1996) outlined plans for the private sector to construct, finance and provide infrastructure services. Some progress has been made, particularly in telecommunications. However, to move forward on this front the new Government must make a strong commitment to making the reforms that will bring in private investment and management expertise. This chapter examines first the current situation of the infrastructure sectors, then assesses the broad strategic decisions the Government must make, and provides recommendations for each of the main sectors (transport, electricity, water and sanitation, and telecommunications). Finally, the chapter assesses investment priorities in each sector. Recommendations are presented at the end of the chapter. II. INFRASTRUCTURE SERVICE PROVISION IN NICARAGUA: ORGANIZATION AND PERFORMANCE Sector Structure 3.4 In the roads sector, major rehabilitation and new works are contracted to the private sector, with oversight from the Ministry of Construction and Transport (MCT). Around 85 percent of road maintenance is carried out by public agencies (Corporaciones Empresarias Regionales de Construcc16n, CERCs). Although the MCT has been reducing the share of maintenance undertaken by the CERCs, it must accelerate this process; MCT has already agreed with the Bank that the CERC's share will be reduced to 50 percent by 2000, with their eventual phasing-out. The MCT has also embarked on a pilot program to contract road maintenance to micro-enterprises. 3.5 State-owned enterprises presently enjoy monopolies in power, water, and airports (Table 3-1). Only in telecommunications has competition presently been introduced, for the limited share of the market represented by value-added services. The Government must reinitiate within the new Assembly the privatization of the Empresa Nicaragiiense de Telecomunicaciones (ENITEL), the state-owned telecommunications company. A 30 MW diesel-fired independent power project (IPP) is expected to commence operation shortly under contract to the Empresa Nicaragiiense de Electricidad (ENEL). ENEL is also currently negotiating contracts for the rehabilitation and operation of the Momotombo geothermal plant, and is considering a number of other IPP contracts. 16 Chapter 3. Infrastructure 3.6 In all the sectors, apart from water, there is a nominal separation of the roles of regulation and policy-making on the one hand, and operations, on the other. In reality this division is unclear. The public- sector monopoly service providers enjoy a strong position vis-A-vis the Government bodies; even in electricity and telecommunications where there exist regulatory agencies, they do not exercise powers in a fashion similar to regulators found in the Southern Cone of Latin America, Europe and the USA. The energy sector regulator, the Instituto Nicaragiense de Energia (INE) is awaiting the passage of its Organic Law, and until this is approved by the Assembly it lacks the authority to set electricity tariffs. At present, it can only recommend tariffs to the Presidency, which then approves them. In all areas there is confusion between the roles of regulation and policy-making. Table 3-1 Summary of Existing Situation in Main Infrastructure Sector Sector Ownership Competition Regulation Policy Responsibility Roads Construction Private contractors Competitive bidding MCT MCT Maintenance Private and public companies 15% done by private sector Electricity Public enterprise (ENEL) None INE INE Water Supply Public enterprise (INAA) None INAA MCT Ports Public enterprise (ENAP) None DGTAc/MCT MCT Airports Public enterprise (EAAI) None DGTAe/MCT MCT Telecoms Basic services Public enterprise (ENITEL) By 2001, for all services Cellular Two private groups By 1998 TELCOR MCT Value-added Private companies Full competition Infrastructure Service Provision: Quality, Coverage and Efficiency 3.7 Only 17 percent of Nicaragua's roads are classified as being in good condition (Chart 3-1). A recent Bank study of the transport sector indicated that the poor state of the country's road network was the main bottleneck in the transport sector. Under programs financed by IDA, IDB and other donors, the MCT is embarking on a rehabilitation program which targets 30 percent of the road network being in good condition by the year 2000. Nicaragua's ports at present have excess capacity because, due to their inefficiency, they have lost substantial market share to ports in Costa Rica and Honduras. The Empresa Nacional de Puertos (ENAP), which operates the ports, makes a financial deficit. 3.8 In the electricity sector, Nicaragua has the highest level of energy losses in the region, at over 30 percent, which have deteriorated rapidly over the last four years. Technical losses are not excessive in Nicaragua. Instead, fraud, lack of metering and meter-tampering and illegal connections have grown and now amount to US$25 million of lost revenue, equivalent to one quarter of ENEL's total revenue. This high level of losses places ENEL in a precarious financial situation and makes it extremely difficult to meet future increases in demand: ENEL is not generating enough resources to invest in system expansion, and its poor credit-worthiness, added to the general country risk, makes it very difficult to attract privately-financed generation projects. This is crucial, because the country has in the recent past suffered from substantial power rationing, and the forecast balance between demand and supply in 1997 is extremely tight. At present there is some rationing of power in Nicaragua, but the IPP scheduled to start production in the near future, should at least temporarily reduce the risk of load shedding. Approximately 51 percent of the population has access to electricity, which is forecast to rise to 55 percent by the year 2000. Electricity demand is projected Nicaragua - Publc Investment Review 17 Chart 3-1: Infrastructure Service Provision in Central Am erica Access to Telephone Service(%) Paved Roads in Good Condition Costa Rica H.r.$. e nduras ..::... ., * . ........ Panar *~~~pn a Paaa Honduras a M(Telephone El Salvador m ainlianes per 0uatemala . 1,000 person.) Guatemala N icragu, F7 71N icaragus 0 50 100 150 0 20 40 60 Electric Losses as % of energy generated Population W ith Access to Water Supply Service (% of total) 30 0 N Ccaragua WRegion Costas Rica Panama 20 0 - Hndurs Guatemala 10.0 N icaragua 00 * *I *E Salyador 25 50 75 100 to grow at the rate of 5-6 percent per annum until the end of the century. By the year 2000, under a central growth forecast, peak demand is expected to reach 440 MW. To achieve a satisfactory margin of capacity over demand, of around 20 percent, 140 MW of new capacity will be needed by this time. 3.9 In 1996, water service coverage was estimated at 56 percent; 82 percent for urban areas and 26 percent for rural areas. Sanitation coverage (including septic tanks), estimated at 33 percent in urban areas and 18 percent in rural zones, is well below that of other countries in the region. While the quality of the drinking water is good, the distribution system is poor. The level of unaccounted-for-water (UFW), estimated at 46 percent of total production in 1996, is a major problem. Commercial losses account for a large percentage of the total, reflecting a high level of unmetered water services and poor billing and collection practices. Significant physical losses result from poor operational practices, such as inadequate regular and preventive maintenance. 3.10 Despite improvements in recent years, INAA (the national water company) continues to face sever financial difficulties. As a result of high UFW and low collection efficiency, only about 40 percent of water produced is actually collected. Not surprisingly, revenues hardly cover operating costs and INAA cannot meet its large corrective and preventative maintenance needs, nor can it significantly contribute to its capital investment program which is almost entirely financed with foreign aid. Furthermore the current tariff structure is complex, based on obsolete criteria and subsidizes residential consumers at the expense of other, particularly commercial, consumers. And despite significant tariff increases in 1996, the average tariff is only a fraction of long run marginal costs. A tariff model with IDB support has been developed and should be used to adopt a simplified, more cost reflective tariff. Improvements in the sector's finances through better management and a new tariff structure are priorities for the new Administration. 3.11 In 1990, Nicaragua had the lowest coverage of telecommunications services in Latin America, with only 40,000 lines and less than 11 lines per 1000 persons. Investment in modern technologies in recent years has let Nicaragua "leap frog" a number of its neighbors and by the end of 1996 around 110,000 lines were in 18 Chapter 3 Infrastructure operation, up 175 percent from 1993 and equivalent to around 26 lines per 1000 people with almost the entire system being digital. However, as Chart 3-1 shows, Nicaragua still has some way to go to approach the better performers in the region. III. INTRODUCING THE PRIVATE SECTOR -- CROSS-SECTORAL AND STRATEGIC ISSUES 3.12 The private sector can play an important role in financing and providing many infrastructure services in Nicaragua. The Government has already embarked on the process of privatizing the ownership and operation of infrastructure in Nicaragua, of which the recent IPP contract is an example. However, successful privatization of infrastructure services is not easy, and will require considerable attention on the part of the Government to ensure that the desired results are obtained. There are a number of general principles which should be followed, some of which relate to the need to make cross-sectoral decisions. The Government should revise the Foreign Investment Law, to remove uneccessary restrictions on or discriminatory treatment to foreign investors. In addition, the Government will need to set priorities in terms of which sectors should be targeted. As explained below, the Government should concentrate its initial efforts on: (i) encouraging private participation in electricity distribution and continuing the development of privately-financed and operated power plants; (ii) completing the sale of ENITEL; and (iii) increasing the share of road maintenance undertaken by private contractors, including micro-enterprises. 3.13 In making decisions on how to involve the private sector in infrastructure service provision, the Government has to bear in mind the following: * the feasibility and extent of private sector participation varies from sector to sector depending upon the characteristics of the good or service being supplied: long-distance telecommunications services will attract private sector interest; at the other end of the spectrum, funding for construction of most roads will remain the responsibility of the public sector; * some infrastructure services require a clear and transparent regulatory framework to control prices and the quality of service being provided; where competition exists, the need for regulation will have a different focus (e.g., on allowing third-party access to transmission lines); * permanent improvements in operating efficiency are likely to be enjoyed only with private sector management and ownership: this stems from better incentives and the arm's-length relationship between the managers and the Government, something which is rarely present with state-owned enterprises; and * successful privatization can be jeopardized by a poorly-designed legal framework, inadequate tariff levels, poor macroeconomic conditions and concession requirements that place an undue burden on the private sector. Table 3-2: Options for Involving the Private Sector, and their Benefits 3.14 Table 3-2 illustrates the range of different options for involving the private Mgmt. Lease Concession Demnonopoize Disvestiture sector. Some options may be more Contract /BOT I /BOO 2 appropriate for one particular sector than for another - for political, constitutional or vanagen t Experise yes yes yes yes yes strategic reasons. However, the benefits TanffDisapIme s yes yeS yes that can be obtained, for example, from a PrivateInestmn t e Ss yes management contract, are clearly different Relnui Asset Sales yesu__ and more limited from those that can be v/BOT Build uatcramfer, 2/BOOBudate . obtained by full divestiture. 3.15 Although the approach used to involve the private sector may differ across sectors, there are at least two issues on which the Government should think cross-sectoraly: regulation and concessioning. In a country with relatively limited capacity for undertaking efficient regulation, cross-sectoral agencies should be given serious consideration. Agencies with broader responsibilities will reduce the vulnerability to industry "capture" and to political interference, and allow consistent approaches to be taken on issues such as asset Nicaragua - Public Investment Review 19 valuation, treatment of inflation, rates of return, etc. While there are some merits in not upsetting the recently established regulatory framework, the merger of INE and the telecommunications regulator, and transferring regulatory responsibilities for water and sewerage to a new single entity, potentially together with oversight of private concessions in transport, could be considered. 3.16 A growing number of countries are addressing the legal issues for private investment in infrastructure through cross-sectoral concession laws (including Chile, Colombia, Brazil, Hungary, Bulgaria and the Philippines). These laws stipulate the basic terms of concession contracts, including international arbitration, the cancellation and modification of concessions, as well as the authority to award concessions and the process for doing so. A cross-sectoral approach allows consistent interpretations and provides economies of scale in developing at least part of the regulatory framework. It is important that the legislation take into account the existing legal and constitutional framework for granting concessions in Nicaragua. IV. REFORMING THE INFRASTRUCTURE SECTORS - CHALLENGES AND SOLUTIONS Roads 3.17 Given the expected volumes of traffic, it is anticipated that virtually all investments in this sector will be undertaken by the public sector. The only possible exception to this might be the concessioning of the Managua-Masaya highway, which needs substantial rehabilitation and could possibly be operated as a toll road. The Government should accelerate the growth in private participation in road maintenance and should actively pursue the privatization of the CERCs, for example through employee buy-outs. 3.18 A plan to restructure MCT is being finalized with IDA assistance. Under this, MCT would be transformed from an executing agency to one that plans and contracts out services, retraining its staff to undertake these planning and supervisory functions. This means it has to strengthen its abilities to prioritize investments. A major step forward would be the completion of the road condition inventory now underway with DANIDA assistance. MCT does not at present select roads for rehabilitation based upon a ranking determined by economic benefits. Instead, it does economic and technical feasibility studies for a subset of the projects that are presented, and then chooses from this list based upon available funding sources, and requests from local communities and from interested groups. Although most of the projects have an economic rate of return exceeding the minimum hurdle rate, scarce public funds could be better used if projects were selected.primarily on their economic benefits. 3.19 A Road Maintenance Fund. In 1994, US$71 million was raised through fuel taxes, representing about 90 percent of total revenues raised by road users at the national level. Total expenditure on roads has typically been around 50 percent of sector revenues and of this, road maintenance allocations have been only around US$12 million per year. This is insufficient to fund the program of maintenance that is needed to bring the road network into adequate shape. A stable and adequate source of financing is needed for the financing of road maintenance and rehabilitation, and Nicaragua lacks a tradition of being able to provide the required funds through the regular public budget. Many developing countries in a similar situation are adopting an alternative financing mechanism, that of a dedicated road maintenance fund (RMF), to provide such a regular source of funds for maintenance. A properly administered road fund would act as a way of commercializing the provision of roads by establishing a set of user charges, rather than a way of earmarking taxes. 3.20 The IDB has funded a study to examine the mechanics for developing a RMF in Nicaragua. It is planned that this will result in legislation being sent to Assembly to establish such a fund. The draft report of the study was reviewed by the Bank and the IDB and it was concluded that extensive work by the study team is still needed before the draft Law can be presented. The following broad principles should be followed in establishing the fund: 20 Chapter 3. Infrastructure * the user charges to provide revenue to the fund should be clearly distinguishable from the indirect taxes that road users have to pay at present; it could be comprised of an additional levy on fuel and/or vehicle license fees, bridge tolls, weighbridge fees (including fines from overloaded vehicles) and international transit fees; in Nicaragua an additional 10 US cents per gallon on diesel and gasoline would produce around US$12 million in additional revenue; ideally charges should be two part, based on access fees (vehicle license charge) and a usage charge (levy on fuel charges); * the fund should be designed to avoid both under-funding and over-funding; medium-term planning, for example over three years, of maintenance requirements should provide a sound basis for forecasting future revenue requirements; and * the fund should be administered by a Board, composed of representatives from MCT, local government, and road users. This Board would be an autonomous agency, and would determine the level of user charges and the revenue requirements based on maintenance needs. The road users should have at least 50 percent of the Board members. Electricity 3.21 The new legal and regulatory framework. Legislation is currently in the Assembly to establish a new legal and regulatory framework for the power sector. The law, the Ley de la Industria El6ctrica, received its dictamen in August 1996, and it is hoped that passage of the law will take place during the first session of the new Assembly. The law would: * establish a wholesale market run by an independent system operator, allow freedom of entry into generationi and allow consumers with a demand over 2 MW to choose their supplier; * establish the regime for concessioning transmission and distribution and prevent vertical integration (between generation, transmission and distribution) for new companies operating in the national interconnected system, but allow ENEL the right to continue functioning as a vertically integrated company; * provide suppliers with the legal mechanisms to disconnect consumers for illegal consumption, and to impose fines for such consumption; * establish the principles for regulating prices for transmission wheeling and for the supply of electricity to final consumers, and the provision of lifeline subsidies to consumers with a consumption of 25 kWh or below per month, funded by a levy on higher consumption residential consumers; and * establish a Comisi6n Nacional de Energia (CNE), composed of representatives from INE and from the Ministries of Finance, Economy, Natural Resources, and Construction and Transport, and two members of the public, to undertake indicative planning in the sector. 3.22 Once the law is passed, more detailed regulations will be needed. These will need to deal with, among other aspects: * price regulation: these regulations should not be overly specific, and give some room to companies in the sector to adjust tariffs, for example through a price cap covering regulated services. At present the law states that all residential consumers with consumption under 25 kWh per month will receive a subsidized tariff, with the costs being borne by residential consumers with a higher monthly consumption. It is important that this subsidy not be applied to isolated systems or to areas that do not yet have electricity supply, as it may retard service expansion to such areas; and * distribution concessions and exclusivity: concessions should not include extensive geographical exclusivity for those parts of the country with relatively low connection rates. The law states that expansion plans only have to be "consistent" with the indicative plans developed by the CNE. Nicaragua - Public Investment Review 21 3.23 Future sector structure and the role of the private sector. The Government has a clear strategy that future generation projects will be constructed and operated by the private sector. Although this represents a Chart 3-2: Breakdown of Losses - 1995positive move, the Government needs to broaden its Chart 3-2: Breakdown of Losses - 1995 reforms to address the key problem facing the sector in Broken or Technical Nicaragua, which is the high level of non-technical 23% 42% losses, virtually all of which occur in Managua and represent a major impediment to the future development of the sector (Chart 3-2). To provide a permanent and sustainable solution to the high level of non-technical Shanty town Billing errors losses, the Government needs to involve the private 11 Fraud sector in distribution in Managua. This would provide 21% the most sustainable solution to the high level of non- technical losses. Losses represent a profit opportunity, and the experience of other countries in the region (e.g., Argentina) shows that the private sector can rapidly reduce the level of non-technical losses (Box 3-1). Experience also shows -- as in the case of Honduras and the Dominican Republic -- that it is very hard for state-owned enterprises to reduce losses because of the lack of incentives and the temptation for the Government to curry favor with voters by preventing the company from cutting illegal connections. The actual sale of the assets of ENEL's Managua distribution business may not be necessary. A concession or affermage contract will give strong incentives as well; a shorter-term management contract may not give enough incentives or control to the managers to allow a resolution of this problem. The Government should immediately address the issue of how the private sector should be brought in, and whether the benefits from splitting distribution in Managua into two (for example to allow yardstick regulation) outweigh the costs of doing so. 3.24 As a prior step, the Government should ensure the enactment of the Ley de la Industria Elgctrica, to provide the legal measures which electricity suppliers need in order to take action against fraud. However part of the losses can also be attributed to factors other than the absence of a legal framework. ENEL itself has estimated that it could take actions by introducing, repairing and recalibrating meters and introducing better financial controls, which would reduce fraud by around 5 - 7 percent, amounting to US$10 million per year of revenue. Box 3-1: Reducing Losses - Lessons from the Region Regional experience shows that privately-owned companies, which face strong incentives, can successfully reduce losses, whereas state-owned enterprises have difficulty in doing so. In Honduras, the state-owned ENE has seen a drop of only 2 percent in losses, from 26 percent to 24 percent, despite a loss reduction program. In the Donunican Republic, at another state-owned utility, losses have continued to rise and have now reached 44 percent, despite substantial investment in new commercial systems. Nonetheless, the power company has continued to sign IPP contracts and as a result the central government is now transferring around US$10 million per annum to meet the cost of these contracts. On the other hand, in Argentina, following the 1992 privatization of the electricity sector, two of the largest distribution companies serving the Buenos Aires metropolitan region, Edenor and Edesur, were plagued by high losses due to illegal connections. Much of the theft occurred in shanty towns and low-income areas where cutting off power was viewed as unacceptable by local authorities. The solution was to install medium tension distribution lines in areas most prone to theft problems and to connect only about ten consumers through a transformer and low voltage lines. The high voltage in the medium tension lines makes illegal connections practically impossible and any attachment to the low voltage line is easily identified, since the transformer cannot process more than ten users. Thus, illegal connections result in automatic interruptions of service on specific lines and places the burden on communities to address the problem of electricity theft. In addition, collections have improved through a system whereby the municipalities pay the bills to the electricity concessionaires and are responsible for collecting from users. The outcome has been dramatic increases in payment levels in low-income areas, reaching as high as 90 percent for Edesur. Source: World Bank, mimeo and Argentina-Reforming Provincial Utilities: Issues, Challenges and Best Practice, draft (1996). 22 Chapter 3 Infrastructure 3.25 If private generation projects are not to impose a major recurrent cost burden on the sector it is vital that losses be reduced substantially from their current level.' In addition, because of the poor financial situation of the company and the Government's history of enforcing subsidized tariffs, private investors will perceive Nicaragua as having a risk higher than other countries in the region and will ask for corresponding premiums. The Government should actively pursue the program of IPPs that ENEL is currently following, but distribution privatization will provide the permanent solution to the problem of poor credit-worthiness and therefore reduce investors' perceptions of risks. 3.26 In conjunction, the Government needs to tackle the issue of what should be done with the remaining parts of ENEL, in particular whether generation should be split off from transmission. Although the Nicaraguan system is small, doing so would present a level playing field for new generation coming into the system. An entity that retained existing generation and transmission assets might try to keep out other generating companies, or make it harder for them to sign contracts with the distribution company. ENEL is currently negotiating the leasing of the Momotombo geothermal field to a private company, which would have responsibility for increasing its output to 70 MW (from the current 27 MW) and for its operation. This type of leasing could be a model for other existing generation facilities. As mentioned earlier, new generation facilities should be constructed and operated by the private sector. Water and Sanitation Services -- Initiating Reform 3.27 This sector has made little progress in terms of delineating the responsibilities for policy, regulation and operations, let alone introducing private sector participation. Legislation has been presented to the Assembly that would establish INAA as a regulatory entity, create an operating company known as ENACAL, and locate within the yet-to-be-created Ministry for Infrastructure a Sectoral Coordination Secretariat to undertake planning activities. This legislation will also define the procedures for the authorization of concession contracts. Outside of INAA, there are a plethora of actors involved in water resource management and planning including the National Commission on Water Resources (CNRH), the Ministry of the Environment and Natural Resources (MARENA), the Ministry of Health (MINSA), INE and a number of others. Serious consideration should be given to reducing the number of actors involved in water resource management, preferably to one. Box 3-2: Community Participation in Rural Water Projects in Paraguay More than 250 rural water and sanitation systems have been built in Paraguay. The projects rely on community organizations to construct, operate, maintain and assume financial obligations for water systems, and are models of community-government partnership. Rural water supply projects are implemented through the creation of Local Sanitation Committees (Juntas) within the communities. The Juntas follow a standard pattern delineated by SENASA (the government Water Agency) in the Rules and Regulations for the Juntas. This document spells out the organization and the obligations of each Junta with SENASA. Once the systems are built, the Juntas fully administer, operate and maintain their systems and service the debt on their loan from SENASA. SENASA provides technical assistance to the Juntas during the initial phase of the operation and supervises them during the life of the loan. The Juntas are also responsible for preparing proposals for approval by SENASA on water service tariffs, manage their own assets and funds and have boards of directors and legal representatives. Source- Luis Chang, Task Manager, Rural Water Supply and Sanitation Project, 1996 mmeo 3.28 It is not yet clear how the Government wishes to restructure the operational part of INAA, which would become ENACAL under the proposed legislation. It is doubtful that many substantial economies of scale exist beyond those at the system level. Therefore, there is no pressing need to retain ENACAL as a single entity. ENACAL could be divided into a number of regional/municipal units based around current water systems. In rural areas greater decentralization should take place with municipalities, NGOs and 2 If power from an IPP costs 9 US cents per unit produced, then with losses of 30 percent the cost of energy per unit billed from this plant will be over 12.5 US cents per kWh, without even making any allowance for incremental transmission and distribution costs, compared to current average tariffs of 9.3 US cents per kWh. Nicaragua - Public Investment Review 23 community groups taking over more responsibility for water and sewerage provision (Box 3-2). This would force the existing service providers to compete to provide services to the new infrastructure owners and hence allow them to receive what they consider to be the best service available. 3.29 The potential scope for private sector involvement is limited by the absence of a clear regulatory framework and tariffs below cost-recovery levels. A stepwise approach to private sector involvement beginning with a management contract and building up to a concession or divestiture may be appropriate for Nicaragua. Management contracts would at least provide a way of obtaining improvements in operating efficiency. Concessioning would provide the additional benefit of relieving some of the investment burden from the public sector. It would be easiest to do this for the systems which do not need major rehabilitation. Systems which need major rehabilitation could be left to a subsequent stage of privatization. The design of the concession will, as always, be key, and the Government should sound out potential investors beforehand to ensure that it puts in place the necessary enabling conditions, and clearly the granting of concessions must be in line with the existing legal framework. A concession for a major urban area (e.g., Managua) should be piloted. Systems in Granada and Le6n would also be candidates for the first round of concessioning. Other areas that could be transferred would be periurban areas with no legal service at present and no sanitation, and rural systems. Cooperatives or regional companies could emerge to serve these areas. One issue that will have to be addressed is the current system of regional cross-subsidies. Although a system of subsidies can be maintained through some form of revenue-sharing, it would be preferable to gradually eliminate them to ensure that each system earns revenue sufficient for expansion and maintenance. Ports 3.30 Nicaragua's major ports, Corinto and Sandino, face severe competition from rival ports in neighboring countries. This is in part due to geography: both are located on the Pacific, and the majority of Nicaragua's exports are destined for the Atlantic coast of the USA. Nicaragua's Atlantic port, El Rama, is an inland river port which cannot handle larger traffic but has potential for expansion. It is estimated that of the 1.1 million tonnes exported by Nicaragua in 1995, around 750,000 tonnes were exported through the Atlantic ports of Honduras and Costa Rica. A private sector consortium has been studying plans to develop a seaport at El Bluff or Monkey Point. If there are private sector interests that wish to develop this project, then there is in principle no problem with the Government granting them a concession. However, the Government should study carefully any complementary investments in public transport (e.g., roads), to ensure the ports' viability. A second private sector consortium is developing a feasibility study for an ambitious "dry canal" project which would have two container terminals, one on the Atlantic and one on the Pacific, linked by rail. Once again, the Government should allow such studies to proceed as long as it is made clear it is not committing any resources or making obligations to support the proposal. Box 3-3: Port Privatization in Latin America Most Latin American countries are in the process of reforming their port sectors and introducing private participation in port operations. Argentina, Chile, Colombia and Guatemala have been in the forefront of these efforts. Mexico, Peru and Jamaica are fairly advanced, with other countries such as Brazil, Honduras, Panama, St Vincent, Trinidad and Tobago and Venezuela also making strides. Countries that have gained some experience with these reforms provide examples of dramatic gains with little additional investment by improving management, providing appropriate autonomy and incentives to Port Authorities, and allowing private participation. The following post-privatization results are examples: * Argentina saw its port tariffs decrease by an average of 46 percent as a result of its concessions policy; * Colombia saw tariffs decrease by 52 percent in the ports of Barranquilla, Santa Marta, Cartagena and Buenaventura while productivity increased by an average of 60 percent-loading and unloading time was also reduced by over one- half. * Uruguay's privatization yielded even more spectacular results, with productivity increasing by 300 percent, within 18 months of the implementation of the reforms. 24 Chapter 3 Infrastructure 3.31 The poor financial and competitive position of Nicaragua's ports raises the question of how easy it would be to privatize their activities. The opposition of trade unions may be a further obstacle, but the experience of Latin America, for example in Mexico and Argentina, shows that when Governments have the political will to reduce the labor force, then opposition of the unions is not an obstacle. In addition, Corinto has already achieved a substantial reduction in the size of its labor force -- down to 530 from 1250 employees in 1990, due to a program of voluntary redundancies and attrition. However, successful privatization will probably require the Government to assume the debt built up, particularly by Corinto. The proceeds of concessioning could be used to repay this debt. 3.32 To initiate the process of privatization, the Government should first attempt to concession the terminal operations; assuming the Government assumes the debt service obligations, it should be able to make a net financial gain from the concession. If this does not succeed, it should instead undertake a strategy of partial privatization/concessioning, through the creation of competing stevedoring companies and the selective concessioning of other services within the ports (e.g., piloting, storage, etc.). 3.33 In tandem with this, the Government must consider a reorganization of the ports sector. ENAP should transfer local ports to the municipalities -- including the lacustrine ports and the minor marine ports, such as Puerto Cabezas and El Bluff; and secondary activities to the Direcci6n General de Transporte Acudtico, which can then concession them. Labor unions have obtained a legal block on the transfer of the local ports to the municipalities, arguing that the objective of the transfer is to reduce the labor force. The Government should use the Programa de Movilidad Laboral to reduce the number of employees in the local ports, which will facilitate their transfer to the municipalities without imposing an undue burden. With the transfer of the minor ports and secondary activities, and with the concessioning of operations at the major activities, ENAP would cease to function. Its regulatory activities -- for instance related to ensuring terms of concessions are adhered to -- could be transferred to a transport regulator. Given the stiff competition that Corinto and Sandino face, regulation can be relatively light-handed, although some residual monopolies, for example the oil terminal at Sandino, should be controlled through flexible rules such as price caps. Airports 3.34 EAAI, which operates the airport at Managua, currently makes an operational surplus of around US$1.5 million per year. The airport is therefore in the comfortable position of being able to fund the investments that are needed in the short and medium term. However, the Government should give serious consideration to concessioning all services at the airport either as a whole or separately e.g., baggage handling, the restaurant, cargo handling and storage. In line with these reforms, there would be a need to establish an adequate regulatory framework, both for safety and navigation aspects, as well as for monitoring the economic aspects of the service concessions. Telecommunications 3.35 The privatization of ENITEL has been delayed a number of times, initially because of the Assembly's failure to pass the required enabling legislation, and more recently because investors were uncertain about the results of the recent elections. All required enabling legislation, including a sector law, has now been passed. The repeated delays and the uncertainty associated with the recent elections has meant that investors have begun to lose confidence and interest in the ENITEL privatization, with only one bidder coming forward. The Government has postponed the award of the concession and should re-offer ENITEL under a new concession. Under the current design of the concession contract, the successful bidder would have received a 4 year period of exclusivity for basic services, and a 20 year total concession period. Investors were to bid for 40 percent of ENITEL, with the Government retaining 49 percent, 1 percent being given to workers with another 10 percent available to the workforce through purchase options. The service targets were ambitious, and may have dampened investor interest. Although the conditions were relaxed in the contract and it was stated that the conditions would hold only insofar as there was sufficient demand, the quality targets were set out in law and hence, could be judged to be binding regardless of what was stated in the contract. Nicaragua - Public Investment Review 25 3.36 It is vital that ENITEL be successfully privatized if the telecoms sector is to be developed, and the new Government should make this one of its main targets in the infrastructure sector in 1997. To do this, it will have to re-launch the bidding process. Although the overall framework laid down by the Government is sound, it should re-examine the criteria for acceptance of bids for ENITEL, opening the field to consortia composed of recognized telephone companies, acting as the "technical partner" in the consortium, capable of managing the company and other investors. This will increase competition for the bid and the likelihood of a deal. V. PUBLIC INVESTMENT IN THE INFRASTRUCTURE - CURRENT PRIORITIES AND FUTURE PLANNING 3.37 While there is much that can be done to shift more of the investment and operational burden in the infrastructure sectors onto the private sector, there will still remain a role for public sector financing, Table 3-3: Public Investment in Transport particularly in sectors such as roads and (in millions of USs) water supply and sanitation. In others, Total --there may be a transitional period where 1996 1997 1998 1999 2000 97-2000 the public sector funds certain investments Ports 1 4 0.6 0.2 0_2 0.3 1 3 over the next three to four years, or where the Government retains a core investment AiMorts 0.0 03 0.2 0.2 0.2 0 9 role. This section examines the key Roads 50 6 1 5.0 22 96.3 22L2 public sector investment priorities in each MCT (Rehab) 382 447 549 68.8 85 7 254 1 FISE (Rehab) 3.6 3.3 3.2 3.1 3.1 12.7 sector, taking into account the extent to PNDR 8 8 8 2 7.9 7,7 7.6 31.4 which the Government can utilize private Maintenance 9 6 5 9 5.6 7.1 6 0 246 sector funding over the next few years. Total 52 0 17.1 66 4 80.0 96 8 300 4 Table 3-3 presents a modified investment II Includes about 10 percent of improvement works. plan for the transport sector, based upon Source INEPORT, MEDE (SNIP), MCT and Bank staff estunates the discussions presented. Roads 3.38 It is in this sector that the public sector will continue to provide virtually all financing for new investments and rehabilitation works. This makes it vital that the MCT improve its planning capability, to prioritize new investments and rehabilitation. The main priorities for investment are at present the rehabilitation and improvement of the east/west road, linking Managua with the Atlantic port of Rama, and the north-south road, including the Pan-American Highway, providing links with Honduras and Costa Rica. Ports 3.39 In this sector, the Government should undertake only those investments that are necessary for the immediate future, leaving the rest to the private sector or to the municipalities that will take over the smaller ports. ENAP is in a position to fund some of the most urgent works at Corinto, although the proposed rehabilitation of a berth should be delayed until operations are concessioned, allowing the new operators to decide whether the expected volume of traffic would justify the investment. These urgent works would include: (i) continuing the works aimed at shoreline protection; (ii) repairing the berth defenses; (iii) repairing the container terminal crane; and (iv) rehabilitating the warehouse doors. Airports 3.40 Although a Master Plan has been drawn up for the international airport in Managua, the majority of the investments analyzed do not appear to be priorities in the near future. Of those that are, the new cargo terminal (US$2 million) and the improvements to the passenger terminal (US$6 million) could be financed using EAAI's own funds, without relying on funds from the Central Government. Given the current and forecast level of traffic, many of the investments identified in the Master Plan are hard to justify (e.g., a second runway to accommodate wide body aircraft), as are those for the improvement of the airdrome at San Carlos or Puerto Cabezas. However, two investments not considered in the Master Plan seem to have high 26 Chapter 3. Infrastructure priority: (i) new equipment to allow the change in the frequency used for air traffic control to be undertaken; and (ii) improvements in security measures which will allow the FAA to reevaluate Nicaragua's status and allow the national airline to fly to the USA. These measures together will cost about US$0.5 million. Electricity 3.41 Generation Projects. No more public investment in generation should be undertaken, even if concessional funding is available. ENEL and the Government are clearly embarking along the IPP route. Any additional rehabilitation of existing plant should be undertaken through the private sector using leasing arrangements where possible. The negotiations that ENEL is pursuing over the leasing of Momotombo (where ENEL has now used the public funds available for drilling new wells) should, if successful, be used for other plant. 3.42 Transmission Projects. Transmission investment requirements have been developed from a transmission master plan that was based on a given generation expansion plan, including the expansion of Momotombo and the addition of the Estrada II plant. The transmission plan should be re-evaluated given the possibility of changes in the generation plan from which it was developed. In particular, ENEL should develop a plan of "core" transmission projects, related to strengthening of the grid which would be relatively independent of the location of future generation. 3.43 Distribution Projects. It may take two to three years before distribution can be transferred to the private sector. Therefore the main priority should be the implementation of the programs to reduce non- technical losses, which also include efforts to improve the financial and management systems and to provide legal connections (with meters) to consumers in poorer areas in Managua who currently have illegal Table 3-4: Suggested Investment Plan for the Electricity Sector connections. ENEL should evaluate (in millions ofUSs) carefully whether investments in Total upgrading the distribution grid in Tota 1 1Managua are justified, in particular given the possibility that these assets will be Generation 187 0.0 0.0 0.0 0.0 0.0 transferred to the private sector. In Transmission 6.4 24 5 10.8 0.0 0.0 35.3 addition, distribution planning should be Distribution 8 7 17.3 15 2 26.4 25.9 84.6 undertaken in a more systematic way than Total 33 8 41 8 26.0 26.4 259 119.9 at present; no plan exists for the region S : B* sf s s outside of the Managua area and although the Managua projects do have estimates of economic benefits, the projects in zones outside of Managua do not. Distribution planning should produce estimates of the benefits of potential projects, thereby allowing management to prioritize among projects. Table 3-4 presents a modified investment plan for ENEL. This takes into account the comments made above and the priorities facing the sector. Water 3.44 For the period 1997-2000, INAA plans to increase annual investments to approximately US$42 million from US$30.6 million during 1990-96. The aim is to reach 87 percent water supply coverage in urban areas and 40 percent in rural areas, to increase urban sewerage coverage to 38 percent in urban areas and to reduce water losses to 35 percent. However, because of lack of medium-term strategic planning the link between sector targets and investment is weak. The current program shows a sharp decline by the year 1998, which is unlikely to occur in practice. The program indicates greater priority to sanitation and wastewater with 22 percent of resources dedicated to the clean-up of Lake Managua and the provision of sanitation services in urban areas. Water supply with 64 percent would again be mainly for the urban sector, with the rural sector programmed at 10 percent of the total. Given the importance of access to safe water for poverty alleviation, more ambitious targets for rural sector coverage should be pursued. With the appropriate institutional structure, such as well structured community participation programs (Box 3-3), it Nicaragua - Public Investment Review 27 should be feasible to reach a higher proportion of the rural population. The net benefits of wastewater treatment investments should be carefully evaluated With very few exceptions, the net benefits of providing safe water are much higher than those of treating wastewater. The investment program should be revised to give priority to institutional strengthening (reducing water losses), expansion of rural and urban water supply, and expansion of urban sanitation. 3.45 A major issue of concern is that projects are donor-driven, as INAA lacks a reliable least-cost Table 3-5: Public Investment in Water Supply and Sanitation expansion plan for water and sewage (in millions of USs) services and a good coordinating mechanism for on-going projects. Total Total Furthermore, many projects under 1990-96 1997 1998 1999 2000 97-2000 negotiation with donors and Water 153.5 390 36.6 18 3 146 108 5 international institutions have not been Sanitation 17 0 14 2 11 6 14 4 16.2 56 3 subject to rigorous economic analysis. Institutional' 13 4 1.6 1.5 0 8 0.7 4.6 A notable exception are works Total 183 8 54 8 497 33 5 31 4 1694 executed under the Water and Sewer Managua 57 6 19.6 23.3 17.2 19.3 79 3 System Rehabilitation Program, funded Other Urban 102 1 322 21.5 11 7 7.8 73 2 by the IDB, which were selected Rural 24 2 3.0 4.9 4.6 4.4 16.9 through economic evaluations, and I/ Calculated as. 3.6 % of total water costs and 1% of total wastewater costs are for institutional assessment of environmental and health Source INAA and Bank staff estimates. impacts. VI. RECOMMENDATIONS General * Examine the possibility of introducing a cross-sectoral regulatory entity and a cross-sectoral concessions law, and reform the Foreign Investment Law. Roads * Rehabilitate the principal north/south and east/west export corridors, and improve transport links connecting the main agricultural regions. * Contract a greater proportion of road maintenance to the private sector, including small enterprises and local communities, and privatize three CERCs. * Establish a road maintenance fund. Electricity * Involve private sector in distribution to reduce high technical losses and improve operational efficiency. * Pursue development of additional independent power projects. * Establish legal framework for sector by passing electricity law. Water and Sewerage * Separate roles of regulation, planning and operation by passing the water and sanitation law to establish INAA as regulatory entity. * Involve private sector beginning with a management contract for Managua. Ports * Privatize/concession existing major ports (Corinto, Sandino, El Rama) and decentralize other ports. * If privatization of national ports is not possible in the short term, concession the stevedore services by means of licenses to various companies. Telecommunications * Privatize ENITEL and reexamine concession obligations. 4. SOCIAL SECTORS I. OVERVIEW 4.1 Over the last few years, the Government's social sectors strategy aimed to: (i) focus on the most vulnerable groups, which suffer from malnutrition Chart 4-I Distribution or Social Expenditure 1996 and the extreme poor; (ii) expand access to basic education, primary health and water and sanitation; and (iii) improve the efficiency of delivery of basic services. MAS INIFOM More than 35 percent of public expenditures, equivalent umiver.nties 6.% ., u 11% Socal to 13.5 percent of GDP are allocated to the social sectors MED Infrastruct (Chart 4-1). The largest share goes to health and 26% 11% education. These figures exclude investments in water and sanitation which represent another 11 percent of GDP. A large share of social expenditures (particularly, MINSA health and education) are channeled through the Social 40% Investment Fund (FISE). The new Administration is I _ _ _ _ _I currently defining a coherent social policy which will So4wre: Budget wnd WP specify the role of the state, establish coordination mechanisms and identify target groups. II. HEALTH Strategy and Main Issues 4.2 The health sector strategy, formulated in 1993, focuses on improving the delivery of basic services and introducing major institutional reforms to improve the sector's efficiency and implementation capacity. In a relatively short time, MINSA has decentralized services and resources to local health systems (SILAIS), introduced new administrative and accounting systems, and developed a primary heath care delivery system with emphasis on women and children. However, a legal framework' defining the State's responsibilities for health services, the normative and regulatory role of MINSA and the implementing role of the SILAIS, is urgently needed. It is also important to increase cost recovery, expand the coverage of health insurance and improve the efficiency of resource use. Effective family planning programs need to be put in place to address rapid population growth. Further improvements in the delivery of primary health care in rural areas are also needed in order to address malnutrition (36 percent) and to lower fertility. 4.3 Despite major government efforts over the last 20 years, Nicaragua's health indicators continue to be poor. The country has low life expectancy and one of the highest infant mortality rates in the region (Chart 4-2). At current fertility rates (4.6 children per woman) the population doubles every 26 years. Malnutrition among children continues to be a major health problem. On the other hand, significant advances have been made in immunization coverage; and access to care, at about 83 percent, is above the region's average. The availability of trained health care professionals and hospital capacity appears adequate. The number of doctors per inhabitant (82/100,000) is fairly high compared to other low income countries, and although there are less hospital beds per capita than in other Central American countries, the average occupancy rate is low at approximately 70 percent. A new law on "Sistema Nacional de Salud" is awaiting approval in the National Assembly. The law states that health is a social right and that minimum basic services are guaranteed by the State on an equal basis to the entire population; that the community shall participate in planning and implementing activities; and that these should be complementary and integrated among the public, social and private sectors. It also allows the State to contract private services. Nicaragua - Public Investment Review 29 Chart 4-2: Health Indicators for Central America Life Expectancy (years) Infant Mortality (per 1,000) Costa Rica '75 75 - Panama Hoduras . . .... .. 70 El Salvador 6 u atem ala N icaragua Z 0. L0 20 40 60 Immunization Coverage (% of pop ) Gov 1R elth Expenditure (% of GDP) El Salvador . . ....:. ... - -.--.-- -Costa Rica m Hoduras Nicaragua Panama Panama Costa Rica . .**.. . -Honduras Nicaragua .El S alvador ~.. Guatemala Guatemala . 70 80 90 100 0 2 4 6 8 Source: Health expenditure in Latin America Resources 4.4 Nicaragua's total health expenditures as proportion of GDP (6.6 percent) are high in relation to most other developing countries,2 but in absolute terms, at about US$30 per capita, remain one of the lowest in Latin America.' MINSA already has the largest share of government expenditures (15 percent), and public health expenditures at 5.4 percent of GDP are significantly above the Central American average of 4.1 percent (Chart 4-2). Private expenditures, on the other hand, at merely 1.2 percent, are less than half the Central American average of 2.8 percent. With a rapidly growing population and targets for increased coverage, MINSA will have to find ways to further improve the efficiency of resource use, attract private sector resources to the system, and mobilize additional funds through cost recovery from those who can pay. While a number of cost cutting measures have been introduced, further cuts are possible by reducing hospital overstaffing,4 reducing operating costs through improved maintenance and continued improvements in drug management. Furthermore, as per capita income grows and the private health industry and health insurance develops, MINSA no longer should be expected to be as big and all-encompassing as it has been for the past 15 years. 2 Govndaraj et al., 1995 "Health Expenditures in Latin America", World Bank Technical Paper #274, reports that of 34 countries in LAC, Nicaragua was among the top 7 in terms of total and public health expenditures as a percent of GDP but was also the second lowest in terms of total health expenditures per capita (1990). Haiti was the lowest. This figures is based on public expenditures for 1996 (including extra-budgetary) at US$24 per capita or 5.4 percent of GDP and assumes that private expenditures remain at the 1990 estimate of 1.2 percent of GDP (in general the elasticity of private health expenditures to GDP is equal to 1). Fiedler, MINSA 's Provision of Services and Financial Requirements, 1997-2001, mimeo, estimates that aligning staffing levels with international hospital staffing norms would generate between US$2.4 and US$5 million savings per year (or 14 - 31 percent of MINSA's hospital personnel expenditures). 30 Chapter 4 Social Sectors 4.5 Weaknesses in available health expenditure data limit the ability to analyze the adequacy of resource allocation. First, the MINSA budget excludes more than two thirds of the sector's foreign aid, representing 30 percent of the sector's official resources. According to MINSA's report on external cooperation, bilateral and multilateral foreign aid for 1996 was planned at some US$57 million; of this amount, only US$18.6 million were included in the PIP. The fact that donors provide direct support to the SILAIS further complicates matters. Second, there is no information regarding NGO or private sector contributions to the sector. Nicaragua has a large number of NGOs active in health and a rapidly expanding private health industry. To evaluate the adequacy of resource allocation it is indispensable to improve health expenditure data. The first step is to include all public expenditures in the budget. The second step is to develop the National Health Accounts, which have been started under a regional PAHO/Harvard initiative with USAID funding. 4.6 MINSA 's budget. The approved 1996 budget (Table 4-1) reveals a very high dependency on Table 4-1: Ministry of Health 1996 Budget foreign aid, which funded about (in millions of USs) one fourth of total expenditures Program Wages & Goods & Transfers Total Total and 85 percent of investment Salaries Services Current Capital TOTAL expenditures. Domestic Primary level 15.5 4 7 3.9 24.1 12.5 36.7 resources finance recurrent Secondary level 17.2 4.0 7.1 28.4 9.7 38 1 expenditures, whereas foreign aid finances investments in Coordination SILAIS 2.8 0.0 0.8 3.5 0.2 3.7 infrastructure equipment, training Central Aand institutional development. 3f A 8. 13.7 0.9 22.4 83 The distribution of resources Domestic Resources 609 3.6 64 5 between primary and secondary External Resources 18.8 188 Source: MINSA level care is fairly even, representing 44 and 46 percent respectively. This shows a significant shift from 1992 when secondary level health received 56 percent of the budget while primary care obtained merely one fourth of the total. 4.7 The investment program. In 1996 the investment program comprised 38 programs and projects and represented 27 percent of total expenditure. Some expenditures included in the PIP, such as Medical Equipment and Health, equivalent to 7 percent of the total, are actually recurrent expenditures.5 As in other sectors, most of the resources are for rehabilitation of infrastructure (deferred maintenance) with very little going to expansion. Investments in the primary level, representing 53 percent, consist of 7 programs executed by FISE, mainly for latrine building (US$2.8 million), reconstruction of health posts (US$2.7 million), equipment (US$1.9 million), reconstruction of health centers (US$1.8 million), and preventive health care (US$1.1 million). Investments in the secondary level consist of 29 projects for rehabilitation or reconstruction of hospitals, mainly through the IDA project. There are 10 investment projects financed exclusively with domestic funds of US$0.7 million. While most projects are in line with the sector's strategy, there is concern with increasing resources being allocated to the construction of new hospitals. The new Esteli 200-bed hospital financed with a US$19.8 million Spanish Government loan (grant element of 60 percent) represented 30 percent of the 1996 investment program. 4.8 Investment program for 1997-2000. While the program is tentative, it will be very similar to the 1996 program. Investments in the primary level will be executed by and financed through FISE, while at the secondary level the bulk of the projects involving the rehabilitation of 5 The funds are used to finance increasing recurrent costs due to the devaluating Cordoba and special campaigns such as vaccinations. Nicaragua - Public Investment Review 31 hospitals will be executed by MINSA. A few changes, however, seem fairly clear. Three FISE- programs will be expanded considerably, namely equipment (US$5.1 million), reconstruction of health centers (US$5.2 million) and reconstruction of health posts (US$2.5 million). The main changes at the secondary level are the extension and conclusion of the Esteli project and the start of a new hospital in Granada. The Granada project, estimated at US$16. 7 million, includes the construction of a new 150- bed hospital with Japanese grant funds. MINSA has requested additional Japanese funds for two more new hospitals. 4.9 Investment planning. There is no explicit investment strategy. Within MINSA, the Direcci6n de Infraestructura is responsible for central planning and for investment decisions. At the regional level the SILAIS prepare their own projects and investments. There is no ex-post evaluation of investments and the ex-ante evaluation is poor. As in other sectors, the deciding factor for project inclusion in the PIP is whether financing is available or not. The problems with this heavy donor- dependency have already been discussed in Chapter 2. Here it is important to emphasize that MINSA needs to develop and adopt a consistent sector investment strategy --based on the health sector strategic plans under preparation-- to direct interested donors to the national priority areas. A project evaluation and planning model, known as Sistema de Andlisis y Evaluaci6n de Projectos (SAAP), is being developed. For the model to be operational it will be necessary to strengthen technical capacity at MINSA and the SILAIS in coordination with the National Public Investment System (SNIP). 4.10 Recurrent costs. MINSA does not incorporate estimates of recurrent costs in its investment decisions, not even for the new Granada hospital or for the other two new hospitals for which funding has yet to be finalized. The reason often claimed is that since the investments are mainly for the rehabilitation of old infrastructure, there are no additional recurrent costs. While this is partly true, it is precisely the lack of maintenance that gave rise to the need for the investment in the first place. In any event, the importance of calculating recurrent costs will increase as MINSA goes from pure rehabilitation and reconstruction projects to investments in new capacity. A study and a model have recently been prepared on how to incorporate recurrent expenditures in investment analysis, but it has yet to be implemented. The software should be used both at MINSA, particularly by the Direcci6n de Infraestructura, and at the hospitals. 4.11 Maintenance. Nicaragua's health system has not been allocating sufficient resources to the maintenance of buildings, installations, industrial and medical equipment. This has resulted in premature deterioration, loss and unreliability of equipment, which translates in low productivity and poor quality of health care. At present there is -no formal maintenance policy and maintenance expenditures represent 1.3 percent of the budget on average, whereas needs are at least 1.9 percent. To avoid further deterioration, MINSA has decided to implement a coherent maintenance policy for its physical assets. Maintenance will be a decentralized activity to be carried out by the SILAIS. The maintenance system will strengthen local level decision-making and will have a mixed public-private sector structure. The service will cover preventive and repair maintenance for physical infrastructure and equipment. Another important issue to facilitate maintenance and contain costs is the development of guidelines for the acquisition and distribution of medical technology, particularly for high technology investments. Nicaragua is receiving relatively large amounts of new medical equipment with tied financing, such as in the cases of Spain and Japan. The lack of guidelines results in multiple brand names from various sources, making the organization and operation of maintenance programs difficult. Hence, equipment is in disuse, and services are paralyzed. Therefore, there is an urgent need to carry out a technology assessment to develop appropriate guidelines for Nicaragua. Cost Recovery 4.12 Cost recovery through user fees has only been initiated at the secondary health care level and above. MINSA is now billing hospital services to INSS affiliates, charging user fees to patients in 32 Chapter 4 Social Sectors private rooms, and requiring co-payments for selected services from patients not affiliated with INSS The amount recovered, mainly within Managua, is small (7 percent of the hospital budgets) . While cost-recovery practices should be encouraged, the present system raises equity and accountability concerns. A recent study for Managua7 shows that only 17 percent of those seeking health care (hospitalization, laboratory tests or medicines) pay for the services. Many of the poorest (15 percent of those with monthly income under US$60) pay while many of the non-poor (60 percent of those with incomes over US$120) do not pay. Moreover, income generated at the institutional level is neither programmed for nor reported to MINSA and there is no accounting or control on medicines and materials provided for services to paying patients. Under present circumstances it is possible for public funds to subsidize private services. Therefore, it is important to develop clear exemption guidelines for the poorest groups (there are no magic rules here and an design appropriate to Nicaragua's specific circumstances will have to be developed) and at the same time, to enforce a costing system. Over the longer term, management of hospitals as financially independent units could be considered. 4.13 The coverage of the National Insurance Health Program8 (INSS, Programa de Salud Previsional) is low; covering only 90,000 (7 percent of the labor force) of government and private employees (over 50 percent in Managua) ,lus 50,000 family members. They are affiliated to some 32 Empresas Medicas Previsionales (EMP), of which two are public and the rest private. The EMPs provide basic medical services, including contracting of public and private hospitals for hospital care and should be further promoted. However, the quality of service is uneven and MINSA needs to introduce regulation, such as a quality control/assurance accreditation system, to protect users. 4.14 Increased coverage of health insurance programs should be pursued as they have the advantage of spreading and lowering the cost for the individuals and of promoting private sector participation through EMPs and hospital referrals. A recent cost recovery study concluded that expanding insurance coverage could result in cost recovery in amounts equivalent to between 5 and 10 percent of public expenditure in the health sector. Minimum charges for consultations and care not connected with priority programs or guaranteed basic services (such as maternal and child health and disease control), could also generate some income at the primary level and help create greater cost awareness. As in the case of secondary care, a mechanism to exempt those who cannot pay would be needed. The distribution of financial resources based on population coverage, poverty and epidemiological factors should also be considered. 4.15 Decentralization of Health Services. Clear progress has been made in deconcentrating the management of primary services to the SILAIS level, and in some cases even to the municipal level. The process, however, has taken place without the necessary legal backing. The establishment of a legal framework defining the role, authority and accountability of the different agents is urgently needed. Furthermore, only 20 percent of the budget has been decentralized and the rest (salaries and medicines) remains at the central level. The SILAIS have implemented a number of measures to improve the delivery of primary health care, such as the development of a model of integrated care to 6 According to a study of 19 public hospitals, the amount recovered during 1994 represented on average 5 percent of the hospitals' total budget or 20 percent of the operational budget controlled by the hospitals (excluding salaries and medicines), and 7 percent of total budget during the first half of 1995. There were wide variations between hospitals, ranging between US$10,000 - 250,000. Funded under the MINSA-IDB project, subcomponent "Financing Alternatives," August, 1996. Affiliation to INSS is compulsory for government and private employers with more than 8 employees. There are some 210,000 affiliates representing 17 percent of total labor force, but there is a 30 to 40 percent evasion rate Only 90,000 insured (mainly in urban areas) buy into the full health insurance package and are affiliated to an EMP. Compulsory contributions to INSS are 12.5 percent employee, 4 percent employer and 0.5 percent government. EMPs are similar to Health Maintenance Organizations in the United States. Nicaragua - Public Investment Review 33 mothers and children, training of health personnel and basic drugs and equipment support. However, information about quality improvements of services rendered, other than the fact that drugs are more readily available and coverage of services has increased, is not available. Systematic impact monitoring needs to be instituted. At this juncture, to fully integrate the primary health care model into the health system it is critical to develop and implement a supervision system from central level to SILAIS, and from SILAIS to municipalities. The Private Sector 4.16 The private health sector consists of private hospitals (2),10 private clinics/practitioners (30 EMPs), private laboratories, pilot private hospital pharmacies and NGO clinics/programs. The number of private hospitals and clinics has increased recently partly in response to the introduction in 1993 of the insurance program (Programa de Salud Previsional). Information on total number of private clinics or NGO clinics/programs is not available. It could be presumed that the NGO clinics cover a significant part of primary health services not covered by the public services. In many cases these clinics collect minimum charges from users (with exemption for the poorest). Coordination 4.17 Apart from the MINSA, the other government agencies involved in the health sector are FISE (construction of health posts and latrines), MAS (providing construction and equipment through integrated social projects) and municipalities (rehabilitation and repair of health posts). Coordination regarding local health services and intersectoral cooperation with other government agencies could be further improved, mainly at the local (municipal) level, to achieve better targeting and more efficient use of available resources. 4.18 With regard to coordination of foreign aid, there has been a reasonable overall distribution of external resources, especially with regard to support for the decentralization process and the primary level (SILAIS). There have also been efforts to ensure thematic coordination such as maternal and child health and drug management. MINSA produces an annual report on external cooperation according to project agreements between the Government and donors showing amounts programmed, disbursed and executed during the previous year. Coordination could be further improved, particularly in the area of training activities, especially among the projects that support the SILAIS. To improve the general effectiveness of foreign aid, MINSA needs to develop a clear sectoral investment strategy which would provide the framework for foreign assistance. III. EDUCATION Strategy and Issues 4.19 Despite severe resource constraints, Nicaragua has achieved comparatively high coverage in basic education: net enrollment in grades 1-6 is 80 percent, distributed relatively equitably across geographical regions, rural and urban areas, and gender (50 percent of school population are girls). However, illiteracy rates remain high at 23 percent; only 20 percent of the relevant age-group attends secondary school; and some 30 percent of sectoral expenditure is allocated for public universities. The most important issues in the sector are the low quality of basic education and the low coverage of pre- school/early childhood development programs and of secondary education. The Government's strategy seeks to improve the quality of basic education, expand pre-school and secondary services, and improve targeting of public education services. This would be achieved by increasing financing for basic education (mainly through voluntary contributions and community participation), improving resource allocation within the sector, concentrating resources in the first four grades, decentralizing school management and improving teacher competencies. 1o A third private hospital is presently under construction in Managua, financed partly by loans to the private sector from IDB. 34 Chapter 4. Social Sectors 4.20 The Government's goal over the next three years is to increase the proportion of students that finish fourth grade from 65 to 80 percent and the proportion of those who finish sixth grade from 55 to 75 percent. Almost 30 percent of the children repeat first grade and only 17 percent of new entrants finish primary school in 6 years. Grade repetition and dropout rates are high throughout the school cycle, and for each student that graduates the system must finance 11 student years instead of 6.11 As a result, the country pays 1.7 times more than it would for an efficient school system. Although poor economic conditions which lead to nutritional deficiencies and the need to work account for some of the dropouts, low quality of educational delivery is equally responsible. Resources 4.21 In 1996 education's share (MED, INATEC and Universities) of the total budget was 16 Table 4-2:Central America Public Expenditure on Education percent (the same as in 1990) which was As % of As % of Public Expenditure per student (USS) equivalent to 4.2 percent of GDP Nat. Budget Primary Secondary Tertiary GDP. This is in line with Nicaragua 4 2 15 7 61 59 885 relative allocations in other Guatemala 1.6 12.8 88 146 1,110 countries in the region Honduras 4 1 15.9 209 370 1,658 (Table 4-2). However, as Costa Rica 4.6 20.2 438 877 3,166 in the case of health, per Panama .... S..... 5.5..... 18 9 536 659 2,142 ........t... i ...i.......... I...........g y.............. ..... ! .............. capita expenditures are C America . .. 362 531 1,782 caia epntus ar ____Amerial_1___6_-1-1,782 much lower. The Source 1DB, 1996. Economic and Social Progress in Latin America distribution of resources and students among primary, secondary, and other education (INATEC, pre-school and adult education) are shown in Chart 4-3. It is evident that expenditures are biased in favor of university education. University students, who represent 3 percent of the total number of students, obtain 33 percent of the resources, resulting in a per 4-3:Dishinofeamtum&NunerofStu&eb university student/primary student expenditure ratio of 14.5:1 or almost two times the average for h.% arSsw Latin America of 7.6:1. Furthermore, 60 percent n% hEDR of the university students belong to the 30 percent highest income group whereas merely 3 percent of them belong to the 30 percent lowest income group. This clearly implies that cost recovery at S--&" the university level must be a priority. However, even if a significant proportion of available P-Wu. l resources were to be redirected to basic education, I . . spending per student would still be significantly 7 6 4 15 0 15 3 1 a) below the region's average. Therefore, in addition to improved resource allocation within the sub-sector, it will be necessary to mobilize additional resources through voluntary parent contributions and by negotiating with donors so that a larger share of aid is allocated to education. 4.22 Investment. The education PIP for 1996 was US$13.4 millionl2 or 23 percent of the sector's budget and consists of 7 programs. The most important program, representing 90 percent of total investment, concentrates on rehabilitating primary level schools. The program is managed by FISE in accordance with MED's technical guidelines and comprises constructing and rehabilitating schools, equipping schools with desks and mini-libraries and organizing School Councils. There is also a " World Bank Staff Appraisal Report, "Nicaragua: Basic Education Project", 1995 12 Including the rehabilitation by FISE of 13 INATEC installations. Nicaragua - Public Investment Review 35 secondary schools microlocation project which will provide the basis for technical-pedagogical study of the current situation of the secondary school network and its expansion needs. Two projects, financed by USAID and by Dutch Cooperation, finance teacher and administrator training, curriculum development and reform for primary education. The IDA project APRENDE supports decentralization, provision of inputs and pre-school programs. The IDB is financing early childhood development and preschool programs. About 85 percent of the funds are from foreign sources (Table 4-3). A small fund of US$0.5 million is for maintenance, but is classified as investment. 4.23 For the 1997-2000 period the PIP is very much the same as the 1996 program. Beyond 1998 however, the figures are not realistic as they exclude future investments by FISE and do not Table 4-3: Ministry of Education 1996 Budget contemplate any expansion in (m mnion of Lss) capacity. The bulk of resources, 80 percent, are from Wages & Goods & Transfers Total Total IDB and IDA credits. The PIP Salaries Services Current Capital TOTAL consists entirely of on-going projects and resources Budget 253 4.1 15.0 444 127 57 1 currently programmed are Total for MED 253 41 44 4 127 57.1 insufficient to achieve MED's Domestc Resources 444 07 45 1 school rehabilitation or grade External Resources 120 12.0 completion targets. MED Source. MED. plans to rehabilitate some 2,000 schools over 1997-98. FISE considers that these targets are too optimistic, as in 4 years FISE rehabilitated only 1,000 schools. MED must develop an investment plan to create the additional capacity that is required to achieve MED's grade completion targets. A planning model that estimates investment needs under alternative quality improvements assumptions is currently being developed and can be a useful tool for future planning. However, the model's implementation has been hampered by the poor quality of the data being supplied by the different departments in MED. Therefore, MED's staff should be trained on the use of the model and its data requirements. 4.24 As in the health sector, foreign financed projects that do not require counterpart funds are excluded from the budget. For 1997-2000 these represent US$15.5 million or about 7 percent of the sector's total resources. 4.25 Project selection and evaluation. At present most investment goes to physical rehabilitation managed by FISE. The project selection follows FISE's processes where resources are assigned to municipalities according to a poverty index. Through a consultation process between MED, FISE and the municipality, towns and villages are selected for school rehabilitation. A pre-investment study is carried out to arrive at a minimum cost design. New classrooms are built only if the costs of rehabilitating existing ones is more than 50 percent of the costs of new classroom construction. MED is finalizing a primary schools microlocation project which will develop a geographical information system that will enable MED to identify school needs based on spatial considerations. Maintenance 4.26 Resources assigned to maintenance are grossly insufficient. MED is responsible for the maintenance of some 5,000 schools. At present, approximately US$0.8 million per year (1.4 percent of MED's budget) is allocated to maintenance whereas MED staff estimate requirements are US$8 million. The deterioration of physical infrastructure is such that in some Managua schools children are forced to use latrines because the lavatories are never repaired. For the next 4 years, FISE is setting up a maintenance fund for 2,000 schools for a sum of US$2 million to be funded by donors. Furthermore, MED has started implementing the Primary Schools Maintenance System (SIMCEP) to 36 Chapter 4. Social Sectors be funded with US$2 million from IDA to maintain 400 schools over 4 years. The remaining 2,600 schools plus MED's central facilities will have to compete for the US$3.2 million of domestic funds. Adding up all resources available results in US$1.8 million per year which is about one fourth of the estimated needs. Decentralization and Cost Recovery 4.27 MED has implemented a very successful decentralization strategy and has succeeded in mobilizing private resources. More than 90 percent of the 154 secondary schools are under an autonomous management structure governed by School Councils (composed by parents, teachers and students) following a model similar to the Salvadoran EDUCO program. Based on this successful experience, MED is pursuing the decentralization of primary schools. Parents' voluntary contributions represent 15 and 20 percent of the recurrent costs per student in secondary and in primary schools respectively. As in health, the legal framework for the decentralization process, and a system that ensures accountability in the use of resources and the preservation of equity consideration are urgently required. While a mechanism to exempt the poorest students is in place (Box 4-1), a systematic evaluation of its effectiveness is still needed. Box 4-1: Financial Aspects of Autonomy Autonomous schools are funded through monthly lump-sum transfers from the Central Government and locally generated resources collected from student fees, community contributions, and school activities. Government transfers --based on student attendance and on average per-student operating costs-- cover base salaries and expenditures associated with routine school maintenance. All secondary schools are encouraged to collect a fee of 10 c6rdobas per month (US$1.22) from each student. Certain students, however --the children of teachers and veterans, poor students and students with outstanding academic records-- can be exempted from the fees. For exempt students, the schools receive a subsidy of 5 c6rdobas per month per student, thus reducing the schools' incentive to grant exemptions. The constitutional provision guaranteeing free primary education prevents primary schools from charging student fees. However, it is customary for primary schools to collect a voluntary fee of 5 c6rdobas per month per student. In 1995, actual average fees were 10.4 c6rdobas for rural primary, 11.4 for urban primary and 12.8 for secondary schools. The percentage of exempt students were 36 percent for rural primary, only 3 percent for urban primary (usually better off) and 9 percent for secondary. Source: Elizabeth King et al, Nicaragua's School Autonomy Reform: A First Look, 1996 4.28 An initial evaluation of the first two years of the reform based on a school-household survey of December, 1995 has been finalized.13 The evaluation found signs that progress is being made in the expected direction. In general, directors, council members, teachers, and parents felt that the reform had improved students' academic performance, teacher attendance, and parents' level of participation in school. However, it was also found that more information and training of teachers and parents was needed to raise their understanding of school issues and their level of involvement. The implementation of a training program, financed under the IDA project, needs to be accelerated. An impact assessment on the quality of service will be available shortly based on the results of achievement tests and of qualitative evaluation based on focus groups and classroom observations which have been recently performed. 4.29 In addition to voluntary contributions, MED has considered recovering costs by charging for textbooks. Under the old centralized system this was difficult, but it may be feasible under the autonomous schools system. This issue should be further analyzed as there are significant benefits to even minimal textbook charges. 13 World Bank, Working Paper Series on Impact Evaluation of Education Reforms, Elizabeth King et al "Nicaragua's School Autonomy Reform: A First Look", October, 1996. A follow up evaluation focusing on the costs of the reform is planned. Nicaragua - Public Investment Review 37 Coordination 4.30 The coordination between MED and FISE has worked well at the technical level, but there have been discrepancies in the priorities for resource allocation. This is to be expected as FISE's allocation criteria is poverty levels, while MED has education objectives in non-poor areas. This has led to tensions in the past. In 1997, FISE and MED reached an agreement whereby MED would select 30 pre-investment projects, but this arrangement is not efficient. Given that FISE manages almost all MED's investment resources it is very important that education objectives be satisfied. One possible solution could be to set aside a pre-specified amount of resources that would be allocated directly by MED, the rest would be prioritized by FISE, while continuing to implement the whole investment package. The fact that there are fewer donors in the education sector than in health, and two donors provide a large portion of the resources, has facilitated donor coordination, especially in support of decentralization. IV. SOCIAL SAFETY NETS The Social Investment Fund (FISE) 4.31 The FISE was established in November 1990, as a temporary social safety net program to help protect and improve the standard of living of marginal social groups during a period of economic adjustment, through the provision of employment and social and economic infrastructure services. FISE is a financing entity with implementation left to private contractors, local bodies and NGOs. During its first 6 years of operation, FISE has managed to attract US$214 million of which US$140 million have been disbursed and the rest is expected to be disbursed over 1997-98. FISE's life has recently been extended to 2002 and additional resources are being mobilized, including a third IDA credit. 4.32 FISE's success can be attributed to its good management and ability to attract donor funding. Applying standard Social Investment Fund procedures, FISE has established a transparent system of resource allocation, accountability of resource use and administrative efficiency. Until recently, administrative costs have been 10 percent of total disbursements, in line with administrative costs of other social investment funds. However, during 1996 there was a significant deterioration in administrative efficiency, which appears to be related to the unusual circumstances of an election year and to the fact that FISE was entering into new areas such as environmental projects, school vegetable gardens, etc. It is important not to overextend FISE as this may hurt its efficiency. 4.33 There are two areas where FISE needs to improve: coordination with and capacity building of municipal governments, and ensuring the sustainability of sub-projects. FISE is aware of these issues and is considering implementation of measures to address them. In the future, FISE expects to strengthen municipal governments by channeling all project funds through the municipalities. Sustainability will be increased by establishing a maintenance system and involving communities in the entire project cycle, while promoting a closer collaboration with NGOs. A recent review of social funds found that to ensure subproject sustainability, appraisal criteria should include: evidence of demand, appropriateness of technical standards, community participation, and local organizational and financial capacity to manage and maintain investments. FISE should consider including the adequacy of operation and maintenance as subproject appraisal criteria. 4.34 Investments. In 1996, FISE's official budget allocation was only US$3.4 million. The bulk of investment resources are budgeted under the corresponding partner line ministry or autonomous public institution. The distribution of investment resources programmed by FISE over 1996-98 is presented in Table 4-4. More than half of the resources are allocated to social infrastructure (school rehabilitation, pre-school centers, health centers and posts, latrines, water and sanitation, and community training programs, - MINSA, MED, FONIF), next in importance is economic 38 Chapter 4. Social Sectors infrastructure (bridges, roads - INIFOM). Until now, FISE has not been involved in rural water in scarcely populated areas, although this is often the main priority for many rural communities. Recently, FISE has reached an agreement with INAA and this important effort will be launched shortly. 4.35 Project selection and evaluation. FISE allocates resources according to poverty and population, with projects selected from a project menu. Project selection follows a two step process In step one, FISE consults local governments and the Municipal Development Committees to select projects according to local priorities. In step two, projects are evaluated and approved. At times, the project proposed by the community is rejected at the evaluation stage and a different project is selected for implementation. However, local governments are not adequately consulted before introducing the changes and this has been a source of frustration. To solve the problem, coordination with the municipalities and the communities during the pre-investment stage must be strengthened (e.g., making project selection an iterative process) while at the same time respecting FISE's project evaluation standards. 4.36 FISE has developed detailed pre-investment manuals that cover all aspects of project preparation. These manuals are provided to project formulators which are hired directly by the project beneficiaries. For water supply and Table 4-4:Public Investment Program for FISE economic infrastructure projects, the Partner 1996 Beyond 1996 approval criteria is an internal rate of return Institutions millions of USS millions ofUSS (IRR) of at least 10 percent. For social sector projects, the criteria is that the INAA 2.3 10.3 project should be within cost parameters set M EN/SATEC 12 05.4 9by FISE in coordination with the respective M ED/INATEC 12.2 45.4 IN 1170 M 9.2 10.7 line ministries. The cost parameters are MARENA 0.1 0.7 reviewed periodically and adjusted for F IS E 3.2 4 .8 geographical variation. While this limits the costs, it says nothing about the benefits. TOTAL 37.8 948 _A simple way to introduce some type of Source- B udget and SNIP. cost-benefit relationship would be to establish a maximum cost per beneficiary in addition to the cost parameters already in place. 4.37 Maintenance. As has been discussed in the previous sections, budgetary allocations for maintenance are minuscule compared to requirements. FISE estimates that preventive maintenance per maintenance cycle (excluding community contributions) amounts to US$2 million per US$50 million of infrastructure stock whereas rehabilitation expenditures -- due to lack of maintenance -- are US$8 million. In the past, FISE has not set in place mechanism to ensure that rehabilitated infrastructure will be maintained. Now it plans to address this issue by setting up a maintenance fund financed with donor resources and managed by the Municipalities in coordination with the line Ministries and the community. While this may provide temporary relief, a permanent solution must still be found. The solution will require that establishment of permanent financial and administrative arrangements at the local level. The Ministry of Social Action (MAS) 4.38 MAS was created in 1993 with a mandate to improve social sector planning and coordination and to monitor the implementation of the Government's social policy and programs. One of the major achievements of MAS has been the widespread organization of local communities by establishing the Municipal Development Committees. These provide the necessary organizational structure to develop demand driven community-based projects such as those financed through FISE. MAS has also developed a modern management information system to track project financing from different sources Nicaragua - Publc Investment Review 39 at the municipal level. However, MAS has not performed its planning and coordinating function and instead has been mainly dedicated to the implementation of projects and programs. In 1996, MAS managed almost 30 programs totaling US$13 million (equivalent to MED's PIP). These include 7 Integrated Rural Development (IRD) programs which were set up initially to assist war victims. The problems of the IRD programs, their lack of coordination and duplication with line agencies, are well known. About one fourth of the funds are allocated to infrastructure, there are no provisions for maintenance, and sub-projects are not subject to economic or incidence analysis. MAS also manages a portfolio of microcredit projects. 4.39 There continues to be an urgent need to fulfill MAS' planning and coordinating mandate. However, the Government may want to consider whether MAS is the appropriate vehicle. An alternative could be to transfer the MAS project portfolio to the appropriate line agencies or INIFOM, close MAS and create in its place a social policy formulating and coordinating body at the highest level of Government with a full time technical secretariat. Alternatively, MAS could retain ministerial rank without portfolio, with limited staff and without authority to execute projects. V. RECOMMENDATIONS Health * Develop a sector investment strategy (with attention to recurrent cost implications) and require that all projects be consistent with the strategy. * Deepen and strengthen the decentralization process to SILAIS and municipalities by establishing the required legal framework, developing a cost accounting system and transferring a larger share of budgetary resources. * Improve cost recovery by continuing to charge for differentiated services at hospitals but complemented with measures to ensure accountability and exemption guidelines to ensure equity; consider the introduction of minimum charges for non-priority programs at primary level and implement measures to increase participation in the INSS. Education * Augment financing for basic education through: voluntary contributions from parents and communities, reallocation of funds designated to universities by introducing a system of cost recovery at the university level, negotiations with donors to increase the share of aid allocated to basic education. * Concentrate investments in the first four grades and develop an investment plan to achieve the Government's education quality improvement goals. * Continue decentralization of school management, establish the required legal framework, adopt formula to transfer allocations to decentralized schools, and train teachers, school administrators and parents to better use and monitor resources at the school level. Social Safety Nets * Care should be taken when deciding on the expansion of FISE's project menu to ensure that its administrative efficiency will not be hurt. * FISE should strengthen community participation in project selection by developing an iterative project selection process and should include adequacy of operations and maintenance arrangements in subproject appraisal criteria to ensure subproject sustainability. * Consider transferring MAS's project portfolio to other ministries or public entities and its planning and coordinating function to a social policy formulation and coordinating body at the highest level of Government. Implement mechanism to coordinate social policy at the municipal level. и Z О � F� U �" � О U и А " Z °' � � ~ и 3 а' ао w U �о �°�3� � ~ е�Э р й� и�� О i••i р и� и и �'i 1 д� Q о�� й �и �.ой .� а _ и .:, .� Г.ту ��U 3 � � �'� ��йи и у � �аа°�°а°a3wxw� � � Н � Annex I Page 1 NICARAGUA Public Investment Review Problem/Sector Policy Priority Actions Institutional Framework Lack of institutional framework to Increase the planning capacity of the High * Institute CONACES or a similar body to prepare a global formulate global and sectoral public sector. economic strategy to provide the basis for public investment strategies. priorities and for coordination of foreign aid. Uneven ability to evaluate projects. * Continue efforts initiated under SNIP to prepare standard High project evaluation methodology. * Strengthen DGIP to assist ministries (and public enterprises) Medium to evaluate projects and to prepare sectoral investment programs. Lack of institutional locus for the Improve budgeting process and High * Create a CONACES-like entity responsible for proposal of formulation of a coherent strengthen dialog between bilateral and policy objectives and for design of macroeconomic policy macroeconomic framework. multilateral donors. and medium-term global strategy. The majority of projects financed by Widen the budgetary coverage to High * Institute standards to assure that all projects financed with foreign aid that do not require include all public investment projects. external resources (including technical assistance) are budgetary contribution are not incorporated in the budget. incorporated in the budget. This High * Centralize control of all external technical and financial makes it impossible to evaluate the assistance, grants and loans in one organization. This distribution of resources. organization could be MIFIN. Weak screening process for public Improve efficiency of public High * SNIP should accelerate the development of standard investment projects. investment. methodology for project evaluation. Medium * SNIP should create committees with high-level and working- level members to ensure methodologies are understood, accepted and used. Lack of timely good quality reports Facilitate the execution of projects, Medium * Ensure that SIGFA and SNIP do not overlap in functions and on project execution due to simplify information reporting and responsibilities. Review draft SIGFA and SNIP laws in duplication in information collection increase the transparency in the use of preparation. and incomplete budgeting of funds. foreign aid. The implications of recurring costs Integration of the formulation of PIP Medium * Integrate the DGIP office in the Ministry of Finance. of the investment program are not to the general budget. Medium * Continue to develop methodologies to calculate recurring considered. costs. NICARAGUA - Public Investment Review Annex 1 Page 2 Problem/Sector Policy Priority Actions Participation of the Private Sector Potential for inconsistencies in Ensure consistency in regulatory Medium * Consider the establishment of a single regulatory entity for regulation, and for regulatory decisions and reduce the possibility of infrastructure. capture. capture. Fragmented legislation for Ensure private sector access in areas Medium * Consider the possibility of introduction of a general participation of private sector. where it may be feasible or desirable. concessions law. Delays in concessions if awarding Ensure transparency and agility of High * Assembly to determine procedure for concessioning but and revoking authority resides with concession. awarding/revoking authority be delegated to appropriate Assembly. level. Power Confusion of planning and Clear separation of policy-making and High * Pass Electricity Industry Law, establish CNE and transfer regulatory roles. regulatory activities. planning functions from INE. High * Draft regulation that gives authority to grant/revoke concessions to CNE or INE but not to the Assembly High level of non-technical losses. Reduce losses to commercially Medium * Implement loss reduction and financial control programs. sustainable level. High * Privatize distribution in Managua. Low margin of capacity over Target use of public funds. Medium * Restrict public investment to the rehabilitation of demand. Momotombo. High * Pass Electricity Industry Law. Encourage private sector generation Medium * Separate ENEL into generation, transmission, and projects. distribution entities; and privatize where feasible Medium * Reduction in non-technical losses (see above). Low * Transparent and competitive system for awarding concessions for geothermal resources. Insufficient access to electricity in Increase opportunities for development High * Revise energy law to exempt isolated systems and areas isolated areas. of isolated systems. without electricity from subsidy to residential consumers. Medium * Ensure distribution concessions define service area in terms of a limited distance (e.g. 500 meters) from existing system. Medium * Develop more rigorous planning for distribution in areas outside of Managua. Inadequate tariffs. Interim tariff policy until new law High * Develop system for allowing variations in cost and quantity passed and implemented. I of fuel to be reflected in tariffs. NICARAGUA - Public Investment Review Annex I Page 3 Problem/Sector Policy Priority Actions Roads Sub-sector The project selection system does Improve the system of evaluation, Medium * Implement a surfaces and roadways administration system. not optimize the efficiency of public selection, and implementation of Medium * Give first priority to the rehabilitation of the principal investment. projects. north/south and east/west export corridors. Low * Give second priority to the improvement of principal production corridors connecting the principal agricultural regions. Medium * Carry out environmental analysis for any project in the Atlantic Zone. Need to improve the efficiency of Promote the participation of private High * Promote small businesses involved in road maintenance, investment. sector in the roads sub-sector. concession a greater proportion of road maintenance, allocate funds for maintenance, and privatize 3 CERCs. Medium * Strengthen MCT's capacity for planning, contracting, and tracking of works. Low * Consider the possibility of concessioning Managua-Masaya highway. Insufficient allocation of resources Increase allocations through the High * Estimate recurring costs of investment. It is estimated that for maintenance and no attention to establishment of the Road Fund. the 1996_program resulted in recurring costs of US$3.2 recurrent costs. million; continuation at the same rate would amount to US$16 million in the year 2000. High * Establishment of Road Fund to be managed by users , private organizations, and national and local Government. The Fund could be financed by surcharges on the price of diesel/gasoline. Ports Sub- Sector Low sector efficiency, decline in Improve efficiency through Low * Liquidate ENAP; transfer its activities to Direccidn General volume of cargo, insufficient decentralization and privatization. de Transporte Acudtico. investment, and over-extension of Low * Prepare legislation that permits the decentralization of ENAP. secondary ports. Low * Pass control of secondary ports to municipalities; privatize national ports. High * If privatization of national ports is not possible in the short term, concession the stevedore services by means of licenses to various companies. NICARAGUA - Public Investment Review Annex ] Page 4 Problem/Sector Policy Priority Actions Ports Sub- Sector (cont'd) Scarcity of public resources Limit investments. High * In the short term perform only necessary rehabilitation, leave investment in national ports to the private sector. High * Let municipalities invest in ports in their jurisdiction, according to their financial capacity. Operating losses of ENAP Improve efficiency. Medium * Losses are due to operative inefficiencies of ENAP; a rise in tariffs is not recommended as this would hurt the competitiveness of ports. It is recommended to restructure the tariffs in order to make them more transparent and in line with international tariffs. Airport Sub-Sector Lack of private sector involvement. Improve efficiency, increase resources. Medium * Explore the possibility of concession of the International Airport of Managua, require that the concessionaire implement the fiscal and operational improvements foreseen in the 1993 Master Airport Plan. Medium * If the concession is not possible on acceptable terms, concession of restaurant services, VIP room, and management of luggage and cargo; and renegociate with existing commercial renters. Public investment. Improve efficiency. Low * Implement only low cost, high impact operational improvements in the first phase of the 1993 Master Airport Plan. Low * Investments in the improvement if the Airdrome of San Juan with public funds are not high priority High * Implement priority investments not included in the investment plan are: a) replacement of microwave network for air control b) improvements in the security program. Interoceanic Canal. Low * Permit feasibility studies by the private sector without promising any type of financial guarantees. Water and Sewerage Regulation, planning and operation Separate regulation, planning and High * Pass water and sanitation law to establish INAA as in a single entity. operation. regulatory entity. High levels of required investment, Decentralize, increase private sector Low * Contract study to determine the viable number of successor low efficiency, lack of response to participation and competition in entities to INAA. Non-commercially viable entities to be customer needs. provision of service. passed to municipal or co-operative authorities with financial autonomy. High * Involve private sector beginning with a management contract for Managua and building up to a concession. 1v-1mYuA - ruouc investment ieview Annex I Page 5 Problem/Sector Policy Priority Actions Education Sector Excessive amounts assigned to Direct more funds to basic education. Medium * Continue to work with the National Assembly on this issue. upper levels in comparison to Educate the public and legislators on the equity implications primary and secondary levels. of high budgetary assignments to the universities. Lack of investment planning. Develop a long term investment plan, High * Develop a long term investment plan based on considering separating rehabilitation from alternative assumptions on quality and efficiency. expansion of infrastructure. Emerging concerns about Improve efficiency and equity. High * Establish a supervision system that ensures accountability in accountability and equity of the use of resources in autonomous schools. decentralization. Medium * Study the equity implications of voluntary contributions at primary and secondary levels. Insufficient funds for maintenance Increase and improve maintenance. Medium 0 Integrate different maintenance funds (FISE, SIMCEP, and variable quality of maintenance. domestic) into one, mobilize additional resources for maintenance. Health Sector Lack of investment strategy. Improve overall planning and High * Design an investment strategy for the sector. Improve the evaluation of projects. methods for evaluating projects, including methods for estimating recurring costs. Medium * Subject new hospital projects to careful economic and social evaluation. Insufficient health insurance Increase the participation in insurance. Medium * Complete legislation and develop plans to reduce evasion. coverage. Decentralization process not fully Improved efficiency in system High * Continue decentralization to SILAIS and municipalities, integrated in health system. delivery. issue legislation to clarify roles at different levels and develop a cost accounting and a supervisory system. Insufficient cost recovery. Develop plans to charge for services. Medium * Introduce minimum charges for non-priority services and develop a system to exempt population unable.to pay. High * Encourage different levels of attention and cost charged depending on the level of service in the secondary health sector but complement with measures to ensure accountability and oversight. Low * Promote the administration of hospitals as independent financial units with shared private/public administration. Insufficient resources allocated to Improve maintenance. Medium * Increase resources for maintenance, implement new maintenance. maintenance policy and develop a technology assessment. NICARAGUA - Public Investment Review Annex I Page 6 Problem/Sector Policy Priority Actions Health Sector (cont'd) Insufficient coordination with other Improve coordination. Medium * Establish coordination mechanisms with central entities such public services. as INAA, and with local providers of other services. Medium * Promote exchanges of experiences among different technical cooperation projects. FISE Deterioration in operational Regain efficiency. Medium * Care must be taken when deciding on expansion of FISE's efficiency. project menu in order not to hurt its administrative efficiency. Insufficient involvement of Improve communication with High * Regularly inform Ministers on project implementation. municipalities and ministries. munitipalities and ministries. * Work closely with the Municipal Development Committees. Pre-investment system does not Improve community consulting High * Modify the current pre-investment system to include more incorporate municipal preferences. mechanisms. complete and interactive consulting mechanisms with communities. Insufficient priority given to Ensure that municipalities and/or Medium * Consider incorporating adequacy of operation and development of maintenance fund. project sponsors are responsible for maintenance arrangements in project appraisal criteria. maintenance MAS Lack of coordination of social Coordinate social policy. High * Concentrate on coordination of social policy and give up policy. project implementation activities. Medium * Consider creating a planning and coordinating entity with full time technical staff in place of MAS. ANNEX 2 STATISTICAL TABLES Tables: I National Accounts, Shares of Gross Domestic Product 2 National Accounts, Annual Growth Rate 3 External Debt Stocks and Flows 4. Public Finance (NFPS) 5 Public Finance (Central Government) 6. Central Government Total Expenditure and Public Utilities Investment Expenditure 1996 (in millions of US$) 7. Central Government Total Expenditure and Public Utilities Investment Expenditure 1996 (As percentage of GDP) 8. External Cooperation 1990 - 1995, Flow of Donations by Source 9. External Cooperation 1990 - 1995, Flow of Loans by Source 10. External Cooperation 1990 - 1995, Foreign Donations and Loans by Sector 11. Allocation of Public Investment Among Major Expenditure Categories Table 1: National Accounts Annex 2 Shares of Gross Domestic Product (percentages calculated using current price data) Base-case (most likely) projection Actual Estimate Projection 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2005 Gross domestic product 1000 1000 1000 100.0 1000 1000 1000 1000 1000 1000 1000 Net indirect taxes 15 5 175 165 171 225 210 21 8 217 217 21 7 217 Primary 303 309 31 1 333 337 338 338 340 340 340 340 Secundary, of which 209 201 206 206 210 209 209 21 4 214 21 4 214 Manufacturing 174 166 170 165 163 163 16.3 163 163 163 163 Tertiary 488 490 482 461 453 453 453 446 446 446 446 Resource balance (X-M) -283 -33 1 -263 -273 -228 -224 -191 -174 -15 8 -140 -85 Exports (GNFS) 20.1 167 197 246 335 398 427 427 427 43 1 423 Imports (GNFS) 484 498 461 51 9 564 622 61 8 601 585 571 509 Total expenditure 1283 133 1 1263 1273 1228 1224 1191 1174 1158 1140 108 5 Total Consumption 1082 115 1 106 1 1023 959 948 910 890 868 847 784 Government consumption 21.3 185 15.4 140 130 159 154 15 1 147 141 118 Private consumption 869 966 907 884 829 790 757 739 72 1 706 666 Gross Domestic Investment 20 1 180 202 250 269 276 280 285 290 293 301 Total fixed investment 183 195 207 25 1 268 274 279 283 288 290 297 Govenment investment 5 1 98 117 147 163 159 145 132 12 1 114 89 Private investment 13 1 97 90 104 106 11 7 13 5 15 3 169 179 21 2 Changes in stocks 1 8 -1 5 -05 -01 01 02 02 02 02 03 04 Gross domestic savings -82 -15 1 -61 -23 41 52 90 110 132 153 21 6 Gross national savings -288 -411 -289 -31 5 -107 -49 42 76 106 13 5 23 3 Memorandum items GDP deflator (annual change) 3764 23 7 20 1 88 11 5 123 100 76 54 40 40 Consumer price index (annual averages) 7,7553 405 204 77 11 2 120 96 74 54 40 40 Consumer price index (end of period) 8650 3 5 195 124 11 1 11 3 74 66 49 3 5 3 5 Total GDP (million current USS) 1,741 1,846 1,808 1,844 1,916 2,029 2,217 2,430 2,661 2,915 4,714 Conversion factor used (C/US$) 43 50 61 68 75 84 92 94 96 98 102 Per capita gross national product 280 310 360 330 390 382 426 464 499 537 762 (Atlas method in 1987 US$) 1 "GNFS" denotes "goods and nonfactor services" 5/28/97 9:57 AM Annex 2 Table 2: National Accounts Annual Growth Rate (calculated from data in constant 1980 prices) Base-case (most likely) projection Actual Estimate Projection 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2005 GDP at market paces -02 04 -02 33 42 55 6.0 63 65 67 67 Primary -41 32 24 102 5 1 56 63 68 73 76 76 Secundary, ofwhich 43 -30 03 30 5.0 50 52 54 5.7 61 60 Manufacturing 65 -5 1 00 10 30 30 3 1 32 32 32 32 Tertiary -08 10 -19 -03 3 1 58 64 65 65 66 65 Exports (GNFS)' -152 202 37 98 148 340 183 78 73 70 70 Imports (GNFS) 198 43 -105 149 62 168 92 63 59 50 52 Total expenditure 97 -24 -48 54 19 06 2.1 56 58 57 5 8 Consumption 11 8 -32 -43 -02 -01 -1 5 0.3 46 5 3 5 5 62 Investment -17 28 -79 409 10.6 89 86 87 76 64 47 Gross domestic income 30 -74 07 53 66 00 37 65 70 72 67 Gross domestic saving -897 2917 81.4 41.3 359 439 274 113 98 99 79 Per capita growth rates Per capita GDP (mp) b -29 -27 -32 -01 0.8 23 28 30 32 34 34 Per capita GNP (mp) -132 -09 05 -84 173 2 82 41 40 43 37 Per capita total consumption 87 -62 -71 -36 -33 -45 -27 14 2 1 23 29 Per capita private consumption 39.7 -38 -74 -28 09 -74 -33 1 3 2 1 2 8 33 1 "GNFS" denotes "goods and nonfactor services' 2. "mp" denotes "market prices" 5/28/97 9:56 AM Annex 2 Table 3: External Debt Stocks and Flows (USS millions at current prices) Base-case (most likely) projection Actual' Estumate' Projection ' 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2005 A. Gross disbursements Public & publicly guaranteed 3450 4040 1570 338.0 2674 231 7 235 1 2370 2040 194 0 160 7 Official multilateral creditors, olw 1810 1840 980 2300 1620 1600 1590 1590 1602 1542 1398 IDA 53 7 736 146 52 1 180 770 700 400 400 400 400 IBRD 00 00 00 00 00 00 00 00 00 00 00 Official bilateral creditors 164 0 2200 590 1080 105 4 71 7 76 1 780 438 398 209 Total LT ' loan disbursements 3450 4040 1570 3380 2674 2317 235 1 2370 2040 1940 1607 Net ST' credit -160 1210 -3650 -1290 00 00 00 00 00 00 00 Drawings from IMF 233 00 00 287 00 00 587 580 00 00 00 Total disbursements (LT+ST+IMF) 3523 5250 -2080 237.7 2674 231 7 293 8 2950 2040 1940 1607 B. Amortizations Public & publicly guaranteed 261 1 35 7 423 1105 5604 538 5 3754 2916 265 5 2625 1310 Official multilateral creditors, alw 157.2 260 33 0 590 87 7 83 8 84 7 966 95 3 95 0 389 IDA 30 07 11 11 26 30 11 11 11 17 73 IBRD 1109 156 150 176 180 129 110 11 8 110 76 00 Official bilateral creditors 1009 67 60 45 5 4647 4464 285 1 190 1 1653 163 3 91 5 Private creditors 30 30 3.3 6.0 80 83 56 49 49 42 06 Private credators nonguaranteed 00 00 00 0.0 0.0 0.0 00 00 00 00 00 Total LT loan amortization 261 1 35 7 423 110 5 5604 538 5 3754 2916 265 5 2625 1310 Repayments to IMF 00 00 00 30 129 94 00 00 29 5 7 00 Total amortization (LT+1MF) 261 1 35 7 423 113 5 5733 5479 3754 2916 2684 2682 1310 C Net disbursements Public & publicly guaranteed 839 3683 1147 2276 -2930 -3068 -1403 -546 -61 5 -68 5 297 Official multilateral creditors, o1w 238 1580 650 171.0 743 762 743 624 649 59.2 1009 IDA 507 729 13 5 510 15 4 740 689 389 389 383 327 IBRD -1109 -15 6 -150 -176 -180 -129 -110 -11 8 -110 -76 00 Official bilateral creditors 63 1 213 3 530 626 -3593 -3747 -2090 -112 1 -121 5 -123 5 -706 Private creditors, ofwhich -30 -30 -3 3 -60 -80 -83 -5 6 -49 -49 -42 -06 1 Historical data from Debt Reporting System (DRS), other data projected by country operations division staff 2 "LT" denotes "long-term," "ST" denotes "short-term " Annex 2 Table 3: External Debt Stocks and Flows (Continued) (USS millions at current prices) Base-case (most likely) projection Actual' Estimate' Projection' 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2005 Total LT ' loan net disbursements 83 9 3683 1147 2276 -2930 -3068 -1403 -546 -61 5 -68 5 297 Net ST ' credit -160 1210 -3650 -1290 00 00 00 00 00 00 00 Net credit from MF 233 00 00 25 7 -129 -94 587 580 -29 -5 7 00 Total net disbursements (LT+ST+IMF) 91.2 4893 -2503 1243 -3059 -3162 -81 6 3 4 -644 -74 2 297 D Interest and charees Public & publicly guaranteed 1956 329 47.5 1250 3645 3069 2073 1832 1760 1644 777 Official multilateral creditors, o/w 1843 22 1 190 33 5 809 722 684 580 490 41 4 178 IDA 34 07 14 16 30 25 26 26 26 26 25 IBRD 1374 99 86 78 102 97 62 31 21 12 00 Official bilateral creditors 103 102 28 1 91 2 2836 2347 1389 125 2 1270 1230 599 Private creditors 10 06 0 4 0 3 00 00 00 00 00 00 00 Private creditors nonguaranteed 00 00 0.0 00 00 00 00 00 00 00 00 Total interest on LT loans 1956 32.9 475 1250 3645 3069 2073 1832 1760 1644 777 Interest on ST credit 50 271 12.5 74 00 20 100 230 250 250 180 Interest on MF drawings 0 2 18 14 13 1.2 16 0 1 0 1 0 1 0 1 00 Total interest (LT+ST+IMF) 200 8 61.8 61 4 133 7 365.7 310 5 2174 2063 201 1 1895 95 7 E External debt (DOD) Public & publicly guaranteed 8,770 8,999 8,770 9,006 9,046 5,648 5,527 5,440 5,262 5,155 4,920 Official multilateral creditors, o/w 991 1,127 1,162 1,312 1,547 1,653 1,597 1,572 1,570 1,572 1,663 IDA 113 182 196 254 276 323 343 365 388 412 560 IBRD 124 104 87 76 65 39 28 19 15 11 2 Official bilateral creditors 5,860 5,969 5,712 5,801 7,072 3,683 3,620 3,558 3,499 3,442 3,188 Private creditors 1,920 1,903 1,896 1,894 427 313 311 310 193 140 68 Private creditors nonguaranteed 00 00 00 00 00 00 00 00 00 00 00 Total LT DOD 8,770 8,999 8,770 9,006 9,046 5,648 5,527 5,440 5,262 5,155 4,920 ST debt 1,859 2,123 1,748 1,962 1,213 417 418 420 422 424 435 UseoflMFcredit 24 23 23 51 39 29 29 50 80 73 57 Total DOD (LT+ST+IMF), o/w 10,654 11,145 10,541 11,019 10,298 6,094 5,974 5,910 5,764 5,652 5,412 Total Arrears 3,804 4,510 4,576 5,815 4,419 2,008 1,971 1,925 1,876 1,822 1,220 Principal arrears 2,502 3,065 3,142 4,038 3,315 1,402 1,371 1,330 1,292 1,254 826 Interest arrears 1,302 1,445 1,435 1,778 1,104 606 600 595 584 568 394 1 Historical data from Debt Reporting System (DRS), other data projected by country operations division staff 2 "LT" denotes "long-term," "ST" denotes "short-term" 3 'DOD" denotes "debt outsanding and disbursed" Annex 2 Table 3: External Debt Stocks and Flows (Continued) (US$ millions at current prices) Base-case (most likely) projection Actual' Estimate ' Projection' 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2005 F. Debt and debt burden indicators Total debt service (USS millions) 462 98 104 247 939 858 593 498 469 458 227 Interest (LT + ST + IMF)' 201 62 61 134 366 311 217 206 201 190 96 Principal (LT + IMF) 261 36 42 113 573 548 375 292 268 268 131 Total DOD ' and TDS' DOD / exports (GNFS) ' ratio 3,042 3,603 2,962 2,432 1,599 755 631 570 507 450 271 DOD / GDP ratio 612 604 583 598 537 300 269 243 217 194 115 TDS / exports (GNFS) ratio 132 32 29 55 146 106 63 48 41 36 11 TDS / GDP ratio 250 54 56 129 463 387 244 18.7 16 1 143 48 IBRD exposure indicators IBRD DS 6/ public loan DS 54 36 26 11 3 3 3 3 3 2 0 Preferred creditor DS / public DS 75 71 59 40 19 20 26 33 33 33 27 IBRD DS / exports (XGS) 66 8 6 5 4 2 2 1 1 1 0 Memorandum items Factor payments / exports (XGS) ratios Interest payments / exports 994 1498 1067 1078 46 1 340 205 180 160 13 8 46 Total factor payments / exports 1026 153 5 1092 1078 50 1 340 205 180 160 138 46 I Historical data from Debt Reporting System (DRS), other data projected by country operations division staff 2 "LT" denotes "long-term," "ST" denotes "short-term" 3 "DOD" denotes "debt outsanding and disbursed" 4 "TDS" denotes "total debt service " 5 "GNFS" denotes "exports of goods and non factor services," which comprises exports of goods, nonfactor services 6 "DS" denotes "debt service " Annex 2 Table 4: Public Finance (at current prices and exchange rates) Actual Estimate Projection 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Shares ofGDP (%) Current revenues 248 285 290 293 288 286 30 1 30.0 300 300 Current expenditures 274 271 259 270 250 25 4 245 239 226 220 o/w Interest Payments 1.2 29 39 52 48 37 65 6 1 5 3 5 3 Budgetary savings -2.5 14 3 1 24 37 3 1 56 6 1 74 79 Capital revenues 02 02 06 03 05 0.3 03 03 03 03 Capital expenditure and net lending 54 100 124 150 153 168 146 13 3 122 11 5 Overall Balance (- = deficit) -7.7 -84 -8 8 -124 -11.1 -13 4 -87 -69 -4 5 -3 3 Sources offinancing 77 84 88 124 11 1 134 87 69 45 33 Official capital grants 119 49 85 65 60 8 1 73 56 39 3 7 Net extemal borrowing 04 10.2 1.3 8 5 42 56 74 46 44 40 Domestic financing -4.7 -67 -10 -26 08 -03 -60 -3 3 -3 8 -44 o/w Central Bank 03 -69 1.5 0.7 39 10 -29 -17 -20 -23 Government Debt (DOD /2 at the end of the year, in (millions LCUs, unless noted)) External debt 37,448 44,995 53,672 60,791 68,321 47,914 50,034 51,603 51,473 51,022 External debt (in USS millions) 8,770 8,999 8,770 9,006 9,056 5,677 5,556 5,490 5,342 5,228 Total government debt (pub and publicly guar) 8,770 8,999 8,770 9,006 98,321 61,481 33,578 33,406 33,007 31,757 Total government debt as percent of GDP 117.9 975 79.3 724 680 1 3590 1682 1462 1287 1Il 6 Tax burden indicators (%) Direct taxes / GDP ' 3 1 3 1 27 24 28 30 3 2 32 32 32 Indirect taxes on domestic G&S'/ GDP 15 2 173 161 174 178 173 176 176 177 178 Indirect taxes on domestic G&S 3 / pn consum 175 179 17.7 197 215 219 232 238 24 5 252 Taxes on intemational trade / merchandise impts 94 93 108 98 104 90 110 110 110 Ito 2 "DOD" denotes "debt outstanding and disbursed" 3 "G&S" denotes "goods and services" 5/28/97 7 47 PM Annex 2 Table 5: Public Finance Central Government Expenditure and Net Lending (As % of GDP) Actual Estimate Projection 1991 1992 1993 1994 1995 1996 1997 Total Expenditure 26.9 28.1 27.5 30.3 31.2 29.7 28.1 Current Expenditure 23.4 22.1 20.7 21.3 19.8 19.6 18.9 Operating Expenditure 187 155 12 9 116 100 11 1 77 Wages and Salaries 11 1 98 74 6 9 6 7 5 5 4 5 o/w Voluntary Retire. comp 3 0 1.4 0.0 0.2 0 7 0 5 0 2 Goods and services 76 57 5.5 4 7 3 4 57 32 Interest payments 1.1 2.9 3 8 5.2 4 8 3 3 6.0 On Domestic Debt 0.0 00 00 0.3 0 2 0 3 0 4 On External Debt 1.1 2.9 3 8 4 8 46 3.0 56 Transfers 3.6 3.7 4 0 4.5 5 0 52 5 3 To rest of General Governme 0.9 10 0 6 0.6 0 5 0 4 0 4 Other 2.7 27 3 4 3 9 4.5 4 8 4 9 Rest of Pubhc sector 0 2 0 3 0 3 0 8 1 1 1.1 0 8 Private Sector 1.2 1.2 1.6 1 7 1 6 1 7 1 3 Umversities 1.2 1.2 1.4 1.3 1 2 1 1 1 4 Abroad 0.1 0.1 0.1 0.1 00 0.1 0.2 CBTs 0.0 0.0 0.0 00 0.5 0 8 13 Capital Expenditure 2.6 5.8 6.6 8.4 10.4 10.1 9.4 Fixed Capital Formation 2.1 3 4 2.5 4.6 5.3 6 0 5 3 Transfers. 0.5 24 4.1 3 7 5.1 4.1 4.1 to Rest of General Government 0.0 00 0.0 0.0 0 5 0 5 0.2 to INSSBI/INSS 0 0 0.0 0.0 00 0.0 00 00 of which to Managua 00 0.0 0 0 0.0 0 5 0 5 0.2 to Public Utilities 02 10 0 1 0 3 0.2 0.2 0 3 INE/ENEL 00 0.8 0.0 0.1 00 00 00 INAA 0.2 0 2 0.1 0 2 0.2 0.2 0.3 to Rest of Public Sector 0.3 0 7 1.3 1.1 1 2 1 1 0 4 to Municipalities 0.0 0.1 0.1 0 4 0.5 0 5 0.2 to Private Sector 00 0.8 2 7 2.2 3.2 23 3 1 Net Lending 0.9 0.2 0.2 0.6 1.0 0.0 -0.2 Source Banco Central de Nicaragua ,IMF and Bank staff estimates Annex 2 Table 6: Central Government Total Expenditure and Public Utilities Investment Expenditure 1996 (in milhons of US$) Institution Current Exp Capital Exp Total Expenditure Total Sub-Total Sub-Total Expenditure not IncL PIP Expenditure Economic Infrastructure 45 129.6 134.0 43.9 177.9 Ministerio Construccion y Transporte (MCT) 446 4992 54.4 21 7 76.1 INAA 000 5049 50.5 164 66.8 ENEL 000 2847 28.5 58 34.3 INE 000 069 0.7 00 0.7 Social Infrastructure L.S 37.3 45.2 22.8 67.9 Ministerio de Acción Social 064 15 60 16.2 6.2 22.4 Ins Nicaraguense de Fomento Municipal 1.13 990 11.0 26 13.6 Inst Nicaraguense de Cultura 118 1 28 2.5 00 2.5 Teatro Ruben Dano 044 013 0.6 00 0.6 FISE 000 323 3.2 19 5.2 Instituto Nic de la Juventud y Deportes 1 11 049 1.6 00 1.6 Instuto Nacional Tecnológico 1 62 0 85 2.5 9 3 11.8 Ministerio del Ambiente y Rec Naturales 1 28 495 6.2 2 8 9.0 INSS 044 0.89 1.3 00 1.3 Health and Education 130-2 30.4 160.6 15.1 175.7 Ministerio de Salud 6344 1776 81.2 14 1 95.3 Mirnsterio de Educación 44 16 11 76 55.9 09 56.8 Consejo Nacional Universidades 22.64 0.85 23.5 00 23.5 Productive 5.6 34.6 40.3 19 42.2 Ministero de Economía y Desarrollo 189 342 5.3 00 5.3 Miisterio de Agricultura y Ganadería 239 1334 15.7 00 15.7 Inst Nicaraguense de Reforma Agraria 0.96 1.95 2.9 1 2 4.2 Ministeno de Tunsmo 0.39 0 27 0.7 0.7 1.4 CONAGRO 0.00 0 59 0.6 0.0 0.6 Prog Nacional de Desarro Rural (PNDR) 000 15 06 15.1 00 15.1 Administration and Public Safety 131.4 10.4 141.7 2.6 144.4 Asamblea Nacional 7.71 0.23 7.9 06 8.6 Consejo Supremo Electoral 26 85 2.50 29.3 0 1 29.5 Corte Suprema de Justicia 7.92 4.47 12.4 0 0 12.4 Contraloria General de la República 1.85 0.00 1.9 0.0 1.9 Presidencia de la República 4.01 000 4.0 0 0 4.0 Mnisteno de Fianzas 8.33 0.15 8.5 02 8.7 Ministerio del Trabajo 1 37 000 1.4 00 1.4 Minusterio de Relaciones Exteriores 14 14 0.00 14.1 00 14.1 Ministeno de Cooperación Externa 101 000 1.0 10 2.0 Mmisteno de Gobernación 27 97 1 50 29.5 0 0 29.5 Procuraduría General Justicia 1 46 0 19 1.6 0 2 1.8 Cons y Gob Autónomos Atlantico Norte y Sur 1.28 0.49 1.8 04 2.2 Ministerio de Defensa 2748 09 28.3 00 28.3 Credit 0.0 15.1 15.1 15.1 Apoyo al BND 000 0.79 0.8 0 0 0.8 Credito Pequena Empresa FNI 000 4.19 4.2 0.0 4.2 Programa Global Cred. Multisectonal FNI 0 00 10 07 10.1 00 10.1 Others 87.2 5.9 93.1 8.8 101.9 Total Expenditure 366.8 263.2 630.0 95.1 725.0 1/ Includes interest payments. Source Presupuesto General de la Republica and PIP Annex 2 Table 7: Central Government Total Expenditure and Public Utilities Investment Expenditure 1996 (As percentage of GDP) Instidution Current Exp Capital Exp Total Expenditure Total Sub-Total Sub-Total Expenditure not Ind PIP Expendture Econonc Infrastnicture 0.2 L:4 .6 L:2 18 Ministerio Construcción y Transporte (MCT) 0 22 2 46 2.7 11 3.7 INAA 000 249 2.5 08 3.3 ENEL 000 140 1.4 03 1.7 INE 000 003 0.0 00 0.0 Social Infrastructure 0.4 1. 2.2 1:1 3:3 Ministeno de Acción Social 0 03 0 77 0.8 0 3 1.1 Ins Nicaraguense de Fomento Municipal 0 06 0 49 0.5 0 1 0.7 Inst Nicaraguense de Cultura 006 0 06 0.1 0 0 0.1 Teatro Ruben Darío 002 001 0.0 0 0 0.0 FISE 000 016 0.2 01 0.3 Instituto Nic de la Juventud y Deportes 0.05 0 02 0.1 0 0 0.1 Instuto Nacional Tecnologico 008 004 0.1 0 5 0.6 Ministerio del Ambiente y Rec Naturales 006 0 24 0.3 0 1 0.4 INSS 002 004 0.1 00 0.1 Health and Education 64 1S- 7.9 0.7 L:7 Ministerio de Salud 3.13 0.88 4.0 0 7 4.7 Munsteno de Educación 218 058 2.8 00 2.8 Consejo Nacional Universidades 1 12 004 1.2 00 1.2 Productive 0.3 1.7 2.0 0.1 2.1 Mumsterio de Economia y Desarrollo 009 0.17 0.3 00 0.3 Minusteno de Agricultura y Ganaderia 0 12 0.66 0.8 0.0 0.8 Inst Nicaraguense de Refoma Agraria 005 0.10 0.1 01 0.2 Ministerio de Tunsmo 002 001 0.0 00 0.1 CONAGRO 000 003 0.0 00 0.0 Prog Nacional de Desarro Rural (PNDR) 0.00 0.74 0.7 0.0 0.7 Administration and Public Safety 6.5 .5 7.0 :1 7-1 Asamblea Nacional 038 0.01 0.4 00 0.4 Consejo Supremo Electoral 1.32 0 12 1.4 00 1.5 Corte Suprema de Justicia 0 39 0 22 0.6 0 0 0.6 Contraloría General de la República 009 0.00 0.1 0 0 0.1 Presidencia de la República 0 20 0 00 0.2 0 0 0.2 Mmisteno de Finanzas 0.41 001 0.4 00 0.4 Ministerio del Trabajo 007 000 0.1 0 0 0.1 Mmisteno de Relaciones Exteriores 0 70 0 00 0.7 0 0 0.7 Ministerio de Cooperacion Externa 0.05 0.00 0.0 0 1 0.1 Ministeno de Gobernación 1.38 0.07 1.5 00 1.5 Procuraduría General Justicia 007 0.01 0.1 00 0.1 Cons y Gob Autónomos Atlantico Norte y Sur 0 06 0.02 0.1 0.0 0.1 Ministerio de Defensa 1.35 00 1.4 00 1.4 Credit 0.0 0.7 0.7 0.7 Apoyo al BND 0.00 0 04 0.0 0 0 0.0 Credito Pequena Empresa FNI 000 0.21 0.2 00 0.2 Programa Global Cred Multisectonal FNI 0.00 0 50 0.5 00 0.5 Others 4.3 0.3 46 0.4 5.0 Total Expenditure 18.1 13.0 31.0 4.7 35.7 1/ Includes interest payments Source- Presupuesto General de la Republica and PIP Annex 2 Table 8: External Cooperation 1990 - 1995 Flow of Donations by Source (millions of US$) Source 1990 1991 1992 1993 1994 1995 TOTAL Donations 439.3 513.3 289.5 336.3 310.1 333.2 2,221.8 L Bilaterals 399.1 454.2 211.8 267.9 244.5 226.2 1,803.8 Eurove 118.5 1609 116.5 108.1 121.3 1598 785.0 Denmark 5.9 167 74 115 168 18.5 767 Finland 92 220 8.7 94 10.6 50 64.7 The Netherlands 86 8 3 70 191 161 334 925 Norway 222 204 16.5 15.8 14.7 186 108.1 Sweden 62.5 390 595 30.5 33 1 348 2594 Others 10.2 54 5 17.5 21 9 30.0 496 183.6 America 279.1 277.4 84 0 127 8 96 8 40.9 906 0 Canada 9.5 130 75 105 9.2 104 602 Cuba 1 1 141 2.0 20 20 27 23.9 USA 268.4 2503 740 1151 830 277 8186 Others 00 00 0.4 02 2.6 0.1 3.4 Africa - - 005 - - - 0.05 Asia 1.5 16.0 11.3 31.9 26.4 25.6 1127 Japan 1.4 154 76 29.5 22.6 21.7 982 Taiwan - 0.2 3.7 2.3 37 36 13.6 Others 0.1 03 00 01 01 0.3 10 IL Multilaterals 40.2 59.0 77.7 68.5 65.6 107.0 418.0 ACNUR 6.1 117 8.4 97 0.1 - 36.1 World Bank - - - - - 39.6 39 6 BCIE - 0.3 0.1 - - 0.4 IDB - 04 32 4.7 30 82 19.6 OPS/OMS 4.8 7.6 7.7 6.2 6.0 5.6 37.9 PMA 5.7 68 62 60 98 84 429 UNDP 36 107 14.0 150 12.8 10.3 66.5 EU 31 16 21.5 79 174 188 704 Others 166 201 162 189 165 162 1047 Source: Mimsteno de Cooperacion Externa. Annex 2 Table 9: External Cooperation 1990 - 1995 Flow of Loans by Source (millions of US$) Source 1990 1991 1992 1993 1994 1995 TOTAL Loans 233.6 538.5 306.1 144.6 327.4 260.5 1,810.6 . Bilaterals 228.2 367.9 124.2 37.8 89.2 83.5 931.0 Europe 225.7 122.7 31.8 17.7 18.3 38 0 454.3 Germany 54 320 19.2 33 25 15 1 776 Austria - 57 - 23 33 1 8 131 Spain 08 752 55 28 86 21 1 1140 Denmark 26 01 03 - - - 30 Finland 18 . 67 29 01 - 115 France 0.5 - - 64 38 - 107 Others 2146 97 01 - 00 - 2244 America - 147.3 23.9 20.1 208 155 227.6 Colombia - 90 - - - - 90 Mexico - 69.0 - - - - 69 0 Venezuela - 693 239 20.1 20.8 155 1496 Asia 2.5 980 68.5 - 501 300 249 1 Taiwan 1.9 60.0 300 - 300 300 1519 Japan - 372 385 - 20.1 - 958 Others 0.6 08 - - - - 14 IL Multilaterals 5.3 170.6 181.8 106.7 238.1 177.0 879.6 World Bank - 55.0 73.6 145 527 152 2110 BCIE 4.2 14.5 186 56.0 728 21 7 1879 IDB - 75.0 814, 305 98.9 1201 406.0 Others 1.1 26 1 8.2 56 136 200 747 Source: Ministeno de Cooperacion Externa. Table 10: External Cooperation 1990 - 1995 Annex 2 Foreign Donations and Loans by Sector (millions of USS) 1990 1991 1992 1993 1994 1995 1990-1995 Productive 203.3 147.0 144.3 136.5 141.2 1058 878.0 Economic Infrastructure 108.1 45.2 67.5 93.7 105.6 105.6 525.8 Social Infrastructure 99.5 108 3 870 102.8 124.5 138.6 660.8 Financial 199.5 714.5 272.0 125.0 234.3 209.5 1,754.9 Other 62.4 36.8 24.8 22.8 31.8 343 212.9 Total 672.9 1,051.8 595.6 480.9 637.5 593.7 4,032.3 Source: MCE Foreign Donations & Loans by Sector (As percentage of total foreign aid) 80 60 0 1990 1991 1992 1993 1994 1995 M Other U Productive U Economic Infra 0 Social Infra 0 Financial Annex 2 Table 11: Allocation of Public Investment Among Major Expenditure Categories (Millions of US $ and Actual as percentage ofPublc Investment Program) 1994 1994 1994 1995 1995 1995 1996 1996 1996 PIP actual (Act./ PIP) PIP actual (Act / PIP) PIP actual (Act./ PIP) Economic Infrastructure 27.7 141.6 511.7 119.6 156.6 130.9 130.7 139.3 106.6 Roads and Transport 27.7 39.6 143 1 40.7 38.8 95.2 50.8 39 9 78 5 Energy 0.0 41.6 . 43.4 46.5 107.2 490 389 79 4 Water and Sanitation 0 0 25.7 .. 30.0 36.0 119 8 28 0 58 0 206 9 Comunications 0.0 34.7 .. . 5 4 35 4 649.8 0 0 0 0 100.0 Others 0.0 00 100.0 0.0 00 1000 28 25 86.5 Social Sectors 20.5 86.3 420.0 81.6 80.7 98.9 65.8 80.7 122.6 Health 113 18 8 167.0 249 205 823 209 303 144.7 Education 18 15 1 827.6 8 7 91 104.9 123 15 2 1239 FISE 00 3 1 . 2.7 27 100.0 32 3 7 1153 Other Social Services 7.5 492 6605 45.3 48.4 1069 293 31 4 107.2 Productive Sector 20.9 51.1 244.2 57.9 61.5 106.3 54.1 72.2 133.5 Administration and Gene 4.8 4.5 94.4 6.3 4.2 66.8 3.1 5.6 179.7 Defense 00 04 100.0 00 00 1000 00 00 1000 Total 74.0 283.5 383.4 265.3 303.1 114.2 253.6 297.8 117.4 Source: SNIP, Programa de Inversiones Publicas Nicaracua-Pubhc Investment Review BIBLIOGRAPHY Albano, Osvaldo (1995), Programa 'Sistema Integrado de Gestión Financiera, Administrativa y de Auditoría - SIGFA. 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