Bolivia - Public sector expenditure review with a special emphasis on the social sectors

Report No. 7746-BO Bolivia Public Sector Expenditure Review with a Special Emphasis on the Social Sectors September 15, 1989 Latin America and the Caribbean Region Country Operationis Division I Country Department 111 FOR OFFICIAL USE ONLY < -m S _ > \~~~~~~~V Doueto heWrdBn Thsdcmn a etrce itiuinadma eue yrcpet Douen dicose wthou World Bank atoiain  Fiscal Year January 1 to December 31 Currency Equivalents Currency Unit: Boliviano (Bs) Exchange Rate Effective December 31, 1988 US$1.00 = Bs 2.45 BS 1.00 = US$0.41 ABBREVIATIONS CBF - (Corporaci6n Boliviana de Fomento) National Development Corporation COMIBOL - (Corporaci6n Minera Boliviana) State Mining Company CONES - (Cons3jo Nacional de Construcciones Escolares) National Council for School Constcuction ESF - Emergency Social Fund IBSS - (Instituto Boliviano de Se-uridad Social) Bolivian Institute of Social Security IDA - International Development Association IMF - International Monetary Fund MEC - (Ministerio de Educaci6n y Cultura) Ministry of Education and Culture MINPLAN - Ministry of Planning and Coordination MPSSP - (Ministerio de Prevision Social y Salud P6biica) Ministry of Public Health and Social Security NEP - New Economic Policy, Bolivia's 1985 adjustment policy package RDC - Regional Development Corporation (Corporaciones Regionales de Desarollo) SENAC - (Servicio Nacional de Caminos) National Road Service SENXl - (Servicio Nacional de Educaci6n Ticnica) National Technical Education Service SSS - Social Security System SAFCO - (Sistema Integrado de Administracifn Financiera y Control) Integrated Financial Administration and Control System TGN - (Tesoro General de la Naci6n) National Treasury UDAPE - (Unidad de Analisis de Politicas Econ6micas) Policy Analysis Unit in MINPLAN UNICEF - United Nations' International Children's Emergency Fund WFP - World Food Program YPFB - (Yacimiencos Petroliferes Fiscales de Bolivia) State Petroleum Company  FIOR OFFICUL USE ONLY This report is based on the findings of missions in December 1988 (main mission), November 1988, and July 1988 (preparatory missions). The mission participants were Steen Jorgensen (Mission Leader), Mary Barton, Dan Newlon and William Shaw with assistance from Juan C. Aguilar and Julie VanDomelen of the Resident Mission. Background papers and notes were produced by M. Grosh (Health), D. Newlon (Education), W. Schultess (Social Security). UDAPE (Fiscal Performance 1980-87) and J. VanDomelen (NGOs). D. Cortijo coordinated the production of the report. This document has a restricted distribution and may be used by recipients only in the performance of their official dutie. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS Page No. SUMK ARY AND CONCLUSIONS ........................................... i-vii INTRODUCTION ................................................... 1 PART I: PUBLIC SECTOR EXPENDITURES 1980-1987 CHAPTER I. BACKGROUND ............................................. 4 A. Crisis 1980-1985 ................................... 4 B. Stabilization 1986-1988 ............................ 5 CHAPTER II. INSTITUTIONAL ISSUES .. 7 A. Organization of the Public Sector ..................7 B. Budget Procedure ................................... 9 CHAPTER III. THE PUBLIC FINANCES 1981-87 ............................ 13 A. Non-financial Public Sectcr ....................... 13 - Financial Flows ................................. 13 - Revenue ................................. 14 - Expenditures ................................. 15 - External Accounts ............................... 16 - Transfers ................................. 17 B. Central Administration ............................ 19 C. Regional and Local Governments .................... 21 D. Conclusions .22 CHAPTER IV. FUNCTIONAL DISTRIBUTION OF EXPENDITURES .23 A. By Sector .23 B. Expenditures by Type .28 C. Conclusions .30 PART II: THE SOCIAL SECTORS CHAPTER V. PUBLIC SECTOR INVESTMENT REVIEW . .31 A. Management of the PSIP .31 B. Implementation of the 1988 Program .32 C. The 1989 Investment Program .33  -2- Page No. CHAPTER VI. HEALTH .......................................... .37 A. Institutional Structure . . 37 B. Sources of Funds ....................., 39 C. Importance of the Private Sector .43 D. Distribution of Type of Expenditures .... ........ . 45 E. Wage and Income Developments .48 F. Efficiency in Health Care .49 G. Equity Considerations .51 H. Conclusions .53 CHAPTER VII. EDUCATION .. 55 A. Institutional Structure .55 B. Expenditures in Public Education .55 C. Efficiency Levels in Bolivian Education .59 D. Educational Equity in Bolivia .61 E. Conclusions .63 CHAPTER VIII. SOCIAL SECURITY ........... : ............................ 65 A. Institutional Description .65 B. Financing .65 C. Expendituress........ 66 D. Equity ............... 67 E. Conclusions ....................................... 67 CHAPTER IX. PROJECTIONS . ............................. 69 A. Assumptions ......................... ......... .. c .69 B. Results for Sectoral Distribution ................. 73 C. Expenditiures by Category .. 76 D. Conclusion ....................................... 77 ANNEX: Bibliography TABLES III.1 Financial Flows: Non-Financial Public Sector .14 IIi.2 External Position of the Non-Financial Public Sector 17 III.3 Financial Flows: Local & Regional Governments .21 IV.1 TGN Expenditures by Sector .24 IV.2 Real Expenditures by General Government .26 V.1 Execution of the Investment Programs .32 V.2 Investment Program . 34  -3- Page No. VI.1 Public Funding of the Health Sector .................... 38 VI.2 Shares of MPSSP Funding by Source .................. .... 39 VI.3 TGN Support to MPSSP ................................... 40 VI.4 Percent Share of Social Security Expenditures in GDP ... 42 VI.5 Health Expenditures Per Capita by Organization, 1988 ... 44 VI.6 Health Infrastructure by Operating Organization ........ 45 VI.7 MPSSP Expenditures by Category ......................... 46 VI.8 Share of MPSSP Expenditures by Destination ............. 47 VI.9 Expenditures of Social Security on Medical Services .... 48 VI.10 Number of Consultations per Staff per Hour by .......... 50 Three Types of Organizations in Cochabamba VI.1l Distribution of Health Facilities among Poverty Areas..52 VI.12 Requests by MPSSP and NGOs from ESF for Health ......... 52 Projects by Poverty Area VII.1 Public Expenditures on Education in Bolivia ............ 56 VII.2 Comparison of the Real Income of Teachers .............. 57 with Real Per Capita.n Income: 1980-1987 VII.3 Bolivia: Ministry of Education Budgets by Level ........ 58 VII.4 Different Estimates of Number of Public ................ 60 Schools Teachers VII.5 Repetition, Drop-Out and Promotion Rates ............... 61 for Students in 1987 VII.6 NGO Targetting in Education through ESF's 1988 ......... 62 Expenditures in Formal Es oation VIII.1 Revenues, Expenditures and Coverage of the ............. 65 General Pension System IX.1 Non-exogenous Variables .. 71 FIGURES 11.1 Organization of the Public Sector . . . 8 III.1 Intresectoral Transfers (1981-1987) . .8.......... l III.2 Financial Flows: Central Administration ................ 20 IV.1 Central Government Expenditures by Sector . . 25 IV.2 TGN Expenditures in the Social Sectors . . 26 IV.3 Real Expenditures by Type of Expenditures . . 29 VIII.1 Real Expenditures: Social Security ..................... 68 IX.1 Fiscal Envelope .............. 70 IX.2 Flow Chart for Determining Projected Growth Rate ....... 72 JX.3 Current Expenditures By Sector 1987-2000 . . 73 IX.4 Current Expenditures in Education 1987-2000 .. 74 IX.5 Current Expenditures in Health 1987-2000 . . 75 IX.6 Distribution of Current Expenditures ................... 76 MAP IBRD 20516  S=IAY AND CONCLUSIONS 1. This report analyzes public sector expenditures during the 1980s, covering two distinct periodst the economic crisis (1980-85) and the stabi- lization/adjustment program (1986-88). The goals of this study are: (i) to establish how public expenditures affected economic performance; (ii, to determine the extent to which expenditures changed to reflect new priorities with the introduction of the adjustment program in August of 1985, i.e., diminishing the role of the public sector, and increasing spending in the social area and on operation and maintenance in general; and (iii) to analyze the administrative procedures in budgeting and planning. The analysis is focused on Government expenditures, with a special emphasis on the social sectors. This emphasis reflects the poor state of social well being in Bolivia, coupled with a stated objective of both Government and external financiers to improve the efficiency and equity of social service delivery, as a top priority. Furthermore, there are immediate policy issues in the social sectors which should be highlighted. 2. This report is divided in two parts. Part I deals with overall public expenditures. First, the macroeconomic background ar.d its effects on the public sector are reviewed. Second, the financial flows of the non- financial public sector are analyzed in terms of revenues, expenditures and transfers. Third, the functional distribution of expenditures in general government is analyzed in greater detail, though, regrettably, a sectoral distribution is only available for central government. Finally, the public investment program for 1989 is reviewed and implementation of the 1968 program is analyzed. In Part II, social sector expenditures are reviewed, including an analysis of health, education and social security. Finally, current expenditures are projected until the year 2000, to show the shifts among sectors and type of expenditures that would be needed to obtain an allocation of expenditures on social sectors equivalent to that of the other lower middle income countries. Each chapter contains a conclusion and recommendations section. The major findings are summarized below. PART I A. Economic Framework 3. The Bolivian economy deteriorated rapidly and continuously from 1980 on, reaching a point of total chaos by 1985. The causes are very clear in retrospect: in the seventies, an artificial boom fed by capital inflows, above all from commercial lenders, followed the discovery of substantial hydrocarbon resources, and lasted as long as access to financial resources was easy. When ttie situation changed around 1980, for both internal and external reasons, economic performance deteriorated sharply. Net foreign transfers became strongly negative, GDP fell in real terms year after year, capit&l flight accelerated, and economic policies became erratic and inconsistent. By September 1985, inflation had reached 24,000 a year, GDP per capita had fallen by more than a fifth since 1980, and public sector deficits were around one fourth of GDP. 4. A major cause of Bolivia's poor performance and of its current deep-seated structural problems is the size, complexity, and poor management of the public sector. In terms of sheer size the public sector dominated  and crowded out private sector activity. Its involvement in productive activities was one of the largest in the non-communist world. The public sector expanded following the 1952 revolution, which had as a central premise a sharp increase in the state's role in virtually all aspects of the e:onomy and society. In the succeeding decades, nationalizations were widespread, public enterprises grew (yet were generally run very poorly) and the central administration was inefficient and often corrupt. 5. When the Government of President Paz-Estenssoro took office in August 1985, an orthodox, wide-ranging stabilizati-e package was introduced. The package included freeing most prices, deregulating the trade system and the labor market, establishing a uniform exchange rate (determined through daily auctions) and cutting public sector deficits. Results were immediate: inflation was 112 in 1987 and 21? in 1988, and has been around 6? at an annual rate in the first six months of 19e9; public sector deficits have been brought under control; and the exchange vate has remained unified. Growth took longer to occur, as Bolivia faced serious negative terms of trade shocks in the first year of the program. However, the economy grew, albeit slowly, in 1987 and 1988. 6. The effects of the economic program on the public sector were dramatic. The Government set out deliberately to introduce a fundamentally different view of the public sector. The public sector's role was viewed as prc-,iding basic public services efficiently, engaging in only limited extraction and processing of natural resources, and otherwise providing a "level playing field' for the private sector. The state mining company was closed for restructuring and 902 of the employees were fired, publt' sector salary policy was left to individual entities under a fixed wage tuill, and important reforms were initiated to establish a better accounting and control system in the public sector. B. Financial Flows of the Public Sector 7. In 1984, general government revenues could only cover about 20? of total expenditures, reflecting the total breakdown of fiscal control. The effects of macroeconomic marpgement were plainly reflected In the financial flows of the non-financial public sector. Prior to the 1985 watershed, revenue from both domestic sales and taxes dropped sharply in real terms, as the revenue base was eroded by inflation. Net transfers from state enter- prises to the central government became negative. Expenditures were not brought under control. As shoes of GDP, investment expenditures fell some- what as did purchases of goods and services, while personnel costs remained fairly stable, reflecting an inability to reduce the number of public sector employees. 8. . Immediately after the stabilization program was introduced efforts were launched to put public finances on a sounder basis. Domestic prices of hydrocarbons were raised and clearer taxation rules were established for the state petroleum company, resulting in immediate increases in revenues. The abrupt halt to inflation also helped increase the real value of revenues. In 1986, after a hard fought political debate, a far ranging tax reform was approved by Congress. The reform included an overhaul and simplification of the tax system and the introduction of a 10? value-added tax. The new  - sii - system began to be put into effect in 1987 and by 1988 the reform had achieved a significant increase in revenues. Neverth.eless, improved administration of the system remains an important goal of Government policy. 9. Bolivia has long benefitted from substantial external assistance and support. During the economic crisis, hoiever, external funds were severely reduced. The limited fttnds that were committed were often not used because the administrative apparatus for both public investment and finan- cial control did not work. The 1985 economic program encouraged an increase in external support; substantial new aid commitments were made, many of which for quick disbursing assistance. Even so, real transfers were still impeded by administrative bottlenecks, until a coherent Government effort began to reverse this situation in 1987 and 1988. As Bolivia continued not to pay its commercial creditors, net resource transfers from abroad became positive again in 1986. The terms of trade shocks, however, did cause revenues from foreign sales to fall. This situation was made worse on a cash basis, as Argentina built up substantial arrears on its payments for Bolivian exports of natural gas. 10. A fundamental shift in fiscal policy is evident from the financial flows. Before 1985. fiscal policy was essentially passive, reacting to demands from politically powerful pressure groups by increasing certain expenditures, while not pursuing an aggressivt revenue policy. Since 1985 Bolivia has followed a more active and prudent fiscal policy. Expenditures have been brought under control and revenue has been raised. New revenue sources were found (tax reform) when other sources disappeared (hydrocarbons and tin exports). C. Functional Distribution of Expenditures 11. From 1980 to 1985 expenditures of the central government fell in real terms. Analyzed by sector, the social sectors and defense (from 1982) were especially hard hit. Since 1985 social expenditures have increased together with infrastructure and defense, while support for local and regional governments and transfers to the rest of the public sector have fallen. One significant trend is that social sector expenditures fell in real terms during the crisis, and have increased every year since 1986. This implies, in terms of social expenditures, that Bolivia has suffered much less a "social cost of adjustment" than a "social cost of the crisis". This does not imply that there have been no social costs of the adjustment, only that a cost in terms of cuts in social sector expenditures prompted by adjustment policies per se is not reflected in aggregate expenditure patterns. 12. Among expenditure categories there are significant changes from year to year, but the pattern of Government expenditures is strikingly similar in 1980 and in 1987. In the period between 1980 and 1987, invest- ment and purchases of goods and services have been positively correlated with total expenditures (excluding transfers) while personnel costs remained relatively stable in real terms, independently of the available resources. This was the case in both central, local and regional government entities. From 1980 to 1987, personnel expenditures as a share of total expenditures fell marginaliy (from 45? to 431 of total) at the expense of investment  - iv - etpenditures. Debt service paid has fallen slightly as a share of expen- ditures (from 192 to 172), even though the payments in local currency terms were boosted by the large devaluation in 1985. 13. Expenditure allocation among sectors and categories does not appear to follow from a consistent strategy following the 1985 economic program any more than before 1985, even though the overall level has been brought under control. In its strategy documents the Government states that it is committed to diminishing the role of the public sector overall, while improving social services and infrastructure. Expenditures still appear to be governed largely by the general inertia of the public sector. Even where expenditures patterns changed as a result of specific efforts and policy decisions, there has been a marked tendency for patterns to revert to what they were before the crisis. Only the substantial increases in social expenditures since 1986 clearly reflect new strategic initiatives. In sum, the Government has not yet been able to introduce the fundamental reforms necessary to shift expenditures among categories or sectors, according to a longer term strategy; changes in the overall pattern of public sector spending have thus been gradual, and major further efforts to better manage public expenditures are required. D. Public Sector Investment Program (PSIP) 14. Recent reforms in the management of the PSIP have resulted in improved implementation and a reasonably sound investment program for 1989. The strengthening of the management of foreign sources of financing and of the PSIP helped boost implementation in 1988. Implementation, however, varies from sector to sector and some of the improvenent in implementation is due to investments being made that were not in the original 1988 program, particularly investments by regional governments. The program for 1989 is too large, with investments in 1989 programmed to be 512 higber than in 1988, and a core program of Friority projects has not been identified. The Government needs to continue the efforts to strengthen the investment plan- ning and monitoring process building on the efforts already undertaken to let the investment budget reflect stated priorities and strategies. PART II E. Social Sectors 15. Health services have long been and remain relatively weak and underfunded in Bolivia; these problems are aggravated by the fragmentation of both services and sources of financing. The organization of the health sector is complex. There are four main s'-b-sectors delivering health services: (i) Ministry of Health, (ii) Social Security system, (iii) non- governmental organizations (NGOs), and (iv) the private for-profit sector. Social Security provides health services for its members and their families, and covers about 212 of the population. The Ministry of Health is, in theory, supposed to cover the rest of the population. However, more than 300 NGOs are active in the health sector, at times under agreements with the Ministry. NGOa accounted for about 202 of health expenditures in 1988 and are mainly concentrated in the peri-urban and rural areas. In the three largest cities, NGOs operated 232 of all health facilities. The private for  profit sub-sector operated 35Z of the same facilities, but otherwise no reliable estimate of its coverage is available. NGGs and the Ministry are involved in primary, secondary and tertiary health care, while the Social Security system is involved only in non-primary health care. 16. Sources and uses of funds for health vary from sub-sector to sub- sector. In the Ministry of Health the sources of funds are supported from the Treasury (around 502 in 1988), international support (222), and cost recovery (282). The share of cost recovery and international assistance has increased over the past few years. The Social Security system is financed by payroll taxes and Treasury subsidies. NGOs are mainly financed by private and public international donors and by the Ministry, which pays salaries of employees in the centers run by NGOs. On the uses side of the ledger, there has been a shift in the structure of expenditures towards curative services in the Ministry's sub-sector. The share of salary expen- ditures has fallen over time, but still remains the largest single category (about 802). In the Social Security system, salary costs cover about 75? of all expenditures. Very limited funds have been set aside for maintenance and investment in either system; this is evidently a key problem in looking to the medium- and long-term. 17. In terms of overall efficiency in service delivery, NGOs appear to be most efficient in all categories. In terms of equity, infrastructure is well distributed with fewer people per establishment in the poorer (rural) provinces. However, many of these rural centers have very poor equipment and staff, if any at all. Based on the distribution across poverty areas of the requests for funding from the Government's unit which is working to alleviate the socJal costs of the crisis (the Emergency Social Fund), the non-religious NGOs appear to have the best record in terms of equity, followed by the Ministry and finally the church-affiliated NGOs. 18. In conclusion, the health sector suffers from a lack of coordina- tion and low levels of public funding. The four sub-sectors work indepen- dently, with little or no coordination. This results in duplication of services, and very low usage rates of infrastructure. The Government is taking steps to improve coordination and planning among NGOs and the Ministry's agencies at the local level in four urban areas, supported by IDA under the Integrated Health Development Project. Recommendations include for this effort to be extended to all of Bolivia. In the Ministry of Health, budget procedures need to be strengthened and follow-up systems introduced as a matter of priority. In Social Security, the many individual units should be combined to assure more efficient and equitable service delivery. The Government's plan to establish a Social Investment Fund. building on the positive experiences of the Emergency Social Fur.d, should be supported. The new fund will be under the policy guidelines of the social sector ministries to assure coordination, while continuing to respond to demands for funding from NGOs and community groups. 19. Public expenditures on education reflect both the complex institu- tional set-up and the absence to date of a coherent policy approach to much needed sector reform. There are several sub-sectors in education: (i) the public system, (ii) NGOs, and (iii) the private for-profit sector. The private for-profit sector covers up to 222 of the school age population.  - vI - The public education system in Bolivia is in very poor shape. Teachers are poorly paid even though their income has improved recently. Many teachers do not have formal training. Almost all of the public funds spent in educa- tion go to teachers' salaries. The number of teachers paid is 20Z higher than the number of teachers that the Ministry of Education claims are teaching. 20. Drop-out rates are high, especially in the higher grades. Repeti- tion rates are very high, resulting in very inefficient education where each child spends on average more than a year and a half to progress one grade. Student/teacher ratios are low by international standards, but whether this is reflected in better attention for each child is highly questionable; instead, it probably just reflects inefficiency. On average, the public education system spends over 10 times more per child than the largest NGO. At the same time, several communities have asked the same NGO to manage their school system, indicating a perceived better quality in the education offered by this NGO. In terms of equity the public system is divided into a rural and an urban system, where there is a clear bias against the rural system even though education indicators are worse in rural areas. 21. Recommendations. It is important that the Government remove the division between the urban and rural systems within public education. The Government should consider giving management contracts to NGOs in certain areas where the communities ask for them. The number of teachers on the payroll should be verified and probably cut to reflect more accurately the number of teachers actually teaching. Bonus systems should be introduced to establish incentives for teachers to educate themselves and for raising the sttxdent/teacher ratios. 22. The pension component of the Social Security system is administered by more than twenty individual entities and covers only a small part of the population. Sources of funds are payroll taxes and treasury subsidies. * Administration expenditures are high; in sotae of the smaller entities as much is spent on administration per pensioner as the pensioner receives. Coverage is limited to the public sector and to parts of the urban formal sector, resulting in serious equity problems. Within the covered popula- tion, pension payments differ by a factor of five among the highest and lowest paid recipients. The report recommends that, the system should be unified to lower costs and allow the introduction of cross-subsidies to improve equity. Subsidies from the Treasury should be eliminated and coverage offered to larger parts of the populution. G. Expenditure Projections to the Year 2000 23. Bolivia facss a difficult task in achieving an appropriate level and distribution of expenditures in the social sectors. To illustrate the problems involved, projections of the total level of expenditures (based on expected levels of revenues and financing) were prepared for the period 1989-2000, along with simulations of different distributions of expendi- tures. A number of interesting points emerge from the projections: (i) Bolivia could increase its social expenditures to equal the same share of GDP as the average of middle income countries, but only by severely reducing  - vii - the share of other sectors, for example, by keeping defense expenditures constant in real terms throughout the period: (ii) if the state continues to allocate 52 of revenues to the universities, they would consume more than a third of total education expenditures by the year 2000, clearly a disproportionate share; (iii) the Government's goal of increasing spending on materials in both infrastructure and social sectors (ulth a view to improving operations and maintenance in those sectors) is possible, but only through severely restricting increases in the wage bill. Thus, the Govern- ment faces very serious political choices if it wants public sector expendi- tures to reflect its announced strategy. Conclusions and Recommendations 24. The Bolivian Government has achieved its stated objectives in terms of diminishing the overall size of the public sector and increasing spending on social services. Fiscal management on the revenue side has been prudent, substituting new sources of revenue when other sources failed, and overall spending has been under control. In the social sectors spending has increased substantially since 1986 while relatively more is being spent on materials and services and less on wages. However, the social sectors are still very underfunded compared to such sectors in other lower middle income countries. Jnder presently projected fiscal revenue, it is highly unlikely that spending would be able to reach comparable levels in this century. The social sectors are furthermore plagued by serious management and equity problems, which increased spending will not solve. 25. There has been no fundamental shift among types of expenditures, indicating that the Government has not been able to fulfill its goal of diminishing the share of wage expenditures while increasing the share of maintenance expenditures. This points to a serious issue of lack of consistent expenditure management; the budget process in particular needs special attention. As it is now, the budget is worked out each year, for a one year period, through negotiations with each agency. The process permits precious little attention to the bigger picture and medium-term objective, and choices. It is important that major political groups agree on a clear set of priorities, in order for them to be integrated into the budget. With the success of the stabilization effort, Bolivia's short-term crisis is over, and it is time to focus on how to bring Bolivia's public sector into the twentieth century, before the century is over.  INTRODUCTION 1. This report analyzes public expenditures during the 1980s, cover- ing two distinct periodss the economic crisis (1980-85) and the stabilizA- tion/adjustment program (1986-88). The report falls in two parts: (i) a description of public expenditures from 1980-1988 as aggregated as the data allow, and (ii) a more detailed analysis of revenues and expenditures in the social sectors (health, education and social s0curity). 2. This review is the Bank's third review of issues for public expen- ditures in Bolivia. We expect to continue such reviews on an anniual basis, with a specific focus for each exercise. The first of the previous two reviews was completed in December 1986. It assessed the basic status of the public investment program. The second review, published May 1988, concentrated on implementation issues for management of the public invest- ment programming process. The investment management themes are followed up in Chapter V of this report. A. Overview of the Report 3. Part I of this report, covering Chapters I through V, starts by setting the issues in the context of the macroeconomic background and ise effects on the public sector. Chapter II analyzes a set of institutional issues, describing the organization of the public sector and analyzing the budget process, using as an example the procedures used for the 1989 budget submission. Chapter III describes and analyzes financial flows for the public sector. First, the overall flows of the non-financial public sector are analyzed with special attention to intra-sectoral tran3fers and foreign net transfers. Secondly, the financial flows of central administration and regional and local governments are briefly analyzed. Chapter IV focuses on expenditures exclusively and analyzes their functional distribution; first in terms of dlstribution across sectors and secondly by type of expendi- ture. Unfortunately, due to data limitations, analysis of expenditures by sector is only possible at the level of central government; for general government (i.e., excluding state enterprises) the analysis is limited to axamining the distribution of expenditures by type. Finally, Chapter V analyzes t1:e public sector's investment program in terms of: (i) institu- tional issues, (ii) implementatior; of the 1988 program, and (iii) analysis of the 1989 program. 4. Part II, which covers Chapters VI through IX, analyzes expendi- ture, in the social sectors in greater detail. Chapter VI analyzes the health sector, for which the most complete information is available. The chapter includes analyses of the institutional structure, sources of finan- cing, importance of the private sector, distribution by type of expendi- ture, wage and income developments, and efficiency and equity issues. Chapter VII covers education with emphasis on institutions, and distribu- tion of expenditure, as well as a first look at efficiency and equity issues. Chapter VIII deals with the pension part of the Bolivian social security system covering the same issues as the previous chapter, but based on rather inadequate data. Finally, (Chapter IX) a set of projections are presented. The projections demonstrate what Bolivia needs to do to reach the average of social sector expenditures currently found in lower-middle income countries by the year 2000.  - 2- B. Objectives of the Report 5. As this report is the first of the Bank's reviews to focus on current as well as capital expenditures, the report will provide a descrip- tion and analysis of the development of both sets of expenditures from 1980 to 1988. Current expenditure issues are important in their own right as they cover about 802 (1987) of total public spending. Furthermore, it is important to develop our knowledge of their development and management to establish a base for future studies of the interrelationships between recurrent and investment expenditures. 6. The main objective of Part I is to analyze public expenditures from 1980 to 1988 and their relationship with economic performance and economic policy. Specifically, Part I analyzes the following questions: (i) What are the lessons from the crisis years? (ii) How was the balancing of the fiscal accounts achieved? (iii) How well are the following goals of the stabilization/ adjust- ment program being fulfilleds (1) Cutting the size of the public sector, (2) Increasing spending on public goods such as education, health and infrastructure, (3) Increasing spending on operations and maintenance, and (4) Rationalizing expenditure decisions. 7. The answern to questions (i), (ii) and parts of (iii) are provided in Chapter III. The analysis of the sectoral shifts and among types of expenditures is covered in Chapter IV. The question of rationalization of decision making is covered for the overall budget process in Chapter II and for investment decisions in Chapter V. 8. The objective of Part II is to enhance our knowledge of the workings of the social sectors, which have been identified as an important bottleneck to sustainable and equitable growth in Bolivia. Immediately following the introduction of the stabilization policies, important policy efforts were needed to improve the balance of payments, either through increased exports or through assistance in financing the current account deficit. This immediate crisis is now under control and the focus is shifting to more longer term developmental goals of sustainable growth and poverty alleviation. One of the important obstacles to growth in the longer run is the poor state of Bolivia's human capital. Health and educa- tion indicators are among the worst in the hemisphere and are showing no signs of improving. The social sectors also have an important role to play in providing the social services necessary to improve the standard of living for the poor, to enable them to pull out of their present destitute situation. 9. Important sectoral problems exist in the social sectors, which if solved, could have a substantial impact on the quality of life in Bolivia. In health there is continued emphasis on curative care, which combined with high rates ox cost recovery, has negative distributional effects. In education, the wage bill continues to swallow up the majority of spending while individual salaries remain low. Further problems are related to the  earmarking of a large percentage of the education budget to universities. This practice would also have negative distributional and growth conse- quences as basic education problems would remain unsolved. Most of the solutions to these (and other) problems have the feature that they do not require additional resources yet and could have positive effects on both equity and efficiency. 10. An analysis which pushes our knowledge of the social sectors further has important audiences. Bolivia is at the center of the debate over the social cost of adJustment, and thus it is important to look at how social expenditures were treated through the crisis nd subsequent stabili- zation. The main political parties in Bolivia and the major foreign financiers have all expressed a desire to put poverty alleviation, and thus social sector issues, high on their agenda. Within the Bank, the focus on poverty issues has resulted in a series of studies of the social sectors. The analyses in this report will enhance our general knowledge of the sectors and will allow regional comparisonsl 1/ This report will be a background paper for a forthcoming comparative social sector expenditure review for the Latin American and Caribbean region.  CHAPTER I: BACKGROUND2 A. Crisis: 1980-1985 11. Macroeconomic Context. In the 1970s hydrocarbon discoveries led to a boom in revenues and prospects for the future, which in turn fueled foreign borrowing. High public and private investment levels were a major factor contributing to high growth rates in GDP of about 5.5Z p.a. between 1971 and 1978. However, this growth was based on a highly unstable foundation. A large proportion of investment undertaken and specifically the larger investment projects were of dubious quality. Further, the projects were largely financed by foreign commercial loans backed by Government guarantees. Much borrowing, especially in the latter part of the period, simply financed current expenditures. The accumulation of debt to finance publiciy sponsored investment and expenditures was interrupted in 1978-79 as doubts about Bolivia's debt servicing capacity heightened. The investments were often incomplete and even those completed yielded disappointing results, so they contributed little to repaying the debts. Meanwhile, interest rates rose, and the Government was left with substantial negative net foreign transfers (5.5Z of GDP in 1983). 12. The resulting economic crisis deepened during the first half of the 1980s. The Government's economic p'licies were erratic; for instance, no less than six stabilization packages were introduced between February 1982 and February 1985. All the packages concentrated on the short-term, gave no sense of continuity and often neglected essential meastres which could reverse the basic trends. The economic situation worsened continually until it reached a point of almost total chaos in 1985. GDP fell in real terms every year after 1981, Government deficits widened and inflation reached levels of 60? a month on average in the first six months of 1985. A situation of potential economic and social chaos forced the Government to call elections earlier than scheduled. In August 1985, the Government of Dr. Paz-Estenssoro took office, facing economic problems unparalleled in Bolivia's history. 13. Effect on the Public Sector. The results of 30 years of state involvement in the economy (starting with the 1952 Revolution) was a public sector which by the mid-1980s had developed into a complex entity composed of some 520 agencies--120 in central government, 350 in depart- mental (regional) and local government, and 50 public enterprises and financial institutions. The public sector was responsible for some 65Z of mineral production, 80? of hydrocarbon output, 70% of power production, over half the assets of the banking system, and over 70% of air passenger transportation. Lack of reliable data makes it difficult to quantity the Government's share in manufacturing, but indire:t data suggest that private participation in Bolivia's industry was one of the smallest in the non-socialist world. The state owned glass, textile, and cement factories. The bulk of Bolivia's agroindustrial sector was also run by 2/ This is based on the Updating Economic Memorandum, dated June 2, 1988, Report No. 7278-BE.  the state: milk, dairy products, sugar, rice, maize by-products, edible oils, and tea were produced or marketed almost exclusively by state-owned agencies. 14. The process of growing state involvement in the economy was steady and relatively independent of the political orientation of successive governments. Civil servants attempted to maximize their income and employment opportunities by expanding the scope of their agencies' activities. Conservative governments did not attempt to reverse the trends if anything, they tried to strengthen the management and efficiency of the public sector bureaucracy (as, for example, during the 1970s) with- out questioning or redirecting the role of the state in the economy. More radical governments increased government involvement by expanding the scope of the state activities. For example, Gulf Oil in Bolivia was nationalized in 1969, as was a large mine belonging to United States Steel (Mina Matilde) in 1971. In 1983, a public enterprise was established in passenger and freight surface transportation, a sector that had previously been free from Government intervention. This tendency to enlarge the public sector was not restvicted to the central government. The nine Departments (the political and administrative entities into which Bolivia is divided) also expanded their authority. Earmarked taxes on minerals and hydrocarbons gave some of them a high degree of financial autonomy, which they used to expand their activities into running, among other enterprises, hotels and manufacturing and agro-industrial plants. The scope and fragmentation of the process made it increasingly difficult to introduce any semblance of monitoring much less management, of the role the state had undertaken to fulfill in the economy. B. Stabilizations 1986-1988 15. Macroeconomic Context. Immediately upor. taking office in August 1985, the Paz-Estenssoro Government undertook an orthodox stabilization program which abruptly ended the hyperinflation. The Government increased public sector prices (particularly gasoline) to raise revenues and reduce liquidity, cut public sector expenditures through a temporary prohibition of wage increases and public sector access to Central Bank credit, and increased the official exchange rate (i.e., devalued the Bolivian peso).3 Inflation fell dramatic lly within a few weeks of the program's announce- ment. Despite occasional lapses, Bolivia has enjoyed remarkable price stability compared to other Latin American countries since 1986. The consumer price index rose by only lIZ in 1987, 22Z in 1988, and has been rising at an annual rate of 81 in the first three months of 1989. 16. At the same time, the Government instituted a comprehensive program to increase the role of the price system in allocating resources. The New Economic Policy (NEP) eliminated almost all quantitative trade restrictions and instituted a uniform tariff policy. Controls on interest rates and on denominating contracts in foreign currencies were abolished, along with a variety of programs for offering credit at subsidized rates. Initial steps were made in a restructuring of the banking system to 3/ The Latin American Region defines the exchange rate as units of domestic currency per unit of foreign currency. Therefore, an increase in the exchange rate implies a depreciation of the boliviano (prior to January 1987 the Bolivian peso).  - 6 - increase the soundness of bank portfolios. Price controls were elimi- nated. The exchange rate is now determined in daily auctions with universal access. Restrictions on employment practices and wage negotia- tions were eased. The immediate revenue measures taken in 1985 were followed up by a complete overhaul of the tax system which took effect in early 1987. The tax reform simplified administration by reducing the number of taxes and relying mainly on consumption rather than income taxes. 17. Effects on the Public Sector. The NEP introduced a fundamentally different view of the public sector. The role of the public sector should be to provide public services, i.e., the production and marketing of public goods like defense, health, education, security, enforcement of contracts, etc. The state should no longer be involved in production except in mining, power and hydrocarbons, which have elements of common property rights. Even in mining and hydrocarbons the state should engage in joint-ventures and other measures to attract foreign and domestic private capital. The Government snould provide "a level playing field' for the private sector, and leave most economic activity to the private sector. 18. Based on these principles, the Government began a reform of public sector enterprises, including drastic employment reductions in the state mining company (sp-rred by the collapse of the price of tin in late 1985) and later in the state hydrocarbons company (YPFB), a reorganization of the Central Bank, and first steps towards the privatization of some state enterprises.  CHAPTER II. INSTITUTIONAL ISSUES 19. This Chapter will provide the institutional background for the analysis in the subsequent chapters. First, the organizational structure of the non-financial public sector will be described. Second, the 1989 budget process is briefly cutlined. A. Organization of the Public Sector 20. Figure II.1 summarizes the organization of the public sector. The non-financial public sector can be divided into general government and state enterprises. 21. General government is subdivided into central administration, regional governments, and local governments. Central administration consists of central government, universities, and the social security system. It covers the executive, legislative and judicial branches of central government. The executive branch is the presidency, vice-presi- dency, and the ministries. Presently there are 16 ministries, but the number of ministries changes over time. The picture is made more confu- sing, as some ministries oversee decentralized agencies (13 in total), which are still considered a part of central government. Of these, the only significant agency is the National Road Service (SENAC). Central administration and central government account for about 80Z and 60Z, respectively, of the expenditures of general government. Local governments are municipalities in urban areas and similar local government entities in rural areas (all referred to as "municipios"). Regional governments include regional development corporations (RDCs) and prefectures. A prefecture is the regional arm of the executive branch of government and plays a rather limited, almost purely ceremonial role. In the recent past there has been much discussion of the role of regional government entities, since some regional development corporations have come to exert dispropor- tionate influence over regional development in relation to their role as originally envisaged in the 1974 Law of Regional Development Corporations. 22. The state enterprises are numerous, but by far the most important are the state petroleum company (YPFB) and the state mining company (COMIBOL). There are 13 other state enterprises in total. In addition, the armed forces control 11 enterprises and there are 8 'mixed" enterprises (joint ventures with the private sector) among which is the national airline (LAB). As a part of the Government's economic program, many small state enterprises which previously belonged to a national development corporaticn (CBF) were transferred to the RDCs. Thus the RDCs are both government entities and owners of public enterprises (50 in total). No reliable data exist for these enterprises and they are thus not included in the present analysis. Finally, the six municipalities of the regional capitals oversee 24 enterprises, mainly in water supply and electricity distribution.  - 8 - Figure 11.1 Organization of the Public Sector |Non.-financial Public Sector| Public |General Enterprises Government Hixed Armed State Companies Forces Enterprises Enterprises r~~~~Ohr Central Local | Regional Admin. Governments Governments l I |Munic ipalities| Prefe Regional Dev. Corp. Central Universities Social Enterprises Government Security  -9- B. Budget Proceduresi 23. The Bolivian budget process can be described at best as unplanned and unsystematic, and falls far short of its intended purpose of planning and allocating fiscal resources according to the twin goals of monetary stability and economic reactivation. Weaknesses in the budget process can be traced to three major factors: the unclear and outdatei legal framework and guidelines for budget formulation and execution; the poor quality of financial information in public entities needed for budget programming and formulation; and the lack of clear procedures and institutional responsi- bilities needed for each public entity to provide an accurate input into the budget process. 1. Legal Framework 24. The Ministry of Finance has sought to reestablish a regular annual budget process since 1986, but no single statute regulates the budget process from beginning to end. Three main legal instruments have in theory provided the guidelines for budget planning and execution; seven articles in the Constitution, the 1928 Budget Law, and a Supreme Decree establishing the guidelines for the budget submission to and approval by Congress. The three laws, which are contradictory, constitute a complex and outdated legal framework and have never been adhered to in practice. 2. Budget Process Following 1985 Stabilization Program 25. During the period from 1985 to 1988, extreme fiscal constraints, combined with weak sectoral strategy formulation, investment planning and project monitoring gave the Ministry of Finance nearly complete de facto responsibility for programming and execution of the central government budget. Although the Ministry made an attempt to reintroduce annual budgeting in 1986, inadequacies in information on budgets, operations, and financial performance of public entities have made efficient resource allocation and coherent budget programming decisions extremely difficult. Extra-budgetary expenditures for the period of 1986 to 1988 have been high in relation to the total budget, especially for decentralized and public entities. Also, while responsibilities for the budget rest with the Ministry's Budget Division, actual expenditures are determined by continuous negotiations between the Treasury and public entities, with decisions typically based on short-term cash flow concerns. 26. Due to public entitiL3' weak accounting and internal control systems, the Ministry of Finance has assumed much of the responsibility for budget accounting and expenditures control. Weak financial informa- tion and maneSement systems in public entities, coupled with the centrali- zation of expenditure authorizations in the Ministry of Finance, have resulted in a situation where the Budget Division performs all budgetary accounting and ex-ante control of public expenditure instead of focussing on its primary functions of budget planning and programming. While the Ministry should be able to evaluate, monitor, and control the budgetary 4/ This section is based on Information obtained from the Ministry of Finance and from SAFCO, a program designed to improve public financial management and control.  - 10 - performance of non-financial public sector entities, its primary function should be one of budget planning and programming, with entities more or less autonomous in executing their budgets as determined during the planning stage. 27. There have been attempts in the past, and there is now a signifi- cant technical assistance effort, to put some order into the generally disorganized and unpredictable budget process. In June 1988, an inter- governmental task force was appointed to establish guidelines for the 1989 budget. Although the group was unable to meet the deadline of defining guidelines in key areas (including salary and investment policies) for preparation of the 1989 budget, it did assist the Ministry of Finance in drafting a circular establishing broad requirements for draft budgets to be submitted to the Ministry by public entities. Although rudimentary, the circular represents an effort to establish some basic guidelines for budgeting by public entities, and enabled the Ministry to present the 1989 budget to Congress before the beginning of the 1989 fiscal year, an unprecedented event since 1985. 3. The 1989 Budget Process 28. In August 1988, the Ministry of Finance issued general guidelines to central and decentralized public entities for formulating the 1989 budget. The guidelines set forth broad methods for determining agencies' operating and investment budgets. A noteworthy characteristic of guide- lines for formulation of the operating budget is that entities are to budget under the assumption of a price and salary freeze (at July 1988 levels). Project expenditures should be based on each entity's opera- tional objectives, and on the quantity of goods and services required to reach these objectives during the fiscal year. Expenditures for personnel * services are subject to the entity's salary scale and wage bill as approved by the Budget Subsecretariat in the Ministry of Finance. The I guidelines specify that no budget allocation will be made for payment to non-permanent staff, except for retirement payments. Also, no allocations are provided for any gifts, awards, honoraria, parties, any sort of extra- salary bonuses, grants, or loans to personnel for services rendered. No allocations are allowed for purchases by entities of any "luxury' goods such as rugs, artifacts, electric goods, furniture, or vehicles. Financing of foreign and domestic trips by government officials is subject to strict guidelines set forth by executive decree. Finally, operational expenditures for fuel and vehicle maintenance are authorized only for the highest-ranking government officials. 29. On the investment side of the budget, guidelines for 1989 established that the Ministries of Finance and Planning are to work jointly with entities in budgeting investment resources. Previously, budget procedures involved no specific provision for collaboration between Finance and Planning in determining the investment budget. For 1989, allocation of the investment budget was according to the following priorities:: (1) investment projects in execution; (2) counterpart funds for investment projects with external financing; and (3) new investment projects having all required legal approvals. In addition, Regional Development Corporations, many of which have their own revenue sources from natural resource production royalties, were given guidelines for  - 11 - allocation of central government funds according to the following criteria: no less than 752 for investment purposes, and no more than 25Z for operating expenses. 30 Entities were given only ten days to comply with the above proce- dures and submit draft 1989 budgets ta the Ministry of Finance. In practice, mixed enterprises and municipalities complied with the deadline and adhered to the requirements much more than public enterprises and regional development corporations. Some regional corporations did not manage to comply with the guidelines even by the end of fiscal 1988. In terms of quality of the draft budgets submitted, around 802 of the drafts were judged as being fair or good quality, while the rest were considered poor. The decentralized agencies, perhaps because of their fairly siauple financial structures, submitted the highest quality draft budgets. On average, the budgets that municipalities and prefectures submitted were of the poorest quality. Among public enterprises, the larger entities, and those more closely associated with other private sector companies (i.e., the national airline (LAB) and the national power company), submitted better-formulated budget drafts. 4. Need for Budget Reform 31. The lack of a consistent budget process and the experience of the last two or three years clearly indicate a need for a fundamental revision of the budget process, a task the Government has already begun to tackle. Since November 1988, a group of international consultants has been working closely with the Ministry of Finance and other government entities involved in the budget process to assist in defining a Budget Statute with the norms and procedures needed to establish an effective national budgeting system. Budget norms will be formulated for various groups of public sector entities, including non-financial public enterprises, regional development corrorations, and other local and regional government entities. Budget procedures will be specified for all stages of the budget process, and include guidelines for budget accounting, planning of personnel expenditures, cash management, public credit, and procurement and purchases. The Statute will also provide guidelines for entities to integrate operations programming and budgetiag. Specific guidelines will be provided for formulation of the income and expenditure sides of each entity's budget, as well as guidelines for budget approval, execution, and control. Preparatory activities for the statute and implementation of new procedures are scheduled for 1989 and the first six months of 1990; it is expected that the 1991 budget will be prepared based fully on the new Budget Statute and procedures as specified above. 32. To begin the budget reform process, the Government has already taken some steps to restructure the Ministry of Finance so that its opera- tions are more clearly focussed on the budget process. In late 1988, the Ministry was reorganized such that the subsecretariats that were previous- ly responsible for Financial and Monetary Policy were abolished, and the Ministry was left with four main subdivisions: budget, treasury, internal revenue, and a newly created division to reflect the importance of public accounting to t.ie budget process: government accounting A new budget director was appointed to participate in the budget ref,rm process from the outset, and budget experts are working closely with Ministry of Finance personnel to define and introduce new budget, treasury, and  - 12 - accounting procedures. Computer systems are being installed in the Ministry, as well, to introduce automatic processing of accounting and budget information. 33. In conclusion, the budget process remains uncoordinated and based on non-reliable information, even though substantial progress has bee-n made in recent years. The ongoing reforms must be continued and deepened to assure an efficient budget process which is an essential element in an efficient and equitable allocation of expenditures.  - 13 - CHAPTER III. PUBLIC SECTOR FINANCES 1981-87 34. This Chapter analyzes the financial flows e the non-financial public sectc: as well as the flows of two of its subcomponents% central administration, and regional and local governments. The analysis of the non-financial public sector will look at overall financial flows (current and capital revenue and expenditure), external flows, and transfers within the sector. The data do not allow a sectoral breakdown at this level of aggregation; such an analysis is only possible at the level of central government and will be the focus of Chapter IV. The informatior. presented here does not allow a calculation of reliable real ("constant boliviano") numbers in the high inflation years, as monthly data are not available. However, such an analysis of real numbers is possible at less aggregated levels and is presented in Chapter IV. 35. The development of the macroeconomic variables described in Chapter I is very clearly reflected in the financial flows. During the crisis (1981-84) revenues fell, expenditures increased, and net external transfers became negative. During this period, there was no systematic fiscal policy in place and expenditures were allowed to rise as the Govern- ment yielded to political pressure groups. Following the stabilization in late 1985, revenues increased, expenditures were brought under co3ntrol, and net transfers from abroad became positive again. A. Non-financial public sector 36. Financial Flows. Fiscal performance deteriorated dramatically from 1980 to 1984. Table III.1 shows revenues and expenditures for the non-financial public sector in the period of analysis. The deficit of the non-financial public sector widened from 7.52 of GDP in 1981 to 26.72 in 1984. This deterioration was due almost exclusively to a rise in the current account deficit, while capital expenditures remained relatively constant relative to GDP.  - 14 - T ble III X FIANCIAL FLO: NON-FDNNIAL PtEL1C SECTOR (Peicet of OW)1 --------------------------------------------------------_-----------__ 1981 1982 1988 1984 1986 1986 1987 -------------------------------------------------------------------__- CURRENT INCOME 84.60 81.78 23.87 21.98 27.66 81.17 27.00 Income from taxes 9.11 4.69 8.26 2.31 8.09 0.68 8.71 Domestic Sales 11.17 8.58 6.49 4.09 10.67 12.94 10.25 International Sales 12.27 16.27 12.80 14.68 11.72 10.59 6.72 Others 2.11 2.24 1.32 0.96 2.18 1.06 1.82 CURRENT EXPENDITURES 85.41 P2.61 80.82 84.40 81.47 29.68 28.90 Salaries 11.84 9.20 8.89 14.79 10.34 7.88 8.65 Purch. of goods A serv.14.95 14.61 18.12 11.48 10.99 10.69 8.97 Interest owed 2.80 8.65 4.21 8.58 7.80 6.64 4.66 Others 6.82 6.16 5.10 4.80 2.84 4.62 6.62 CURRENT SURPLUS -0.76 -0.88 -7.45 -1' -8.91 1.69 -1.90 CAPITAL INCOME 0.68 0.12 0.16 0.18 0.17 1.28 0.22 CAPITAL EXPENDITURES 6.10 6.90 4.85 4.76 4.45 6.03 7.88 UNIDE4TIFIED EXP. 1.26 7.61 6.71 9.69 2.60 0.00 0.00 GLOBAL SURPLUS -7.63 -14.17 -18.36 -26.68 -10.69 -3.16 -9.00 of which: INTERNAL FINANCING 8.62 18.63 19.72 23.90 8.49 -2.11 5.03 1 The numbers for 1984 and 1985 are not reliable as a percentage of CDP. This Is due to the fact that a revenue or expenditure item which was made late or early in the year will be over- or underestimated, respectively due to the effect of the high inflation rates. Taking an expenditure as a share of CDP basically assume that on average the expenditure is made in the middle of year. This io not the case, for example, for salaries. Source: UDAPE 37. Revenue. Total revenue fell from about 352 of GDP in 1981 to 222 in 1984. Tax revenue fell from 9.12 to 2.32 and revenue from sales, principally of hydrocarbons, in the domestic market fell from 11.2Z to 4.12. The only revenue source which did not fall was public sales abroad, which were mainly sales of gas and minerals. The dramatic worsening in tax revenues was due to the lack of enforcement of a very complicated tax system and, in 1983 and 1984, the accelerating inflation which eroded real tax receipts. The problem was accentuated by the tendency, in a high inflation situation, to wait as long as possible to pay taxes. In the tumultuous social situation, with inflation picking up, the Government was unable to introduce the necessary stabilization measures to increase prices of publicly supplied goods, especially gasoline, quickly enough to keep the real receipts from falling. This led to the total erosion of that source of income as well. 38. The 1985 stabilization program led to a substantial increase in domestic revenue, while negative terms of trade effects in 1985 and 1986 reduced revenue from abroad. Immediately following the adjustment,  - 15 - domestic prices oi gasoline and liquid gas were raised along with a number of charges for public services such as transportation, communication, and electricity. This led to more than a doubling of revenne from domestic sales (as a share of GDP) from 1984 to 1985, even though the NEP was only introduced in September. The value of domestic sales receipts miglht be overestimated due to the timing issue in the high inflation years. However, domestic receipts continued to rise in 19'6, while dropping slightly as a share of GDP in 1987, due to the adjustment of the price of public sector goods. It appears that the Government used slower adjustments in prices to help slow down inflation in 1987. When gasoline prices were increased in 1988, they set off a round of high inflation from May to July 1988, raising the rate of inflation in 1988 to 21Z (from 1lZ in 1987). 39. The Government introduced a comprehensive tax reform in 1986 which simplified the tax system and introduced better enforcement.5 Revenues from taxes picked up almost immediately and reached nearly the same share of GDP as before the crisis in the first year of implementation. The initial increase in 1986 was due to the dramatic deceleration of inflation while the further increase in 1987 was due to the quick implemen- tation of the tax reform. The "old debt" forgiveness program was especially effective, where by paying a lump sum amount all old tax debts were stricken from the books. 40. Revenue from foreign sales fell as a share of GDP in 1986 and 1987. Even though the large devaluation of the currency allowed local currency receipts of foreign sales to rise substantially, the effect was wiped out by the collapse of the tin market in November 1985. The collapse forced a closing of most of COMIBOL's operations and cut nominal tin mineral export revenues in U.S. dollars by 722 between 1984 and 1986. In 1987 the contract for natural gas sales to Argentina was renegotiated, resulting in a drop in the price by about one-third, which in turn, caused a drop of about the same size in foreign receipts as a share of GDP. 41. Expenditures. Compared to the contraction of revenues from 1981 through 1984 relative to GDP, current and capital expenditures remained relatively constant. Salaries and other personnel costs dropped as a share of GDP until 1983 but then increased substantially6 in the chaotic years of 1984-85 as the Government bought time by increasing salaries. Petroleum workers were especially militant in this period, but more generally the stronger labor unions in the public enterprises were able to paralyze the country as they pleased and were often rewarded with substantial wage concessions. The Government managed to lower its purchases of goods and 5/ A detailed analysis of the tax reform and its implementation is included in the Bank Report: Bolivia - Country Economic Memorandum (Report No. 7645-BO). 6/ Since salaries include an end-of-year bonus ("aguinaldo") of around one month's salary, salary expenditures on average are larger later in the year and would thus be overvalued in high inflation years (see below for an analysis in real terms).  - 16 - services somewhat, to reflect lower revenues, but not enough to offset increased salaries. Investment expenditures albo fell, mainly reflecting a fall in disbursements from donors. Finally, unidentified expenditures rose rapidly, reaching the startling level of 10 of GDP in 1984, reflecting the total lack of control over fiscal policy. These expenditures reflect expenditures that show up when the activity on the public sector's bank accounts in the Central Bank is compared with the books of the public sector. A large part reflects payments made from the government accounts for purposes not corresponding to normal government operations, e.g., unfulfilled commitments by state enterprises that the Treasury had to pay in the final analysis. 42. With the introduction of the NEP, compensation was squeezed, Government purchases were halved as a share of GDP, and investment expendi- tures rose as foreign financing resumed (especially in transportation). Because of the devaluation, the domestic currency value of debt service owed increased substantially. Cash outlays increased by less than the devaluation would indicate, as about half of interest owed was not paid, principally payments due to commercial creditors. The category "Others" jumped in 1986 and 1987 due to accounting proDlem in the state enterprises, which resulted in larger amounts being specified as "others". In 1987, the indemnity payments to ex-miners increased this category even more. 43. The deficits resulting from shrinking revenues and constant expenditures relative to GDP in 1980-84 were financed, principally, by internal financing, i.e., domestic credit expansion. In 1983, domestic credit had to expand by more than the deficit as Bolivia incurred substantial negative net foreign transfers. In 1984, domestic financing was equal to almost one-fourth of GDP, which to a large extent explains the hyperinflation. In 1986, the public sector absorbed credit as the deficit fell (the current account actually ran a surplus) and as net foreign transfers became nositive. 44. Extrnal accounts. The public sector was faced with large net negative foreign transfers until 1985. Table III.2 summarizes the payments and receipts vis-a-vis the exterior. 1981 was the last year of substantial foreign disbursements dating from the "hydrocarbons boom" of the 19709. By 1983, disbursements fell to about one-fourth of the 1981 level, as commercial lenders withdrew Llong with some official lenders. It is surprising that despite the massive shift of net trar.sfers from an inflow of over 12 ol 'DP to an outflow of 5.52 in 1983, Bolivia continued to service so much of its debt during the crisis period.  - 17 - Table 111.2 EXTERNAL POSITION OF TEE NON-FINANCIAL PUBLIC SECTOR Percentage of GDP ----------------------------------------------------------------------__ 1981 1982 1983 1984 1985 1986 1987 ------------------------------------------------------------------__---- Interest Paid 3.38 2.51 4.15 2.93 4.04 3.06 1.44 Amortization 2.25 1.39 1.47 1.76 4.31 2.18 1.71 Disbursements 6.74 3.06 1.80 1.34 1.94 4.67 4.61 Donations 0.08 0.07 0.13 0.02 0.03 1.28 0.22 Change in Argentina 0.00 -2.17 -1.76 2.55 1.31 -0.09 -2.38 Arrears -------------------------------..------------------------------__-------- Net Transfers 1.19 -2.94 -5.45 -0.78 -5.07 0.62 -0.70 Memo item: Interest Not Paid -0.58 1.14 0.06 0.55 3.26 3.61 3.18 Source: UDAPE 45. The positive results of the NEP and the de facto moratorium on commercial debt payments would have made net transfers positive after 1985, if Argentina had kept current on its payments for natud.al gaS. Bolivia had declared a unilateral moratorium on all payments to commercial creditors in 1984. The moratorium was continued following the introduction of the NEP.7 This, combined with an increase in disbursements from official creditors due to the policy changes introduced in the NEP, made net transfers positive in 1986. In 1987, Argentina started running up arrears on its payments for Bolivian exports of natural gas causing net transfers to be negative again. Argentina's non-payment caused actual cash receipts from foreign sales in 1987 to be 35? lower than recorded as revenue, i.e., cash receipts from foreign sales fell by two-thirds from 1986 to 1987. The problems of Argentina's arrears are continuing and have serious negative effects both on international reserves and on the fiscal situation. 46. Transfers. The pattern of intrasectoral transfers changed drama- tically with the NEP. Within the non-financial public sector transfers run from public enterprises to general government. General government (GG) net receipts are equal to the net receipts of central administration (CA) plus the net receipts of regional and local governments. Central administration net receipts are equal to central government net receipts (TGN) plus the net receipts of the social security system and the universities. In Figure III.1 the net positions of GG, CA and TGN are plotted together with the net position of all state enterprises (SE), which consists of YPFB, COMIBOL and the other state enterprises, of which only YPFB is plotted. In terms of a formula, the relationship between the net transfers can be expressed as: GG = CA + regional and local governments CA = TGN + universities + sociel security 7/ In 1988 Bolivia bought back about half of its commercial debt at an 892 discount (see Country Economic Memorandum (Report No. 7645-BO)).  - 18 - Net transfers received by GG is in turn equal to net transfers paid by SE where: SE = YPFB + Others Figure III.1 INTRASECTORAL TRANSFERS (1981.1987) (Positive numbers imply net recipient) % of GDP 15 50~~~~~~~~~.... ........... 0 --- ---- -5 1981 1982 1983 1984 1985 1986 1987 Car Awrn. TGN Geeral Gov't Total Sate 6Etsrp. YPFB Sft: UDAPE 47. Through the period, the large state enterprises have made a net positive transfer to the rest of the public sector with the blatant excep- tion of COMIBOL from 1985 to 1987. All through the period YPFB has been the major contributor.8 The other state enterprises (indicated by the difference between the SE and the YPFB line) paid net vransfers to the rest 8/ Transfers from the state enterprises reflect taxation of the enterprises. "Tax revenue" ("Income from taxes" in Table III.1) in the Government accounts includes tax revenue from the private se',tor and all customs revenues.  - 19 - of the public sector until 1985. Since then they have become net recipients of transfers. Especially the restructuring of COMIBOL and the slow reactivation of COMIBOL's activities have represented a major drain on government finances. Most of the funds from YPFB went to the RDCs before 1985, while the treasury (TGN) has been the major recipient since the 1985 reforms. Basically, the receipts of the RDCs have remained stable as a share of GDP, while the overall increase since 1985 has gone to the TGN. 48. Among the recipients of net transfers, TGN became a net transferor in the high inflation years and has only since 1985 been the major net recipient. The position of the TGN deteriorated through the early 1980s, with TGN becoming a net transferor in 1983 and 1984 (through expanding public credit). This was due to lower receipts from the state enterprises and higher transfers to other parts of the central administration (universities a.l social security). TGN adapted passively to the emerging crisis, rece:'.ving less from YPFB and transferring more to social securtty and universities. Following the NEP the increase in transfers from YPFB made TGN a net recipient again. The net position of local and regional governments (the difference between central administration (CA) and general government (GG)) has remained relatively stable over time 49. The social security system's gross receipts from the TGN doubled as a share of GDP from 1983 to 1984 (from 0.42 to 0.9X). Up to 1985, transfers to social security increased substantially also from the state enterprises. In 1984, the social security system received gross transfers of 2.1Z of GDP, up from 0.7Z in 1982. Transfers to the universities also increased from about 0.32 of GDP in the beginning of the period to 12 of GDP in 1984. Since then the level of gross transfers has been around 0.72 of GDP. 50. The difference in the patterns of transfers before and after the NEP are striking. Before the NEP, the Treasury appears to react passively to demands from the Government's main supporters: the labor unions (to increase support for the social security system), and students (to increase transfers to the universities). At the same time no action was taken to increase transfers from the state enterprises. In contrast, following the NEP a much more active stance was taken, especially to increase transfers from YPFB, but also to rationalize transfers paid. 51. The negative net position of the TGN during 1983-84 reflects the total breakdown of fiscal control during the hyperinflation period. In addition, the "unidentified expenditures' are not included in Figure III.1. If it is assumed that these in effect should have been included as transfers to the state enterprises, the net position of even the general government would have been negative in both 1984 and 1985. That is the 'classical" story told of the reasons for the hyperinflation: that the state enterprises, especially COMIBOL, were running up large deficits draining public finances (especially through the TGN), pushing the Central Bank to expand domestic credit and thus fuelling inflation. B. Central Administration 52. Financial flows. The central administration's finances closely reflect the finances of the non-financial public sector, which is not  - 20 - surprising as central admintstration is a substantial part of the non- financial public sector. Figure III.2 shows the 'financing" of total expenditures through gross transfers received, tax revenue and deficits. It is a graphic representation of the state of financial chaos leading up to the 1985 stabilization program. Tax revenues shrunk every year, transfers vary somewhat from year to year, but were, in the end, lower in 1984 than they were in 1980. Meanwhile, expenditures increased continuously, leading to revenues only covering about one-fifth of total expenditures in 1984. Immediately following the stabilization, transfers increasel due to the clearer taxation rules on YPFB combined with the gasoline price increase. In 1986 tax revenue also increased due to the tax reform. At the same time expenditures are brought under control and thus deficits become manageable. Figure 111.2 FINANCIAL FLOWS: CENTRAL ADMINISTRATION Percent of GDP 30 25 - 20 K- 15 10 55 ILLS~~~~~ 5 0 1980 1981 1982 1983 1984 1985 1986 1987 * Transfers Ta Recieved 02 Revenue Deficit Source: UDAPE  - 21 - C. Regional and Local Governments 53. Financial flows. The financial situation of regional and local governments has generally been good, with small surpluses even in the chaotic years (see Table I1I.3).9 In terms of re enues, local and regional government entities relied mainly on transfers from the TGN and from YPFB. Tax revenue fell dramaticalLy after 1981 until the price stabilization in late 1985. In 1986 and 1987, more than three-fourths of total revenue came from taxes as 20Z of internal revenue taxes were transferred to local and regional government. Expenditures are analyzed in more detail in the following chapter. Table III.3 FINANCIAL FLOWS: LOCAL & REGIONAL GOVERNMENTS (Percent of GDP) ---------------------------------------------------------------------- 1981 1982 1983 1984 1985 1986 1987 -------------------------------------------------------------------__- CURRENT INCOME 1.67 0.72 0.69 0.45 0.84 1.24 1.99 Income from taxes 1.40 0.51 0.52 0.24 0.46 0.93 1.59 Others 0.27 0.21 0.17 0.21 0.38 0.31 0.40 CURRENT EXPENDITURES 1.28 1.00 1.43 1.33 1.10 1.52 1.57 Salaries 0.71 0.59 0.52 1.03 0.72 0.93 0.86 Purch. of goods & serv 0.32 0.26 0.27 0.21 0.24 0.47 0.50 Interest owed 0.09 3.06 0.08 0.05 0.05 0.02 0.01 Others 0.16 0.09 0.56 0.04 0.09 0.10 0.20 CURRENT TRANSFERS (NET) 0.80 1.98 1.47 1.95 1.99 1.59 1.00 CURRENT SURPLUS 1.19 1.70 0.73 1.07 1.73 1.31 1.42 -------------------------------------------------------------------__- CAPITAL INCOME 0.04 0.06 0.01 0.01 0.03 0.13 0.08 CAPITAL EXPENDITURES 1.10 0.85 0.55 1.03 0.49 1.07 1.20 GLOBAL SURPLUS 0.25 0.89 0.18 -0.06 1.26 0.28 0.86 Source: UDAPE 91 As a part of the studies performed utier IDA's Economic Management Strengthening Operation better information on the finances and activities of the local and regional governments is being collected. This will form the basis for recommendations on possible de- concentration of certain aztivities.  - 22 - D. Conclusions 54. The financial flows of the non-financial public sector show the difference in fiscal policy before and after the introduction of the NEP. From 1981 to 1984 revenues eroded rapidly, falling from 34.7Z to 22.OZ of GDP. Since the introduction of the NEP, the Government has been very successful in raising more revenue. However, the public sector despite the sharp recovery of tax revenues since 1986, continues to rely on hydrocarbon sales for more than 60Z of its revenues. At the same time, expenditures have been brought under control and net transfers from abroad have turned positive as external project financing picked up again. The Government has thus been successful in turning the tide on fiscal mis-management, bringing order to the fiscal situation. The now prudent fiscal management should be sustained to provide a sound basis for future growth and to be able to accommodate the needed increase in expenditures in the social sectors (see Chapter IX). 55. As measured by expenditures, the Government has also been successful in reducing the role of the public sector in the economy. Expenditures fell from 31.52 of GDP in 1985 to 28.6Z in 1987. Spending on salaries and on goods and services fell following the stabilization, indicating a tighter control of expenditures. On the other hand, Chapter IV will show very limited shifts among types of expenditures for general government. This combined with the worrisome increase in the "Others" category, seems to indicate that structural reforms in the public sector have not been fully introduced yet. Such reforms will be necessary to reduce the size of the public sector and to improve the composition of public sector expenditures.  - 23 - CHAPTER IV. FUNCTIONAL DISTRIBUTION OF EXPENDITURES 56. This Chapter analyzes expendituresll by sector a;td by type of expenditures. First, expenditures by the TGN are divided by sector and their developments in relative and absolute terms are analyzed. Second, expenditures are analyzed by category (personnel, goods and services, debt service, etc.) for the general government. 57. From 1980 to 1988 for the TGN, there is a shift away from the social sectors towards defense and infrastructure. Social sector expendi- tures fell during the crisis (1981-1985) and have grown since the introduc- tion of the NEP. Among categories, personnel expenditures remain fairly stable while investment expenditures vary with available revenues. For General Government there is surprisingly little difference between the shares of each category in 1980 and 1988. A. Sectoral Distribution of Expenditures 58. Information on the sectoral distribution of expenditures is only available for the part of expenditures financed by the TGN, i.e., the information only covers central government expenditures and not expendi- tures financed by other parts of general government out of their general funds. From a sectoral perspective that implies that important sources of financing such as cost recovery are not included. The picture here is thus only a partial picture of total expenditures in the various sectors. Chapters V through VII will describe sources and uses of funds for the social sectors in more detail. The picture is also incomplete as other agencies might spend money in a certain sector. For example, state enter- prises used to spend money in education and presently the Emergency Social Fund is investing substantial amounts in health, education and infrastruc- ture, neither of which is included in the numbers presented here. It is, however, still of interest to study TGN expenditures as they reflect the central government's priorities. They are the part of the expenditures under the most direct political control. 59. On average, over the period, there have been only gradual shifts in expenditures among sectors even though individual sectors show large fluctuations from year to year. Table IV.l shows expenditures made by TGN across various sub-sectors of the public sector. It is important to note again, that this only includes TGN expenditures, i.e., no foreign financing (only the government's local counterpart funds required by the interna- tional financiers), no spending by local or regional governments, and no social security expenditures. Table IV.1 excludes debt service payments to avoid distorting the picture, and to show how TGN spending developed partly as a response to the increased debt payments. 11/ In this Chapter authorized expenditures are used (not actually paid) as these could be obtained on a monthly basis and with a more detailed distribution across sectors.  - 24 - 60. Between 198012 and 1986 spending on social sectors declined by over 15Z annually in real terms. There was a rebound in 1987 but current levels are still well below those prevailing only 3-4 years earlier. The social sectors include the ministries of health, education, labor and urban affairs, as well as their dependent agencies. The social security system is not included because of its financial and administrative independence of the TGN. Social expenditures remained relatively constant as a share of total expenditures through 1984, fell dramatically in 1985 and only regained their relative importance in 1987-88 (see Figure IV.1). Table IV.1 TGN EXPENDITURES BY SECTOR Thousand 1980 Bolivian Pesos13 ------------------------------------------------------------__------------ INSTITUTIONS 1980 1981 1982 1983 1984 1985 1986 1987 1983 Administration 4948 2157 2616 2395 2491 2374 3078 2525 2820 non-transfers 1987 1290 1345 976 877 1125 1048 1282 1483 transfers 2961 867 1271 1419 1614 1249 2030 1243 1337 Infrastructure 1546 1701 1320 1103 1278 1635 1805 1493 1481 Regional & Local 294 252 137 311 375 113 44 166 30 Social 1/ 6530 4673 4405 4318 3956 4041 2743 3430 3482 Defense 4808 4365 2959 2467 2680 3788 2903 3109 3097 Sectoral 2/ 970 748 364 501 369 707 290 2526 541 __---_---------------------------------------------------------------------! TOTAL 19097 13896 11801 11094 11149 12657 10863 13248 11451 Notes: "Administration* includes Presidency, Vice-Presidency, Legislative Branch, Judicial Branch; and the Ministries of: Planning, Finance (including Taxa tion), Information, and External Affairs. "Infrastructure' includes the Ministries of Transportation and Aeronautics. "Social" includes Ministries of Health, Education, Labor and Urban Affairs (It does not include Social Security nor the Emergency Social Fund). "Defense' includes the Ministries of Defense and Internal Affairs. "Sectoral" includes Ministries of Agriculture, Mining, Energy, and Commerce and Industry. 1/ Adjustments for pensions made for 1980, 1987 and 1988 7/ Large increase in 1987 is due to a one-time surge in indemnity payments to miners Source: UDAPE 12/ All through this chapter 1980 is taken as the base year. While the choice of any particular year is arbitrary, 1980 was chosen here since it represents a dividing line between the late seventies when access to financing was easy and the crisis prone first half of the eighties. 13/ Expenditures of the TGN have been deflated using monthly inflation rates, to diminish the deflation problem in the high inflation years.  - 25 - Figure IV. 1 Central Government Expendftures by Sector Shares of Total (Based on Real Numbers) 1980 1984 34% 1%% j Administraion 355% 3 Transfers 25 Intrastructure 1986 1988 E] Regional & Local 19% 13% 12% Social Sectors t17% 0 e11% [ Defense & Securty 3% [73 Sectoral Ministries Note: Adniftion exckudes ansfers. Source: UDAPE 61. The structure within the social sector mir.istries has remained relatively constant over time (see Figure IV.2). The two principal Ministries are Health and Education, with Education dominating the picture. Total expenditures in education fell in 198.,, remained sttble until 1985, fell temporarily in 1986 due to lower wage payments to teachers because of a long strike, and have since risen in each of the last two years. Expen- ditures in health14 fell steadily until 1986 and, like education, show a recovery since then. 14/ For the Ministry of Health, a series of pension payments were transferred through the ministry as a matter of accounting in 1980, 1987 and 1988. The numbers presented here are without these pension payments.  - 26 - Figure IV.2 TGN Expenditures In the Social Sectors Mon 1980 Bom Peso 6 5 4 3 2- 1980 1981 182 18 1984 1985 low 1987 10BB 62. In terms of cuts in social sector spending, Bolivia has not experienced a high social cost of the NEP. One of the componentr of the "social costs of adjustment" often mentioned is a cut in social sector expe:iditures as total government expenditures fall. It is certainly the case that social expenditures do fall comparing "before and after" the adjustment (e.g., between 1984 and 1988) both in real terms and as a share of total expenditures (both including and excluding debt payments). How- ever, a closer analysis reveals that the item that has fallen is salaries, especially of teachers. This no doubt would have serious consequences for the quality of education in the long run if it were not remedied (teachers' salaries did increase in 1987 and 1988). But the fact that teachers' salaries fell ir. 1986 (mainly because of a strike), does not imply anything about the quality of service in the longer run, even though it is obvious that as long as teachers were not teaching the quality of education suffered. On the contrary, purchaser; of goods and services, i.e., school materials and health supplies, were about ten times higher in 1988 than in  - 27 - 1984.15 These expenditures have a more direct short term relationship with quality of services rendered and should thus indicate that quality has improved following the adjustment. chapters V-VII will analyze social sector expenditures in greater detail. 63. The defense spending pattern is more mixed. Overall defense spending, which includes internal security such as the Ministries of Justice and the Interior, fell dramatically mainly in purchases and invest- ment especially after the civilian government took over in 1932. Expendi- tures rose in 1985 due to an increase of 782 in personnel costs between 1984 and 1985. The reasons behind this are unclear, but it may reflect a decision by the Government to ensure that military personnel were reason- ably satisfied with their income at the peak of the crisis. Since 1985 expenditures have fallen in real terms. Overall, defense has increased its share of total expenditures from 1980 to 1988. 64. Expenditures ir. infrastructure (Ministries of Transportation and Aeronautics) fluctuate over time, but show a general strengthening both in absolute and relative terms. Infrastructure expenditures are dominated by j expenditures related to specific projects which vary from year to year. The sectoral ministries change somewhat from year to year, and show an overall negative trend over the period. The sectoral ministries include the Ministries of Agriculture, Mining, Industry and Commerce, and Energy. The large increase in 1987 is due to the indemnity payments to the miners laid off from COMIBOL; these payments amounted to almost 8Z of total TGN expenditures in 1987. The regional and local. governments' transfers from the TGN fall by more than 90t between 1980 and 1988. Since the revenue sharing system took effect in 1987, local and regional governments receive a total 20X of total revenue raised by the internal revenue, and thus no longer depend on transfers from the TGN. 65. Administration expenditures consist of transfers and direct administrative costs. The direct administrative costs declined continuously until 1984 and recovered again from 1985 or. Transfers are quite erratic, increasing in general over the period. \'ansfers are especially high in 1986 because of large transfers to COMIBOL. Transfers continue from the TGN to COMIBOL through 1988 due to slow reactivation in the state mining sector, albeit at a much lower level than in 1986. Part of the transfers in 1987 and 1988 are transfers to the ESF, the Govern- ment's institution created to alleviate the social costs of the crisis. The pure administrative expenditures (excluding transfers) fall continuously in real terms but remain a stable share of expenditures (around 8Z) until 1986, when they increase to around 10%. In 1988 the expenditures increase across the board but the increase is especially significant in the Ministry of Finance in the part which belonged to the Ministry of Taxation in 1987 (the Ministries were re-combined in August 1988), reflecting the increased tax collection efforts. 151 This excludes expenditures by the Emergency Social Fund which invested substantial amounts in health and education in 1987 and 1988 (see Chapter VI),  - 28 - 66. Conclusions. Over time there has been a slight shift away from the social sectors mainly towards infrastructure, administration and defense. The social sectors diminish in share, but as noted above, the composition of social sector expenditures is better in 1988 compared to earlier in the sense that more is spent on materials also since there has been an absolute increase in expenditures in the social sector since 1986. The increase in infrastructure is mainly in the purchase of goods and services, which could indicate a greater concern for operations a-Id mainte- nance. If true, this would be a very positive development. B. Expenditures by Type 67. This section deals with real expenditures by expenditure category (salaries, investment, etc.) for general government.16 Transfers are not included in the analysis to avoid double counting and as it is impossible to distinguish between capital and current transfers. Table IV.2 Real Expenditures by General Government (Thousand 1980 Bolivian Pesos) -------------------------------------------------------------__- 1980 1981 1982 1983 1984 1985 1986 1987 ---------------------------------------------------------------- Personnel 11800 9693 8838 7675 8207 8944 6549 7217 Goods & Services 5242 4361 3260 2908 2479 3030 3708 3200 Investm. 3920 3494 2165 1911 1966 2876 3670 2999 Debt Service Paid 4985 4745 2541 2539 2696 5066 2983 2756 Other 298 485 516 548 135 112 421 465 ---------------------------------------------------------------- Total 26245 22778 17320 15582 15483 20028 17331 16637 Source: UDAPE 68. Personnel expenditures17 cover between 38Z and 532 of total expen- ditures, and have fallen in real terms about 7Z per year on average from 1980 to 1987 (see Table IV.2 and Figure IV.3). Personnel expenditures decreased from 1980 to 1983 and grew between 1983 and 1985. In 1986, personnel expenditures fell drastically, as a consequence of the general stabilization measures. A substantial part of the 1986 fall was not caused directly by a policy decision to cut expenditures. In 1986, there was a prolonged teachers' strike. The Government refused to pay the teachers for the time not worked. However, a part of this amount was paid out of the 1987 budget, increasing salary costs for 1987. This undoubtedly contri- buted to the recovery of overall personnel expenditures in 1987. This 16/ The numbers include TGN, SENAC, local and regional governments, universities arnd social security. 17/ Personnel costs are defined as total costs related to the employment of labor; i.e., wages, bonuses, social security payments, and other benefits.  - 29 - illustrates a pattern which is evident in all the sub-entities of general government. Personnel expenditures only seem controllable in the short run, and then tend to return to a certain share of total expenditures. Longer run declines in the wage bill require cuts in employment which have proven to be very difficult. In fact, only the restructuring of COMIBOL has had any downward effect on the number of staff, and COMIBOL is not included in the numbers analyzed here, as this analysis only covers general government. 69. Debt payments from the general government remained stable from 1982 through 1984, increased in 1985 due to the devaluation and fell back to their previous level in 1986-87. Debt payments did not increase as much as should be expected, due to the lack of payment of part of the interest due. Purchases of goods and services were squeezed more than most of the categories until 1985. In 1985 this item jumped substantially, in part due to the devaluation and the resulting price increase in imported goods but volume increased as well. Investment expenditures declined at a rate of 15? per year from 1980 to 1984. Since then investment has rebounded especially through SENAC, i.e., road investments. The percentage share of investment expenditures is strongly positively correlated with total expen- ditures (see Figure IV.3). This suggests that investment is the first item to be cut when there is a squeeze, and also the first item to rebound when funds become available. 1986 is a special case as investments rise even though total expenditures fall. This was due to large counterpart fund requirements to a specific road project. Figure IV.3 Real Expenditures by Type of Expenditures General Government 45.0%, 51.0% 1.1% ~~~~~~3.0% 20.0 9 1 90 a8 4 7 14.996 12.5% B Personnel Costs 1980 1982 g Goods&Services [] Investment 53.0% 43.4% [] Debt Service []Oter 0.9% 28 1 6 0 % 4% 19.2%t1119.2: 12.7% 18.0% 1984 1987  - 30 - 70. The variability of each expenditure category is very different. One measure of this is the standard deviation in percent of the mean of each expenditure category. For personnel expenditures this is less than 18% while it is 242 and 262 for goods and services and for investment, respectively. The variability of the share of total expenditures shows an even stronger picture as the value is 102 for personnel expenditures and 19Z for investment. This is a further indication that personnel expendi- tures remain essentially constant in absolute terms (e.g., in SENAC) or as a share of total expenditures (e.g., TGN). C. Conclusions 71. The allocation of expenditures and their evolution over time does not reflect clearly the changes in Government strategy and policies over the period. The Government's stated strategy is to diminish the role of the public sector and reallocate expenditures to make the public sector a more efficient deliverer of public services with a special emphasis on the social sectors. The wage bill (personnel expenditures) has remained essentially constant while public investment and purchases of goods and services are positively correlated with total expenditures. Among sectors, only the increase from 1986 to 1988 in the social sectors appears to be following a strategic decision. Other expenditures change, as they did prior to 1985, with foreign financing availability (infrastructure) or internal political pressures (defense). 72. Overall, public sector investment has increased since 1985 after falling throughout the crisis (1981-1985). The big change sinep 1985 is the increased role of SENAC and of the state enterprises. As far as state enterprises are concerned, the ability to finance investments out of own revenues decreases dependency o; investments on tax revenues. On the other hand, it limits the control and supervision power of central government, which has been a problem in the recent years (see Chapter V). 73. In sum, the Government has had only a partial success in implemen- ting its stated strategy (see para. 72 above). The Government needs to introduce fundamental reforms in terms of employment policy, budget and control mechanisms, and greatly improve its capacity to implement its policy decisions. Many reform measures are ready on paper or have even been introduced as proposals for laws (e.g., the public management law mentioned in Chapter II) but they need to be implemented. The Government's efforts in public sector management have received strong support from IDA and other donors, as implementation problems remain the top issue for Bolivia.  - 31 - CHAPTER V: PUBLIC SECTOR INVESTMENTS 74. This chapter reviews the Public Sector Investment Program (PSIP) in terms of management of the PSIP, implementation of the 1988 program, and a review of the 1989 program. A. Management of the PSIP 75. The basic thrust of the reforms of the management public invest- ment program has been an effort to improve planning and monitoring at a central level in the Ministry of Planning (MINPLAN) while leaving the detailed identification and evaluation of project to specialists in the relevant sectoral ministries. This decentralized approached was adopted following extensive analysis of the failures of a centralized system. Improved management is based on an integrated information system (SISIN) which is continously being developed and enhanced. 1988 saw continued substantial improvements in the management of the PSIP both in terms of supervising implementation and programming for future investments. The public investment unit in MINPLAN surveyed implementation twice during 1988, to establish how much had been implemented by the second and third quarter of the year. The review of the first half of 1988 showed serious problems. Implementation was well below target; a sensible projection, if carried out at mid-year, would have put the year's total at around US$200 million (US$388.8 million was programmed). It was especially worrisome that foreign disbursements were running well below target. This mid-year review helped greatly in identifying the bottlenecks to implementation. It became clear, for example, that the international procurement agents were not working as quickly as had been hoped. In the end, $348.3 million of the $388.8 million planned were executed. 76. Another improvement has been the establishment of a unit under the Sub-secretary of Public Investment in MINPLAN to monitor the commitments from international donors. This unit has Gstablished a database with all the international aid agreements under identification, appraisal, negotia- tion and implementation. The unit tracks each agreement and identifies possible problem areas. The unit also identifies projects under implemen- tation with problems and coordinates with the Central Bank and the Ministry of Finance to help speed up stalled disbursements. 77. The budget process for investment ran much more smoothly than in previous years, but it is still very cumbersome. One problem is that deci- sions on which investments to include in the investment program and how much to invest in total during the next year are taken simultaneously. Ideally, the process should be divided into: (a) a strategic decision on a ranking of projects according to their priority, and then (b) a budgetary decision should be made as to how much is available for each years invest- ment budget based on the state of fiscal affairs. Based on this informa- tion a realistic investment budget could be made. 78. Last year's experience illustrated that further improvements are necessary to strengthen the Central Government's coordination of investment expenditures. The bulk of internal financing for investment was provided  - 32 - by state enterprises for their own projects, rather than by the Treasury. This indicates some lack of centralized influence over investment funds, as entities with surplus resources were successful in spendirg them themselves rather than raising their contribution to the Treasury. iurther, a number of regional development corporations spent substantial sums of money that were not originally included in the investment budget. It is not realistic to expect the central administration to exercise complete control over the activities of the many public sector entities involved in the investment program. However, it will be impossible to direct public sector investment to reflect coherent sectoral strategies unless the administration can play a greater role in directing how investment funds are actually spent. A module for the SI3IN to assist in prioritizing investment projects on the basis of the economic impact of projects is under development and should be implemented for the development of the 1991 investment program. This module will be implemented also in the ministries and the RDCs to ensure better coordination through the planned decentralization process. B. Implementation of the 1988 PSIP 79. The administrative improvements cited above contributed to a higher rate of execution of programmed investment expenditures in 1988 (see Table V.1), although questions remain concerning Central Government control of the investment process. The Bolivian public sector spent US$348.3 million in Investment funds in 1988, compared to US$265.3 million in 1987. Table V.1: Execution of the Investment Programs 1987 and 1988 (US$ Millions) 1987 1988 Programmed Executed (Z) Programmed Executed (Z) Agriculture 70.7 27.9 39.5 21.5 52.2 242.8 Mining 15.7 1.4 8.9 15.5 12.9 83.2 Hydrocarbons 151.0 87.9 58.2 141.2 92.3 65.4 Industry 9.3 3.0 32.3 0.1 1.2 1200.0 Power 17.9 18.0 100.6 45.1 22.3 49.4 Transportation 180.3 85.1 47.2 100.8 118.1 117.2 Social Sectors 1 80.0 21.4 26.8 36.8 25.4 69.0 Other 2 51.5 20.6 40.0 27.8 23.9 86.0 Total 576.4 265.3 46.0 388.8 348.3 89.7 1 Inc,.udes education, sanitation, health, and urban. 2 Includes communications, water management, and multisectoral. 80. Implementation in the agricultural sector reached almost 2.5 times the amount programmed. A number of RDCs spent substantial sums on projects which originally were not included in the program. For example, the Chuquisaca RDC spent over US$4 million compared to an investment budget of  - 33 - US$1 million. Similarly, the La Paz RDC invested over US$5 million compared to US$1 million programmed. The Cochabamba RDC exceeded its investment budget by almost US$13 million, largely owing to a greater than expected external financing for a seeds project. The investment program in the agricultural sector appears to consist of the projects chosen by individual RDCs, with little direction from the central administration. 81. The mining sector showed a substantial rise in execution, spending 832 of programmed funds compared to 92 in 1987. While actual production in COMIBOL recovered only slowly, investments in rehabilitating COMIBOL mines and in increased exploration have provided a solid basis for a more rapid growth in public sector mining in 1989, in line with the newly defined limited role for COMIBOL. 82. Investment in power reached only 492 of budgeted funds, compared to 10C0 in 1987. This may reflect the optimistic rise in programmed investment in the power sector in 1988 to US$45.1 million, compared to US$18 million spent in 1987. In particular, the US$6.7 million budgetted for the seventh electrical generating turbine in Santa Cruz was not spent, and the largest project in the program (US$21.6 million for connecting the central and eastern power grids) spent only 672 of programmed funds. 83. The public sector spent spent 17Z more than the programmed invest- ment budget in transportation. This over-execution does not appear to reflect deficiencies in planning, as most of the expenditures were in projects originally included in the program. Some programmed investment projects were not undertaken, for example the US$3.5 million budgetted for feeder roads in Cochabamba. The execution rate was greatly increased by the US$18.1 million spent on the new airport for Cochabamba, compared to the US$8.3 million budgetted (see below for a discussion of the Cochabamba airport). Expenditures on the largest project in the investment program, the Chimore-Yapacani road, progressed roughly as scheduled, with US$27.9 million spent compared to US$26.0 million programmed. 84. Investment in the hydrocarbons sector was 652 of that programmed. Investments in some of the fields (particularly Campo Santa Cruz, San Roque and H. Suarez) fell substantially below expectations. Investment expendi- tures in the IDA-financed Vruelta Grande project were only US$16.2 million compared to US$20.0 programmed, owing to delays in obtaining materials and equipment. However, implementation of Vuelta Grande is generally on schedule, with only minimal delays anticipated. YPFB was responsible for almost all investment expenditures in the sector, allowing for more centralized planning than in most other sectors where a number of entities manage investment projects. C. The 1989 investment program 85. The 1989 investment program is budgetted at US$527 million, or an increase of 512 over the US$348 million spent in 1988 (see Table V.2). This level of public investment is probably beyond the implementation capacities of the Bolivian public sector, despite improvements in implemen- tation achieved in 1988. It is especially worrisome that the 1989 program foresees a 302 increase in internal financing above what was actually spent  - 34 - in 1988. Thie increase can clearly not be financed. Further, the total investment program would make up over 102 of GDP, or about three percentage points of GDP higher than the current level of public investment. In short, it is extremely unlikely that the public sector would be able to efficiently spend the external funds or generate the internal funds necessary to achieve the programmed investment expenditures. Table V.2: Investment Program 1988 1989 Planned Actual Total (US$ Million) 388.8 348.3 526.6 - External Finance 274.9 201.6 335.7 - Internal Finance 113.9 146.7 190.9 Shares (Z) - Agriculture 5.5 15.0 8.5 - Mining 4.0 3.7 5.9 - Hydrocarbons 36.3 26.5 34.6 - Industry 0.0 0.3 0.3 - Power 11.6 6.4 8.4 - Transportation 25.9 33.9 24.7 - Social Sectors1 9.5 7.3 8.8 - Other2 7.2 6.9 8.7 1 Includes education, sanitation, health, and urban. 2 Includes communications, water management, and multi- sectoral. 86. This very ambitious target reflects the fact that the Government has not yet done a breakdown between the core and complementary parts of the investment budget. That is, the Government has not determined which of the investment projects included in the budget will have the first claim on administrative resources and funds. Division of the program into core and complementary elements is essential to prepare a realistic investment budget! until this is done the investment program is mostly a list of desirable projects with little information on the priority to be given different projects. 87. Broadly speaking, the projects included in the public sector investment program appear reasonable. Many of the white elephants which characterized earlier years have been eliminated. The Government leaving office in August 1989 has spent considerable resources, and has received substantial foreign assistance, in developing sectoral strategies. In some of the productive sectors (hydrocarbons, mining and transportation) the investment program is broadly consistent with the strategy document and with a rational allocation of resources (although note difficulties with some projects mentioned below). Less progress has been made in  - 35 - agriculture, probably reflecting the multiplicity of projects and executing agencies, as well as the organizational problems suffered by the Ministry of Agriculture. 88. The principal uncertainty concerning 'he hydrocarbons program is the fate of the agreements to sell to Brazil the electrical power, polye- thylene and urea that is to be produced usin6 Bolivia's natural gas. The Bank is presently reviewing these projects to assess their economic viability. If final agreement is reached between Bolivia and Brazil on the projects, and if they are found to be feasible, they would absorb about US$1.1 billion over the next 4-5 years in investment funds. The huge size of the project (three times the dollar value of public sector investment expenditures in 1988) and the uncertainty of political and economic developments in Brazil make this a risky proposition for Bolivia. It is expected that the Bolivian Government would borrow the bulk of the money at close to commercial terms. The consequences for thte economic program if the project frils and the Government has to repay this huge debt are poten- tially catastrophic. Further, the project would have few linkages to the Bolivian economy; the gas pipeline) and industrial plants would be highly capital intensive, built and supplied from abroad. On the other hand, successful completion of the project would provide foreign exchange which is desperately needed, particularly as it is likely that Bolivian natural gas sales to Argentina will decline after expiration of the contract between the two countries in 1992. Therefore, the Government should continue to explore whether the projects are economically and politically feasible. However, it would be useful to obtain private investment (perhaps through joint ventures) for at least part of the planned projects, particularly the urea and polyethylene plants. 89. The investment program in mining heavily emphasizes the rehabili- tation of existing mines that were closed in 1986, including the purchase of equipment, spare parts, and some prospecting for additional reserves. The US$19 million budgeted for COMIBOL operations (not including the Bolivar project, see below) may be optimistic, given that the recovery last year was not as rapid as planned. COMIBOL continues to suffer from serious organizational problems, which cannot be remedied quickly. Still, we expect that more will be accomplished this year than last, especially as the new procurement system appears finally to be operating. The non- COMIBOL investment program is achievable, and may well be exceeded if the institutional components of an IDA project (assistance for geological surveys, cadastral surveys, and organizational strengthening) can be made effective by the last quarter of 1989. The Government has budgeted US$10.9 million for the Boliva- mine, but it appears unlikely that operations will begin in 1989. While tlxe proposed operation (which would produce zinc and silver) appears sound, _t may be desirable to involve private companies through joint ventures or management contracts. 90. The investment program in transportation is generally well- planned, although a few projects could be deleted. The budget for SENAC reflects an appropriate division between expenditures on maintenance and new c-nstruction. This is a considerable improvement on past years, when there was a strong tendency to spend money on politically-attractive construction projects and neglect necessary maintenance. On the negative side, the investment program continues to include the building of a new  - 36 - airport for Cochabamba. This airport represents a waste of resources which could be used more productively to solve some of the real transportation bottlenecks suffered in Bolivia. It is particularly vital to build new feeder roads and maintain and rehabilitate existing rural roads to lower the very high transportation costs facing the agricultural sector in Bolivia, which would have a significant impact on reducing rural poverty. Donors would better serve Bolivia by channeling funds earmarked for the airport to other projects. The economic benefits of the planned improve- ments to the La Paz airport would also be much lower than other possible transportation improvements. Some questions also exist concerning ENFE's plan to purchase locomotives. It might be desirable to first devote resources to improving management in ENFE il. order to improve the efficiency of use of the existing equipment, before considering capital improvements. 91. Little progress has been made in implementing a coherent invest- ment program in agriculture. While the Government has defined a sectoral strategy for agriculture, this strategy has not yet had much of an impact on the projects undertaken by the decentralized agencies responsible for investment. For example, the Government's strategy document recommends emphasizing non-traditional export products, while the investment program would devote a majority of resources to improvements in livestock. Understandably, the Government's efforts in this sector have focused on reorganizing the Ministry of Agriculture (which had practically ceased to function by 1985), preparing the agricultural sector strategy, and working on the agricultural development law. However, a great deal more work will be necessary to evaluate the many projects now included in the investment program and begin redirecting resources to projects consistent with the Government's view of the appropriate strategy for agriculture.  - 37 - CHAPTER VI. HEALTH 92. This Chapter covers expenditures on health. First, an overview of the institutional structure is presented, followed by a description of the budgeting process in the health sector. The various sources of funding for public health are then discussed, including a description of the contribu- tions made by the Treasury, social security, municipalities and RDC9. In Seccion C, the role of both the for-profit and non-profit private sectors is analyzed. In Sections D through G, comparisons are made of the three main actors in public health: the ministry, the social security system and the non-government organizations (NGOs). Section D examines their relative breakdown of expenditures; Section E, wages in each sector; while Sections F and G look at their relative merits with respect to efficiency and equity. The final section presents conclusions and recommendations. A. Health's Institutional Structure 1. Overview 93. Health care in Bolivia is available from both the for-profit and non-profit private sectors, and from the public sector. Care provided for profit by the private sector is clearly out of reach for the vast majority of the population, though poor urban neighborhoods, paradoxically, are frequently dotted with private clinics providing care of unknown quality. A 1983 Ministry of Health and Social Security (MPSSP) report estimated that the private for-profit sector may have covered 1Z of the population. How- ever, this estimate seems to be low (see Table VI.6 and para. 121 below). 94. The non-profit private sector is comprised of about 300 NGOs work- ing in health and nutrition. They are by no means homogeneous. Most have very small areas of influence, where they, however, may be the only provider of health care. Estimates of NGO coverage in health are very difficult to calculate. NGOs operate 232 of the health infrastructure in the four major urban areas of Bolivia. With available information, the best estimate of NGO coverage in health care is 202. Rough figures for 1988 indicate that the NGO sector received on the order of US$19 million in foreign financing, exclusive of food donations, which is about 102 less than the total MPSSP budget. 95. The remaining 75-802 of the population are covered by the public sector. The public sector has traditionally been divided into two service networks with separate financing. MPSSP is supposed to provide coverage to 50-602 of the population and is financed from the TGN, cost recovery and international funding. The MPSSP is the centralized institution respon- sible for the direction of the following national units: health servicses, human resources, maternal and infant care, epidemiology, nutrition, environmental health, planning, personnel and external aid. In addition, there are decentralized sanitary units in each department which are respon- sible for coordinating health care on a regional basis. 96. Social Security, which is autonomous from the public health net- work, has provided coverage to 20-252 of the population. A third source of funding, though not a service network, was introduced with the advent of the ESF. It had provided $4.7 million to the public health and non-profit  - 38- private networks by the end of 1988. The nation also receives sizable food donations, a small share of which are distributed in food supplementation programs directly linked to MPSSP or the provision of health services. The amount of public funding channeled through each of these streams is shown in Table VI.1.18/ The weight of the Social Security system, which is charged with providing care to only 20-251 of the population, in comparison with that of MPSSP, which is charged with covering the rest, is heavy. Greater detail on the sources and uses of funds for the health sector is contained in the subsequent sections. Table VI.1: Public Funding of the Health Sector Millions of 1987 USS MPSSP ss1 ESF Food Aid Tovkl 1980 37.1 30.6 - 23.0 90.7 1981 23.2 22.3 - 12.1 57.6 1982 21.0 29.3 - 21.6 71.9 1983 19.7 15.0 - 48.1 82.8 1984 17.6 51.6 - 32.4 101.6 1985 19.0 23.4 - 43.8 86.2 1986 11.7 10.7 - 38.8 61.2 1987 16.9 n.a. 0.3 n.a. n.a. 1988 20.5 n.a. 3.3 n.a. n.a. 19892 24.2 n.a. n.a. n.a. n.a. Source: UDAPE, Schulthess, ESF, staff estimates. ls Spending only on health services, not pensions. 2: Budgetted amount. ?.. Budget structure 97. Each centrally funded entity prepares a budget proposal for sub- mission to the Undersecretariat of the Budget in the Ministry of Finance (see Chapter II for more detail on the 1989 budget process). In the case of MPSSP, the proposal to Finance is based on the institutional budgets submitted through the regional Sanitary Units, and programming budgets for central MPSSP activities. 98. At the ministerial level, the budgeting procedures are the most complete, with separate program budgets identified, and individual sources of funds considered, though the budget is still fairly aggregated. The submissions from the hospitals are of lower quality. Their budgeting is done by expenditure category only. Their revenue estimates are loose extrapolations from past experience but the unwieldy, inaccurate and untimely accounting practices make the reliability of the estimates doubtful. At the local level health centersI9/ have even more rudimentary 18/ In order to convert to real US dollars, the nominal time series in Bolivianos was deflated on a monthly basis using the CPI (see Chapter III). 19/ Health centers are under the supervision of the regional Sanitary units. The centers offer limited services, have some lab equipment and are staffed by a doctor.  - 39 - financial procedures and health posts20/ have virtually no financial planning. 99. The absence of a systematic information system, and the inadequacy of accounting practices inhibits any meaningful control of budget implementation and makes formulation difficult and inaccurate. There is, for example, no simple way to determine what percent of drug expenditures was covered from foreign donations, patient charges, or other sources, nor whether funds charged for drugs were actually used to replenish the supply. B. Sources of Funds 1. Funds Channeled Through MPSSP 100. MPSSP is supported by three sources: the Treasury, cost recovery, and international financing. The relative shares of these have changed markedly since 1984, with TGN shrinking from 922 of MPSSP financing to 5OZ. Cost recovery now accounts for 22Z of funding as opposed to 62 in 1984, and external aid has risen from its 2Z share is 1984 to 28Z in 1988 (see Table VI.2). Each component is examined in more detail in the following sub-sections. Table VI.2s Shares of MPSSP Funding by Source Source 1984 1985 1986 1987 1983 TGN 92.2Z 62.2? 48.8? 60.2Z 50.1Z Cost Recovery 5.6? 17.2? 30.2Z 25.4Z 22.1? International 2.2Z 20.6Z 21.1Z 14.4Z 27.8? Financing Total 100.OZ 100.0 100.OZ 100.0X 100.0? Source: MPSSP 101. TGN. In real terms, public funding for health fell from 1980 through 1984 (not shown in table) as a result of the economic crisis but recovered in 1987 and 1988. Expenditures by MPSSP as a share of TGN expenditures were 4.4Z in 1980, but only 2.1Z in 1986. In 1987, they had recovered to 3Z (see Table VI.3). In real terms expenditures fell from US$6.63 per capita per annum in 1980 to US$1.76 in 1986, rebounding to US$3.79 in 1989 (planned). 201 Health posts have little equipment and are attended primarily by nurses' aides.  - 40 - Table VI.3t TGN Support to MPSSP 1980 1981 1982 1983 1984 1985 1986 1987 TGN SUPPORT TO MPSSP 37.1 23.2 21.0 19.7 17.6 19.0 11.7 16.9 (millions of 1987 US$) TGN SUPPORT TO MPSSP 6.6 4.0 3.6 3.2 2.8 2.9 1.8 2.5 (per capita 1987 US$) SHARE OF MPSSP IN TGN 5.7 5.2 3.9 3.9 3.4 2.8 2.2 2.8 (Z) SHARE OF TGN SUPPORT FOR 0.79 0.52 0.40 0.41 0.36 0.40 0.29 0.45 MPSSP AS SHARE OF GDP (Z) Source: MPSSP, UDAPE 102. Cost Recovery. As resources from the Treasury became scarce, MPSSP sought to replace them through user fees. In real terms cost recovery increased by more than 6002 from 1984 to 1988, rising from US$1.7 million in 1984 to US$10.3 million in 1988. 103. Virtually all institutions (hospitals, health posts, and adminis- trative units) generate resources through cost recovery. For the public bospitals in the cities of La Paz, Cochabamba and Santa Cruz the average percent of their resources generated through cost recovery has risen from 132 in 1984 to 40X in 1988. The standard deviation in the amount recovered has doubled in the same period, suggesting that some institu- tions find it harder to generate resources than others. More specialized hospitals have achieved higher rates of self-financing through cost recovery, except for the psychiatric facilities. Clinics have increased their reliance on cost recovery, though less markedly than the hospitals. Rural health care is still not generating significant resources of its own. 104. A general guideline for fees and charges is approved centrally by MPSSP, but is deviated from widely, at the institutions' discretion. The entirety of funds raised through cost recovery remains with the recovering institution. Theoretically, the uses to which these funds are put could be dictated by the Ministry through the budgetary process, but, in fact, institutions report that their autonomy in using these funds is largely respected. 105. ihysicians' fees form a particularly complex piece of the cost recovery puzzle. The general rule is that in public institutions where salaries are paid by MPSSP, no additional charges should be levied by physicians for patients on ward care. However, a number of deviations exist, some sanctioned by the institution's management. Patients choosing semi-private or private rooms pay additional physicians' fees, sometimes directly and sometimes through the hospital.  - 41 - 106. Business Contracts. Hospitals and clinics also enter into contracts with private doctors, surgeons, insurance funds and large companies. There is no standard rule for the cost/revenue sharing in those contracts which vary from region to region and even within an institution. The medical staff or insurance fund may pay the hospital/ clinic a flat monthly fee for use of the facility, or a fee per patient on a percentage of the charge made to the patient, or may contribute by paying for supplies. Often medical practitioners ensure access to supplies and drugs for the patient, serving as a retailer. These arrange- ments are usually unprofitable to the public facilities, particularly for surgery procedures where surgeons come with their staff and distribute the profit among their team members in a complex way. 107. International Financing. From 1984 to 1988 international finan- cing to MPSSP has risen in real terms from US$660,000 to US$13 million per year. About 802 of this financing was received as donations, the remainder were loans and development credits. 108. The international organizations which contribute to the sector are the World Health Organization, Pan-American Health Organization, UNICEF, and the World Food Program (WFP). In 1988 they accounted for 102, 7Z and 222 of external financing respectively. They each contribute to specific programs, such as maternal-child health, anti-goiter campaigns (goiter is a thyroid problem caused by an iodine deficiency), or vaccina- tion campaigns. The bulk of the WFP contribution is for a Chagas control program (Chagas is a disease caused by a tropical parasite which causes severe heart problems). The largest bilateral donors are the United States and Japan, contributing 23Z (122 of which is food aid) and 22Z, respectively to the 1988 total. The U.S. programs support health projects, especially in epidemiology and primary and maternal-child health care, and small-scale sanitation as well as an older pharmaceutical impor- tation/distribution project. Japan has specialized in constructing and equipping sophisticated infrastructure such as hospitals in Santa Cruz and Cobija. 109. In addition to those resources directed specifically for health, large food donations are distributed to nutrition programs administered by NGOs or community groups as well as through the Ministries of health and of Education. The delivery mechanisms of this food aid frequently includes a health education component, especially in mothers' clubs. In 1986, the value of donated foods was US$38 million, or three and a half times TGN support for MPSSP. 2. Funds Complementary to MPSSP's Network 110. Municipalities. Municipalities contribute to sector financing according to their financial position and political will. For example, in La Paz the municipality does not have a regular health program, but parts of several of its special projects, e.g., the first World Bank urban project, have had health components. Also, it finances integrated community programs (Acci6n Comunal) on a self-help basis of which health is a component. The municipality of Cochabamba charges a transport tax that finances health expenditures. Monies raised are controlled by an independent civic organization dedicated to replacing the city's main general hospital. Finally, in Santa Cruz the Municipality has played a  - 42 - substantial role in health. There are small earmarked taxes on passenger transport and entertainment which allowed the municipality to spend US$1.1 million for hospital renovation in 1987. The Municipality also administers six health districts ("areas") as compared to tte four run by the Sanitary Units and the fifteen to twenty by NGOs. 111. Regional Development Corporations. The RDCs help to construct infrastructure according to their financial position and determination of priorities. CORDECRUZ, the regional development corporation of Santa Cruz, has been particularly active, having constructed on its own account 47 separate health facilities (mainly health posts) and having helped in the construction of over 200 others. CORDEPAZ and CORDECO, the corpora- tions for La Paz and Cochabamba, have much smaller budgets and are much less active in direct health facility construction. In fact, during i987 CORDEPAZ and CORDECO did not spend any money on health, whereas CORDECRUZ, which is by far the wealthiest of the three corporations, spent Bs 0.4 million constructing rural health posts. 3. Networks Alternate to MPSSP Network 112. Social Security. Social security coverage in health in 1986 was 21.4Z of the population, having declined from 26.2Z in 1982. This reduc- tion in coverage was primarily due to the decline in employment in covered sectors which accompanied the economic crisis. Expenditures on social security have been unstable during 1978-1985 especially those for health, as demonstrated in Table VI.4. Table VI.4: Percent Share of Social Security Expenditures in GDP Year Total Health Care 1978 2.9 1.6 1979 3.5 2.0 1980 2.8 1.4 1981 2.7 1.2 1982 2.0 1.1 1983 1.9 0.8 1984 3.5 2.0 1985 1.9 1.0 1986 1.7 0.7 Source: Central Bank of Bolivia and Social Security InstiLate. 113. The Subsecretariat of Social Security of MPSSP is the highest normative body of social security. The autonomous Bolivian Institute of Social Security (IBSS) provides technical supervision of the individual social security institutes. There are seventeen of these. By far the largest is the Caja Nacional de Salud, which covers the public sector. Each institute had completely separate administrations and regimes of contributions, benefits, and mechanisms until June 1987, when Supreme Decree 21637 provided a major step toward the unification of the separate regimes. According to the decree, contributions should now be uniform and  - 43 - administrative structures should be made parallel. How far the reform has been implemented is, however, uncertain. Provision of health care has been separated financially and administratively from administration of pensions. Under the newly decreed uniform contribution scheme, funding for health benefits derives from an employer contribution of 102 of the wage of employed participants and 52 of the pension of retired participants. 114. Ertrgency Social Fund. The ESF has served as a short-run method of funneling official money into the health and nutrition sector since January 1987. As of December 31, 1988, it had committed about $10.5 million to projects in the health sector (not including potable water or sanitation projects), which represents 92 of ESF's total commitments. Of this, ESF has committed US$4.5 million to construction of health infras- tructure (142 of the total spent by ESF on construction), favoring health post construction or upgrading in operating NGO networks. Finally, ESF has committed US$3.0 million to food supplementation programs of a variety of types including school feeding, day care, and soup kitchens for children. Of the total amount which ESF has spent in the health sector, about 432 has been funelled through the public sector and 572 through NGOs. C. The Importance of the Private Sector 1. Non-government Organizations (NGOs) 115. In recent years, NGOs have taken on an increasingly important role in providing primary health care services in Bolivia. In many rural areas, NGOs are the sole providers of health services. The MPSSP estimates that approximately 300 such organizations have projects in the health sector. Fewer than one-third of these have a formalized relation- ship with the Government through official agreements at the departmental level. 116. Table VI.5 shows total estimated 1988 expenditures by NGOs, excluding food donations and ESF contribution, at $2.72 per capita. In comparison, the MPSSP spent $3.24. Social Security $3.35 and the ESF $0.44. NGOs accounted for approximately 282 of total health expenditures. In examining NGO expenditures in the health sector, potable water and sanitation projects have been excluded from consideration, although their importance to health is undisputed.  - 44 - Table VI. 5 Health Expenditures Per Capita by Organization, 1988 ---------------------------------------------------------- Crganization Expenditures z Expenditures US$ Per Capita MPSSP 22.0 33 $3.24 Social Security 22.8 34 $3.35 ESF 3.0 5 $0.44 NGOs 18.5 28 $2.72 TOTAL 66.3 100 $13.18 1 Does not include ESF expenditures or government salary support. 117. The most reliable method for estimating the amount spent by NGOs in the health sector is to review sources of financing. Very few NGOs generate a significant amount of their own resources locally; most rely exclusively on external funds.2l/ The major sources of money are Europe and North America, either in the form of direct financing of projects by these governments or through contributions from private organizations and church groups. Including financing from ESF, an estimated $19.3 million 22/ was spent in the health sector by NGOs in 1988. Of this financing, official bilateral sources accounted for 66Z, church groups for 162, foreign NGOs 13Z, multilateral sources 1Z, and the Government, through the ESF, 42. 118. In addition to this direct financing, NGOs receive support from the Government of Bolivia in the form of personnel paid by the MPSSP who work in facilities run by NGOs as well as the provision of supplies, most importantly vaccines. The extent of this support varies between regions depending on the relative levels of government and NGO presence in the area. NGOs also receive support from the communities in which they work. This support has two forms: direct payment of fees for services, and community provision of health infrastructure. In terms of cost recovery through fees, NGO policies vary; however, NGOs generally provide free preventive services, charge a symbelic fee for medical consultations, and recover a higher percentage of costs on prescriptions. 119. Community provision of health infrastructure is important, but difficult to quantify. A study done of health infrastructure in the cities of El Alto, La Parj Cochabamba and Santa Cruz found that the community owned roughly 292 of all health establishments in these areas, though only two were operated by the community. In many cases, NGOs operate community-owned infrastructure and thus avoid the capital cost of constructing their own facilities. The amount of community support to NGOs on a national level is unquantifiable. An estimate was made for one 21/ However, some of the larger NGOs do generate some funds through cost recovery. 22/ In Table VI.5 tte number for NGOs excludes ESF financing of about $0.8 million.  - 45 - rural province with an active NGO presence. In this case, funding for health activities in the province were broken down as follows: NGO 56.4Z, Government 21.32, church 19.12, and community support 3.2Z. 2. Private for-profit health care 120. There is very little information available at this time on the expenditures of the private for-profit sector in health. Table VI.6 shows the number of institutions being operated by each sector in four cities. Table VI.6s Health Infrastructure by Operating Organization La Paz, E1 Alto, Cochabamba and Santa Cruz, 19881 -----------------------------------------------------------------__- Total La Paz El Alto Cochabamba Santa Cruz I X 1 X t Z t Z 1 2 MPSSP 88 25.4 46 37.4 23 52.2 16 17.4 3 3.4 SOC. SEC. 24 6.9 11 8.9 2 4.6 10 10.9 1 1.2 OTHER GOVT 31 9.0 14 11.4 4 9.1 1 1.1 12 13.8 NGO S 81 23.4 21 17.1 14 31.8 24 26.1 22 25.3 COMMUNITY 1 0.3 1 0.8 0 0 0 0 0 0 PRIVATE 121 35.0 30 24.4 1 2.3 41 44.5 49 56.3 TOTAL 346 100 123 100 44 100 92 100 87 100 -------------------------------------------------------------------- 1 Source: MPSSP/World Bank Integrated Health Project Preparation Survey. 121. According to this Table, the private sector is operating 352 of the institutions to be found in these large cities. However, as mentioned earlier, coverage of the population by the private for-profit sector over- all in the country has been estimated by MPSSP in 1983 to be only around 1X. This estimate appears low as private groups are operating a relatively large share of the health infrastructure, even considering that most of facilities operated by NGOs are of a smaller than average size. D. Distribution by Type of Expenditure 1. 1QSSP 122. Within recurrent expenditures Table VI.7 shows the marked decline in salary expenses from US$25 million in 1984 to US$7.9 million in 1986, recovering to US$15.3 million in 1988. This occur