Bolivia - Public sector investment program review

Report No. 111 24-BO Bolivia Public Sector Investment Program Review October 13, 1992 Country Operations Division I Country Department III Latin America and the Caribbean Region FOR OFFICIAL USE ONLY * W If ~ ~ - . r - .- fi~~~ n d~t~_ '~1E~d I '~ ~ ~~~~~~~ ~fif .4. ~~~~~~~~., ~ ~ Y~~~: ~k JIJ -I " '7-iA ,~ 7~~~~~~~~~~~~~~~- ek,i, 2V~~~~~~~~~~~~~~~~~  FISCAL YEAR January 1 to December 31 CURRENCY EQUIVALENTS Currency Unit: Boliviano (Bs) Exchange Rate Effective July 1992 US$1.00 = Bs. 3.8992 Bs. 1.00 = US$0.2665 ABBREVIATIONS AASANA - National Airports Administration ANESAPA - National Association of Water Supply and Sanitation Institutions CAF - Corporacidn Andina de Fomento CIDA - Canadian International Development Agency CITEL - Comitd Interamericano de Telecomunicaciones COBEE - Corporaci6n Boliviana de Electricidad COMIBOL - Corporaci6n Minera de Bolivia (Bolivian Mining Corporation) COMTECO - Cooperativa Telef6nica de Cochabamba CONEPLAN - Consejo Nacional de Economfa y Planificaci6n CONATA - National Tariff Council CORDECH - Corporacidn de Desarrolo de Chuquisaca CORDEPO - Corporaci6n de Desarrollo de Potosi COTAS - Cooperativa Telef6nica de Santa Cruz COTEL - Cooperativa Telef6nica de La Paz CRA - Certificado de Reintegro Arancelario DINE - Direcci6n Nacional de Electricidad (National Electricity Directorate) DINASBA - Directorate of Water and Sanitation DGH - Directorate General of Hydrocarbons DGT - Directorate General of Telecommunications EBM - Expansi6n del Oriente Boliviano ELFEC - Empresa de Luz y Fuerza de Cochabamba EMSO - Economic Management Strengthening Operation ENAP - Empresa Nacional de Agua Potable (National Water Supply Company) ENDE - Empresa Nacional de Electricidad (National Electricity Company) ENEL - Ente Nazionale per L'Energia Elettrica (Italian Electricity Company) ENFE - Empresa Nacional de Ferrocarriles (National Railways Company) ENTEL - Empresa Nacional de Telecomunicaciones (National Telecom Company) ERNT - Expansi6n de la Red Nacional de Telecomunicaciones FNDR - Fondo Nacional de Desarrollo Regional FONPLA - Fondo Nacional de Planificaci6n FONEM - Fondo de Exploracion Minera (Mining Exploration Fund) GDP - Gross Domestic Product ii  FOR OFFICIAL USE ONLY GEOBOL - Geologfa Boliviana GTZ - German Aid Agency HDM - Human Development Management IDA - Intemational Development Association IDB - Inter-American Development Bank 11IMM - Instituto de Investigaciones Minero Metaldirgico IMF - International Monetary Fund IRR - Intemal Rate of Return ITU - International Telecommunications Union KfW - Kredintanstalt fur Wiederaufbau LAB - Lloyd Aereo Boliviano (Bolivian Airline) LIBOR - London Interbank Offering Rate LRMC - Long Run Marginal Cost MACA - Ministry of Agriculture and Peasant Affairs MAU - Ministry of Urban Affairs MEC - Ministry of Education and Culture MEH - Ministry of Energy and Hydrocarbons MF - Ministry of Finance MMM - Ministry of Mining and Metallurgy MPC - Ministry of Planning and Coordination MTC - Ministry of Transport and Communication NDP - National Directorate of Projects NFPS - Non-financial Public Sector OECF - Overseas Economic Cooperation Fund OLADE - Organizaci6n Latinoamericana de Energfa PAHO - Pan-American Health Organization PEPs - Public Expenditures Programs PFMO II - Second Public Financial Management Operation PFP - Policy Framework Paper PNUD - Programa de las Naciones Unidas para el Desarrollo PRODURSA - Projecto de Desarrollo Urbano y Saneamiento PROISS - Integrated Health Project PSF - Health Strengthening Project PSI - Public Sector Investment PSIP - Public Sector Investment Programs RDC - Regional Development Corporation SAE - Equipment Management System SAFCO - Sistema Integrado de Administraci6n Financiera y Control SAGUAPAC - Santa Cruz Public Services Cooperative Limited SAM - Maintenance Management System SAMAPA - La Paz Municipal Water and Sewerage Services Company SEF - Emergency Social Fund SEMAPA - Cochabamba Municipal Water and Sewerage Services Company SEMENA - Servicio de Mejoramiento a la Navegacidn Amazonfca SENCAM - Servicio Nacional de Cadastro Minero SIIF - Integrated Financial Information System SIF - Social Investment Fund SIMFL - Secretarfa de Intereses Marftimos Fluviales y Lacustres iii This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  SIRSAT - Sistema de Redes por SatElite SISIN - Sistema de Informacifn Sobre Inversiones SNC - National Road Service SNIP - National Public Investment System SRMP - Second Road Maintenance Project TAM - Transportes Aereos Militares TGN - Tesorerfa General de la Naci6n UDAPSO - Social Policy Analysis Unit UEM - Updating Economic Memorandum UNDP - United Nations Development Programme UNFPA - United Nations Fund for Population UNICEF - United Nations Children's Fund USAID - U.S. Agency for International Development VAT - Value-added Tax WHO - World Health Organization YPFB - Yacimientos Petroliferos Fiscales Bolivianos (Bolivian Petroleum Company) iv  This report is based on the findings from a mission to Bolivia in April 1992 and subsequent missions to Bolivia by country and sector operations staff (as part of their on-going work on Bolivia) from April 1992 to September 1992. The following staff members contributed to this report: Vicente Fretes Cibils (task manager), Deborah Bateman, John Panzer, Felix Remy, Susan Goldmark, Aurelio Menendez, Jean Paul Faguet, Alvaro Covarrubias, Eloy Vidal, Constance Corbett, Miriam Schneidman, Roy Ramani, James Cercone, Jose Alonso- Biarge, and Gianni Brizzi. Contributions were also made by Juan Carlos Aguilar, Abderrahmane Megateli, and Alain Tobelem. Guy Chamot (consultant) provided a background paper on the hydrocarbon sector. Jamil Mubarak helped construct the database. Marta Cervantes coordinated the production of the report.  I  BOLIVIA PUBLIC SECTOR INVESTMENT PROGRAM REVIEW CONTENTS Page EXECUTIVE SUMMARY .......................................... i-viii INTRODUCTION . .................................................. 1 1. THE PUBLIC EXPENDITURE PROGRAMS ........................... 3 The Magnitude and Composition of the Expenditure Program of the Non-financial Public Sector, with Emphasis on Public Investment Programs ............ ...................... 3 Some Common Sectoral Issues: Recurrent Cost, Cost Recovery and Formulation and Selection of Public Projects ..... ............ 17 2. SECTORAL REVIEW: THE PRODUCTIVE SECTORS ..... ............ 20 I. AGRICULTURE . .......................................... 20 Background ............................................... 20 Public Sector Investment Strategy and Objectives .................. 21 Project Identification, Preparation, Selection and Monitoring .... ..... 22 The Public Sector Investment Program 1992-1994 .................. 24 Summary and Recommendations ............................... 26 II. MINING AND INDUSTRY AND TOURISM ..................... 26 MINING ................................................. 26 Background ............................................... 26 Sector Strategy and Objectives ................................ 27 The Public Investment Program ............................... 27 Other Issues ............................................... 31 Summary and Recommendations ............................... 31 INDUSTRY AND TOURISM ................................. 32 Sector Strategy a-d Objectives ................................ 32 Public Investment Program, 1991-1994 .......................... 32 Other Issues............................................... 34 Summary and Recommendations .............................. 34 vi  Page HL HYDROCARBONS ........................................ 35 Background .............................................. 35 Sector Organization ........................................ 35 Ministry of Energy and Hydrocarbons ........................... 36 YPFB ................................................... 36 Private Sector ............................................. 37 Sector Strategy and Objectives ................................ 38 YPFB's Investment Programs, 1987-1991 and 1992-1994 .... ......... 38 Other Sector Issues ........................................ 42 Summary and Recommendations ............................... 42 3. SECTORAL REVIEW: THE ECONOMIC INFRASTRUCTURE SECTORS ........................................... 44 I. POWER . ................................................. 44 Background .............................................. 44 Strategy and Objectives ..................................... 44 Electricity Pricing .......................................... 45 Investment Program, 1987-91 ................................. 47 Investment Planning Practices ................................. 48 Size, Composition and Financing of ENDE's Investment Program for the Period 1992-95 .......................................... 49 Other Issues .............................................. 51 Summary and Recommendations ............................... 52 II. TRANSPORT ............................................. 52 Sector Strategy and Objectives ................................ 52 The Public Sector Investment Program, 1987-1991 ................. 53 The Public Sector Investment Program, 1992-1994 ................. 56 Planning and Selection Criteria ................................ 57 The Road Subsector ........................................ 58 The Railway Subsector ...................................... 62 Aviation and River Transport Subsectors ....................... 65 Other Issues .............................................. 67 Summary and Recommendations ............................... 67 III. TELECOMMUNICATIONS .................................. 69 Background .............................................. 69 Public Sector Investment Program, 1987-1991 and 1992-1994 .... ..... 71 Summary and Recommendations ............................... 74 4. SECTORAL REVIEW: THE SOCIAL SECTORS ....................... 75 I. EDUCATION ............ ................................. 75 Background .............................................. 75 Sector Strategty and Objectives ................................ 77 vii  Page The Public Sector Investment Program, 1987-1991 and 1992-1994 .... .. 78 Other Issues . ............................................. 81 Summary and Recommendations ............................... 81 IL HEALTH ................................................. 82 Sector Overview ............................................ 82 Public Expenditures . ....................................... 87 Investment Program, 1992-1994 ............................... 92 Summary and Recommendations ............................... 96 III. SANITATION AND WATER RESOURCES ..................... 97 Background . ............................................. 97 Sector Strategy and Objectives ................................ 98 The Public Sector Investment Program, 1992-94 ..... ............. 99 Other Sector Issues .............. ......................... 101 Summary and Recommendations .............................. 103 IV. URBAN DEVELOPMENT AND HOUSING .................... 104 Background .............................................. 104 The Public Sector Investment Program, 1987-1991 and 1992-1994 ..... 105 Summary and Recommendations .............................. 107 5. INSTITUTIONAL ASPECT OF EXPENDITURE MANAGEMENT AND SOME RECOMMENDATIONS FOR STRENGTHENING ........... ......................... 109 Multi-Year Public Expenditure Planning and Programming .... ...... 110 The Role of the Various Govemment Agencies and Levels .... ..... 110 The National Public Investment System (SNIP): Concept and Structure ............................................ 111 Status of Implementation of the SNIP ......................... 112 Constraints to Further Implementation of the SNIP ..... .......... 112 Summary and Recommendations .............................. 113 Formulating and Executing a Unified Budget .................... 114 Status of Implementation ........... ........................ 115 Constraints to Further Implementation ......................... 115 Summary and Recommendations .............................. 116 List of Text Tables 1 1.1 Total Expenditures of the Consolidated Non-financial Public Sector. 4 viii  Page 1.2 Current Expenditures of the Consolidated Non-financial Public Sector . .............................................. 4 1.3 Programmed Public Sector Investment by Economic Activity, 1987-1991 .... 8 1.4 Executed Public Sector Investment by Economic Activity, 1987-1991. 9 1.5 Execution Rate of Public Sector Investment, 1987-1991 .11 1.6 Programmed Public Sector Investment by Economic Activity, 1992-94 ... 12 1.7 Summary of Sources of Financing of Programmed Investment, 1987-1991 . 14 1.8 Summary of Sources of Financing of Executed Investment .14 l.9 Financing of Executed Investment by Sources and Sectors, 1987-1991 . ......................................... 15 1.10 Summary of Financing of Programmed Investment by Sources and Sectors, 1992-94 .16 2 2.1 Composition of Agriculture Public Sector Investment, 1988-1991 .21 2.2 Distribution of Investments by Economic Activity, 1988-1991 .22 2.3 Distribution of Investments by Departments, 1988-1992 .23 2.4 Distribution of Investments by Economic Activity, 1992-94 .25 2.5 Composition of Agricultural Public Sector Investment 1992-94 .................................................. 25 2.6 Mining Public Sector Investment, 1987-1991 ....................... 28 2.7 Mining Public Investment Program, 1992-1994 ..................... 39 2.8 Investment in Industry and Tourism, 1987-1991 .................... 33 2.9 Programmed Investment in Industry and Tourism, 1992-1994 .... ...... 33 2.10 Investmet in Hydrocarbons, 1987-1991 ........................... 39 2.11 Programmed Investment in Hydrocarbons, 1992-1994 ..... ........... 41 3 3.1 Electricity Price to Final Consumer .46 3.2 ENDE's Investment Records, 1987-1991 .......................... 48 3.3 Power Generation Expansion Plan, 1992-2010 ..................... 49 3.4 ENDE's Programmed Investment, 1992-1995 ...................... 50 3.5. Programmed and Executed Investments in the Transport Sector, 1987-1991 .54 3.6 Executed Investments in the Transport Sector by Subsector, 1987-1991 ............. 55 3.7 Executed Investments in the Transport Sector by Subsector as Percent of Total Executed Investments in Transport, 1987-1991 ........... .......................... 55 3.8 Proposed Investments in the Transport Sector by Subsector, 1992-94 .............. ........................... 56 ix  Page 3.9 Investment in the Transport Sector by Sub-sector and Source of Funds 1992-94 ......... ........................... 56 3.10 Proposed Investments in the Transport Sector by Subsector as Percent of Total Executed Investments in Transport, 1992-94 ........... ............................ 57 3.11 Programmed and Executed Investments in the Road (SNC) Subsector, 1987-1991 ...... ................................ 59 3.12 Programmed and Executed Investments in the Road (RDCs) Subsector, 1987-1991 ........... ............................ 60 3.13 Programmed and Executed Investments in the Railways Subsector, (ENFE) 1987-1991 ................................ 64 3.14 Programmed and Executed Investments in the Aviation Subsector, 1987-1991 .66 3.15 Programmed vs Actual Investment in Communications, 1987-1991 .72 3.16 Programmed Investment in Communications, 1992-1994 .73 4 4.1 Public Expenditures in Education and Enrollments, 1990 .77 4.2 Public Expenditures in Education Compared with Total Current Public Expenditures and GDP, 1987-1991 .79 4.3 Programmed Public Sector Investment in Education, 1992-1994 80 4.4 Regional Health, Fertility and Malnutrition Indicators .83 4.5 MPSSD Expenditures by Category, 1987-1992 .89 4.6 Total Public Sector Investment in Health, 1987-1991 .91 4.7 Total Programmed Public Sector Investment in Health, 1992-1994 .94 4.8 Distribution of Programmed Investment, by Department, 1992-1994 . 95 4.9 Programmed Investment in Basic Sanitation and Water Resources, 1992-1994 ...... . ........................... 99 4.10 Programmed and Executed Investment in Urban Development and Housing, 1987-1991 .106 4.11 Programmed Investment Urban Development and Housing, 1992-94.... 107 Figure Figure 1.1: Percent Composition of Current Expenditure of Non-Financial Public Sector .................................. 5 Figure 4.1: Distribution of Recurrent Spending, 1989 & 1991 ....... ............ 88 Text Boxes Box 4.1: Historical Pattern of Investment in Health Sector ....... ............ 90 Box 4.2: Project Selection Process .................................... 92 Box 4.3 Two Largest Project in 1992-1994 Health PSIP ........ ............. 93 Box 5.1: The National Public Investment System (SNIP) ....... ............ 111 Box 5.2: Systems of Financial Administration (SAFCO) ....... ............. 115 x  Page Annexes Annex A: Public Sector Finances: Organization ........ ................... 118 Annex B: Hydrocarbon Sector: Recent Sector Economic and Technical Development ................ ..................... 120 Annex C: Statistical Annex ........................................... 124 MAP xi  EXECUTIVE SUMMARY 1. This report reviews the Government's proposed 1992-94 public investment program, to determine the extent to which its size, composition, and efficiency is consistent with the Government's objectives to maintain macroeconomic stability and to shift the focus of public investment from directly productive activities to economic infrastructure and the social sectors. It also reviews the largest projects in the proposed public investment program and comments on institutional aspects of public expenditure management. 2. The Government has successfully controlled the expansion of total expenditures from 1987 to 1991. In this period, Bolivia's nonfinancial public-sector expenditure has averaged about 36 percent of gross domestic product (GDP). Although total expenditures did increase from 34 percent of GDP in 1987 to 36 percent of GDP in 1991, it did so at a sustainable rate and within the framework of the fiscal adjustment path. Furthermore, duiing this period there was a shift in the composition of total public expenditures: the proportion of current expenditures within total expenditures fell from about 80 percent to about 74 percent, making possible an expansion of capital expenditures within the fiscal targets. 3. However, within current expenditures, the Government has not been able to reduce the share of the wage bill in order to accommodate the necessary increases in expenditures on operations and maintenance, thus reducing the value of public assets. P' the 1987-91 period, public investments have not substantially been reallocated from directly productive sectors to economic infrastructure and the social sectors. An average of 38 percent of capital was devoted to the productive sectors, 38 percent to economic infrastructure, and 19 percent to the social sectors. 4. Within the National Public Investment System (SNIP) of the Ministry of Planning and Coordination (MPC), the Government has prepared possible investment projects for 1992-94, identified as the Public Sector Investment Program (PSIP). The PSIP constitutes a list of possible projects from which the actual investment program to be implemented during this period will be chosen. The current PSIP is equivalent to 9.7 percent of GDP in 1992, 14.8 percent in 1993 and 14.7 percent in 1994. Within the PSIP, the share of investments in the productive sectors would decline from the 1987-91 average of 38 percent to 33 percent; the share of investments in economic infrastructure would increase from an average of 38 percent to about 42 percent; and the share in the social sectors would increase from 19 percent to 24 percent. 5. The Govemment recognizes that the investments included in the PSIP for 1992- 1994, if fully implemented, would be too large and inconsistent with a feasible fiscal program. However, the Govemment intends to implement a level of public investment equal to 8.7 percent of GDP annually during 1992-1994, as established in the most recent Policy Framework Paper. The composition of the proposed PSIP for 1992-94 is broadly consistent with the Govemment's objective to shift the focus of public investment from the directly  - ii - productive sectors to economic infrastructure and social sectors, thereby complementing private investment and improving the supply of critical public goods and services. 6. During 1987-91 the executed investment program amounted to 65 percent of the PSIP for that period, reflecting a pattern of overprogramming relative to implementation capacity in certain sectors. Even if the execution rates of the 1993 and 1994 PSIP approximate historical levels, public investment would exceed the levels within the fiscal program. Furthermore, given the fact that execution rates in the productive sectors have tended to be higher than in the other areas, the intended shift in the composition of the program would not be achieved. 7. Therefore, in the course of implementing its public investment program during the coming years, the Government will need to make a systematic effort to select components of the PSIP so that (1) the executed investment program does not exceed the targets established by the fiscal program and (2) the intended increase in the shares of economic infrastructure and the social sectors is realized. To achieve these objectives, particular attention should be given to: (1) substituting private investment for public resources in hydrocarbons, power, and telecommunications; (2) strengthening the project implementation capacity in the social sectors; and (3) eliminating from the PSIP those proposed projects which are not economically justified. 8. With respect to the possible substitution of private investment for public resources in hydrocarbons, the Government is now pursuing the use of joint ventures to increase private investment in exploration and production. Also, it is preparing the necessary legal, regulatory and tax policy framework which would encourage private investment in downstream (for example, transport and marketing) operations. However, the PSIP assumes relatively modest success in attracting private investment in the sector. If these efforts are pursued aggressively, it should be possible to achieve the desired expansion of the hydrocarbons sector with less public investment during the 1992-94 period than now envisioned in the PSIP. 9. In the power sector--a key element of economic infrastructure--Bolivia now has a mixed system involving both public and private ownership. In telecommunications the long- distance company is publicly owned and local services are provided by coopeartive. In both sectors the Government intends to improve the legal and regulatory framework in order to encourage greater private investment. It is also studying possible strategies for privatization of the telecommunications sector. Vigorous pursuit of these efforts should make it possible to expand the pace of private investment in these key sectors, allowing some reduction in the allocations in the PSIP. 10. The Government is committed to increase public resources invested in the social sector sectors. This is demonstrated by the fact that during the first six months of 1992 investment in the social sectors was about US$35 million, which is three times the level  - iii - during the same period in 1991. Achieving a significant increase in the share of public investment devoted to the social sectors will require a sustained effort during 1993 and 1994. 11. With respect to eliminating economically unjustified projects from the PSIP, it is noted that the process of formulating, selecting, and monitoring public investment projects has improved considerably over the past five years but still suffers from administrative weaknesses. In particular, the selection, evaluation and ranking of investment projects at the sectoral level (by sector ministries, decentralized agencies, regional development corporations, and municipalities) remains weak. In addition to efforts to improve the implementation of the SNIP, including investment information systems (the SISIN database), greater efforts to improve project selection, evaluation and ranking at all levels are required. It is expected that the proposed civil service reform will enhance the civil service capacity and the quality of the project formulation and selection process. Through these efforts, the least viable projects now included in the PSIP should be dropped. 12. The review of the largest projects has indicated that, in our judgment, a few of these projects require more careful evaluation. They are: (1) San Jose hydroelectric project, in the power sector; (2) Cochabamba's airport project, in the transport sector; (3) the rural telephony program, in telecommunications; (4) the La Paz telefirico, in urban development and housing; and (5) the Misicuni scheme and the Santa Cruz flood control program, in sanitation and water resources. In addition, in education, the allocation of current expenditures (1) between primary and higher levels of education and (2) between personnel and teaching materials/operating expenses deserves a reassessment. SECTORAL REVIEWS I. The Productive Sectors Agriculture 13. The Government has oriented its agricultural PSIP towards providing public goods and avoiding investments that fall within the realm of the private sector. The bulk of the agricultural investment program is implemented by regional development corporations (RDCs) and decentralized agencies. The agricultural PSIP is concentrated in departments whose RDCs are stronger, which may exacerbate economic inequalities among departments. The Government should address the current imbalance and economic disparities among regions/departments by improving the investment process and creating mechanisms to improve the efficiency and equity of the allocation of public resources, such as financing technical assistance for project preparation. The subsector in which agricultural public investment is programmed to grow more rapidly is livestock development. Preventing the misallocation of resources will require a review of the conditions of the credit component of this program.  - iv - Mining and Industry and Tourism 14. The 1992-94 PSIP in the mining sector is consistent with the Government's strategy and objectives. The program will be oriented largely toward supporting reform initiatives in the sector and providing information to stimulate private investment. To date, the reform process has been successful on the legal front. Also, some progress has been achieved on the institutional front. However, the restructuring of COMIBOL is behind schedule. The Government should accelerate the process of creating joint ventures to operate COMIBOL's properties, especially its "core" mines. In addition, the Government should re- evalL.,.te the mnerits of its direct participation in promotional projects, particularly the gold alluvial and prospects of ulexite projects, in light of potential participation of the private sector in these type of projects. In industry and tourism, the PSIP is very small, reflecting the fact that the sectors are overwhelmingly in private hands. Hydrocarbons 15. YPFB's 1992-94 investment program proposes a level of investment in exploration and production of about US$103 million annually, equivalent to approximately 15 percent of the average PSIP. Under the assumption of an expected 70 percent investment execution rate, the investment program implies that YPFB intends to maintain the level of investment of recent years--about US$72 million annually from 1989 to 1991. YPFB's 1992- 94 investment program for transport, marketing and distribution totals US$32.5 million annually. With an expected 70 percent execution rate, the program implies an increase in capital expenditures for these activities from about US$14 million annually in 1989-91 period to an expected US$22 million annually in 1992-94 period. The rest of the program includes minor investments for refining and strengthening YPFB's administration. 16. The proposed investments in upstream operations--exploration and production-- and downstream operations--primarily transport, marketing and distribution--are necessary to address the Government's objective to expand the supply of liquids and natural gas. However, the figures assume relatively modest success in ongoing efforts to draw upon the capital and technical resources of private companies through joint operations as provided by the new Hydrocarbons Law of 1990. If associations and operations contracts in exploration and production were accelerated, financial resources could be freed for other public-sector uses. Moreover, if a more aggressive policy were implemented to open up possibilities for private-sector participation in downstream operations, additional public resources could be reallocated. 17. However, to attract private ventures, the Government must vigorously pursue its ongoing efforts to improve the legal and regulatory framework for this sector. This should include issuing the implementing regulations for the 1990 Hydrocarbons Law. It should also develop a new policy for pricing and taxing petroleum products so as to encourage private participation in downstream operations while securing public revenues from the sector.  II. The Economic Infrastructure Power 18. The total public investment program is based on ENDE's 1992-95 revised investment plan, amounting to US$290 million. The review identifies two periods in this investment program. First, the 1992-93 segment of ENDE's investment program is devoted to projects that are fully justified at a total of US$101.4 million. The level of the investment is within ENDE's technical and financial implementation capacity provided that electricity tariffs are increased to the level of long-run marginal cost. Second, the 1994-95 segment of ENDE's investment program, which includes the San Jose hydroelectric plant, must be updated by December 1992 to establish the roles that this plant and possibly the Misicuni multipurpose project will play within the least-cost power expansion plan beyond 1998. Thus, both of these projects must undergo thorough review that considers the opportunity cost of natural gas for power generation in Bolivia vis-a-vis the export gas price agreed upon with Brazil. 19. Given the need to reduce the overall PSIP and to reallocate public resources, the Government should expand the role of private capital in this sector. It should therefore increase its efforts to draw upon the capital and technical resources of private companies by putting in place a legal and regulatory framework more supportive of private investment in this sector. Transport 20. The investment program for the 1992-94 period totals about US$527 million, of which approximately 50 percent would be financed from extemal sources. However, this program appears to be relatively ambitious, considering the resources available to the Govemment and previous implementation experience. 21. The proposed allocation of resources across transport subsectors is appropriate. The government continues its commitment to support the road subsector: about 82 percent of total investments in transport is allocated to roads. Continuous but declining support (in percentage terms) to the nrajways would be maintained, and some discrete interventions would be undertaken in the aviation and river transport subsectors. 22. In roads, the Central Govemment's efforts are devoted to maintaining and rehabilitating the main national road network. Moreover, consistent with its decentralization policy, RDCs will assume a greater role in maintaining and rehabilitating secondary and rural networks; by 1994, 43 percent of public investment in roads will be channeled through the RDCs. The system of selecting road projects must continue to improve. 23. In railways, the modest investment program proposed (about 8 percent of the total 1992-94 transport investment program) continues the trend of past years; the bulk of the  - vi - portfolio focuses on rehabilitating existing lines and repairing locomotives. These projects are consistent with the Government's objective to maintain the railway system while developing programs to encourage greater private-sector participation in the subsector. 24. In aviation, the Government is correctly focusing on allocating public resources to maintaining and repairing the deteriorated airport infrastructure. However, the major investment in the expansion of the Cochabamba airport (38 percent of the total 1992-94 aviation investment program) deserves careful reassessment to avoid the further misallocation of resources. Telecommunications 25. The level of programmed investment for the 1992-94 PSIP is about US$31 million annually. This level is well below the pace of investment necessary to reach targeted densities by the end of the decade--at least US$60 million annually. Given scarce domestic resources, the Government should thus attempt to attract much-needed foreign capital and technology. 26. Most of the proposed investments by ENTEL are allocated to high-priority needs to improve the quality of service. However, the investment allocation for rural telephony seems disproportionate to the low priority of this project within the Government's objectives and requires a reassessment. The review also indicates that an imbalance in the allocation of resources continues to exist, neglecting the needs of local networks. To correct this imbalance and reduce the proposed public investment program, the Government should induce the cooperatives and private companies to increase investments in telecommunication systems, especially in the local network. Inducing domestic and foreign private investment requires a major reform and restructuring of the telecommunications system. Essential elements of this reform include (1) changing the existing legal and regulatory framework, (2) reviewing the tariff structure and the system for setting tariffs, and (3) restructuring/privatizing ENTEL and transforming the cooperatives into joint stock companies. m. The Social Sectors Education 27. The Government is now preparing a major reform of the educational system, which is a critical necessity for addressing key issues in the sector. The review has identified two major issues associated with current expenditures, which will be addressed by the reform program: (1) there has been an excessive allocation to personnel costs at the expense of other operating expenditures, including teaching materials; and (2) resources have been misallocated between higher and primary education, having been skewed highly toward the higher level where efficiency and the social rate of return are lower.  - vii - 28. Much of the education infrastructure is in severe disrepair, is inadequate in size, or lacks sanitary facilities; physical investments are thus warranted. However, because the public investment program includes none of the investment planned by the universities and includes only a partial list of education investments programmed by the SIF, it is not possible to determine exactly whether the overall size and composition of the program in education is adequate. Health 29. The review has identified two major issues associated with current expenditures: (1) there have been inequalities in the allocation of public resources among departments/regions; and (2) the pattern of public spending has been skewed towards hospital care instead of primary health care. In light of these findings, the Government should continue its current efforts to: (1) reorient spending towards relatively deprived areas, e.g., Oruro and Potosi; and (2) proceed with reallocation of personnel towards primary health care facilities, including salary incentives to achieve this objective. 30. The proposed public investment program of the health sector includes 42 projects, totaling US$144 million. While the needs the health sector are unquestionable, the size of the proposed public investment program for 1992-1994 remains an issue of concern, shared by the Government. The proposed program is likely to tax the sector's limited absorptive capacity and might pose an unsustainable recurrent cost burden on the sector. The Government should, therefore, continue its efforts to strengthen the sector's institutional and policy framework, including investment planning, programming and coordinating capabilities. The Government should also consider: (1) scaling down the proposed investment program in the sector by reducing the design of some projects and/or slipping others to later years; and (2) carrying out, on a priority basis, a careful evaluation of recurrent cost implications of the proposed public programs, with a view to determining its sustainability. Sanitation and Water Resources 31. The proposed investment program for the 1992-94 period totals about US$290 million. Although this proposed program is consistent with the priorities established for the sector, its overall size does appear to be too large, which is also recognized by the Government. In reconsidering a feasible investment program, the Govemment should not change the priority given to basic sanitation, but it must carefully assess potentially marginal projects. In this respect, two large programs/projects currently presented in the 1992-94 investment program must be evaluated further to determine their financial and economic feasibility more precisely and thus to fully justify their inclusion in this proposed investment program. These programs/projects are (1) the Misicuni scheme, and (2) the sanitation and flood control program in the area of Santa Cruz.  - viii - Urban Development and Housing 32. The proposed 1992-94 investment program for urban development and housing totals about US$68 million, equivalent to approximately 3 percent of total programmed investment. In contrast to the overall PSIP, a relatively high percentage (56 percent) of total investment in urban development is to be financed through intemal funds. The proposed program is large relative to executed investments from 1987 to 1991. The main constraints to implementing this program are both the weak institutional capacity of municipalities and weak capacity to generate internal funds. The largest proposed project (US$15 million) in the 1992-94 PSIP is the building of a telefetico transport system between El Alto and La Paz. In light of the financial, operational, and institutional requirements to run this system, the review recommends that a careful feasibility study be undertaken before a final decision is made to include it in the PSIP. INSTITUTIONAL ASPECT OF EXPENDITURE MANAGEMENT 33. Establishing the SNIP, including the SISIN database, is a commendable and ambitious effort, and is improving the administration of public investment. However, the gap between programmed and executed public investments during 1987-1991 reflects not only problems with the implementation of the investment program but also the inadequate budgeting process. As it also partially explains this gap, the subsystem for evaluation and ranking in the SNIP must be improved. If the SNIP is implemented successfully, it will help to reduce these inefficiencies. This will however depend on the extent to which the current constraints can be overcome and the system can further be developed into a useful planning and monitoring tool. 34. To achieve these objectives, the Government should (1) accelerate its current efforts to integrate the investment planning function with the budgeting function; (2) reformulate the Project Impact Management and Project Ranldng subsystems to facilitate selecting investment projects; (3) continue its current efforts to improve coordination among the Ministry of Planning and Coordination (MPC), the Ministry of Finance (MF), and all other relevant agencies; and (4) implement the proposed civil service reform in order to strengthen the capacity of personnel involved in the PSIP process. 35. In the context of the Integrated System of Financial Administration and Control (SAFCO) Law, the Government developed the SAFCO systems, which includes three interrelated systems of financial administration--program-based budgeting and planning, cash management and integrated accounting systems--that should improve the administration of public finance. The extent to which the SAFCO systems can be implemented successfully will also depend on the extent to which the major constraints--the lack of human capital and ministerial coordination, and system incompatibility--can be overcome. Given that the easiest constraint to be resolved is the incompatibility of systems, as correctly identified by the Government's current efforts, the review recommends making both the SISIN and SAFCO systems fully compatible.  INTRODUCTION 1. Bolivia's 1985 New Economic Policy has restored macroeconomic stability and reduced relative price distortions in the economy, essentials for long-term sustainable growth. The stabilization and adjustment programs have only recently been rewarded by strong output growth. In 1991 real GDP grew by over 4 percent for the first time in more than a decade.1' 2. To maintain this level of real growth, the Government must maintain macroeconomic stability and encourage private investment. To maintain macroeconomic stability, the government should continue implementing a credible fiscal adjustment path, a key component of which is its public expenditure program. To encourage private investment, the government's policies should call for providing the necessary investments in physical infrastructure (such as transport) and human capital (such as education) to complement private investment. 3. The size, composition, and efficiency of the public expenditure program, particularly public-sector investment, is an essential element of Bolivia's economic development strategy. In this context, this document is part of the World Bank's ongoing review of public sector investment. In addition to supporting the Bank's dialogue with authorities, the purpose of this document is to help the Bank and other donors provide external assistance that addresses Bolivia's overall development strategy and its investment priorities. As such, the report is part of background documentation for the 1992 Consultative Group Meeting on Bolivia. 4. The analyses in this report assess government spending on an aggregate and sectoral basis, focusing on public investment expenditures. The analysis delves into the changing role of the public sector, as it is increasingly oriented toward supporting private- sector development, increasing the human capital resource base, and expanding the infrastructure. The report covers primarily the developments of executed investments from 1987 to 1991 and the proposed public sector investment program for the 1992-1994 period. It reviews sectoral strategies and objectives and their consistency with their specific public investment programs. It describes implementation and financing issues, as well as some common sectoral issues, such as the selection and implementation of public projects. When possible, it reviews the largest projects in each sector and provides recommendations for improving the allocation of public resources. Finally, the report assesses the institutional aspects of the public expenditure management, including its public investment subsystems. 1/ 'Bolivia: Updating Economic Memorandum (UEM)", Report No. 11123-BO, The World Bank, October 1992.  - 2 - 5. The report consists of five chapters, complemented by three annexes. Chapter 1 reviews the structure of public expenditures, focusing on public-sector investment as well as several common sectoral issues, including the formulation and selection of public projects. Chapters 2 through 4 review of the following sectors specifically: (1) the productive sectors--agriculture, mining and industry and tourism, and hydrocarbons; (2) economic infrastructure--power, transport, and telecommunications; and (3) the social sectors--education, health, sanitation and water resources, and urban development and housing. Finally, Chapter 5 reviews the institutional aspect of the expenditure management system. The annexes provide additional information on: (1) the public-sector organization, (2) recent technical and economic development in hydrocarbons, and (3) the statistical database.  CHAPTER 1 THE PUBLIC EXPENDITURE PROGRAM 1.1 This chapter reviews the overall composition and allocation of public expenditures of the nonfinancial public sector (NFPS)" during 1987-91 and the public investment program. The analysis also intends to evaluate the extent to which the proposed public-sector investment program (PSIP) for 1992 to 1994 is consistent with the Government's policy toward the new role of the public sector--that is, a shift from direct public participation in productive sectors to a greater emphasis on the social sector and economic infrastructure. Furthermore, the chapter discusses recurrent expenditures, cost recovery, and the quality of the process of formulating and selecting public investment projects, which have been identified as the most important problems across sectors. The chapter consists of two sections (1) the magnitude and composition of the expenditure program, with emphasis on the 1987-91 expenditure program and the 1992-94 proposed investment program; and (2) some common issues relevant to the various sectors: recurrent costs, cost recovery, and the formulation and selection of public projects. The Magnitude and Composition of the Expenditure Program of the Nonfinancial Public Sector, with Emphasis on Public Investment Programs 1.2 Total public expenditures of the NFPS increased from about 34 percent of the gross domestic product (qDP) in 1987 to about 36 percent in 1991. The annual average public expenditure of the NFPS for 1987 to 1991 was about US$1.6 billion equivalent, representing about 36 percent of GDP, of which current expenditure represented about 27 percent of GDP (Table 1.1). However, the proportion of current expenditures among total expenditures fell from 80 percent in 1987 to 74 percent in 1991, making room within the fiscal targets for an expansion of capital expenditures. It Most of the information included in the review was provided by (1) the Ministry of Planning and Coordination (Directorate of Public Investment Unit), generated from the SISIN database, and (2) the Ministry of Finance generated from the SAFCO system. The review covers primarily public investment programs channelled through central government ministries and regional development corportions. The investments of major public enterprises included in the SISIN database re also included in this review. All public investment expenditures channeled through 'Fondos'-for example, social investment funds and Fondo Nacional de Desarrollo Regional (FNDR)-- that are included in the SISIN database are part of this review. Moreover, public investments in sanitation, water resources, and urban development and housing carried out by Municipalities and included in the SISIN database are also reviewed. However, the review excludes other public investments of regional and local governments. Annex I provides more details on the organization of the NFPS.  -4 - T :o 1.1: Total Expenditures of the Consotidited Nonfinanciat Pblic Stector.10 1987-19911 Average 1987 1988 1989 1990 1991 1987-1991 1. In US$ Million Total Expenditure 1,473.5 1,579.6 1,607.9 1,649.2 1,804.3 1,622.9 Current Expenditure 1,171.3 1,164.3 1,169.6 1,201.8 1,339.5 1,209.3 Capital Expenditure 302.2 415.2 438.3 447.3 464.8 413.6 o/w: Executed PIP (302.2) (415.2) (377.1) (360.4) (420.5) (375.1) 2. As Percent of GDP Totat Expenditure 34.2 35.7 35.7 36.7 35.9 35.6 Current Expenditure 27.2 26.3 25.9 26.7 26.7 26.6 Capital Expenditure 7.0 9.4 9.7 9.9 9.3 9.1 o/w: Executed PIP (7.0) (9.4) (8.4) (8.0) (8.4) (8.2) 3. Percent Composition Total Expenditure 100.0 100.0 100.0 100.0 100.0 100.0 Current Expenditure 79.5 73.7 72.7 72.9 74.2 74.6 Capital Expenditure 20.5 26.3 27.3 27.1 25.8 25.4 O/N: Executed PIP (20.5) (26.3) (23.5) (21.9) (23.3) (23.1) Source: IF (SAFCO system), MPC (SISIN database), IMF, and World Bank estimates. Current Expenditurez' 1.3 The share of salaries and wages, and goods and services remained around 70 percent (18 percent of GDP), while that of interest payments 14 percent (4 percent of GDP), other expenditures and transfers to private entities has increased (Table 1.2 and Figure 1). TaMI :1 :rf::t I of : SnI d Om -Con.- -i Npnai-:w Pbfo :::::, 0 11 ioa I I I IF I I Tt I _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ~-(MI .US S) - N%OO )~ Cuwrent Expencdture 51 1,184.4 1,171.7 1,201.9 1,330.5 1,219.4 26.33 25.90 26.68 28.8| 26.42 Wag. and Salaries 440.5 474.1 497.5 544.8 489.2 9.96 10.52 11.04 10.85 10.50 ohw: GG 340.5 389.5 38s.0 415.2 377.8 7.70 8.20 8.57 8.27 8.18 Goods & Service, 324.4 368.3 353.1 380.3 3586.5 7.34 8.17 7.84 7.58 7.73 otw: GG 153.5 188.2 183.3 191.0 179.0 3.47 4.17 4.07 3.81 3.88 TranafertoPrvhate 49.8 93.3 120.7 1 16.61 1 98.1 1.13 2.07 2.618 2.32 2.05 nInters 184.8 168.9 147.9 162.9 166.1 4.17 3.75 3.28 3.24 3.61 Paid Exbrnal 40.8 81.8 82.1 83.4 62.0 0.92 1.37 1.38 1 .s 1.33 Unpaid Exmnal 127.3 107.3 84.7 75.5 98.7 2.618 2.38 1.68 1.50 2.16 Paid DomestIc 16.5 0.0 1.1 4.0 5.4 0.37 o.00 0.03 0.06 0.12 Ol OerCurre Expendfture 185.1 1 87.1 1 82.7 1 36.1 1 112.5 1 3.73 1 1.48 1 1.84 1 2.69 2.4 |Y Include.sthoe of public enterprIe Source: MF (SAFCO Syam), IMF and World Bank utmatme a/ The analysis of the composition of current expenditure excludes the year 1987; the format of the detailed information available for that year was inconsistent with the rest of the series.  -5- 1. mm U * a I as 11W low 411 P Sur: MF (WOFCO ystm), IMF, and Wodd Bank simates Salaries and Wages 1.4 The consolidated NFPS wage bill rose from 10 percent of the GDP in 1988 to 11 percent of GDP in 19912'. Furthermore, its share of current expenditure increased from 38 percent to 41 percent between 1988 and 1991, due to annual salary and wage increases. For the 1988-91 period the salaries of NFPS employees, including civil servants increased by about 25 percent each year, while the consumer price index increased by an average of 17 percent. Consequently, the increases improved the real purchasing power of civil servants, which had fallen by over 15 percent between 1985 and 1987. 1.5 From 1988 to 1991, 30 percent of the wage bill included in the Treasury was concentrated in 2 of the 17 ministries, the bulk in education, followed by defense. Over the same period, the education wage bill rose by about 20 percent and the public health wage bill by 15 percent. The combined budget share of education and health grew from 15 to 19 percent of the total budgeted wage bill between 1988 and 1991, reflecting the increase in both wages and personnel in these two sectors. 3/ There is also evidence that some wage expenditures-that is, those financed by nongovermmental organizations and sponsors--were not recorded as such in the budget, but will be transferred to the budget when the relevant projects have been fully implemented. Obtaining a more accurate estimate of the wage bill requires increasing wages recorded in the budget with (1) wage-related expenditures that are not identified in the budget as wage expenditures, (2) wages included in the investment program, and (3) wages financed by sponsors.  1.6 In view of the fiscal constraints, future growth in the wage expenditures should carefully be evaluated; otherwise, under-financing of non-wage expenditures would be difficult to correct. Although the proportion of civil servants' wages among current expenditures is about 31 percents', the current salary scales of civil servants are not competitive with the private sectors, making it difficult for the Government to attract and maintain qualified civil servants, particularly technicians. For example, in 1991, the average gross salary in the private sector was five times that of a civil servant at the midmanagement level. Since the public service is unable to offer more competitive remuneration to staff with specialized skills, it frequently relies on donor-financed foreign technical assistance. However, given budget constraints, it is not possible or efficient to raise civil servant wages across the board. Moreover, given that the civil service and the private sector often compete for the same scarce human resources, to attract the most qualified personnel will require making selective salary increases and rationalizing civil service. Goods and Services 1.7 The NFPS goods and services expenditures increased from about 7.3 percent of GDP in 1988 to 7.6 percent of GDP in 1991. For the same period, its proportion of current expenditures increased from 28 percent to about 29 percent. However, for most sectors, the costs of maintaining existing assets (excluding public enterprises) have been underfinanced, a deficiency that is aggravated by limited public investment in certain sectors such as health and education. Furthermore, the ratio of goods and services expenditures to personnel expenditures, excluding public enterprises, is lower in Bolivia (0.47 from 1988 to 1990) and 0.45 in 1991) than in other Latin-American countries--for example, Colombia (0.6) and Ecuador (0.6). The imbalance should be corrected as soon as possible to avoid the deterioration of capital assets. Furthermore, to the extent that the Govemment relies increasingly on contracting with the private sector for specialized services, this expenditure category must increase even further. Interest Payments 1.8 Reducing Bolivia's debt stock and debt-service payment continues to be a policy priority. Since 1987, Bolivia's external debt policy has been to contract loans primarily on concessional terms. Thus, the proportion of Bolivia's outstanding guaranteed bilateral and 4/ In Bolivia, the average proportion of civil servants' wages and salaries among total government expenditures (23 percent) is not high relative to other industrial and developing countries: United States (25 percent), United Kingdom (25 percent), Colombia (23 percent), Ecuador (27 percent), Malawi (33 percent), and Indonesia (21 percent). However, the data suggest that compared with other Latin-American countries, for example, Argetina and Chile, Bolivia does have a plethoric civil service. For example, excluding public enterprises, Bolivia has 27 civil servants per thousand population; Argentina and Chile have 20. The relatively high proportion in Bolivia thus supports the view that the civil service must be rationalized. The World Bank's Updating Economic Memorandum, (October 1992) provides a more detailed discussion of civil service reform.  commercial debt declined from 80 percent in 1980 to 58 percent of total outstanding disbursed debt in 1991. Moreover, interest expenditures (primarily external) fell from about 4.2 percent of the GDP in 1988 to about 3.2 percent of GDP in 1991, and their proportion of current expenditures fell from 15.9 percent in 1988 to 12.2 percent in 1991. The legacy from the past, when public enterprises were being created, is that several credits had been contracted on non-concessional terms, with interest rates ranging from 10 percent to 15 percent. Most of these loans have now been reimbursed, renegotiated or written off. Thus, average loan terms have fallen appreciably. For example, average interest on total debt fell from 9.5 percent in 1982 to 5.1 percent in 1991, while the grant element increased from 8.1 percent to 37.4 percent during the same period. Furthermore, on an accrual basis, projected external debt service shows that interest on disbursed and outstanding debt, which fell by 1.5 percent of GDP between 1988 and 1991, is expected to continue to decline in the future. Other Expenditures 1.9 In the past, the impact of nondevelopmental expenditures has been detrimental to growth and income--particularly true of direct and indirect transfers to losing public enterprises. However, other expenditures declined as a proportion of GDP, from 3.7 percent in 1988 to 2.7 percent in 1991. At the same time, their proportion of current expenditures fell from 14.2 percent in 1988 to 5.7 percent in 1989, but since then has increased continuously, reaching 9.2 percent in 1991, reflecting increases in transfer expenditures to universities. Capital Expenditures 1.10 Since 1987, the Government has been attempting to integrate capital expenditures into the fiscal program. In this effort, the amount of overall capital expenditures expected to be implemented is determined yearly in the context of the macroeconomic framework elaborated by the Government with the IMF and the World Bank. Capital expenditures normally exceed public investment programs because, in addition to these programs, the Govemment's capital expenditures include capital asset repositions and other capital asset acquisitions, which do not represent strictly public projects or programs. Public projects and programs are included in the PSIP, and represent about 90 percent of total capital expenditures. This review focuses on past and proposed PSIPs (1987 to 1991 and 1992 to 1994) developed the PSIP unit in the Ministry of Planning and Coordination (MPC). The PSIPs intend to translate sectoral goals and priorities into specific investment programs and projects within proposed capital-investment and fiscal targets.  8 Average _________________ __ 1987 1988 1989 1990 1991 1987-91 Totl Fixed Investments 100.0 100.0 100.0 100.0 100.0 100.0 Production 42.7 45.7 48.9 45.9 32.8 42.6 Agriculture 11.7 5.3 7.6 9.2 6.5 8.2 Mining 2.7 4.0 5.9 4.0 2.6 3.8 Hydrocarbons 26.2 36.3 35.0 32.1 22.6 29.7 Industry and Tourism 2.1 0.1 0.3 0.5 1.1 0.9 Economic Infrastructure 39.6 42.6 38.4 40.4 43.6 40.9 Energy 2.6 11.8 8.3 7.0 9.5 7.6 Transport 30.9 27.3 25.4 27.4 29.6 28.3 Communications 6.0 3.5 4.7 6.0 4.5 5.0 SociaL Infrastructure 15.0 11.1 10.5 12.2 19.4 14.1 Heaith and Social Security 1.6 1.3 0.7 2.7 5.9 2.6 Education nd Culture 2.2 0.0 0.4 0.4 2.5 1.2 Basic Sanitation 6.0 3.4 6.1 6.8 6.7 5.9 Urban Development and Housing 4.5 4.8 1.6 1.4 3.1 3.0 Water Resources 0.7 1.6 1.8 1.0 1.3 1.3 Other 2.7 0.6 2.3 1.5 4.1 2.4 Multisectoral 1.6 0.5 2.2 1.2 1.4 1.4 Other 1.1 0.1 0.1 0.3 2.7 1.0 memo: PSIP in USS Million 576.4 388.8 529.9 469.8 628.5 518.7 PSIP as X of GDP 13.4 8.8 11.8 10.4 12.5 11.4 Source: MPC (SISIN database). The 1987-91 and 1992-94 Public Sector Investment Programs 1.11 The average annual 1987-91 PSIP amounted to about 11.4 percent of the GDP (Table 1.3) . The average structure of PSIPs for 1987 to 1991 was as follows: (1) 42.6 percent for productive sectors (agriculture, mining, tourism and industry and hydrocarbons); (2) economic infrastructure (energy, transport and telecommunication), 40.9 percent; and (3) 14.1 percent social sectors (health, education, basic sanitation, urban development and housing and water resources). Classifying investments into the productive sector, economic infrastructure, and social sector, which is done in the PSIP, is only an approximation of the nature of these investments. In particular, some of the investments in the productive sectors are supporting services and public goods which do not involve direct production. 1.12 Especially after 1989, the sectoral distribution of the public investment program reflected the intention of the Government to allocate more public resources to the economic infrastructure and the social sector (Table 1.3). The proportion of economic infrastructure investment among total investment was programmed to increase from 38 percent in 1989 to about 44 percent in 1991 due largely to the expanded investment program in transport and energy. At the same time, the proportion of the social sector investments was programmed to increase from about 11 percent to 19 percent, due to the enlarged public investment  - 9 - program in health and social security, education and culture, and urban development and housing. Public resources allocated to the productive sectors were programmed to decline sharply, from about 49 percent in 1989 to 33 percent in 1991. 1.13 The actual (executed, rather than programmed) average public investment for 1987 to 1991 was 8.2 percent of GDP (Table 1.4). The actual public sector investment increased from 7.0 percent of GDP in 1987 to 8.4 percent of GDP in 1991. The aggregate data on the pattern of sectoral allocations of public investment from 1987 to 1991 suggests that the reorientation of the role of the state--that is, a shift from direct public participation in productive sectors to a greater emphasis on social sectors and economic infrastructure--has been only partially successful. Public investment in productive sectors (agriculture, mining industry and tourism, and hydrocarbons) remained more or less constant at about 38 percent of total investments between 1987 and 1990 and increased to 39.1 percent of total investments in 1991. Moreover, for the 1987-91 period, the hydrocarbon sector continued to absorb substantial public resources--about 26 percent of total investment--while the level of public resources allocated to economic infrastructure (energy, transport, and communications) increased from 40.2 percent of total investments to 42.0 percent of total investments in the same period, due largely to the increase of public investments in energy. 1i. . .,4T blte: 4bd PublicSopcto ~n5lliwt by EQ0QUc AAy 1N7-tW1 ..............................::i. 1987 1988 19 1990 1981 1967-91 Total FlRxd Investment 1/ 100.0 100.0 100.0 100.0 100.0 100.0 Producdon 38.0 37.3 37.7 38.2 30.1 38.1 Agriculture .0 11.4 9.4 9.5 9.3 9.6 Metal and Mlnernh 0.5 3.1 3.3 0.4 1.7 1.9 Hydrocwbons 28.8 22.0 24.6 28.1 28.0 28.1 Industy & Toutam 0.7 0.8 0.4 0.2 0.2 0.5 Economi Incnastructure 40.2 37.6 38.9 31.2 42.0 38.1 Enwgy 7.0 5.4 5.9 6.6 11.7 7.4I Trneport 26.4 29.8 31.4 18.7 28.9 27.1 Communicaons 4.8 2.7 1.5 5.9 3.4 3.8 Socil Inaructure 18.9 20.7 19.9 27.2 8.9 18.9 Hal & Soci Security 2.4 1.6 2.3 5.4 2.8 2.9 EducaIon & Culure 2.8 1.7 2.5 4.0 0.5 2.2 Boik Santation 5.6 7.2 8.2 12.2 2.3 7.0 Urnization & Housing 3.0 8.9 6.0 4.7 2.1 5.8 Waler Feooune 0.2 1.2 1.0 0.9 1.3 1.0 Other 2.9 4.3 3.5 3.4 10.0 5.0 Multecton 1.9 3.9 3.3 2.5 2.8 2.9 oter 0.9 0.4 0.2 0.9 7.2 2.1 Memo: Executed Investment In USS 305.4 416.8 377.1 360.4 420.5 370.4 ow: Socil Emerglnvcy/Th. Fund 33.3 57.9 43.1 45.0 10.7 38.0 Executd Investment as %GDP 7.0 9.4 6.4 8.0 8.4 8.2 oMw: Socil EmWgncyiv. Fund 0.6 1.3 1.0 1.0 0.2 0.9 1/ Includes SEF and SF. Source: MPC (SISN datbe).  - 10- 1.14 In addition, public investment in the social infrastructure declined from about 19 percent of total investments in 1987 to 8.9 percent of total investments in 1991, due largely to the reduction of investments channelled through SEF/SIF during this period (Table 1.4). With the exception of 1990, the proportion of public expenditures in the health sector increased slightly to 2.6 percent of total investment in 1991, and a well-fornulated national plan has also been established. But public expenditures in education fell from 2 percent of total investments in 1987 to a negligible level in 1991, and the sector was still lacking a major policy reform to improve the supply of services. 1.15 During 1987-1991, there have been discrepancies between the actual PSI and the PSIP, as indicated by the ratios of actual to programmed public sector investment.1' Two main reasons may explain the discrepancies between the programmed and executed public investment spending: (1) the necessity of maintaining a credible fiscal adjustment path, as agreed in the context of the policy framework paper; and (2) the weak investment programming capacity, including poor coordination among different ministries, institutions, and agencies. With respect to maintaining a credible fiscal adjustment path, the overall investment program is part of a consistent set of macroeconomic variables, including fiscal targets. Achieving these fiscal targets required tradeoffs between current and capital expenditures during the 1987-1991 period, because the implementation of the composition of the fiscal program was poorly monitored. Thus, the pace at which the investment program was implemented, particularly disbursements of investment financing, decelerated. But more important, as discussed in more detail in Chapter 5, the weak programming capacity and lack of coordination between different sectors in the public investment process have contributed to overprogramming. Thus, the PSIP has included projects which have not actually been executed or overestimated the speed at which projects have been implemented. 1.16 In addition to poor programming and monitoring, the poor implementation performance was also associated with (1) complex project designs, for example, Eastern Lowlands and North Chuquisaca Development projects in agriculture, and the Mining Sector Rehabilitation Project in mining; (2) overestimates of the administrative capacity to implement projects, for example, the PRODURSA I Program of the FNDR, and social investment funds (SIF) in education and health; (3) overestimates of foreign financing disbursements for example, Santa Cruz's seventh turbine project in energy, and Water Supply, Phase II, in basic sanitation; (4) the lack of domestic financing, for example, North/South Chuquisaca Development and Cotapaita-San Juan del Oro projects in agriculture; and (5) delays in the procurement process, for example, for the National Electric Company (ENDE) and the Bolivian Petroleum Company (YPFB). S/ For 1987-90, the analysis of the ratios of actual/programmed excludes investment channelled through SEF/SIF, because these investments were included in the PSIP only in 1991.  - 11 - .jJ~ :isor0. ~. .t o -.: jwl w. l : ..a .. ....... . . ... ...... Sacta.u 19s7 1988 1989 1W0 1W81 1987-1U1 Totd Pbd Inaamumw, 47.2 92.8 6.0 67.1 *es s5.7 1 Po r 47.2 7.9 54.9 63.7 79.9 649 AgriculbAS 36.4 230.6 B7.9 768 95.9 65.2 MnIng 9.3 u.9 39.2 7.9 43.6 36.1 Hydcarbons 5.2 6.4 50.1 67.1 6Z8 63.6 Industiy and Toulm 18.0 1281.2 6.2 26.0 114 36.4 z Economic hrasbucbur 53.8 966. 72.1 592 e45 67.5 En*g 140.9 49.4 50.6 72.7 8.2 70.6 TrAWt 48.7 116.6 6.1 52.3 60.9 69.5 Communlcatlona 42.1 8.0 22.6 74.7 60.2 51.6 3 Soca ndtasbucur 32.8 842 73.9 107.3 30.5 56.0 Hae1 and ocwS.curdy 5f.8 eo.0 127.4 1227 30.1 58.2 Educationr-d CuA 38.7 1,351.3 641 11.1 12.1 33.4 Besicsnion 31.7 110.6 78.8 119.9 23.3 64.2 Urban Devlopment ad Houing 25.6 00.3 74.3 87.1 48.1 47.4 Wate Iaao4jIca 15.5 79.7 39.3I 71.3 ee. 55.1 4 ow 31.0 404.2 35.3 51L4 160.S 103.0 Mu 22.1 434.2 30. 15.0 1263 71.3 Oe 440 2921 147.5 215.0 176.0 148.6 No: Publ Sactr Invedmat In da a u.cuad PSIPP, excluding 1967-0 SEFARF Inveament. Souce: MP (SSIN daWasa). 1.17 On average, during the 1987-91 period, excluding the "other" category, the agricultural sector showed the best performance in terms of share executed with an 85 percent ratio, followed by energy (71 percent) and transport (70 percent) (Table 1.5). The lowest ratios were in education and culture (33 percent) and mining and industry and tourism (36 percent each). However, these averages are not representative of the execution ratios by year and across sectors; the execution ratio of the public investment program since 1987 has been consistently erratic and unstable across sectors. Increasing investment execution ratios across sectors will require continuing efforts to improve investment programming at each level of the process, including project formulation and selection. 1.18 The proposed public sector investment program (PSIP), if fully implemented, would increase from 9.7 percent of GDP in 1992 to 14.8 percent of GDP in 1993 and to 14.7 percent of GDP in 1994 (Table 1.6). This proposed investment program constitutes a list of possible projects from which the actual investment program to be implemented during this period will be chosen. As currently proposed, it is large and inconsistent with a feasible fiscal adjustment path to achieve the Government's macroeconomic targets established in the most recent Policy Framework Paper agreed upon by the Government, the International Monetary Fund (IMF), and the Intemational Development Association (IDA). The Government should therefore make a rational and systematic effort to select components within the proposed PSIP so that the executed investment program does not exceed the  - 12 - feasible investment targets (8.7 percent per annum for the 1992-94 period). In reducing the proposed PSIP for 1992-1994, priority should be given to substituting private investment for public resources in hydrocarbons, power and telecommunications. In addition, the Government could reduce allocation of public resources to public projects that require more careful evaluation. 1.19 In the proposed 1992-94 public investment program, the proportion of investments in the directly productive sectors would decline from the 1987-91 average of 38 percent to 33 percent; the proportion of investments in the economic infrastructure would ixicreas. .;oai an average of 38 percent to about 42 percent; and the proportion in the social sectors would increase from 19 percent to 24 percent. This composition is consistent with the stated objectives of the Government to move away from public investments in productive sectors toward investing in the economic infrastructure and human capital. It is also consistent with the objectives of the Govemment to complement private investment for real economic growth, and to improve the supply of critical public goods and services. The Government must therefore make a systematic effort to reduce the proposed PSIP so that the executed PSIP achieves these objectives. 1.20 In the productive sectors, consistent with the Government's policy to rely on joint ventures with private concems, the proposed public investment in hydrocarbons represents about 19.4 percent of the total investment program for 1992 to 1994. This share should however be further reduced through a more aggressive policy to attract joint ventures into the sector. Public resources allocated to agriculture, with emphasis on agricultural services, will remain constant at about 10.9 percent of total investments. Given that investments in mining will rely exclusively on joint ventures with private concems, public investments in this sector (and industry and tourism) are negligible. Jkbtl 1i* : -Programmed Public Sector Investment by Econownc Activity4 1992-1994, (in percent). _ _ _ __ _ _ _ _ _ ___--_ _ _ __ _ _ _ Average Sectors 1992 1993 1994 1992-1994 Total Programmed Investment 100.0 100.0 100.0 100.0 Production 34.4 31.3 32.8 32.6 Agriculture 9.5 11.3 11.3 10.9 Mining 1.1 2.2 1.6 1.7 Hydrocarbons 23.0 17.2 19.3 19.4 Industry and Tourism 0.8 0.7 0.5 0.6 Economic Infrastructure 40.5 41.6 40.3 40.8 Energy 10.1 12.2 13.0 12.0 Transport 26.7 23.5 23.6 24.3 Commi.nications 3.7 5.9 3.7 4.5 Social Infrastructure 23.0 24.3 25.1 24.3 Health and Social Security 6.4 6.9 7.1 6.8 Education and Culture 2.1 0.7 0.6 1.0 Basic Sanitation 9.2 9.0 8.7 8.9 Urban Development and Housing 4.4 2.9 2.6 3.1 Water Resources 0.9 5.0 6.1 4.5 Other 2.2 2.7 1.8 2.2 Multisectoral 1.4 1.1 0.9 1.1 Other 0.8 1.6 0.9 1.2 Totat PSIP in USS Million 509.5 806.1 852.5 722.7 Total PSIP as X of GOP 9.7 14.8 14.7 13.1 Source: MPC (SISIN database).  - 13 - 1.21 In the economic infrastructure, the proportion of energy is proposed to increase from 10.1 percent of total investment in 1992 to 13.0 percent in 1994. While the proposed increase is economically justified, the Government should make greater efforts to substitute private capital for public resources in light of existing private interests to invest in this sector. The average allocation of public resource to telecommunications is about 4.5 percent of the proposed total public investment for 1992-1994; in this sector, the Government should also accelerate its efforts to substitute private for public capital, particularly in local network investments. Although the share of transport is programmed to decline, the public investment allocation by subsector responds to the strategy of the overall sector, with roads as the backbone of transport. The subsector allocation is also consistent with the overall strategy to move away from commercial sectors (such as railways and river transport), where private-sector involvement is more likely. 1.22 In the social sectors, the allocation of public resources to both health and education is consistent with the overall strategy. To achieve the objectives of the investment program in the social sectors, the Government must continue to improve project implementation capabilities of the institutions involved in executing the program. In addition, given that the proposed investment program does not include investments planned by universities, a more detail analysis of the subsector allocation is required. As the implementation of its public investment program for the first six months of 1992 indicates, the Government is indeed committed to allocate public resources to the social sectors. More specifically, over this period, the Government has already invested about US$35 million in the social sectors, which represents about three times the public investment executed over the same period in 1991. 1.23 Approximately 900 public projects are included in the proposed PSIP for the 1992-94 period, compared with about 1,283 for the 1987-91 period. With the exception of a few projects in the infrastructures, the hydrocarbon sector and the multi-sectoral category, the small average size of projects (disbursements of about US$2 million per project per year) and their relatively short duration (about 2 years) make the PSIP a relatively flexible programming instrument that can be used effectively to reflect changes in priorities. The public-sector project portfolio includes a few large projects that require further analysis (see Sectoral Reviews). Public Investment Flnancing 1.24 The external financing program for the 1987-91 PSIP represented about 55.4 percent of total financing (Table 1.7). Official external credit was programmed to finance about 45.4 percent of total financing, and grants, about 10 percent. The PSIP also programmed the following sources of domestic financing: the Treasury, own resources of public enterprises, RDCs, and others--primarily domestic counterpart funds of aid programs.  - 14 - Avenge 1907 1968 19o 1990 1901 1967-1991 To0l SOwoeof llrwnng 100.0 100.0 100.0 100.0 100.0 100.0 gemedd 52.3 29.3 36.6 51.5 4S.6 446| Temjy 8.7 1.t 3.0 6.1 11.1 6.9 Own Paorce 18.2 23.0 19.9 24.C 28.3 23.0 t0w 25.3 5.1 13.6 15.5 9.1 146 ForeDgn 47.7 70.7 63.4 40.5 51.4 55.4 CmdI 40.3 59.8 50.9 40.1 40.6 45.4 ormu3 7.5 10.9 12.4 8.3 10.6 0.9 Memo: ToMI P@IP Finwlo hi IUJ MNlon 576.4 366.6 529.9 409.8 6.5 516.7 ToI P1IP Fhiencg a # o OOP 13.4 6.I 11.6 10.4 12.5 11.4 NoW: It eIde 196740 SEIF 1nvo*ben pgmm. Soue: MPC PION dutbm). 1.25 In line with the program, external sponsors did provide a large share of executed investment financing, about 55 percent for the 1987-91 period (Table 1.8). Most of the identified foreign financing for this period was official external credit, with the remainder provided by grants. The primary source of official external credit, as expected, was the multilateral development banks operating in Bolivia. :Iai j1.: S imer)t of Total F ic of Execute Inveitment ___ ___ ___ ___ ___ ___----__ 1S-|giXdiE; - Perce nt C. .ro 5itiOf)lii3E-fffSt30; -2 -i-S0if Average 1987 1988 1989 1990 1991 1987-1991 Total Sources of Financing 1%1 100.0 100.0 100.0 100.0 100.0 100.0 Internal 45.2 39.3 41.4 41.1 54.2 44.3 Treasury 5.9 5.4 3.1 5.4 11.1 6.3 Own Resources 33.4 27.0 29.6 30.6 36.2 31.3 Other 5.8 7.0 8.8 5.1 6.8 6.8 Foreign 54.8 60.7 58.6 58.9 45.8 55.7 Credit 45.0 50.5 43.9 47.5 35.4 44 .3 Grants 9.8 10.2 14.7 11.4 10.4 11.3 Total Financing in USS Million 305.4 418.8 377.1 360.4 420.5 376.4 Total Financing as XGDP 7.0 9.4 8.4 8.0 8.4 8.2 Note: The figures include social emergency investment fund. Source: MPC (SISIN database). 1.26 Given the success of fiscal revenue adjustments and increased public savings, domestic resources were transferred increasingly to finance capital expenditures. The aggregate trend supports the Govemment's commitment to increasing domestic resource allocation to capital investment to ensure sustainable long-term growth. Local resource  - 15 - financing of public investment increased from 45 percent in 1987 to 54 percent in 1991. For this period, the Treasury contributed about 6 percent of total financing, own resources of public enterprises 31 percent, and primarily domestic funds generated by aid programs the remainder. 1.27 A significant portion of the external--and internal--financing was allocated to standard public infrastructure projects and hydrocarbons (Table 1.9). Transport (primarily roads) received the largest amount of external financing, followed by allocations to hydrocarbons and agriculture. However, hydrocarbons received the largest amount of internal financing, followed by transport--encompassing primarily roads-and agriculture. :~~~~~~~~~~~~~~~~~~~~ . : . -. . . . . . . ,j,: . . . ':' . . . . . . . . . . . . . . . . . . . . . . : . ' . . . . . . . ~~~~~XJsAJ ri ittw Of ~eud etuwit f 7> i9 InternL J External| Total Internal| External| Total ___ ___ ___ ___ ___ ___ __BY_ jy inancing_Source _ _ _ __BY Sector _ _ _ _ Total Investment