report no. 40774-cr costa rica public expenditure review

March 31, 2008

Document of the World Bank and the Inter-American Development Bank

Report No. 40774-CR

Costa RicaPublic Expenditure Review Enhancing the Effi ciency of Expenditures

Central America Department Vice-Presidency for CountriesPoverty Reduction and Economic Management Unit Country Department for Central America, Mexico,Latin America and the Caribbean Region Panama and Dominican Republic (CID)The World Bank Inter-American Developmemt Bank

Report N

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Costa R

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CURRENCY EQUIVALENTS Currency Unit = Colon (C)

EXCHANGE RATE

Exchange rate effective March 31, 2008 C 495 = US$1

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ACCCR Costa Rican Association of Roads and Rural Roads

Asociación de Carreteras y Caminos de Costa Rica

ADPCC CEN-CINAI Development Association

Asociación de Desarrollo Pro CEN-CINAI

APO Annual Plan of Operations ARESEP Public Services Regulatory

Authority Autoridad Reguladora de los Servicios Públicos

AYA Costa Rican Water and Sewage Institute

Acueductos y Alcantarillados

BANHVI National Housing Mortgage Bank Banco Hipotecario de la Vivienda BCCR Central Bank of Costa Rica Banco Central de Costa Rica BCR Bank of Costa Rica Banco de Costa Rica BCIE Central American Bank for

Economic Integration Banco Centro-Americano de Integración Económica

BID Inter-American Development Bank Banco Interamericano de Desarrollo BNCR National Bank of Costa Rica Banco Nacional de Costa Rica BPDC People and Communal

Development Bank Banco Popular y de Desarrollo Comunal

CABEI Central American Bank for Economic Integration

CAD Computer-assisted drawing CAFTA Central American Free Trade

Agreement

CCSS Costa Rican Social Security System Caja Costarricense del Seguro Social CE School lunch programs Comedores Escolares CEM Country Economic Memorandum CEN Education and Nutrition Centers Centros de Educación y Nutrición CEN-CINAI Integrated Care Centers for

Children Centros de Educación y Nutrición y Centros Infantiles de Atención Integral

CEPAL Economic Commission for Latin America and the Caribbean (ECLAC)

Comisión Económica para América Latina y el Caribe (CEPAL)

CETAC Civil Aviation Council Consejo Técnico de Aviación Civil

CFAA Country Financial Accountability Assessment

CGR Office of the Comptroller General Contraloría General de la República CIG Commission of Revenues and

Expenditures Comisión de Ingresos y Gastos

CINAI Integrated Service Centers for Children

Centros Infantiles de Atención Integral

CIPPEC Center for the Implementation of Public Policies Promoting Equity and Growth

Centro de Implementación de Políticas Publicas para la Equidad y el Crecimiento

CN Nutrition Centers Centros de Nutrición CNC National Concessions Council Consejo Nacional de Concesiones CNFL National Power and Light Company Compañia Nacional de Fuerza y Luz CNP National Council of Production Consejo Nacional de Producción CONAFIN National Finance Council Consejo Nacional de Financiamiento CONAVI National Roads Council Consejo Nacional de Vialidad COSEVI National Road Safety Council Consejo de Seguridad Vial CREMA Rehabilitation and Maintenance

Contract Contrato de Recuperación y Mantenimiento

CTAC Civil Aviation Technical Council Consejo Técnico de Aviación Civil CTAMS Technical Council for Social and

Medical Care Consejo Técnico de Asistencia Médico Social

CTP Public Transport Council Consejo Transporte Público DCNDI Department of Child Nutrition and

Development Centers Departamento de Nutrición Infantil y Desarrollo

DANEA Food and Nutrition Division for School Children and Adolescents

Dirección de Alimentación y Nutrición del Escolar y el Adolescente

DFOE Evaluation and Operational Oversight Division

División de Fiscalización Operativa y Evaluativa

DGABCA Goods and Administrative Procurement Supervision Office

Dirección General de Administración de Bienes y Contratos

DHR Citizens’ rights office Defensoría de los Habitantes de la Republica DPT Diptheria, Pertussis, Tetanus EBAIS Basic Comprehensive Health Care

Team Equipos Básicos de Atención Integral de la Salud

ECENDI Local Nutrition Center and Child Development Team

Centro de Nutrición y Desarrollo Infantil

ECLAC Economic Commission for Latin America and the Caribbean

Comisión Económica para América Latina y el Caribe (CEPAL)

EHPM Household Surveys for Multiple Purposes

Encuesta de Hogares de Propósitos Múltiples

ESPH Heredia Public Services Company Empresa de Servicios Públicos de Heredia FANAL National Liquor Factory Fábrica Nacional de Licores FODESAF National Social Development and

Family Allocations Fund Fondo Desarrollo Social y Asignaciones Familiares

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FONABE National Scholarship Fund Fondo Nacional de Becas FONAFIFO National Forestry Financing Fund Fondo Nacional de Financiamiento Forestal FWD Falling Weight Deflectometer GAM Greater Metropolitan Area Gran Área Metropolitana GDP Gross Domestic Product GNI Gross National Income HDI Human Development Index MH Ministry of Health HSSTB Health and Social Support

Technical Board

IADB Inter-American Development Bank ICE Costa Rican Electricity Institute Instituto Costarricense de Electricidad ICHO International Cooperation Health

Office

ICT Costa Rican Tourism Board Instituto Costarricense de Turismo IDA Agrarian Development Institute Instituto de Desarrollo Agrícola IDS Social Development Index Indicé de Desarrollo Social IICE-UCR Economic Research Institute of the

University of Costa Rica

IMAS Mixed Institute of Social Aid Instituto Mixto de Ayuda Social IMF International Monetary Fund INA National Apprentice Institute Instituto Nacional de Aprendizaje INAMU National Institute of Women Instituto Nacional de las Mujeres INCOP Port Authority for the Pacific

Region Instituto Costarricense de Puertos del Pacífico

INEC National Statistical Institute Instituto Nacional de Estadística y Censos INFOCOOP Institute for Cooperative

Development Instituto Nacional de Fomento Cooperativo

INS National Insurance Institute Instituto Nacional de Seguros ITCR Technical Institute of Costa Rica Instituto Tecnologico de Costa Rica JASEC Public Service Administrative

Board of Cartago Junta Administrativa de Servicios Eléctricos de Cartago

JE Education Boards Junta Educativa JPSSJ Social Protection Council of San

José Junta de Proteccion Social de San José

KfW German Development Bank Kreditanstalt für Wiederaufbau LAC Latin America and the Caribbean LAFRPP National Financial Administration

Law Ley de la Administración Financiera y Presupuestos Públicos

LANAMME National Laboratory for Materials and Structural Analysis

Laboratorio Nacional de Materiales y Modelos Estructurales de Costa Rica

LCA Public Procurement Law Ley de Contratación Administrativa LGOCP General Concession Law for Public

Works with Public Services Ley General de Concesión de Obras Públicas con Servicios Públicos

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MEP Ministry of Public Education Ministerio de Educación Pública MH Ministry of Health Ministerio de Salud MIDEPLAN Ministry of National Planning and

Economic Policy Ministerio de Planificación Nacional y Política Económica

MOPT Ministry of Public Works and Transport

Ministerio de Obras Públicas y Transportes

MTSS Ministry of Labor and Social Security

Ministerio de Trabajo y Seguridad Social

NFPS Non-Financial Public Sector OCIS Office for International Cooperation

of Health Oficina de Cooperación Internacional de la Salud

OECD Organization for Economic Co-operation and Development

OLS Ordinary Least Squares PANEA Food and Nutrition Program for

School Children and Adolescents Programa de Alimentación y Nutrición del Escolar y el Adolescente”

PAO Annual Operating Plans Planes Anuales Operativos PEN Poverty Environment Nexus PER Public Expenditure Review PESP Public Expenditures on Social

Programs

PETS Public Expenditure Tracking Survey

PLN National Liberation Party Partido Liberación Nacional PND National Development Plan Plan Nacional de Desarrollo PNUD United Nations Development

ProgramPrograma de las Naciones Unidas para el Desarrollo

PPP Purchasing Power Parity PROCOMER Foreign Trade Promotion Institute Promotora del Comercio Exterior de Costa

Rica PRODEV Public Sector Effectiveness

Enhancement Program Programa de Mejoramiento de la Eficiencia del Sector Público

PROMECUN Programa de Mejoramiento de la Calidad de Vida y Educación de Comunidades Prioritarias

PUSC United Christian Social Party Partido Unidad Social Cristiana RECOPE Costa Rican Oil Refinery Refinadora Costarricense de Petróleo RIVM Old Age, Disability and Death Fund Régimen de Invalidez, Vejez y Muerte RPN National Budget Program Régimen del Presupuesto Nacional SEM Women’s Health Service Servicio de Noticias de la Mujer SETENA National Environmental Technical

Secretariat Secretaría Técnica Nacional Ambiental

SIECA Central American System of Economic Integration

Secretaría de Integración Económica Centroamericana

SINE National Evaluation System Sistema Nacional de Evaluación

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STAP Technical Budget Authority Secretaría Técnica de la Autoridad Presupuestaria

SUGEF Office of the Superintendent of Financial Institutions

Superintendencia General de Entidades Financieras

TICA Information Technology for Customs Control

Tecnología de Información para el Control Aduanero

TSE Supreme Electoral Tribunal Tribunal Supremo de Elecciones UCR University of Costa Rica Universidad de Costa Rica UN National University Universidad Nacional UNDP United Nations Development

ProgramPrograma de las Naciones Unidas para el Desarrollo

UNICEF United Nations Children’s Fund Fondo de las Naciones Unidas para la Infancia

URCNDI Regional Unit of Nutrition Centers and Child Development

Unidad Regional de Centros de Nutrición y Desarrollo Infantil

WDI World Development Indicators

IBRD Vice President, LCR: Pamela Cox Director, LCC2C: Laura Frigenti Director, LCSPR: Marcelo Giugale Lead Economist, LCSPR: David Gould Sector Manager, LCSPE: Mauricio Carrizosa Task Team Leader , LCSPE: Ana Lucia Armijos

IADB Vice President for Countries: Otaviano Canuto General Manager, CID: Gina Montiel Country Representative in CR: Fernando Quevedo Task Team Leader : Fernando D. Straface

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Costa Rica Public Expenditure Review

Table of Contents ABBREVIATIONS AND ACRONYMS.................................................................................................... II ACKNOWLEDGMENT............................................................................................................................ XI EXECUTIVE SUMMARY .....................................................................................................................XIII

CHAPTER 1 THE MACROECONOMIC ENVIRONMENT: MAIN FISCAL CHALLENGES .............................. 1

A. COUNTRY CONTEXT ........................................................................................................................................1 B. RECENT ECONOMIC DEVELOPMENTS AND CHALLENGES .................................................................................4 C. GOVERNMENT’S FISCAL STRATEGY AND DEVELOPMENTS ..............................................................................6 D. FISCAL TRENDS AND SUSTAINABILITY.............................................................................................................8 E. THE STRUCTURE AND COMPOSITION OF PUBLIC EXPENDITURES ...................................................................12 F. THE STRUCTURE AND COMPOSITION OF PUBLIC REVENUES ..........................................................................23 G. KEY FISCAL POLICY CHALLENGES ................................................................................................................25

CHAPTER 2 ENHANCING THE EFFICIENCY AND TARGETING OF SOCIAL EXPENDITURES ................ 29

A. OVERVIEW .....................................................................................................................................................30 B. EDUCATION....................................................................................................................................................33 C. HEALTH .........................................................................................................................................................44 D. SOCIAL PROTECTION......................................................................................................................................51 E. POLICY OPTIONS............................................................................................................................................59

CHAPTER 3 EFFICIENCY AND EFFECTIVENESS OF TWO SOCIAL PROGRAMS THROUGH THE LENS OF AN EXPENDITURE TRACKING SURVEY.................................................................................... 61

A. SCOPE AND METHODOLOGY ..........................................................................................................................62 B. DESCRIPTION OF THE INTEGRATED CARE CENTERS FOR CHILDREN (CEN-CINAI) .......................................64 C. DESCRIPTION OF THE SCHOOL-LUNCH PROGRAM..........................................................................................74 D. EVALUATION OF ORGANIZATION AND PERFORMANCE...................................................................................80 E. QUALITY AND IMPACT ASSESSMENT .............................................................................................................83

CHAPTER 4 ACHIEVING A GOOD ROAD NETWORK........................................................................................... 85

A. NETWORK OVERVIEW....................................................................................................................................85 B. ROADS EXPENDITURES AND INSTITUTIONAL ISSUES......................................................................................90 C. PRIVATE PARTICIPATION IN ROADS ...............................................................................................................96 D. ROADS SECTOR EXPENDITURE NEEDS AND FINANCING REQUIREMENTS.......................................................98

CHAPTER 5 THE POLITICAL ECONOMY OF THE BUDGET PROCESS: RULES, ACTORS AND INCENTIVES ........................................................................................................................................... 107

A. BUDGET INSTITUTIONS, ACTORS AND FISCAL OUTCOMES...........................................................................108 B. BUDGET PREPARATION AND APPROVAL ......................................................................................................118 C. BUDGET EXECUTION....................................................................................................................................123 D. BUDGET CONTROL AND EVALUATION .........................................................................................................126 E. POLICY OPTIONS..........................................................................................................................................131

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CHAPTER 6 SECURING COST SAVINGS IN PUBLIC SECTOR PROCUREMENT ......................................... 135

A. AN OVERVIEW OF PUBLIC SECTOR PROCUREMENT IN COSTA RICA.............................................................136 B. SIZE AND STRUCTURE OF PUBLIC PROCUREMENT........................................................................................138 C. MEASURES FOR GREATER PROCUREMENT EFFICIENCY AND COST SAVINGS ...............................................139 D. ANALYSIS OF COMMON PROCUREMENT EXPENDITURE CATEGORIES ..........................................................141 E. DETERMINATION OF THE SAVING POTENTIAL ..............................................................................................149 F. STRATEGY AND METHODOLOGY FOR IMPLEMENTATION OF A COST-REDUCTION PROGRAM.......................149 G. LEADERSHIP AND ACTION PLAN ..................................................................................................................152

BIBLIOGRAPHY .................................................................................................................................... 177

LIST OF TABLES

TABLE 1.1: KEY SOCIAL INDICATORS............................................................................................................. 2 TABLE 1.2: GDP GROWTH IN COSTA RICA AND LAC, 1991-2005 ................................................................. 4 TABLE 1.3: KEY MACROECONOMIC INDICATORS, 2001-2007 ........................................................................ 5 TABLE 1.4: CENTRAL GOVERNMENT BALANCE, DECEMBER 2006-DECEMBER 2007 ..................................... 7 TABLE 1.5: CONSOLIDATED NON-FINANCIAL PUBLIC SECTOR BALANCE ...................................................... 9 TABLE 1.6: CENTRAL GOVERNMENT BALANCE............................................................................................ 10 TABLE 1.7: PRIMARY SURPLUS REQUIRED TO MAINTAIN PUBLIC DEBT AT CURRENT LEVEL...................... 11 TABLE 1.8: CONSOLIDATED PUBLIC SECTOR EXPENDITURES BY INSTITUTIONAL GROUPING....................... 13 TABLE 1.9: COMPOSITION OF CONSOLIDATED PUBLIC SECTOR EXPENDITURES BY INSTITUTIONAL GROUPING......................................................................................................... 13 TABLE 1.10: UNCONSOLIDATED PUBLIC SECTOR EXPENDITURES BY INSTITUTIONAL GROUPING ................ 14 TABLE 1.11: UNCONSOLIDATED PUBLIC SECTOR EXPENDITURES BY INSTITUTIONAL GROUPING ................ 14 TABLE 1.12: SPENDING BY DECENTRALIZED INSTITUTIONS ......................................................................... 15 TABLE 1.13: SPENDING BY PUBLIC ENTERPRISES......................................................................................... 15 TABLE 1.14: SPENDING BY PUBLIC FINANCIAL INSTITUTIONS...................................................................... 16 TABLE 1.15: SPENDING BY AUTONOMOUS ENTITIES .................................................................................... 16 TABLE 1.16: CENTRAL GOVERNMENT EXPENDITURES ................................................................................. 17 TABLE 1.17: PUBLIC SECTOR EXPENDITURES BY SECTOR ............................................................................ 18 TABLE 1.18: PUBLIC SECTOR EXPENDITURES BY SECTOR ............................................................................ 19 TABLE 1.19: EFFICIENCY SCORES FOR PUBLIC SPENDING IN EDUCATION AND HEALTH............................... 20 TABLE 1.20: CENTRAL GOVERNMENT EXPENDITURE BY INSTITUTION......................................................... 22 TABLE 1.21: CENTRAL GOVERNMENT BUDGET EXECUTION ........................................................................ 23 TABLE 1.22: COSTA RICA: COMPOSITION OF CENTRAL GOVERNMENT REVENUES...................................... 24 TABLE 2.1: PESP BY SECTOR, 1995, 2000, 2005 .......................................................................................... 31 TABLE 2.2: ECONOMIC CLASSIFICATION OF PESP ....................................................................................... 31 TABLE 2.3: DISTRIBUTION OF PESP BENEFITS BY SECTOR 1988, 2004 ........................................................ 33 TABLE 2.4: STUDENTS, TEACHERS, ESTABLISHMENTS AND CLASSROOMS, BY SECTOR 2006....................... 34 TABLE 2.5: EDUCATIONAL EXPENDITURES, INTERNATIONAL COMPARISONS, 2002 ..................................... 35 TABLE 2.6: EXPENDITURES IN PUBLIC EDUCATION BY LEVEL, 2000-2005................................................... 36 TABLE 2.7: BUDGET SHARE ENROLLMENT INDEX BY EDUCATIONAL LEVEL, 2005...................................... 36 TABLE 2.8: ECONOMIC CLASSIFICATION OF PUBLIC EDUCATION EXPENDITURES BY LEVEL, 2005.............. 37 TABLE 2.9: EDUCATIONAL ATTAINMENT BY LEVEL AND EXPECTED YEARS OF COMPLETED EDUCATION, 1996-2006............................................................................................................. 40 TABLE 2.10: SCHOOL ENROLLMENT BY INCOME QUINTILE AND EDUCATIONAL LEVEL, 2004 ..................... 41 TABLE 2.11: PRIMARY AND SECONDARY FAILURE RATES COST ESTIMATE, COSTA RICA 2000-2005 ......... 43 TABLE 2.12: RELATIONSHIP OF PUBLIC EXPENDITURE AND REPETITION AND DROPOUT RATES, 1980-2005.................................................................................................................... 43 TABLE 2.13: PUBLIC EXPENDITURE IN HEALTH BY LEVEL, 2000-2005 ........................................................ 46 TABLE 2.14: HEALTH EXPENDITURES BY ECONOMIC CLASSIFICATION AND INSTITUTION, 2005.................. 47 TABLE 2.15: KEY HEALTH INDICATORS: 1990-2004 ................................................................................... 48

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TABLE 2.16: HEALTH INSURANCE COVERAGE BY POVERTY LEVEL, 2004 ................................................... 49 TABLE 2.17: DISTRIBUTION OF PUBLIC HEALTH EXPENDITURES BY INCOME DECILE, 2004 ........................ 50 TABLE 2.18: RELATIONSHIP OF HEALTH INDICATORS AND EXPENDITURES IN LATIN AMERICA, 2002......... 51 TABLE 2.19: FINANCES OF RPN CONTRIBUTIVE PENSIONS, 2000-2005 ....................................................... 53 TABLE 2.20: COMPOSITION OF SOCIAL PROTECTION EXPENDITURES BY PROGRAM..................................... 55 TABLE 2.21: COVERAGE OF SELECTED SOCIAL PROTECTION PROGRAMS. 2006........................................... 56 TABLE 2.22: DISTRIBUTIVE IMPACT OF SELECTED SOCIAL PROTECTION PROGRAMS, 2004 ......................... 57 TABLE 2.23: COVERAGE, EXCLUSIONS AND LEAKAGES FOR SELECTED SOCIAL PROTECTION PROGRAMS, 1999 AND 2006..................................................................................................... 58 TABLE 3.1: AVERAGE MONTHLY POPULATION SERVED IN CEN-CINAI PROGRAM, BY MODE AND POPULATION GROUP, 2006 ................................................................................................ 65 TABLE 3.2: AVERAGE MONTHLY POPULATION SERVED IN CEN-CINAI PROGRAM, BY REGION, MODE AND POPULATION GROUP 2006 ...................................................................................... 66 TABLE 3.3: CHARACTERISTICS OF CEN-CINAI PROGRAM BENEFICIARIES, 2006........................................ 67 TABLE 3.4: CEN-CINAI PROGRAM EXPENDITURES BY SOURCE AND ITEM. 2000-2006 .............................. 68 TABLE 3.5: CHILDCARE (CC) PROGRAM LOSSES FROM UNAVAILABLE REVENUES...................................... 71 TABLE 3.6: PRICE VARIABILITY FOR PURCHASE OF CERTAIN PRODUCTS AT CEN-CINAI........................... 73 TABLE 3.7: CE PROGRAM EXPENDITURES BY SOURCE AND LINE ITEM, 2000-2006...................................... 76 TABLE 3.8: PRICE VARIABILITY OF CERTAIN PRODUCTS PURCHASED BY CES............................................. 79 TABLE 4.1: ROAD NETWORK, 2005 .............................................................................................................. 86 TABLE 4.2: STRUCTURAL QUALITY COMPARISON OF NATIONAL PAVED ROADS, 2004-2006 ...................... 88 TABLE 4.3: COSTA RICA: QUALITY OF CANTONAL ROADS (2006) ............................................................... 89 TABLE 4.4: CONAVI´S ROAD EXPENDITURES (NATIONAL PAVED NETWORK, 1998-2006) ........................ 91 TABLE 4.5: CANTONAL ROAD NETWORK FUNDING, 2002-2007................................................................... 95 TABLE 4.6: PRIVATE ROAD CONCESSIONS IN COSTA RICA........................................................................... 97 TABLE 4.7: ROAD INFRASTRUCTURE GOALS OF THE NATIONAL DEVELOPMENT PLAN 2006-2010 .............. 99 TABLE 4.8: ESTIMATED ROAD CONSTRUCTION, MAINTENANCE AND REHABILITATION COSTS ................. 100 TABLE 4.9: EXPENDITURES NEEDED TO IMPROVE THE NATIONAL PAVED ROAD NETWORK, DISAGGREGATED BY ROAD CONDITION .................................................................................. 100 TABLE 4.10: PROVINCE-WISE EXPENDITURES NEEDED TO IMPROVE THE NATIONAL PAVED ROAD NETWORK .................................................................................................................... 101 TABLE 4.11: ESTIMATES OF REQUIRED EXPENDITURES TO IMPROVE THE STRUCTURAL QUALITY OF THE CANTONAL PAVED ROAD NETWORK ......................................................................... 101 TABLE 4.12: SUMMARY POINT ESTIMATES OF REQUIRED EXPENDITURES TO IMPROVE THE STRUCTURAL QUALITY OF THE TOTAL ROAD NETWORK ...................................................... 102 TABLE 4.13: ACCCR ESTIMATES OF REQUIRED EXPENDITURES TO IMPROVE THE NATIONAL ROAD NETWORK OVER 15 YEARS ......................................................................................... 102 TABLE 5.1: GOVERNMENT STRUCTURE AND CONSTITUTIONAL RULES ...................................................... 108 TABLE 5.2: PUBLIC SECTOR INVESTMENT PORTFOLIO AS AT DECEMBER 31, 1998-2006............................ 116 TABLE 5.3: COMPARISON OF SELECT MACRO-ECONOMIC ASSUMPTIONS WITH ACTUAL OUTCOMES, 2003-2006............................................................................................................ 120 TABLE 5.4: CGR: REQUESTS GENERATED BY THE CONGRESS ................................................................... 128 TABLE 6.1: SAMPLE OF SELECTED AGENCIES AND ANALYZED CATEGORIES ............................................. 142 TABLE 6.2: PRICE RESULTS FROM COMPUTER AND SOFTWARE PURCHASES ............................................... 145 TABLE 6.3: PRICE VARIATIONS IN PURCHASES OF VEHICLES ..................................................................... 146 TABLE 6.4: CONTRACTED SECURITY SERVICES BY COSTA RICAN SOCIAL SECURITY AGENCY................... 148 TABLE 6.5: SAVINGS POTENTIAL FROM IMPROVED PROCUREMENT PROCEDURES...................................... 149 TABLE 6.6: PROCUREMENT BUDGET SPENT IN SELECTED CATEGORIES ..................................................... 150

LIST OF FIGURES

FIGURE 1.1: LATIN AMERICA $2 PPP/DAY POVERTY ..................................................................................... 2 FIGURE 1.2: POVERTY HEADCOUNT RATES BY YEAR..................................................................................... 3 FIGURE 1.3: EVOLUTION OF INCOME INEQUALITY, SELECTED YEARS............................................................. 3 FIGURE 1.4: TOTAL PUBLIC SECTOR DEBT ..................................................................................................... 7

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FIGURE 1.5: PUBLIC SECTOR DEBT COMPOSITION, BY CURRENCY................................................................. 8 FIGURE 1.6: PUBLIC SECTOR BALANCES, 1997-2006 ................................................................................... 10 FIGURE 1.7: PUBLIC SECTOR DEBT BY INSTITUTION .................................................................................... 11 FIGURE 1.8: COMPOSITION OF PUBLIC SECTOR EXPENDITURE BY INSTITUTIONAL GROUPING ..................... 13 FIGURE 1.9: CENTRAL GOVERNMENT EXPENDITURE BY INSTITUTION ......................................................... 22 FIGURE 1.10: CENTRAL GOVERNMENT BUDGET........................................................................................... 23 FIGURE 1.11: MIDDLE-INCOME COUNTRIES TAX REVENUE ......................................................................... 24 FIGURE 2.1: PER CAPITA PESP IN COSTA RICA, 1995 TO 2005..................................................................... 30 FIGURE 2.2: PESP CONCENTRATION COEFFICIENT, EXCLUDING SOCIAL PROTECTION................................ 32 FIGURE 2.3: GROSS AND NET ENROLLMENT RATES BY EDUCATION LEVEL, 1995-2006.............................. 39 FIGURE 2.4: SECONDARY NET ENROLLMENT RATE AND EDUCATIONAL PUBLIC EXPENDITURE IN LATIN AMERICA, 2003 .......................................................................................................... 41 FIGURE 2.5: AVERAGE ANNUAL COST PER STUDENT ................................................................................... 42 FIGURE 2.6: FAILURE RATES BY EDUCATIONAL LEVEL................................................................................ 42 FIGURE 2.7: NUMBER OF COVERAGE OF EBAIS BY REGION, 2004 .............................................................. 45 FIGURE 2.8: ORGANIZATION OF SOCIAL PROTECTION PROGRAMS ............................................................... 52 FIGURE 3.1: CEN-CINAI PROGRAM RESOURCE FLOWCHART ..................................................................... 70 FIGURE 4.1: QUALITY OF NATIONAL PAVED ROADS, BY PROVINCE (2006).................................................. 87 FIGURE 4.2: QUALITY OF NATIONAL PAVED ROADS, EXPORTS AND TOURISM, BY REGION (2006) ............. 89 FIGURE 4.3: COSTA RICA – EVOLUTION OF PUBLIC EXPENDITURES ON TRANSPORT INFRASTRUCTURE....... 90 FIGURE 4.4: CONAVI´S REVENUES AND EXPENDITURES, 1998-2007 ......................................................... 92 FIGURE 4.5: ESTIMATES OF REQUIRED EXPENDITURES TO IMPROVE THE NATIONAL PAVED ROAD NETWORK, 14-YEAR PERIOD (BY LANAMME) .......................................................... 104 FIGURE 4.6: SOURCES OF PUBLIC FINANCING FOR ROAD INFRASTRUCTURE, 2001-2020 ........................... 104 FIGURE 5.1: EXTRAORDINARY BUDGETS, MODIFICATIONS APPROVED BY LEGISLATURE, AND FISCAL DEFICIT 1990-2006 ............................................................................................. 115 FIGURE 5.2: IMPORTANCE OF NON-DISCRETIONARY CENTRAL GOVERNMENT EXPENDITURES.................. 117 FIGURE 6.1: PUBLIC SECTOR PROCUREMENT ............................................................................................. 136 FIGURE 6.2: OVERALL DISTRIBUTION OF PURCHASES IN PUBLIC SECTOR IN 2006 ..................................... 138 FIGURE 6.3: DISTRIBUTION OF PURCHASE OF GOODS, SERVICES AND INFRASTRUCTURE IN 2006.............. 138 FIGURE 6.4: CONCENTRATION OF PURCHASES IN PUBLIC SECTOR IN 2006................................................. 139 FIGURE 6.5: ASSESSMENT OF COSTA RICA’S PUBLIC PROCUREMENT SYSTEM COMPONENTS .................... 140 FIGURE 6.6: PURCHASE EXPENDITURE GROUPING IN COMMON CATEGORIES ............................................ 142 FIGURE 6.7: OFFICE SUPPLY PURCHASE DISTRIBUTION ............................................................................. 143 FIGURE 6.8: DISTRIBUTION OF PRICES FOR PURCHASE OF PAPER ............................................................... 144 FIGURE 6.9: COMPUTER EQUIPMENT AND SOFTWARE PURCHASE DISTRIBUTION....................................... 144 FIGURE 6.10: VEHICLE PURCHASE DISTRIBUTION ...................................................................................... 146 FIGURE 6.11: GENERAL SERVICES PURCHASE DISTRIBUTION .................................................................... 147 FIGURE 6.12: PRICE DISTRIBUTION FOR CLEANING SERVICES.................................................................... 148 FIGURE 6.13: PROGRAM IMPLEMENTATION STRATEGY .............................................................................. 150 FIGURE 6.14: SEQUENCING OF PROGRAM IMPLEMENTATION...................................................................... 151 FIGURE 6.15: PROPOSED IMPLEMENTATION SCENARIOS ............................................................................ 153

LIST OF BOXES BOX 1.1: COSTA RICA’S MAIN TAXES.......................................................................................................... 25 BOX 2.1: DATA SOURCE FOR PESP .............................................................................................................. 30 BOX 3.1 THE SCHOOL LUNCH PROGRAM..................................................................................................... 74 BOX 4.1: LEGAL FRAMEWORK FOR PRIVATE PARTICIPATION IN INFRASTRUCTURE/ROADS......................... 96 BOX 5.1: CITIZEN’S CONTRACTS UNDER THE NATIONAL DEVELOPMENT PLAN, 2006-2010 ...................... 119 BOX 5.2: SOME CONSTITUTIONAL COURT INTERVENTIONS ON SPECIFIC ALLOCATIONS............................ 126 BOX 5.3: CGR INSTRUMENTS FOR BUDGET CONTROL ............................................................................... 127

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ACKNOWLEDGMENT

This report was prepared by a team led by Ana Lucia Armijos (Senior Economist, LCSPE-WB) and Fernando Straface (Coordinator for Costa Rica, IADB) and comprising Stephan K.L. von Klaudy (FEU), Carlos Sobrado (LCSPP), Jordan Schwartz (LCSFT), Rajeev Swami (LCSFM), Keisgner Alfaro (LCSPT), Marie Gaarder (IADB), Mateen Thobani (Consultant), Diego Trejos (Consultant), Ana Ines Basco (IADB), Julian Caballero (IADB), Jorge Vargas (Consultant) and Rosina Estol (IADB). Production assistance was provided by Hazel Vargas (LCSPE), Julieta Abad (LCSFT), and Cecilia Bernedo (IADB). The peer reviewers were Andrew Mason (LCSHD), Cecilia Corvalan (LCSTR), Ernesto Stein and Jorge Requena (IADB). The principal authors responsible for each chapter in the PER are as follows:

Chapter 1. Ana Lucia Armijos Chapter 2. Carlos E. Sobrado Chapter 3. Marie Gaarder Chapter 4. Stephan K.L. von Klaudy and Jordan Schwartz Chpater 5. Fernando D. Straface Chapter 6. Rajeev Swami and Keisgner Alfaro

The PER team would like to thank David Gould (LC2), Mauricio Carrizosa (LCSPE), Augusto de la Torre (LCRCE), Laura Rawlings (LCSHD), J. Humberto Lopez (LCRCE), Santiago Herrera (DECPR), Roby Senderowitsch (LCSPS), Roberto Panzardi (LCSPS), and Joel Reyes (LCSHE) for their valuable comments. The PER team would also like to thank the Costa Rican authorities for their support in facilitating data and information.

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EXECUTIVE SUMMARY

Background and Objectives

1. Costa Rica, an upper middle-income developing country of 4 million inhabitants, is well known for its socio-economic achievements. Its life expectancy is substantially higher than in comparable countries, while infant and child mortality rates are significantly lower. Costa Rica had the second lowest poverty headcount in Latin America in 2004, with just 9 percent of households below the $2 per capita per day poverty line. Income inequality is also among the lowest in Latin America.

2. Costa Rica’s economic growth has averaged 4.7 percent annually over the last 15 years, about 2 percentage points above the rest of Latin America, reflecting its stable macroeconomic and political environment, strong institutions, and a well-educated work force. During this period, Costa Rica has followed a successful strategy of outward-oriented export-led growth, openness to foreign investment, and gradual trade liberalization that transformed the economy from one highly dependent on agriculture and agro-industry to one that is now led by high-tech computer and electronic industries, services such as transport, communications and banking, non-traditional agriculture, and tourism.

3. Despite these achievements, several challenges remain. Firstly, notwithstanding recent gains, Costa Rica’s poverty and inequality levels have shown little improvement since 1994. This suggests that Costa Rica’s economic growth may not be broad based and raises concerns as to the efficacy of its social sector expenditures. Costa Rica is falling behind in some public health areas and its performance on secondary education—vital to benefiting from globalization—has not kept pace with countries spending similar amounts on education per capita. Secondly, the quality of the country’s infrastructure is deteriorating. For instance, less than 12 percent of the national paved road network is estimated to be in good condition, while 64 percent is in poor or very poor condition. This helps explain why Costa Rica scored well below average in a survey of infrastructure quality. Thirdly, while its fiscal balances and debt situation have improved in recent years, Costa Rica is still vulnerable to deterioration in the external environment from: (i) an economic slowdown in the United States; (ii) tighter global financial market conditions, and (iii) sharp increases in fuel and commodity prices.

4. The government of Costa Rica realizes that continued economic growth and poverty reduction require an improvement in the quality of infrastructure and social sector services, particularly if Costa Rica is to take full advantage of the greater global market opportunities in the context of DR-CAFTA and other free trade initiatives. To improve the quality of public services while simultaneously reducing its fiscal vulnerability is challenging, especially since reaching a political consensus on revenue-enhancing tax reform has proven difficult.

5. This report is the outcome of the government’s request to the World Bank (WB) and Inter-American Development Bank (IADB) to identify possible reforms in policies and institutions to enhance the effectiveness, efficiency, and equity of public

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expenditures. Such reforms will support Costa Rica’s efforts to ensure sustainable fiscal balances and establish effective and transparent mechanisms to allocate public resources so as to promote broad-based economic growth, improve social indicators, and reduce poverty.

6. The report has been produced in close consultation with authorities in several relevant government ministries and public institutions, including the Minister of Finance, Minister of Education, Minister of Health, and Minister of Public Works and Transport. In particular, the sectors, programs and issues addressed in the report—education; health; social protection, with an in-depth analysis of the childcare and school lunch programs; roads; the budget process; and procurement—were requested by the authorities at the start of the exercise. The study also addresses specific questions posed by the authorities during the joint WB-IADB consultation mission of July 2007 where the preliminary findings of the study were presented.

7. In light of the concerns above, the study focuses on how to improve public services while maintaining the share of overall public expenditures in GDP. This will require eliminating ineffective spending, mainly by implementing measures to enhance efficiency, especially in education, health, roads, and public procurement. It will also require measures to improve targeting, especially in social protection programs and health.

8. The study also suggests that there is room to increase public funding in certain neglected areas without sacrificing fiscal stability and while continuing to consolidate gains in poverty reduction and social outcomes. This will require selected expenditure reallocations that are likely to be challenging due to fiscal rigidities caused by widespread earmarking as well as some issues relating to the budget process. In addition, institutional and technical capacity constraints may make it hard to implement the reforms as envisaged or to achieve the desired results from scaling up expenditures. Addressing these constraints and improving the budget process will be key to reform implementation and enabling the needed expenditure reallocations.

9. After describing recent economic developments, the rest of this executive summary will discuss in turn the four themes identified above that run through most of the chapters: (i) efficiency of public expenditures; (ii) institutional and technical capacity constraints; (iii) fiscal rigidities and the budget process; and (iv)targeting and equity. The political economy of introducing and implementing suggested policy options are also discussed.

Recent Economic Developments

10. Despite rising oil prices, Costa Rica’s GDP grew by 8.8 percent in 2006 and 6.8 percent in 2007. Improved macroeconomic balances have accompanied the growth—domestic interest rates have fallen and inflation reached single digits in 2006. From a deficit of 4 percent of GDP in 2002, the non-financial public sector balance shifted to a surplus of 0.7 percent of GDP in 2006, due to a combination of buoyant revenues from

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increased economic activity, firmer control of expenditures, better debt management, and improvement in tax and customs administration.

11. Between 2002 and 2006, Costa Rica’s public sector spent 48.8 percent of GDP. The high share is due partly to the public sector having a monopoly or near-monopoly in services such as telecommunications, electricity, and oil and gas. Over this period it also spent 16.0 percent of GDP on education, health and social protection, higher than the LAC average but below some high middle-income countries in Latin America. Recent analysis concluded that with the exception of contributory pensions, social sector expenditures are quite progressive. Health expenditures are found to be fairly efficient but education efficiency lagged behind comparable countries in LAC.

12. To avoid a return to the double-digit inflation, high public debt, growing dollarization and the large external balances that haunted it earlier in the decade, the government has increased flexibility in its exchange rate regime, introduced inflation targeting, reduced public debt’s exposure to exchange rate risk and rollover risk, continued efforts to increase its primary fiscal surplus, and enhanced efforts to attract investment and improve trade. While actions are still pending to implement the recently approved Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) with the United States, prospects of greater trade and investment have improved.

13. Once a highly indebted country, Costa Rica has seen a decline in its debt burden to 46 percent of GDP by the end of 2006. The decline in debt burden has been due in part to Ministry of Finance initiatives relating to the creation of a consolidated debt and cash management office, the development of a coordinated exchange and interest rate policy with the Central Bank, and the implementation of a debt management strategy. This PER finds that under reasonable assumptions on growth and interest rates, a primary fiscal surplus of central government of between 1.6 and 2.3 percent of GDP is required for Costa Rica’s public debt to remain below 50 percent of GDP.

14. To ensure that debt levels remain sustainable even if growth were to slow down, Costa Rica could simultaneously look for efficient ways to raise public revenues, such as by reducing tax evasion, which is estimated to be 40 percent and 60 percent for the sales tax and corporate tax respectively. Another option for generating fiscal space is via new taxes. The administration sent several bills to the National Assembly in August 2006 aimed at generating the equivalent of 2.0 to 2.5 percent of GDP in additional revenues, however discussion of the bills has been postponed to 2008.

Efficiency of Public Expenditures

15. The government could take a number of measures to enhance the efficiency of public expenditures so as to achieve substantially better outcomes with little or no increase in public resources. While all the reform options discussed in this section can be done administratively, they will not necessarily be easy to implement, as there will be losers as well as winners. Providing the right incentives to implement reforms is essential. Also, while some reforms will generate fiscal savings, additional public resources will be required to generate improved outcomes in many instances. If recent

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strong economic growth rates continue it will be easier to implement the reforms by ensuring that the resulting tax revenue increases are spent disproportionately on efficiency-increasing reforms.

16. An area where efficiency could be enhanced while simultaneously achieving significant fiscal savings is by better administrative controls, especially with respect to personnel, where the problem of absentee workers appears to be serious. While it is difficult to estimate the size of problem, a public expenditure tracking survey (PETS) carried out for two social assistance programs—school lunches and childcare centers—finds large discrepancies between personnel registered in the corresponding ministries and the program staff working in the field. A thorough review of personnel records in all ministries, starting with the ministries of health and education, would be a fruitful exercise. The resulting savings could be allocated to under-funded activities, preferably in the same program or center in order to provide better incentives to unveil any fraud or theft. More frequent and better internal audits of various programs and decentralized entities are likely to have a high return.

17. A second area where improved efficiency could result in substantial fiscal savings is in procurement. Costa Rica’s internal control systems are satisfactory and its legal and institutional frameworks for procurement follow best international practice. For instance, they allow for advanced purchase mechanisms such as contratos marco, for recurring bulk or volume purchases, and reverse auctions, under which suppliers make price, specifications, and quality proposals to the buyer. However, the public sector fails to take full advantage of available procedures, practices and management tools. For instance, it fails to consolidate purchases or use standardization of specifications. It lacks reference prices, information on supply industries, or benchmarks on unit costs for standardized services. The focus is on complying with existing legislation such as the procurement law and budget ceilings rather than on seeking higher efficiency and cost savings.

18. This study analyzed the procurement practices of four items: office supplies, computer equipment and software, vehicles, and general maintenance services in three of the largest decentralized entities and three important government ministries. It found wide variations for similar procurement purchases between various public sector institutions and even within the same institution in the same year. Similar results were obtained in PETS for the two social assistance programs mentioned above. Comparing actual costs with what might have prevailed if better procurement techniques had been used, the potential for annual savings in Costa Rica’s public sector was estimated at between US$300 and US$430 million, depending on how aggressively the procurement techniques were introduced. The cost savings would come from consolidating purchases, using reverse auctions, defining standards, better relating specification requirements to purpose, establishing benchmarks for use in service catalogs, and contratos marco. The savings can be realized without changing any laws or regulations but will require the support and cooperation of the Comptroller General’s Office (CGR) and the heads of key decentralized entities, which account for the bulk of procurement.

19. A third broad area of efficiency gains could arise by spending more on neglected areas such as school materials and school maintenance. Overall, Costa Rica spends a

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higher share of GDP on education than the vast majority of Latin American countries, yet often has worse outcomes in terms of enrollment rates, dropouts and repetition, especially at the secondary school level. A focus on improving secondary school enrolment rates and reducing dropouts and repetition would be particularly beneficial. Building maintenance is also an issue for the childcare centers, many of which suffer from safety defects in electrical and plumbing systems and have leaky roofs.

20. Since teacher salaries and pensions account for the bulk of educational expenditures, reforms in the education area will need to focus on improving educational outcomes. Policy options include: (i) launching an initiative to eradicate absentee workers and using the savings to buying teaching materials and investing in school infrastructure; (ii) introducing a transparent system of teacher evaluation and providing bonuses to strong performers and better-qualified teachers; (iii) reforming rules and regulations for hiring and firing permanent staff to provide improved flexibility and appropriate performance incentives; and (iv) bringing more temporary teachers into the now more flexible permanent cadre, thereby better motivating such teachers and enhancing fairness. To reduce opposition to reform, it may be necessary to introduce some of these changes for new teachers only and to make teacher evaluation system voluntary, but necessary for promotions or bonuses. The study estimates that repetition and dropout rates costs the government at least 0.5 percent of GDP. However, these costs could be under estimated, as they do not take into consideration likely side effects. For example, the negative impact on the quality of education from having more students per classroom or per teacher.

21. Similarly, health outcomes could improve further by concentrating even more on primary health, both in the primary care centers and on enhanced education campaigns for the control of malaria, dengue, and AIDS or on the promotion of vaccination, all areas where Costa Rica lags behind comparable countries. Funds for such activities could come from increases in government revenues as a result of economic growth, from reducing tax evasion, and/or from increased tax resources if some or all of the tax proposals before Congress are approved.

22. Furthermore, most of the social protection programs, including the CEN-CINAI and school lunch programs, do not collect relevant data in a systematic and timely manner and therefore lack any sort of impact and process evaluations. Without this information, one cannot determine whether the programs are financing the right interventions, and that these are being carried out in the right way. In order to decide on the desirability of expanding programs, or indeed proceeding with them, it is crucial to create the conditions for continuously evaluating their performance.

23. Significantly more resources needs to be spent on road maintenance, but much less on doing the thin overlays and more on major rehabilitation, which can greatly reduce longer-term costs, while improving road quality on a sustainable basis. Moreover, at least some of the road maintenance and rehabilitation activities could be carried out by the private sector under performance-based management contracts (CREMA). The feasibility of introducing or raising tolls could also be explored. The private sector has stronger incentives to carryout the maintenance and rehabilitation activities more

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efficiently and could provide the investment resources needed for road rehabilitation or new roads under a long-term concession arrangement. To bring about the needed efficiency enhancements, Costa Rica will need to introduce institutional reforms as well as consider a way to ensure that the budgetary process allows sufficient resources for road maintenance. The following two sections discuss some policy options in this regard.

Institutional and Technical Capacity Constraints

24. The quality of public expenditures is hampered in many cases because the incentives facing various actors are not consistent with the outcomes desired. These institutional constraints negatively affect the quality of services and preclude an efficient scaling up of otherwise desirable activities. For instance, increasing funds for road maintenance without effective planning, coordination, and procedures or without assigning responsibility to the institution with a strong incentive to maintain it are unlikely to produce desired results.

25. In addition, even with the right incentives and good intentions, some public sector institutions may be unable to comply with rules and regulations or to take advantage of the Costa Rica’s flexible legal and regulatory framework because of a lack of technical capacity. To continue with the road maintenance example, without additional training, neither municipalities nor the national road agency, CONAVI, may be able to carry out effective planning or be able to contract out and supervise a long-term concession or a performance-based maintenance contract. This section discusses these two related themes.

26. Appropriate planning and budgeting can make an enormous difference in the efficiency and efficacy with which public services are delivered. This is true at the national level, at the level of a decentralized entity, within a government ministry, or at the level of a program such as a childcare center. Costa Rica’s national planning and budget process is fairly sophisticated in that it attempts to link the performance-based five-year development plans (PND), annual operating plans, and the annual budget. The government has also launched an initiative to include a multi-year investment plan. However, the efforts have only partial success, mainly because of the incentives facing institutions and the technical capacity of the entities to implement the processes and procedures. Increased training and implementing some of the suggested changes to the budget process could help address these issues.

27. Several reforms in roads could help improve outcomes by addressing institutional and technical constraints. First, road maintenance could be assigned to the institution with the highest incentive to manage and maintain them. This involves correctly classifying roads as to whether they are of national or municipal importance, thereby assigning them to the right institution, and introducing performance-based road maintenance contracts (CREMA), which are permitted under law but have still not been implemented. Recognizing that the existing road classification is outdated and inaccurate, the government has already started on a reclassification exercise.

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28. To identify a suitable road maintenance strategy and implement CREMA contracts, the national roads agency, CONAVI, and the municipal governments responsible for cantonal roads will need technical assistance. Municipalities, in particular, lack implementation capacity and are often unable to even prepare the feasibility studies necessary to request a budgetary transfer for larger investments. In addition to help on establishing and monitoring CREMA contracts, municipalities could benefit from assistance in: (i) planning, implementation and supervision of works, (ii) budget and financial management, and (iii) preparation and processing of funding requests. Utilizing the technical skills in CONAVI and the national road research laboratory (LANAMME), the Ministry of Works and Transportation could develop a road maintenance strategy based on up-to-date industry standards and international best practice. Road maintenance and rehabilitation activities based on sound technical criteria and cost-benefit principles could greatly improve the design, feasibility, quality of materials, and durability of construction.

29. Well-designed road concessions better align incentives for road maintenance with performance. Costa Rica already has a flexible legal and regulatory framework to encourage such arrangements, allowing one to overcome the institutional capacity limitation as well as the resource availability constraint. However, no private road concessions have begun implementation yet, although two projects are expected to start in 2008. This is partially because while the broad legal framework is fine, there is a need to improve procedures, clarify responsibilities, and enhance coordination. There is a need to revise rules and regulations relating to joint and several liabilities in project financing structures, to introduce partial guarantees for investors and lenders, and to streamline bidding documents and procedures. There is also a need to clarify rules on the transfer of concessions, expropriation, the tax regime, and the administrative structure and role of the national concessions council. Legislation to address many of these reforms has already been prepared.

30. The effectiveness of social sector services is also hampered by institutional and technical capacity considerations. In the social assistance area, a lack of coordination among the 46 programs administered by 22 institutions leads to wasteful duplication and higher overheads even as many deserving sectors and vulnerable groups fail to get assistance. Also, a lack of data or monitoring capacity makes it impossible to evaluate the extent to which a particular program or activity is achieving its intended goal—an issue that cuts across many programs and expenditures.

31. To address these issues, consideration should be given to the creation of a permanent institution or body entrusted with coordinating and evaluating the various social assistance programs. For such an institution to work effectively, it should have some control over the programs’ plans, budgets and budget allocation and the ability to recommend merging programs or institutions. It also needs to ensure that disaggregated information on program costs and beneficiary profiles are collected and analyzed on a timely basis. Some of the data collection could take place at the highly decentralized level: for instance, each childcare center could input the data in real time, which would then be analyzed by the coordination institution.

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32. Training is also an issue in the social protection programs. For instance, the childcare centers could benefit from training in administration (accounting), beneficiary treatment (special needs), and labor and social issues. In the case of the school lunch program, there is a need to provide training in accounting, social and labor relations, and food handling and nutrition. The administrative training could also help reduce delays in obtaining budgetary releases, which are dependent on the community representatives complying with reporting requirements by the central government. Further simplifying and standardizing reporting requirements could also reduce delays in budgetary releases.

Fiscal Rigidities and the Budget Process

33. Costa Rica’s budget is characterized by increasing rigidity, mainly as a result of minimum expenditure mandates. For example, budgeted expenditures must reserve a minimum of: (i) six percent of GDP for education, (ii) ten percent of the budget for municipalities, (iii) three percent of the budget for a housing subsidy, (iv) two percent of the budget on community development, and (v) six percent of central government revenues for the judiciary. In addition, certain taxes and fees are earmarked for specific activities and institutions. For example, FODESAF is to receive 20 percent of the sales tax for poverty alleviation programs; CONAVI is to receive 50 percent of the vehicle property tax; 30 percent of the fuel tax is to go to the road sector, split between CONAVI (75 percent) and municipalities (25 percent); and the forestry fund is to receive 3.5 percent of the fuel tax.

34. Even though these directives are usually not complied with fully, it becomes difficult to allocate expenditures in a rational manner in line with public policy objectives. As a result, public investment and the provision of public services have suffered. The budgetary rigidities have also led to political and legal conflict, often leading to intervention by the Constitutional Court, as the Executive has systematically breached legal and constitutional mandates in order to maintain macroeconomic stability as well as to ensure funding for essential activities. This, in turn, has hardened congressional positions, with legislators specifying even more earmarks and minimum expenditure directives. A political deadlock often ensues, with the status quo prevailing.

35. The damage from such legal directives is not as severe as it appears because of some flexibility on the part of the Ministry of Finance to not abide by the laws if it can show that doing so would result in fiscal imbalances. In practice, these budgetary mandates act as a ceiling rather than a floor, with the Ministry of Finance often winning legal battles for failing to comply with the earmarks on the grounds that it has a mandate to maintain fiscal balance. The differences between legally mandated allocations and actual allocations are often large. The childcare and school lunch programs received only 35 percent and 57 percent of what was due to them in 2006. Between 1998 and 2006, CONAVI received less than three-quarters of what was mandated by law.

36. Even popular mandates such as for education have not met their target in any recent year, prompting an initiative to increase the “minimum” to 8 percent. Even though this is even less likely to be binding if passed, there will almost certainly be increased pressure to spend on education at the expense of other equally needy sectors. There will

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also be less pressure to look for efficiency savings within the sector, which already spends more on education as a share of GDP than comparator countries. Such earmarking would limit the ability to reallocate resources to where they are most needed and could force undesirable cuts in infrastructure investment.

37. While earmarking is not generally desirable, it can play a helpful role in some cases. For instance, earmarking in Costa Rica has proved to be an effective way to break a political deadlock on needed fiscal reform. It is also useful in cases where political support for funding for high return activities is low, such as for road maintenance. Several countries in Africa and Asia have had success with creating a legal road entity with its own funding mechanism. Within Latin America, El Salvador, Guatemala and a few states of Brazil all have such road funds. Such entities typically have a governance structure and oversight function that includes participation by users. Having such an independent road agency allows decisions on road rehabilitation and maintenance to be made on technical and economic grounds rather than in the political realm, ensuring greater transparency and making more effective use of resources. This is an option that Costa Rica could explore.

38. Addressing issues related to earmarking and fiscal rigidities require making the national budget process more effective. Costa Rica’s budgeting system is modern in that its processes are well documented, its internal controls are effective, and it has effective horizontal and vertical accountability mechanisms. The Executive, Legislative and Judiciary branches share power, while the Comptroller General and heads of decentralized entities also have substantial power. An effective Ombudsman’s Office exists and the legal framework allows for the participation of the civil society in the budget formulation, execution, and monitoring process. Nonetheless, certain measures could improve the budget process, or rather, budget processes, since three distinct budgeting procedures coexist in the public sector at the national level, each with their own rules, actors and political economy.

39. The first budget process determines the central government budget, which includes the executive branch and its agencies, the legislative branch, and the judicial branch. It accounts for about 33 percent of public expenditures. The second determines the decentralized sector budget, which accounts for over 60 percent of public expenditures. The third determines the municipal budgets; it accounts for only three percent of public expenditures. While all budgets have to be approved by Congress in principle, in practice Congress plays a significant role only in the central government budget. The budgets of the decentralized entities is determined largely by the heads of the decentralized entities under budget caps and guidelines provided by the Ministry of Finance and subject to modification and monitoring by the Office of the Comptroller General (CGR).

40. To improve planning and budgeting at the Executive level, the Ministry of Finance could submit a multi-year budget for the last three years of its term that includes an investment plan that is consistent with its four-year development plan, thereby reinforcing the link between its budget planning process and the development plan. It could also require all entities to use the same certified accounting system and ensure

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consistency with budget-approved figures and procurement systems. Finally, it could complement CGR’s legal review of decentralized institution budgets with its own analysis, linking decentralized entity expenditure schemes to the public policy objectives proposed in their budgets.

41. Congress could usefully build up its technical capacity for meeting its obligations to independently assess budget proposals and carry out its own appraisal of budget execution and evaluation. It could also request decentralized entities—or at least the major ones—to send annual updates on budget execution, using the standard accounting system and linking expenditures to policy objectives. In addition, Congress could be better briefed on decentralized entities by devoting a few plenary sessions each year to reviewing the CGR and Ombudsman reports. It could also request the heads of select major decentralized entities to present performance reports and respond to any questions. Finally, making voting decisions by Congress public would enhance transparency and accountability.

42. To better carry out its mandate on the internal control system as required by law, CGR could provide technical assistance to the internal audit departments of the decentralized entities. It could also devote more attention to ex-post rather than ex-ante controls and make public certain stages of the budgeting process for decentralized entities now hidden from public scrutiny. Consideration could also be given to signing performance agreements with the Boards of select decentralized entities, to improving the procurement process, to assessing the technical capacity to manage government resource transfers, and to encouraging greater participation by civil society in monitoring budget execution and evaluation. Improving the budget process in this manner could do much to allocate public expenditures so as to achieve better outcomes.

Targeting and Equity

43. Public expenditures can play an important role in promoting equity in the sense of giving its citizens equal access to public services such as education and health, including water, sewerage and garbage services. They also seek to ensure that its poor and vulnerable—such as the sick, elderly, disabled or chronically poor—have at least a basic minimum standard of living. Providing subsidized or free provision of education, health and social protection services is the main way that this is done. Such services account for the bulk of public expenditure on social programs. Improved targeting in terms of more spending on services consumed by the poor and vulnerable will help promote equity.

44. Excluding contributive pensions, public expenditures on social programs in Costa Rica are quite progressive or pro-poor, in the sense that the share of expenditures on the poor was greater than the share of poor in the population. Moreover, they have become more so over time. This is particularly true of the social protection programs oriented towards the poor. With its policy of universal coverage, health and education expenditures are only mildly progressive.

45. Social protection programs are classified as social insurance, which improve the ability of households to manage risk, or social promotion and assistance, which ensure a

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basic level of welfare for the poor and vulnerable. In Costa Rica, social insurance consists of three programs: illness and maternity, worker compensation and accident insurance, and contributive pensions. Contributive pensions comprise an old age, disability and death fund (RIVM), mostly for private sector employees, and a national budget program (RPN), which itself comprises fourteen programs providing pensions to public sector employees, mostly teachers. Contributive pensions account for about three-quarters of social protection expenditures.

46. Since benefit payments are related to contributions, contributive pensions are regressive by nature. As most of the poor did not make contributions and, in any case, made smaller contributions than the non-poor, it is no surprise to find that the poor, which account for about 20 percent of the general population, make up only 14 percent of beneficiaries and account for only 5 percent of the value of benefits. If the pension scheme were self-financing one could argue that this is a fair outcome. However, the government subsidizes both RIVM and RPN pensions. Contributions by individuals in the RPN system accounted for just 14 percent of payments in 2006, making them a highly regressive government intervention. The government has already sensibly restricted new entrants to the RPN pensions, thereby resolving the issue in the long term. What is needed in the short and medium term are politically acceptable ways to gradually reduce benefits in order to reduce the gross inequity of the RPN pension system.

47. The social promotion and assistance component, which accounts for about one-quarter of social protection expenditures, includes an additional 46 programs managed by twenty-two institutions. The largest of these are a system of childcare centers, a school lunch program, non-contributive pensions for the elderly poor, and a family housing subsidy. The first three of these are highly progressive, while the last in neutral in its impact on the poor. Even so, as the analysis of the four programs shows below, there is substantial scope to improve targeting so as exclude the non-poor, while expanding the programs to include some of the excluded poor.

48. Assuming that the programs aimed to target all of the poorest 40 percent of the population, the school lunch program proved to have the highest coverage, with coverage increasing from 54 percent in 1999 to 66 percent in 2007. Childcare centers have the lowest effective coverage, falling from 14 percent in 1999 to 10 percent in 2006. However, because of budgetary limitations, even if childcare expenditures had been perfectly targeted they would not have been able to cover more than 15 percent of the population in 2006. In contrast, there were sufficient funds in the school lunch program to reach all of the target population in 2006. Perfect targeting would have allowed 71 percent of the non-contributive pension population and 84 percent of the family housing subsidy population to be included.

49. In terms of the share of benefits going to the non-poor, leakages in the housing subsidy are the highest, at 50 percent. While the school lunch program in Costa Rica has three important characteristics not always found in other food programs in Latin America:

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First, it was designed as a universal program to reach all public primary schools in the country. It was not designed to reach only a small proportion of the population but as a benefit to anybody enroll in the public system. not necessarily targeted to the poor. While it may be logistically difficult to screen which students should receive the school lunches in a subsidized manner, and doing so may have adverse effects on the willingness of the communities to share in the costs, these factors are not true for the housing subsidy, leading one to question whether the goal of this program is to provide housing for the middle class as well as the poor. In this regard, the childcare centers program is to be commended for having the lowest rate of leakage at 22 percent, although it is up from 18 percent in 1999, suggesting that improvement is possible even here.

50. Introducing or increasing user fees could also help as they would generate resources that could be used to subsidize the poor. Increasing tuition fees in universities could allow generating additional funds for need-based scholarships. Introducing or increasing tolls, especially for new roads and roads that have undergone a major rehabilitation, could be used to subsidize road maintenance in poorer or more remote areas, complementing the commendable government policy of directing discretionary spending by Congress to underdeveloped areas. Increasing resources to primary health care, which is used disproportionately by the poor, would also promote equity. Finally, the earlier suggestion to improve health sector efficiency by spending more on primary care also has the side effect of promoting equity, as the poor rely on the primary care centers more than the non-poor. Similarly, improving the quality and coverage of public secondary education is also likely to benefit the poor relatively more than the non-poor, who may have access to tutors or private schools.

Conclusions

51. As compared to its neighbors, Costa Rica has achieved enviable socio-economic indicators, low poverty and inequality rates, and good coverage of public services. However, poverty and inequality have largely stagnated since 1994 until 2006, leading one to question the efficacy of public services. This is worrisome as improved infrastructure and social services are essential for Costa Rica to benefit from global market opportunities and to maintain the stellar growth rates of 2006 and 2007. Because of fiscal constraints, efforts to improve the quality of public services would need to come largely from enhanced efficiency and improved targeting rather than by increasing the share of public expenditures in GDP.

52. Costa Rica could increase the efficiency and efficacy of its public expenditures by implementing better administrative controls via more frequent and better internal audits, by using modern procurement techniques such as consolidated purchases, and by ensuring that the funds are spent on high-return activities. This, in turn, will require better planning and budgeting as well as addressing institutional and technical constraints to more closely align incentives with performance, especially in roads, education, and social protection programs. The efficacy of public expenditures could also improve by better targeting to reduce leakages to non-target groups and by enhancing service coverage to the poor and vulnerable, especially in social protection programs and health. This report suggests specific policy options towards this end.

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Report Scope and Structure

53. With a view to maintaining fiscal balances while allowing selective expenditure increases identified above, this report seeks to identify reforms to enhance the efficiency of public expenditures and improve their targeting. Identification of needed reforms is only the first step in achieving desired outcomes. The process of approving the reforms and implementing them the way envisaged is equally, if not more, important. Therefore, this study analyzes process issues related to decision-making, budget formulation, approval and execution, monitoring and evaluation. It also evaluates procurement processes and suggests changes in purchasing methods and strategies to generate fiscal savings.

54. In a study as broad as a PER, it is infeasible to carry out an in-depth analysis of each important sub-sector as well as analyze the process issues discussed above. The PER focuses its sectoral analysis and recommendations in three sectors that have been identified by the Ministry of Finance as being both important and more open to reform: (i) education, (ii) social protection programs, and (iii) roads infrastructure. The analysis focuses on ways to enhance efficiency and improve targeting in these sectors.

55. The report has six chapters. Chapter 1 provide the macroeconomic context for expenditure policy, highlighting the fiscal constraints and challenges facing Costa Rica and describing the evolution of public expenditures and revenues to identify major trends and sources of concern. It assesses Costa Rica’s fiscal sustainability and analyzes the structure of public expenditures from a sectoral, institutional, and economic viewpoint. Finally, it briefly reviews the structure of taxation, which has been distorted by numerous exemptions and may have contributed to the increase in income inequality. However, an analysis of taxation is beyond the scope of this study.

56. Chapter 2 evaluates the efficiency and effectiveness of select social sector expenditures and outlines some policy options. A key objective of the evaluation is to point out shortcomings in the provision of these social services and to identify ways to generate fiscal savings through efficiency-enhancing reforms and improved targeting. Education, health and social protection were selected because these sectors were government priorities and offered the potential for substantial gains from reforms.

57. Chapter 3 uses a tool called the Public Expenditure Tracking Survey (PETS) to evaluate the effectiveness of expenditures in selective social programs and identify areas for efficiency gains. Using two important social protection programs identified by the Ministry or Education and Ministry of Health—school lunch program and pre-natal and childcare—PETS helps in the detection, analysis and quantification of weaknesses in both budget execution and service delivery. It also helps improve coordination among the various social protection programs.

58. Chapter 4 focuses on roads. It describes the quality of the road infrastructure and analyzes reasons for why it has failed to improve despite laudable government efforts. It evaluates the extent to which the additional resources can improve the quality of the road network. It considers financing options for the short and medium term, including via

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additional tax revenues, mobilizing resources from the private sector via concessions, and selective international borrowing by the government. It also considers ways to enhance the quality of the road infrastructure by increasing the efficiency of expenditures.

59. Chapters 5 and 6 focus on process issues, which are central to this study. Chapter 5 analyzes the institutional decision-making and budgetary process, focusing on public expenditure management. It studies the budget process in Costa Rica—emphasizing the role of political actors with influence on budgetary decisions and its processes—in order to discuss policies to enhance the efficiency and sustainability of the budget. Effective public expenditure management is key to allocating government resources toward priority areas in a sustainable manner.

60. Chapter 6 assesses the government purchasing and contracting strategy, which is critical to the efficient utilization of public resources. The chapter identifies opportunities for achieving economies of scale and greater efficiency in purchasing government goods and services, including real estate, capital equipment and consulting services. It includes examples of costs and potential projected savings based on the current supply system in Costa Rica, as well as good practice examples from similar programs in comparable economies. The chapter also suggests how changes in procurement policy could result in quick fiscal savings, thus reducing the fiscal burden and freeing resources that could be re-allocated for investments in the social and infrastructure sectors.

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Chapter 1 THE MACROECONOMIC ENVIRONMENT: MAIN FISCAL CHALLENGES

1.1 To promote economic growth and reduce poverty the World Bank periodically prepares Public Expenditure Reviews (PERs) aimed at advising governments on reforming policies and institutions that allocate and utilize public resources. This PER is the last major economic report on Costa Rica under the current Country Partnership Strategy 2004-2007 and has been prepared jointly by the World Bank and the Inter-American Development Bank (IADB) in close consultation with authorities in several relevant government ministries and public institutions. It is part of an ongoing dialogue with the Government of Costa Rica on economic, social and environmental policy.

1.2 The administration that came to power in May 2006 is committed to macroeconomic stability. Recognizing that improving the efficiency and effectiveness of public spending is a vital part of this effort, the administration sought World Bank and IADB advice on identifying needed reforms in this area. Such reforms will support Costa Rica’s efforts to ensure sustainable fiscal balances and establish effective and transparent mechanisms to allocate public resources so as to promote broad-based economic growth, improve social indicators, and reduce poverty.

1.3 This requires addressing both sector issues as well as process issues relating to public expenditure decision-making and management, budgetary processes and execution, monitoring and evaluation, and procurement. The sector focus in this report is on education, health, social protection and roads, where effective service delivery can improve lives both directly and indirectly, by promoting income generation and employment.

A. Country Context

1.4 Costa Rica is an upper middle-income developing country of 4 million inhabitants. Its per-capita income of $4,590 million in 2005 is slightly below the Latin America and the Caribbean (LAC) middle-income country average of US$4,700. Costa Rica is well known for its socio-economic achievements. Its life expectancy is substantially higher than in comparator countries, while infant and child mortality rates are significantly lower. The one area where Costa Rica lags behind Latin America and other upper-middle income countries is education. While its adult literacy rate is very respectable, its enrollment rates, especially in secondary school, are well below LAC averages, despite above-average public expenditures on education (Table 1.1).

1

Table 1.1: Key Social Indicators Avg. Upper

Middle-Income

CRI ARG CHI MEX PAN Avg. LAC LAC World

GNI per capita, 2005 (Atlas method, current US$) 4,590 4,470 5,870 7,310 4,630 4,008 4,700 4,805 Population growth, 2005 (%) 1.7 1.0 1.1 1.0 1.8 1.3 1.2 1.1 Education, 2004 Adult Literacy rate (% 15+) 95 97 96 91 92 90 94 93 Net enrollment, primary (%) 87 99 96 98 98 95 94 92 Net enrollment, secondary (%) 50 79 53 64 64 68 75 78 Health, 2004 Life expectancy at birth (years) 79 75 78 75 75 72 74 73 Under-5 mortality rate (per 1000) 13 18 8 28 24 31 19 20 Child malnutrition (% underwt.) 5 5 1 8 8 7 5 NA Source: World Development Indicators, 2004-2005. 1.5 Using one measure of poverty—households earning less that $2 per person per day—Costa Rica had the second lowest poverty headcount in Latin America in 2004, with just 9 percent of households below the poverty line (Figure 1.1). This was half the regional average. Using the absolute poverty line of $1 per person per day, Costa Rica’s poverty rate was only 2 percent, one-fifth of the Latin American average.1 However, under a different measure of poverty based on a household survey carried out by INEC, 24 percent of the population was classified as poor in 2004; moreover this percentage, after declining from 32 percent in 1989 to 23 percent in 1994, has stagnated until 2006. In 2007 the increase in real incomes and social transfers pressed the poverty rate down to a record low of 16.7 percent, while the extreme poverty decreased to 3.3 percent. (Figure 1.2).

Figure 1.1: Latin America $2 PPP/day Poverty

0102030405060708090

Uru

guay

Cos

ta R

ica

Chi

le

Jam

aica

Arg

entin

a

Pan

ama

Bra

zil

Colo

mbi

a

Latin

Amer

ica

Mex

ico

Par

agua

y

Bol

ivia

Gu

atem

ala

Per

u

Hon

dura

s

El

Salv

ador

Nica

ragu

a

Source: World Development Indicators

Pove

rty h

eadc

ount

1 See Costa Rica Poverty Assessment: Recapturing Momentum for Poverty Reduction. The World Bank, February 2007.

2

Figure 1.2: Poverty Headcount Rates by Year

0%

5%

10%

15%

20%

25%

30%

35%

1989 1994 2000 2001 2002 2003 2004 2005 2006 2007

% o

f pop

ulat

ion

All poor Extreme poor

Source: INEC household surveys, various years.

1.6 Income inequality in Costa Rica has been low by Latin American standards. However, as measured by the Gini coefficient, inequality increased from 0.44 in 1989 to 0.50 in 2001, before falling slightly to 0.48 in 2004 (Figure 1.3). Inequality in both rural and urban households mirrored this trend. This is still below the Latin American average of 0.52, with Uruguay being the only country to have a lower Gini coefficient.

Figure 1.3: Evolution of Income Inequality, selected years

Source: Costa Rica Poverty Assessment (2007)

0.41

0.43

0.45

0.47

0.49

0.51

1989 1994 2000 2001 2002 2003 2004 YEAR

Costa Rica Urban Rural

Gini value

1.7 Due to its stable macroeconomic and political environment, strong institutions, and a well-educated work force, Costa Rica has been among the faster growing economies of Latin America over the last fifteen years. Economic growth averaged 4.7 percent annually, about 2.0 percentages points above the rest of Latin America (Table 1.2). After tepid growth averaging 2.4 percent during the 1980s, the economy grew strongly at 5.3 percent annually during the 1990s. While it slowed somewhat to 4.1 percent annually between 2000 and 2005, it was still well above the LAC average of 2.6

3

percent. In per capita terms, Costa Rica grew by 2.5 percent as compared to the LAC average of 1.6 percent.

Table 1.2: GDP Growth in Costa Rica and LAC, 1991-2005 (percent)

Growth rates of GDP Growth rates of GDP per capita LAC CRI Diff. LAC CRI Diff.

1991-2000 2.9 5.3 2.4 2.1 2.9 0.8 2001-2005 2.6 4.1 1.5 1.1 2.1 1.0 1991-2005 2.7 4.7 2.0 1.6 2.5 0.9 Source: World Bank estimates.

1.8 Unlike most countries in LAC, Costa Rica has not suffered from financial and debt crises. Meanwhile, Costa Rica has followed a successful strategy of outward-oriented export-led growth, openness to foreign investment, and gradual trade liberalization that transformed the economy from one highly dependent on agriculture and agro-industry to one that is now led by high-tech computer and electronic industries, services such as transport, communications and banking, non-traditional agriculture, and tourism.

B. Recent Economic Developments and Challenges

1.9 Costa Rica’s recent economic performance has been among the strongest in Latin America. Importantly, the growth has been accompanied by increased fiscal and monetary stability, as well as lower inflation and domestic interest rates. Economic growth in 2006 reached 8.8 percent, surpassing the 5.9 percent growth rate of 2005 as well as the growth rate of 6.8 percent of year 2007 (Table 1.3). This occurred despite high oil prices which is very commendable. Key contributors were strong external demand, robust domestic manufacturing, especially in the high-tech sector, strong construction growth, and sizeable increases in tourism and foreign direct investment inflows.

1.10 Inflation shows signs of getting under control. Partly due to high international oil prices, inflation averaged 13.6 percent in 2004-2005, declined to 9.4 percent in 2006 and increased to 10.8 percent at end 2007 in response to the rising food and oil prices. The increase in the rate of GDP growth and GDP per capita has positive implications for long-term growth, given the associated rise in consumer activity. Private consumption, which accounts for almost two-thirds of GDP, grew by 5.6 percent in 2006, in response to an increase in wages, which grew hand-in-hand with a 7 percent real increase in the availability of consumer credit. Open unemployment reached 6 percent in 2006, down by 0.7 percentage points from 2005 and the lowest since 2001.

1.11 Fiscal balances have recovered strongly. Following the economic slowdown of 2001-2002, the deficit of the non-financial public sector had widened to 4 percent of GDP in 2002, due to a drop in tax revenues, increases in interest payments, higher than planned raises in public wages, investments in public enterprises, and Central Bank losses. Despite its efforts, the Pacheco Administration was unable to pass a tax reform to address the fiscal problems. The Arias Administration sent several tax reform bills to the

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National Assembly in August 2006. Although the bills are still under discussion, the overall balance of the non-financial public sector already shifted to a surplus of 1.3 percent of GDP in 2007—its best showing in a decade. While buoyant revenues from increased economic activity was probably the main explanation, control of expenditures, better debt management, and improvement in tax and customs administration also contributed. Total public debt fell to 46.5 percent of GDP at the end of 2006, down from 56.2 percent in 2003 and to a low record of 37.6 in 2007 (Table 1.3).

Table 1.3: Key Macroeconomic Indicators, 2001-2007 (percent of GDP, unless noted otherwise)

2001 2002 2003 2004 2005 2006 2007 Real GDP (% annual growth) 1.1 2.9 6.4 4.3 5.9 8.8 6.8 Real GDP per capita growth (%) -1.1 0.8 4.4 2.3 4.1 6.1 4.1 Inflation rate (%, end of year) 11.0 9.7 9.9 13.1 14.1 9.4 10.8 Gross Domestic Investment 20.3 22.6 20.6 23.1 24.8 26.4 25.6 Gross National Savings 16.6 17.5 17.1 18.68 20.1 21.9 19.6 Public Sector

Overall Public Sector Balance -2.9 -5.4 -4.5 -3.6 -2.3 -0.5 0.6 Overall NFPS Balance -1.7 -4.0 -2.9 -2.3 -0.9 0.7 1.3

Central Government -2.9 -4.3 -2.9 -2.7 -2.1 -1.4 0.4 Revenues 13.4 13.3 13.9 13.6 13.8 14.2 15.5 Expenditures 16.4 17.6 16.8 16.3 15.9 15.6 15.1

Rest of NFPS 1.2 0.3 0.0 0.4 1.2 2.1 0.9 Central Bank -1.2 -1.4 -1.6 -1.3 -1.4 -1.1 -0.7 Total Public Debt 49.9 54.3 56.2 55.8 52.0 46.5 37.6

External Sector Indicators Current account balance -3.7 -5.1 -5.0 -4.3 -4.6 -5.0 -5.8

Trade Balance -5.0 -7.6 -6.2 -10.5 -14.1 -15.0 -14.3 Merchandise Exports (fob) 30.0 31.3 35.2 34.0 35.3 36.4 35.7 Merchandise Imports (fob) 35.0 38.9 41.4 44.5 49.4 51.4 50.0

GDP (US$ million) 16,403 16,844 17,513 18,598 19,909 22,522 26.238 Source: Central Bank, Ministry of Finance, IMF and Bank Staff estimates. 1.12 Costa Rica’s large trade imbalance shows signs of improvement during 2007. Merchandise exports more than offset an upsurge in imports to produce a reduction in the country’s trade deficit. The positive export performance was driven by a 17 percent increase in industrial exports, mainly computer components and microchips. Imports rose by about 10 percent, which was about half the growth rate during the same period of 2006. The trade deficit for the full year declined from 15 percent of GDP in 2006 to 14.3 percent in 2007. While the current account balance increased to -5.8 percent of GDP in 2007, strong capital inflows—1.8 billion dollars in 2007—allowed the country to increase its reserves to over $4 billion by the end of the year.

1.13 The authorities are taking additional steps to avoid a return to the double-digit inflation, high public debt, growing dollarization, and large external balances that haunted it earlier in the decade. This is being done mainly through increased flexibility in its exchange rate regime, inflation targeting, continued efforts to increase its primary fiscal surplus, and efforts to attract investment and enhance trade. In October 2006 the Central Bank introduced a system of bands for the exchange rate, after more than two decades with a crawling peg regime. The main objectives of monetary and exchange rate

5

flexibility are to help reduce inflation and dollarization. The smooth behavior of the foreign exchange market during the first year after the change suggests the strategy is working, although the Central Bank is intervening in the market to avoid a further strengthening of the Colon.

1.14 Measures to attract investment and enhance trade focus on enhancing integration with the rest of the world. These efforts received a boost the ratification of the Central American Free Trade Agreement (CAFTA) with the United States in October 2007. A bilateral agreement with the European Union is also under discussion. In August this year, Costa Rica and Panama signed a free trade agreement that allow 90 percent of Costa Rican goods to enter Panama duty free and vice-versa. Tariffs on the remaining goods are to be phased out gradually—in 5 to 11 years for industrial goods and 3 to 17 years for agricultural goods. Panama is Costa Rica’s fifth major trade partner, after the United States, China, Nicaragua, and Guatemala.

1.15 Despite these encouraging developments, Costa Rica is vulnerable to deterioration in the external environment from: (i) a sharp slowdown in the United States; (ii) tighter global financial market conditions, and (iii) increases in fuel and commodity prices. This will negatively affect its fiscal revenues, making it much more difficult to increase the primary surplus, especially as there is an urgent need to redress infrastructure bottlenecks and increase education enrollment. A recent study highlighted underinvestment and decaying infrastructure as being the most pressing threat to the business climate.2 Another recent report concluded that to sustain growth Costa Rica needs to reduce infrastructure bottlenecks by rehabilitating and maintaining the key trade corridors and by creating incentives to expand electricity generation, albeit with appropriate regulatory oversight.3 It also advised Costa Rica to take measures to increase productivity in the telecommunications sector and to conclude pending concessions and public-private partnerships in transport, electricity and telecommunications.

C. Government’s Fiscal Strategy and Developments

1.16 The authorities’ analysis of the main challenges facing the economy has led them to formulate a broad medium-term agenda where greater fiscal discipline is one of the main elements. With the aim of bringing down inflation and setting the stage for continued economic growth and poverty reduction, the administration and the Ministry of Finance, in particular, has proposed measures to reduce public debt, improve debt management, reduce the quasi-fiscal losses of the central bank, and strengthen the financial sector. It also proposed measures to stimulate private sector led growth through further integration with the rest of the world and by redistributing resources towards education, health, security and infrastructure. Its fiscal consolidation strategy also includes a prudent wage policy, additional measures to improve tax and customs administration, and a comprehensive tax reform.

2 Costa Rica: Investment Climate Assessment, Report No. 35424-CR, The World Bank, June 2006. 3 Costa Rica: Country Economic Memorandum: The Challenges for Sustained Growth, Report No. 35910-CR, The World Bank, September 2006.

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1.17 The authorities have sent several tax bills to the National Assembly, proposing reforms to the value added tax, real estate tax, and business registration tax. While the proposals have not yet been approved, the dynamism of the economy, coupled with improvements in tax and customs administration, has resulted in buoyant revenues. Tax revenue grew by 20 percent between 2006 and 2007, increasing its share of GDP from 14.2 percent to 15.1 percent (Table 1.4). The increase in revenue has been coupled with a better control of expenditures and improved debt management, resulting in an overall central government surplus of 0.6 percent of GDP as opposed to a deficit of -0.4 percent of GDP the previous year.

Table 1.4: Central Government Balance, December 2006-December 2007

(percent of GDP)

2006

2007

Total revenue 14.5 15.5 Tax revenue 14.2

4.0 15.1

Direct taxes 4.5 Indirect taxes 10.1 10.6

Total Expenditures 15.6 15.1 Current expenditure 14.5 14.0

Salaries and wages 4.7 4.7 Good and services 0.5 0.6

Interest on debt 3.8 3.7 Current transfers 5.5 5.0 Capital Expenditures 1.1 1.1

Primary balance 3.0 4.0 General balance -0.4 0.6

Source: Ministry of Finance.

1.18 The decrease in the overall public debt, including central bank debt, started even earlier. The share of debt to GDP has fallen substantially from 72 percent of GDP in the early 1990s, prior to the external debt reduction negotiated under the Brady Plan, to around 50 percent of GDP in 2006 (Figure 1.4). This was partly due to Ministry of Finance initiatives relating to the creation of a consolidated debt and cash management office, the development of a coordinated exchange and interest rate policy with the Central Bank, and the implementation of a debt management strategy.

Figure 1.4: Total Public Sector Debt (as percent of GDP)

0

1020

3040

50

6070

80

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Internal Debt External Debt

Source: Ministry of Finance and Central Bank of Costa Rica.

1.19 In the last fifteen years, improvements in the composition of the debt have reduced the public sector’s liability exposure to interest rate and exchange rate risk. While the share of the debt subject to the domestic jurisdiction has risen steadily, a

7

significant proportion of internal debt is in foreign currency. Nevertheless, between 1991 and 2006, the share of debt denominated in foreign currency fell from 70 percent to 46 percent (Figure 1.5). Public debt exposure to exchange rate risk has thus been mitigated, but still remains high, given that the government’s income is mainly in local currency.

Figure 1.5: Public Sector Debt Composition, by Currency (as percent of total)

0%

20%

40%

60%

80%

100%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Domestic Denominated Foreign Denominated

Source: Ministry of Finance and Central Bank of Costa Rica.

1.20 A key element of the strategy has been to increase the share of debt at fixed interest rates as part of its efforts to extend the Colon yield curve. By suspending the issuance of central government debt at variable interest rates for five years, the share of fixed interest rate debt rose from 50 percent in 1999 to about 80 percent in 2006. This has reduced exposure to interest rate risk and resulted in a more stable and predictable yield curve in short- and medium-term securities. Encouragingly, the nominal Colon interest rate has trended down in the past decade, with a sharp decline in recent months, as a consequence of the change in the exchange rate regime from a crawling peg to a band-constrained floating rate. Finally, the average maturity of central government debt has also increased, thereby mitigating rollover risk. As of December 2005, the average maturity was 2.3 years for internal debt and 5.2 years for external debt.

D. Fiscal Trends and Sustainability

1.21 With the exception of 2002, when Costa Rica’s public sector deficit reached a worrisome 4 percent of GDP, Costa Rica has demonstrated remarkable fiscal discipline. Its public sector balance has been relatively stable. The public sector deficit averaged just 1.7 percent of GDP during the last 10 years and reached a surplus of 0.8 percent of GDP in 2006 (Table 1.5). The prudent fiscal stance has served Costa Rica well, giving it macroeconomic stability and allowing it to grow faster than the vast majority of countries in the region. Part of the improvement in the fiscal balance was due to a welcome reduction in interest payments from a peak of 4.3 percent of GDP in 2002-2003 to 3.9 percent in 2006. However, some of it came from a worrisome decrease in capital expenditure, which fell from an average of 4.1 percent of GDP between 1997 and 2003 to 3.2 percent of GDP in 2006.

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Table 1.5: Consolidated Non-Financial Public Sector Balance (as a percent of GDP)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Total Revenue 22.6 22.3 19.9 21.5 23.0 22.7 22.8 22.5 23.3 24.4

Current Revenues 22.5 22.3 19.7 21.5 22.9 22.7 22.6 22.5 23.3 24.3

Tax Revenues 12.5 12.6 11.9 12.3 13.2 13.2 13.3 13.3 13.6 14.2

Soc. Sec. Contr. 5.9 5.7 5.6 5.9 6.0 6.2 6.0 5.8 6.1 6.3

Non-tax Reva 4.1 4.1 2.1 3.3 3.7 3.3 3.2 3.3 3.5 3.8

Capital Revenues 0.0 0.0 0.2 0.0 0.1 0.0 0.3 0.0 0.0 0.0

Total Expenditures 23.7 23.1 21.5 23.5 24.8 26.7 25.7 24.8 24.1 23.6

Current Expend. 19.5 19.0 17.5 19.5 20.9 22.1 21.4 21.0 20.6 20.4

Wages and Salar. 6.9 6.9 6.8 7.3 7.7 8.0 8.0 7.7 7.5 7.5

Goods and Services 2.1 2.1 1.8 1.9 2.1 2.4 2.2 2.1 2.0 2.1

Interest 3.8 3.2 3.6 3.6 4.0 4.3 4.3 4.1 4.1 3.9

Current Transf. 6.7 6.8 5.1 6.6 7.1 7.3 6.9 7.0 6.9 7.0

Capital Expenditure 4.3 4.1 4.0 4.0 3.9 4.6 4.4 3.8 3.6 3.2

Primary balance 2.6 2.4 2.1 1.6 2.2 0.3 1.4 1.8 3.3 4.6

Overall Balance -1.2 -0.8 -1.6 -2.0 -1.7 -4.0 -2.9 -2.3 -0.9 0.8

Overall Balances:

Central Government -2.9 -2.5 -2.2 -3.0 -2.9 -4.3 -2.9 -2.7 -2.1 -1.1

Rest of NFPS 1.8 1.7 0.6 1.0 1.2 0.3 0.0 0.4 1.2 1.9

Central Bank -1.3 -1.2 -1.6 -1.8 -1.2 -1.4 -1.6 -1.3 -1.4 -1.2

GDP (US$ millions) 12,829 14,096 15,797 15,946 16,403 16,844 17,514 18,594 19,973 22,229 a. Includes transfers from public enterprises. Note: Consolidation of the reduced non-financial public sector includes the central government and the following entities: CNP, FANAL, AYA, ICE, INCOP, JPSSJ, CCSS, CTAMS, FODESAF, ICT, IDA, INA, OCIS. Source: Ministry of Finance. 1.22 The central government balance tracks the overall non-financial public sector balance very closely, with the rest of the non-financial sector—mainly public enterprises—generating a small surplus every year (Figure 1.6). Although the primary balance has shown a surplus every year, the overall balance of the central government budget has been in deficit every year, averaging 2.6 percent of GDP between 1997 and 2006 (Table 1.6). The central bank has also been in deficit, generating operating losses averaging 1.4 percent of GDP over the decade. These quasi-fiscal losses have been largely due to its interventions in the foreign exchange market to sterilize the liquidity impact of large capital inflows.

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Figure 1.6: Public Sector Balances, 1997-2006 (as percent of GDP)


Table 1.6: Central Government Balance (as percent of GDP)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Total Revenue 12.7 12.7 12.5 12.4 13.4 13.3 13.9 13.6 13.8 14.5

Tax Revenue 12.5 12.6 11.9 12.3 13.2 13.2 13.3 13.3 13.6 14.2 Direct taxes 3.0 3.2 3.5 3.4 3.7 3.8 4.0 4.0 4.0 4.3 Indirect taxes 9.5 9.3 8.4 8.9 9.5 9.4 9.3 9.4 9.5 9.9

Imports … … … … 4.6 4.2 4.0 4.0 4.2 4.4 Domestic sales. … … … … 2.4 2.4 2.2 2.4 2.5 2.7 Excise tax … … … … 0.5 0.2 0.2 0.2 0.2 0.2 Other … … … … 1.9 2.6 2.8 2.7 2.6 2.6

Non-tax Revenue 0.1 0.1 0.5 0.1 0.2 0.1 0.6 0.3 0.3 0.2 Total Expenditures 15.6 15.1 14.7 15.4 16.4 17.6 16.8 16.3 15.9 15.5 Current Expenditures 14.0 13.7 13.4 14.0 15.1 16.2 15.7 15.2 14.8 14.4

Wages and Salaries 4.8 4.9 4.7 5.2 5.0 5.2 5.2 5.0 4.9 4.7 Goods and Services 0.6 0.6 0.5 0.5 0.5 0.6 0.4 0.5 0.5 0.5 Interest 3.8 3.2 3.6 3.6 4.0 4.3 4.3 4.1 4.1 3.9

Internal 3.5 2.9 3.2 3.0 3.2 3.5 3.4 3.2 3.3 3.1 External 0.4 0.3 0.5 0.5 0.7 0.8 0.9 0.9 0.8 0.8

Transfers 4.8 5.1 4.5 4.7 5.6 6.2 5.8 5.6 5.4 5.3 Capital Expenditure 1.6 1.4 1.3 1.4 1.3 1.4 1.1 1.1 1.1 1.1 Primary Balance 0.9 0.7 1.4 0.6 1.1 0.0 1.4 1.4 2.0 2.8 Overall Balance -2.9 -2.5 -2.2 -3.0 -2.9 -4.3 -2.9 -2.7 -2.1 -1.1 Source: Ministry of Finance.

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1.23 Following the Brady Plan debt reductions, the combined debt of the central government and central bank stood at 50-55 percent of GDP between 1992 and 2004 (Figure 1.7). However, whereas the central bank debt declined steadily from almost 30 percent of GDP in 1992 to 12 percent in 2006, the central government debt increased from 25 percent of GDP in 1992 to 33 percent of GDP in 2006. Thus their combined debt reduced from 53 percent in 1992 to 46 percent in 2006. The rest of the public sector debt has remained fairly stable around 6.6 percent of GDP between 1992 and 2006.

Figure 1.7: Public Sector Debt by Institution (as percent of GDP)

0

10

20

30

40

50

60

70

80

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

CG BCCR Rest

Source: Ministry of Finance and Central Bank. 1.24 Based on the level of the debt and its trajectory, a 2006 World Bank report attempted to measure the level of the fiscal primary surplus needed to ensure debt sustainability under a reasonable range of scenarios.4 The analysis was carried out on the central government and central bank debt and used three different approaches. The first was the classic deterministic approach, which calculated the likely level of future debt by assuming alternative but predetermined paths for macroeconomic variables (such as interest rates, growth, and exchange rates), without capturing explicitly the relationship among them. The second was a probabilistic approach, which derived probability distributions of the future paths of macroeconomic variables using historical averages and standard deviations. The final approach was also probabilistic, but captured the dynamic interactions between the macroeconomic variables and ran simulations to forecast

Table 1.7: Primary Surplus Required to Maintain Public Debt at Current Level

(percent of GDP)

Scenario Policy CEM

calculation PER

Calculation a. Historical Scenario 1.6 1.4

b. Stress Scenario 4.2 3.5

c. Active Policy Scenario 1.9 1.6

d. Passive Policy Scenario 2.7 2.3

Average 2.5 2.2

Debt/GDP (%) 50.9 45.0 Source: World Bank staff calculations.

4 Costa Rica: Country Economic Memorandum: The Challenges for Sustained Growth, Report No. 35910-CR, The World Bank, September 2006.

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stochastic trajectories for the relevant variables. For both from the deterministic and probabilistic models and using data through end-2004, the 2006 study calculated that a 2.5 percent of GDP primary surplus would be necessary to allow debt to remain under 50 percent of GDP (Table 1.7).

1.25 This PER study has updated the analysis above using the deterministic approach and assuming deterministic paths for endogenous macroeconomic variables. As in the earlier study, four deterministic scenarios were considered. The first two scenarios were based on historical values while the second two multiplied the historical average by 1.6 times their historical standard deviation. In the first scenario—the “central” or optimistic scenario—the required primary surplus was calculated to be 1.4 percent of GDP, which is close to its historical average of 1.5 percent. Under the “stress” or pessimistic scenario—with slightly negative GDP growth, a domestic real interest rate of 12 percent, an international real interest of 4 percent, and the real exchange rate depreciating by 6.5 per year—the required primary surplus was estimated to be 3.5 percent of GDP per year. The last two scenarios differed in that one assumed passive policy attitude while the other assumed a more active policy. The required primary surpluses were estimated to be 1.6 and 2.3 percent of GDP for the active and passive scenarios respectively (Table 1.7), above the historical average but below the positive fiscal outcome in 2006.

E. The Structure and Composition of Public Expenditures

Institutional Composition of Public Expenditures

1.26 At the national level, Costa Rica’s public sector comprises the central government, decentralized institutions, public enterprises, public financial intermediaries, and autonomous entities.5 The Central Government has three branches: the executive with 18 ministries, a legislature, the judiciary, and three autonomous entities: the Contraloría General de la República (the comptroller-general’s office), the Tribunal Supremo de Elecciones (TSE, the supreme electoral court) and the public defender (Defensoría de los Habitantes). Provincial and local governments (municipalities) make up the rest of the public sector (Figure 1.8).

1.27 The consolidated6 accounts of public sector expenditure by institutional grouping reveals that over the last decade, the central government accounted for about half of total spending (49.5 percent), followed by decentralized institutions (27 percent), public enterprises (7.7 percent), financial institutions (5.5 percent), and autonomous entities (4.8 percent), while local governments’ spending account for less than 3 percent of all expenditures. This consolidation better reflects what was actually spent by the public sector in carrying out its functions. (Table 1.8).

5 In this report, the non-central government entities are referred to as decentralized entities. 6 The consolidation process in Costa Rica follows the Manual on Government Finance Statistics of the International Monetary Fund and it essentially involves the elimination of transactions between the different parts of government, so as to avoid double counting.

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Figure 1.8: Composition of Public Sector Expenditure by Institutional Grouping (as percent of total public spending)

0%

20%

40%

60%

80%

100%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

LocalGovernments

Other Entities

FinancialIntermediaries

PublicEnterprises

DecentralizedInstitutions

CentralGovernment

Source: Ministry of Finance and Central Bank.

Table 1.8: Consolidated Public Sector Expenditures by Institutional Grouping (net of inter-institutional transactions and as percent of total public spending)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Central Government 52.1 51.7 51.1 51.5 50.9 46.5 46.3 47.5 47.8 47.9 Decentralized Institutions 25.7 25.3 25.4 26.3 25.6 28.8 29.7 28.5 29.2 30.2 Public Enterprises 9.3 9.6 9.7 7.7 7.4 9.3 8.7 8.8 8.2 7.6 Financial Institutions 3.0 3.8 3.4 3.5 5.1 7.2 8.0 7.7 7.1 6.6 Autonomous Entities 7.2 7.2 7.8 8.6 8.5 5.6 4.7 4.6 4.7 4.5 Local Governments 2.6 2.4 2.6 2.4 2.5 2.6 2.6 2.8 3.1 3.2 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Ministry of Finance. 1.28 Overall, consolidated public spending has averaged 26 percent of GDP over the last decade (Table 1.9). This is below most middle-income countries in LAC and almost half of the public sector unconsolidated spending, reflecting that public enterprises, and to a lesser degree, decentralized institutions, generate significant operational surpluses.

Table 1.9: Composition of Consolidated Public Sector Expenditures by Institutional Grouping (Net of inter-institutional transactions and as a percent of GDP)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Central Government 13.1 12.9 12.5 13.0 14.0 14.0 13.6 13.4 13.0 12.5 Decentralized Institutions 6.5 6.3 6.2 6.6 7.1 8.7 8.7 8.0 7.9 7.9 Public Enterprises 2.3 2.4 2.4 1.9 2.0 2.8 2.6 2.5 2.2 2.0 Financial Institutions 0.7 1.0 0.8 0.9 1.4 2.2 2.3 2.2 1.9 1.7 Autonomous Entities 1.8 1.8 1.9 2.2 2.3 1.7 1.4 1.3 1.3 1.2 Local Governments 0.7 0.6 0.6 0.6 0.7 0.8 0.7 0.8 0.8 0.8 TOTAL 25.1 24.9 24.4 25.2 27.6 30.1 29.3 28.2 27.1 26.2


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1.29 For the analysis of technical, economic or costing relationships it is useful to use the unconsolidated accounts. It is also useful from the budget management point of view as it shows the actual amount of spending that the central government controls. According to this presentation, decentralized entities increase in importance, as a percent of total spending, while the share of the central government in 2006 falls sharply to about 30 percent. (Tables 1.10 and 1.11). Shares for years over the last decade are similar.

Table 1.10: Unconsolidated Public Sector Expenditures by Institutional Grouping (as percent of GDP)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Central Government 15.6 12.8 14.7 18.0 16.4 17.6 16.8 16.3 15.9 15.5 Decentralized Institutions 7.9 6.5 7.5 9.3 8.5 8.8 8.9 8.2 8.1 8.1 Public Enterprises 10.1 8.3 9.4 12.5 11.4 14.0 14.1 14.8 15.4 16.1 Financial Institutions 7.0 5.8 8.6 10.0 9.1 9.5 9.8 9.4 9.9 9.6 Autonomous Entities 2.5 2.0 2.6 3.4 3.1 3.1 2.7 2.5 2.3 2.1 Local Governments 0.8 0.6 0.7 0.9 0.8 0.8 0.8 0.8 0.9 0.9 TOTAL 43.9 36.1 43.6 54.0 49.2 53.9 53.2 52.1 52.5 52.3

Table 1.11: Unconsolidated Public Sector Expenditures by Institutional Grouping


(as percent of total public spending) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Central Government 35.6 35.6 33.7 33.3 33.3 32.7 31.6 31.4 30.3 29.6 Decentralized Institutions 18.0 18.0 17.1 17.2 17.2 16.4 16.7 15.8 15.5 15.5 Public Enterprises 23.0 23.0 21.6 23.1 23.1 25.9 26.6 28.3 29.2 30.7 Financial Institutions 16.0 16.0 19.8 18.5 18.5 17.7 18.5 18.2 18.8 18.3 Autonomous Entities 5.7 5.7 6.0 6.3 6.3 5.7 5.1 4.7 4.4 4.1 Local Governments 1.8 1.8 1.7 1.6 1.6 1.5 1.5 1.6 1.7 1.7 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Ministry of Finance. Decentralized Intitutions

1.30 The Costa Rican Social Security Institute (CCSS) accounts for about three-quarters of all spending by the decentralized institutions, accounting for roughly 23 percent of total public spending. Of the remaining amount, almost half is spent by the public universities, with the University of Costa Rica (UCR) alone accounting for 7.0 percent of spending by the decentralized institutions, followed by the National University (UN) that accounts for 2.6 percent of the expenditure. The National Apprentice Institute (INA) and the Institute of Social Help (IMAS) together accounted for 9.5 percent, but decreased to 5.9 percent in 2006 (Table 1.12). In part, this was due to a decline in IMAS spending in different social promotion programs. While this flexibility was one of its

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strong points, it also led to duplication, which is why its activities have been curtailed in favor of programs run by other ministries and agencies.

Table 1.12: Spending by Decentralized Institutions (as a percent of total spending)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Caja de Seguridad Social 71.0 74.3 76.6 76.0 77.0 76.0 74.8 75.3 74.2 75.7 Universidad de Costa Rica 8.4 8.2 7.1 7.5 7.2 6.2 7.4 7.3 7.7 7.0 INA 4.4 4.0 3.8 3.8 3.9 4.3 3.7 3.1 3.3 3.0 IMAS 5.1 3.2 3.3 4.5 3.6 2.4 2.2 2.8 3.1 2.9 Universidad Nacional 3.1 3.0 2.6 2.7 2.8 2.0 2.5 3.1 2.6 2.6 Instituto Tecnológico 1.7 1.7 1.4 1.6 1.5 1.4 1.3 1.4 1.4 1.4 Other 6.4 5.6 5.2 3.8 4.0 7.7 8.1 6.9 7.8 7.3 Total 100 100 100 100 100 100 100 100 100 100 Source: Ministry of Finance.

Public Enterprises

1.31 The share of public enterprises in total spending has declined from 9.3 percent in the late 1990s to 7.6 percent in 2006 (Table 1.8). There have been important shifts in the composition. The Costa Rican Institute of Electricity (ICE) has increased its share of public enterprise spending from 37 percent in 1997 to 62 percent in 2006 (Table 1.13), reflecting the importance the government places to enhance power generation, power transmission, and distribution activities. In contrast, the share of the oil refinery enterprise (RECOPE) declined from 29 percent to 11 percent over this period.

Table 1.13: Spending by Public Enterprises (percent of total)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Instituto Costarricense de

Electricidad 37.2 39.9 44.0 38.7 38.0 66.0 77.8 75.7 68.3 62.4 Refineria de Petroleo 28.6 26.4 23.6 31.9 33.3 3.9 4.6 4.5 12.4 11.4 Compania Fuerza & Luz 12.5 12.5 11.7 9.8 11.7 15.1 3.3 7.0 5.2 5.8 Inst. Acueductos y

Alcantarillados 5.5 6.0 5.0 4.5 4.1 4.8 3.9 2.9 3.1 4.5 Junta de Proteccion

Social 7.7 6.5 6.0 5.4 5.5 2.0 0.9 1.0 2.3 2.0 Other 8.4 8.7 9.7 9.8 7.4 8.3 9.6 9.1 8.7 14.1 Total 100 100 100 100 100 100 100 100 100 100.0 Source: Ministry of Finance.

Public Financial Institutions

1.32 The share of public financial institutions in total public spending over this period increased from 3.0 to 6.6 percent, peaking at 8 percent in 2003, when the central bank’s quasi-fiscal losses also peaked (Table 1.8). For years the central bank tried to limit monetary growth and sterilize inflows of foreign exchange, receiving lower interest on its international reserves than what it paid out on its domestic debt, thereby accumulating losses. As a result, the share of the central bank’s spending in total financial institutional spending shot up dramatically from 5 percent in 1997 to 58 percent in 2006 (Table 1.14).

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The other important public financial institutions are the National Mortgage Bank, the Banco Nacional de Costa Rica, Banco de Costa Rica, and Banco Popular (owned by Costa Rican workers), all of which are deposit-taking institutions.

Table 1.14: Spending by Public Financial Institutions*

(as percent of total spending) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Banco Central (BCCR) 5.4 22.9 27.7 29.4 18.1 49.3 59.4 52.6 64.4 58.2 Banco Hipotecario

Vivienda 0.4 0.3 0.3 0.2 0.2 7.6 7.1 12.0 12.6 12.0

Banco Nac. de Costa Rica 28.7 25.4 19.7 17.3 25.0 6.6 6.0 5.6 6.7 9.0

Banco Popular 8.3 6.6 6.5 6.5 7.2 3.5 4.6 3.9 3.8 2.8 Banco de Costa Rica 16.8 13.1 14.6 15.2 13.2 5.4 3.7 8.0 2.6 6.2 Other 40.4 31.7 31.3 31.4 36.2 27.6 19.2 17.9 9.9 7.8 Total 100 100 100 100 100 100 100 100 100 100 Includes amortization of debt and financial investments. Source: Ministry of Finance. Autonomous Entities

1.33 In recent years, autonomous entities7 reduced their share of total spending from 8.5 percent in 2001 to 4.5 percent in 2006. The Social Development Allocation Fund (FODESAF), which accounted for over half of the expenditure in this category, now accounts for only one third (Table 1.15). The main source of revenue of FODESAF is the 20 percent of the sales tax, which has not been transferred by the central government on a regular basis, due to alleged inefficiencies in the Fund. In contrast, the National Roads Counsel (CONAVI), which did not exist until 1999, now accounts for 22.7 percent of expenditures in this category. Its source of revenues is the fuel tax.

Table 1.15: Spending by Autonomous Entities (as percent of total spending)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

FODESAFa 63.4 54.0 51.8 50.6 46.8 33.2 31.4 34.1 34.6 33.6 CONAVIb 0.0 0.0 11.1 20.1 22.3 19.3 24.0 21.7 21.7 22.7 Pensions 11.9 12.6 10.2 9.5 9.9 11.7 11.5 12.1 11.1 14.4 Consejo Vial 7.0 6.6 6.6 4.4 3.2 3.5 4.1 4.5 4.3 5.2 Other 23.0 31,0 23.9 19.0 20.7 36.0 31.4 29.7 28.3 24.0 Total 100 100 100 100 100 100 100 100 100 100 a. Fondo de Desarrollo Social y Asignaciones Familiares (FODESAF) is the Social Development Fund responsible for programs to reduce poverty. b. Consejo Nacional de Vialidad is the National Highway Administration Board. Source: Ministry of Finance.

7 Organos Adscritos a Ministerios y/o Entidades Autônomas.

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Economic Composition of Public Expenditures

1.34 The wage bill is the largest line item in the economic composition of Costa Rica’s non-financial public sector (Table 1.5). It has averaged 7.4 percent over the last 10 years, which is higher than the Latin American average of about 6 percent. This is unsurprising given that public employment in Costa Rica is much higher than in other LAC countries, since that many services such as telecommunications, electricity, and oil and gas remain in the public sector. There were 230,000 employees in the public sector in 2006, which represents 12.9 percent of the labor force. This is almost twice the average for Central America (7.1 percent) and considerably higher than the 4.3 percent observed in other middle-income countries. The optimal size of government is not unique; most countries tend to choose the government size, typically measured by general government consumption expenditures on wages, goods, and services. In more than half of all countries included in the study (28 of the 50) general government consumption is within the 10 to 20 percent of GDP range.8 Using this criterion, Costa Rica’s wage burden is within norms, since government consumption is relatively modest at 12.4 percent of GDP. These disparities may reflect differences in the number and size of public enterprises, in the “labor intensity” of government, and in the relatively low wage rates in the public sector.

1.35 Not far behind wages stand the current transfers, which have averaged 6.7 percent of GDP between 1997 and 2006 (Table 1.5). In fact, they are the single largest item in the central government budget, accounting for one-third of central government expenditures (Table 1.16). This item includes transfers to different decentralized institutions, public enterprises, public financial institutions, autonomous entities, and local governments, as well as transfers to non-governmental organizations in the private sector. Interest payments, representing about one-quarter of central government expenditures, are the third-largest item. The interest payments on domestic debt are four times those on external debt, reflecting the higher share of the domestic debt as well as higher domestic interest rates.

Table 1.16: Central Government Expenditures (percent of total)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Current Expenditures 89.4 90.8 91.0 90.7 92.0 92.2 93.5 93.1 93.0 92.9 Wages and Salaries 30.7 32.2 32.1 33.7 30.3 29.5 30.9 30.8 30.5 30.5 Goods and Services 3.6 3.8 3.3 3.0 3.0 3.4 2.7 3.1 2.9 3.2 Interest 24.4 21.1 24.8 23.2 24.2 24.3 25.3 25.0 25.9 24.9 Internal 22.1 18.9 21.5 19.8 19.7 19.8 20.2 19.5 20.6 19.9 External 2.3 2.3 3.2 3.4 4.5 4.5 5.1 5.5 5.3 5.0 Transfers 30.7 33.6 30.8 30.7 34.5 35.1 34.6 34.2 33.7 34.3

Capital Expenditure 10.6 9.2 9.0 9.3 8.0 7.8 6.5 6.9 7.0 7.1 Source: Ministry of Finance.

8 Mauricio Carrizosa, “Note on Public Sectors in the Americas: How big are they?” World Bank (2007).

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Sector Composition of Public Expenditures

1.36 About one-third of Costa Rica’s public expenditures are devoted to the social sectors. Its share has changed little over the last decade, fluctuating between 31 and 36 percent of total public spending (Table 1.17). While is significantly lower than the LAC average (45 percent), this is because Costa Rica’s public expenditures include sizeable expenditures on infrastructure relating to oil and gas, telecommunications, and electricity, which have been partially or fully privatized in most LAC countries. In fact, Costa Rica allocates a higher share of GDP (15.4 percent) to education, health and social protections than the LAC average (12.5 percent), though lower than upper middle-income countries in LAC. For example, Uruguay and Argentina each spent over 20 percent of GDP on their social sectors to achieve similar social outcomes.

Table 1.17: Public Sector Expenditures by Sector (as percent of total spending)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

General Services 3.4 2.8 2.2 2.2 2.1 2.6 1.8 1.8 1.6 1.9

Public Security 3.6 3.7 3.7 3.8 3.7 3.9 3.6 3.6 3.6 3.3

Education 10.5 10.6 9.9 10.8 10.8 11.1 11.1 11.1 10.7 10.4

Health 11.2 11.5 11.4 11.5 11.3 11.5 11.6 10.5 9.9 10.1

Social Protection 14.8 14.0 13.2 13.4 13.2 11.5 11.1 11.3 11.0 10.9

Housing, urban and rural planning 3.8 3.5 3.3 3.0 3.1 3.2 3.3 3.5 3.3 3.3

Cultural and religious 0.5 0.4 0.3 0.3 0.4 0.3 0.3 0.3 0.3 0.3

Energy and oil 15.4 14.0 13.4 14.7 15.5 18.3 19.1 21.5 22.9 25.0

Agriculture, Forestry, Fisheries 1.8 1.5 1.6 1.8 1.4 1.5 1.2 1.2 1.1 0.9

Mining and minerals 0.4 0.4 0.4 0.3 0.3 0.1 0.1 0.1 0.1 0.1

Transport and Communications 6.8 6.9 8.2 7.7 9.9 8.6 9.0 8.3 7.7 7.2

Economic services 14.2 18.5 18.6 17.3 14.5 14.0 14.6 14.6 15.3 15.2

Unclassified 13.7 12.1 13.6 13.2 13.8 13.4 13.0 12.2 12.5 11.5

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Ministry of Finance. 1.37 Energy and oil is the single largest line item. Its share in total public spending increased from 15 percent in 1997 to 25 percent in 2006 (Table 1.15) and its share in GDP doubled (from 6.1 to 12.2 percent) (Table 1.18). The main drivers in this sector are ICE, RECOPE and CNFL, whose expenditures shot up as a result of the dramatic increase in oil prices since 2002. Transport and communications expenditures, after peaking in 2001 to 9.9 percent of total spending, fell to 7.2 percent in 2006, reflecting an effort to maintain fiscal discipline. However, roads were particularly affected: their expenditures have fallen to a critical low level—about 0.6 percent of GDP, as compared to countries such as Chile and Colombia, which have invested in roads at levels consistently greater than 2 percent of GDP over the last decade. Due in large part to the reduced public funding, much of the road infrastructure has not been maintained well and a large proportion of the roads are in poor condition.

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Table 1.18: Public Sector Expenditures by Sector

(percent of GDP) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 General Services 1.4 1.1 0.9 0.9 1.0 1.3 0.9 0.9 0.8 0.9 Public Security 1.4 1.5 1.5 1.6 1.7 1.9 1.8 1.8 1.7 1.6 Education 4.2 4.3 3.9 4.5 5.0 5.5 5.5 5.4 5.2 5.0 Health 4.5 4.6 4.5 4.9 5.2 5.6 5.7 5.1 4.9 4.9 Social Protection 5.9 5.7 5.2 5.7 6.1 5.6 5.5 5.4 5.4 5.3 Housing, urban and rural planning 1.5 1.4 1.3 1.3 1.4 1.6 1.6 1.7 1.6 1.6

Cultural and religious activities 0.2 0.2 0.1 0.1 0.2 0.2 0.1 0.1 0.1 0.1

Energy and oil 6.1 5.7 5.3 6.2 7.1 9.0 9.4 10.4 11.2 12.2 Agriculture, Forestry, Fisheries 0.7 0.6 0.6 0.7 0.7 0.8 0.6 0.6 0.5 0.4

Mining and mineral resources 0.1 0.2 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 Transport and Communications 2.7 2.8 3.3 3.2 4.5 4.2 4.4 4.0 3.8 3.5

Economic servicesa 5.6 7.5 7.4 7.3 6.7 6.9 7.2 7.1 7.5 7.4 Unclassified 5.5 4.9 5.4 5.6 6.3 6.6 6.4 5.9 6.1 5.6 TOTAL 39.8 40.5 39.6 42.1 47.0 49.3 49.1 48.4 48.8 48.5 a. Includes debt service. Source: Ministry of Finance. The Efficiency of Social Sector Spending

1.38 A general assessment of the efficiency of Costa Rica’s public expenditures may be obtained from recent research at the World Bank on the measurement of efficiency in public spending across countries.9 Using empirical means, the research constructs world production possibilities frontiers, relating the amounts of public spending in particular sectors to various outcome indicators in each sector. Efficiency is then measured as the distance between a country’s actual public spending-output combination in each sector and the efficiency frontier. This distance to the frontier can be measured both in terms of the amount of inputs used to generate a particular output, or in terms of the output generated for a particular level of public spending. In both cases, the index measuring efficiency is constructed in such a way that countries on the frontier exhibit an index of 1.0 and less efficient countries exhibit an index that is between 0 and 110

1.39 Herrera and Pang (2004) construct a set of production possibilities frontiers for a number of activities in the education and health sectors using various indicators. In education, they use information on eight output indicators including primary and secondary enrollment (gross and net), average years of schooling, first and second level completion rates and the literacy rate among youth aged 15-24 years. Each of these 9 Herrera, Santiago and Gaobo Pang (2004), “Efficiency of Public Spending in Developing Countries: An Efficiency Frontier Approach,” World Bank working paper and Herrera Santiago and Gaobo Pang (2005), “How Efficient is Public Spending in Education?” World Bank Paper 10 The efficiency measurements discussed here mainly focus on the narrow concept of technical efficiency and do not extend to the broader concept of allocative efficiency, as that would have required comparable data on input prices across countries that is not available.

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output indicators is related to total public expenditures in education to derive single-output/single-input measures of efficiency. The same is done in health by relating total public expenditures on health and four output indicators including life expectancy at birth, DPT immunization, measles immunization and the disability-adjusted life expectancy (DALE) index, which takes into account both mortality and morbidity.

1.40 Based on this study, Table 1.19 presents efficiency scores for public spending in health and education for both the input-oriented and output-oriented measures of efficiency. In health, Costa Rica’s efficiency measures are similar to those in comparator middle-income countries and Central America. The input-oriented measure has an average score of 0.67, just above the average scores of 0.66 and 0.65 exhibited by comparator middle-income countries and Central America respectively. Looking at the output-oriented measure, Costa Rica also presents a favorable picture, showing a score of 0.93, which is just below the 0.95 score for other middle-income countries, but just over the 0.91 score for Central America.

Table 1.19: Efficiency Scores for Public Spending in Education and Health

Costa Rica Central All DevelopingAmerica Middle-Inc. All

EDUCATIONPrimary Enrollment -- Gross 0.67 0.75 0.77 0.74 0.71 -- Net 0.68 0.75 0.87 0.77 0.72Secondary Enrollment -- Gross 0.61 0.70 0.70 0.69 0.67 -- Net 0.62 0.72 0.69 0.69 0.69Average Years of Schooling 0.22 0.29 0.41 0.32 0.28First Level Complete 0.25 0.32 0.48 0.36 0.32Second Level Complete 0.22 0.29 0.41 0.32 0.28Youth Literacy Rate (ages 15-24) 0.63 0.72 0.72 0.72 0.72

Average 0.49 0.57 0.63 0.58 0.55

HEALTHLife Expectancy at Birth 1.00 0.70 0.70 0.69 0.68Immunization DPT 0.53 0.63 0.62 0.68 0.70Immunization Measles 0.53 0.65 0.62 0.69 0.70Disability Adjusted Life Expectancy 0.61 0.64 0.69 0.70 0.68

Average 0.67 0.65 0.66 0.69 0.69

EDUCATIONPrimary Enrollment -- Gross 0.76 0.79 0.82 0.82 0.72 -- Net 0.91 0.88 0.96 0.93 0.83Secondary Enrollment -- Gross 0.43 0.40 0.65 0.61 0.50 -- Net 0.48 0.45 0.68 0.66 0.56Average Years of Schooling 0.56 0.50 0.76 0.60 0.54First Level Complete 0.29 0.31 0.50 0.36 0.33Second Level Complete 0.11 0.16 0.41 0.24 0.26Youth Literacy Rate (ages 15-24) 0.98 0.87 0.98 0.94 0.86

Average 0.56 0.54 0.72 0.65 0.57

HEALTHLife Expectancy at Birth 1.00 0.91 0.97 0.92 0.84Immunization DPT 0.90 0.91 0.92 0.87 0.82Immunization Measles 0.88 0.93 0.93 0.91 0.82Disability Adjusted Life Expectancy 0.96 0.88 0.96 0.90 0.81

Average 0.93 0.91 0.95 0.90 0.82

Regional Averages

INPUT-Oriented Measures (Single Input/Single Output)

OUTPUT-Oriented Measures (Single Input/Single Output)

Latin America

Source: Herrera, Santiago and Gaobo Pang (2005), “Efficiency of Public Spending in Developing Countries: An Efficiency Frontier Approach,” World Bank working paper.

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1.41 However, in education both measures suggest that Costa Rica’s public expenditures are not that efficient. On the input-oriented measure Costa Rica shows an average score of 0.49, which is well below the average score of 0.63 displayed by other middle-income countries in LAC, and even below the average score of 0.57 displayed by Central American countries. On the output-oriented measure Costa Rica displays an average score of 0.56, which is much lower than the average middle-income country score of 0.72, although slightly higher than the average of 0.54 for Central America. Looking at the individual input-oriented measures, Costa Rica exhibits inefficiencies across the board. Looking at output-oriented measures, it exhibits weaknesses relative to the comparator group in the areas of secondary enrollment and first and second year completion rates. This suggests that education is where efforts to improve efficiency need to be focused, in part by following best practices applied in other countries.

Efficiency and Quality

1.42 The indicator that best captures the quality of education is the learning scores. To complement the efficiency scores reported in the table above, the research report notes that there is a positive association between the per capita income level of a country and learning scores. Therefore, given the positive association between public expenditure and per capita GDP, it seems natural that an examination of the association between public spending and quality of education across countries should control for the income level of the country. From the analysis of this relationship, two conclusions are worth highlighting: (i) there is at best a tenuous relationship between both variables; and (ii) if any relationship exists, it is negative: some European countries with high spending and low scores were classified as most inefficient, while countries such as Japan, Korea, and Greece, with low spending and high scores relative to sample countries, were the most efficient. Unfortunately, due to lack of information, this relationship was not depicted for Costa Rica. At the end of the 1990’s, Costa Rica’s11 performance on standardized international tests was below comparator countries, despite high levels of spending. However, it seems reasonable to speculate that there has been an improvement in quality since in 2000 Costa Rica introduced a Pilot Program of Excellence to improve the learning scores, and in February 2008, the Education Board approved the participation of Costa Rica on standarized international tests.

Institutional Composition of Central Government Public Expenditures12

1.43 Over the last decade, the Ministry of Education has taken the greatest share of the central government budget (28 percent). Its share has increased sharply from 24 percent in 1997 to 31 percent in 2006 (Table 1.20). However, the percentages are misleading as on the one hand, they exclude universities and, on the other hand, a lot of other expenditures in other sectors are outside the central government. For instance, the bulk of health expenditures take place in the social security institute--a decentralized

11 See “Costa Rica Social Spending and the Poor” (2002) World Bank Report 12 The source for data is this section is: Clasificador Institucional del Sector Publico, Oficina de Presupuesto Nacional, Ministerio de Hacienda de Costa Rica, Abril, 2006.

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institution--rather than the Ministry of Health. Debt service is the second largest item: about 25 percent of the budget goes to this end, reflecting Costa Rica’s high level of public indebtedness and high interest and amortization payments. Other important budget allocations, in declining order, include pensions, judiciary, public works, health, and security. Altogether, they account for 84 percent of total central government spending in year 2006. The remaining ministries and institutions account for 16 percent of the Central Government expenditure (Figure 1.9).

Table 1.20: Central Government Expenditure by Institution (as percent of total spending)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Avg.

97-06 Min. of Public Security 3.0 3.2 3.0 3.1 3.3 3.4 3.2 3.2 3.0 2.8 3.1 Min. of Public Works 4.8 4.4 5.3 5.9 5.6 5.8 5.1 5.3 5.9 5.4 5.3 Ministry of Education 24.2 26.0 25.4 26.7 27.7 27.7 29.2 29.9 30.0 30.5 27.7 Ministry of Health 2.2 3.6 2.4 2.8 2.7 2.8 3.2 2.6 2.6 2.6 2.7 Judicial Power 4.3 4.7 5.2 5.4 5.2 5.5 5.5 5.6 5.7 5.7 5.3 Pensions 13.7 14.8 14.2 14.7 15.5 15.2 16.1 16.5 16.1 16.0 15.3 Debt Service 24.4 21.1 24.8 23.0 24.6 24.3 25.7 25.4 26.2 25.1 24.5 Total Above 76.7 77.9 80.2 81.6 84.7 84.7 87.9 88.6 89.5 88.0 84.0 Other* 23.3 22.1 19.8 18.4 15.3 15.3 12.1 11.4 10.5 12.0 16.0 Total 100 100 100 100 100 100 100 100 100 100 100.0 * Includes 14 other Ministries, as well as the Legislature, Electoral Court and Comptroller’s Office. Source: Ministry of Finance.

Figure 1.9: Central Government Expenditure by Institution (as percent of Central Government spending)

0%

20%

40%

60%

80%

100%

1997 1998 1999 2000 2001 2002 2003 2004 2005

Res t of CG Budget

Min is try of Public Sec ur ity

Min is try of Public W orks andtrans por tMin is try of Educ ation

Poder Judic ia l

Pens ions

Pulic Debt Serv ic e


Central Government Budget Execution

1.44 Over the last decade, successive Costa Rican governments have been very disciplined about not exceeding their approved central government budgets; indeed, one could argue that they were too disciplined in that some important development expenditures failed to get implemented. The reductions in development expenditures have been necessitated in part because of fiscal rigidities caused by earmarking. The ratio of actual to budgeted expenditure has averaged 74 percent during this period, decreasing over time (Table 1.21). However, the ratio averages are skewed by gross under spending on one of its most important line items: debt service, whose ratio has averaged 48 percent

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over the period, reflecting in part significant changes in interest rates on both foreign and domestic debt and lower-than-expected depreciation of the Colon. If this item were excluded the average ratio stands at 94 percent (Figure 1.10).

Table 1.21: Central Government Budget Execution (executed as percent of approved, by institution)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1997-2006

Min. of Public Works & Transport 98.9 72.2 79.0 94.8 94.9 97.7 81.9 84.6 102.8 109.3 91.6

Min. of Education 99.0 97.9 94.6 93.9 97.9 102.1 96.1 98.2 97.6 100.0 97.7 Judiciary 102.4 45.3 90.8 97.5 90.1 94.3 95.7 98.1 99.9 96.3 91.1 Pensions 94.0 93.2 92.6 96.3 100.5 92.6 89.8 92.2 95.7 98.0 94.5 Debt Service 46.7 76.8 73.4 34.9 55.4 55.3 42.1 35.0 34.8 30.9 48.5 Rest of Central Government 128.6 85.8 85.6 77.3 79.0 90.0 93.4 82.3 91.6 92.9 90.7 Total 81.5 83.2 84.9 65.4 78.8 81.2 70.9 65.0 65.9 63.5 74.0 Total w/o Debt Service 107.5 85.1 89.6 88.6 91.4 95.6 92.9 91.7 96.4 98.1 93.7 Note: The Institutions appearing in the table account for over 5% of total Central Government spending. Source: Ministry of Finance.

Figure 1.10: Central Government Budget

(executed as percent of approved)

81.5

63.5

107.5

98.1

50

60

70

80

90

100

110

120

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

%

Executed to Approved Executed to Approved w/o Debt Service


F. The Structure and Composition of Public Revenues

1.45 As in most countries, taxes account for the bulk of Costa Rica’s public revenues. Tax revenues and social security contributions together have averaged 19.0 percent of GDP over the last 10 years (Table 1.5). However, since this includes about 6.0 percent of GDP in social security contributions, which are arguably not taxes, Costa Rica’s tax burden has averaged 13 percent of GDP between 1997 and 2006. This is well below the tax burden in other countries at similar levels of income (Figure 1.11). Non-tax revenues are modest at 3.4 percent of GDP, reflecting mostly transfers from public enterprises. Central government non-tax revenues have averaged just 0.3 percent of GDP (Table 1.6).

23

Figure 1.11: Middle-Income Countries Tax Revenue (percent of GDP)

0

5

10

15

20

25

30

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

GDP per capita (constant 2000 US$)

Tax

Rev

enue

as

% o

f GD

P

PANSLV

CRI MEX

CHLPOL

EST

Source: WDI 2006. 1.46 Sales taxes on goods and services are the largest single source of tax revenues. Between 1997 and 2006 they averaged 4.9 percent of GDP, followed by taxes on personal and corporate income (3.0 percent of GDP), and import duties (2.2 percent of GDP). Another important source of revenue in the last five years (2002-2006) is the fuel tax that averaged 1.9 percent of GDP. (Table 1.22). Other smaller taxes include an annual property tax at rate of between 0.5 to 1.5 percent depending on the property value (0.7 percent of GDP), a property transfer tax of 3 percent and taxes on capital gains and dividends, ranging from 5 to 15 percent, whose revenues averaged just 0.2 percent during the period (Box 1.1). Finally, other indirect taxes with an average of 1.1 percent of GDP include the excise tax on selective goods, airport tax, consular fees and other minor taxes.

Table 1.22: Costa Rica: Composition of Central Government Revenues (as percent of GDP)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Total Revenue 12.6 12.7 12.5 12.5 13.4 13.3 13.9 13.6 13.8 14.4 Tax Revenue 12.5 12.6 11.9 12.3 13.2 13.2 13.3 13.3 13.5 14.2 Direct Taxes 2.8 3.2 3.5 3.4 3.7 3.8 4.0 4.0 4.0 4.1 Income Tax 1.9 2.1 2.6 2.4 2.9 3.0 3.1 3.1 3.2 3.2 Capital Gains & Dividends 0.2 0.2 0.3 0.2 0.1 0.0 0.2 0.2 0.2 0.2 Real Estate Tax 0.7 0.8 0.7 0.8 0.7 0.7 0.7 0.7 0.7 0.6 Indirect Taxes 9.7 9.4 8.4 8.9 9.5 9.4 9.3 9.4 9.5 10.1 Sales Tax 5.0 4.8 4.3 4.5 4.9 4.9 4.7 4.9 5.1 5.5 Import Duties 3.1 3.1 2.6 2.7 2.1 1.7 1.5 1.6 1.7 1.8 Fuel 0.0 0.0 0.0 0.0 0.8 1.9 2.1 1.9 1.8 1.8 Property Tax 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 Othera 1.4 1.3 1.4 1.6 1.5 0.7 0.8 0.8 0.8 0.8 Non Tax Revenueb 0.1 0.1 0.5 0.2 0.2 0.1 0.6 0.3 0.3 0.2 a. Includes airport taxes, excise taxes, consular fees and other taxes. b. Includes non tax current revenue, current transfers and capital revenues. Source: Ministry of Finance.

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Box 1.1: Costa Rica’s Main Taxes

The tax code of Costa Rica is enacted on a territorial basis; both corporate and personal income taxes are levied only on earnings generated in Costa Rica. The tax structure is quite simple and the core tax system comprises six taxes, dominated by income taxes and the sales tax. Personal Income Tax: The personal income tax is levied on a sliding scale, with rates ranging from zero to 15 percent depending on monthly wages: a zero rate, for those with monthly wages below US$800; a marginal rate of 10 percent for the amount exceeding US$800 but below US$1200; and a marginal rate of 15 percent on amounts over US$1200. Corporate Income Tax: The corporate tax varies from 10 to 30 percent depending on the firm’s income. Sales Tax: Although there is just a single rate of 13 percent applied to the final consumption of goods and services, many items, including basic consumption goods, electricity and public transportation, are exempt. The intake from the sales tax, about half of which is currently collected from customs, is still high (56 percent of indirect tax revenues) compared to other countries in the region. Import Tax: The import tariffs range mainly between 0 and 15 percent. However, some imported items receive a tariff of 20 percent or more. Real Estate Tax: This annual tax ranges from 0.5 to 1.5 percent of the property value. Property Tax: This is a property transfer tax of 3 percent, based on the registered value of the property. Taxes on Capital Gains and Dividends: These taxes range from 5 to 15 percent.

G. Key Fiscal Policy Challenges

1.47 Costa Rica has done a commendable job of having maintained fiscal discipline, achieving sustained economic growth and making impressive strides against poverty. Its socio-economic indicators are generally comparable to those of richer countries. However, some strains are beginning to show.

1.48 First, although Costa Rica’s poverty and inequality levels are low by Latin American standards, household survey data show poverty to have been stagnant between 1994 and 200513 although recent indicators (2007) suggest that improvement is being made as economic growth has accelerated. This lack of progress in poverty reduction over the last decade despite steady growth leads one to question the effectiveness and efficiency of Costa Rica’s social protection programs. Costa Rica has more than 40 programs in social assistance programs, aimed at supporting vulnerable groups and those affected by unexpected economic downturns or shocks. It also has social insurance programs, covering risks of illness, maternity, accidents, disability, old age and death. It will be a challenge to reduce the duplication and inefficiency and ensure that funds flow to those most in need.

1.49 Second, Costa Rica lags behind the Latin America and upper-middle income countries in secondary school achievement. Its secondary school enrollment rates are lower than in comparable countries and its performance on standardized international

13 For more on this, see Costa Rica Poverty Assessment: Recapturing Momentum for Poverty Reduction. Report No. 35910-CR, February 2007.

25

tests is below par. Moreover, as seen earlier (Table 1.17), education expenditures in Costa Rica are more inefficient than in comparable countries.

1.50 Third, while Costa Rica’s health indicators are the envy of Latin America, there have been worrisome declines in insurance affiliation rates and worrisome increases in the use of the health services by children under one year of age. Also, cost increases in health have almost wiped out operational surpluses, making it more difficult to finance Costa Rica’s poor.

1.51 Fourth, Costa Rica lags significantly behind other Latin American countries in its road infrastructure. Most recent assessments indicate that only 12 percent of the national paved road network is in good condition, based on structural capacity standards. On the other hand, 64 percent of the network is in poor or very poor structural condition. Through the 1970s and 1980s Costa Rica invested heavily in roads, creating the highest paved road density among all Latin American countries. The GDP share of public expenditures in road infrastructure decreased significantly from a peak of about 2 percent of GDP in 1984, remained well below 0.5 percent during the 1990s, and rose slightly thereafter fluctuating around 0.6 percent since 1999. In contrast, countries such as Chile and Colombia have invested at levels consistently greater than 2 percent of GDP over the last decade.

1.52 Fifth, Costa Rica has made significant progress in the area of public procurement. Notwithstanding its strong foundations, there is scope for further modernization so as to incorporate new and more effective public procurement methods that capitalize the potential savings in public sector purchases.

1.53 Thus the challenge facing the government is to increase funding for some neglected expenditure areas such as roads and secondary education without sacrificing fiscal stability and while continuing to consolidate gains in poverty reduction and social outcomes. This will require selected expenditure cuts, which will all the more daunting because of fiscal rigidities caused by constitutional and legal earmarking, as well as pressures for increased funding for certain areas, such as security and public transfers. To ensure that services are not negatively affected because of cuts, it will require eliminating wasteful spending, mainly via increased efficiency and improved targeting, especially in education, social protection programs and procurement of goods and services.

1.54 Costa Rica could also simultaneously look for efficient ways to raise public revenues. One possibility is to cut down on tax evasion. Even after some improvements in tax administration in the late 1990s, various studies estimate that the rates of evasion for the sales tax and corporate tax are about 40 percent and 60 percent respectively.14 The current Administration is seeking further changes to the legislation on tax procedures, including a chapter on rights and obligations for the taxpayers. Once the main issue in the

14 See, for example, Herrero F. and Monge G. Grandes Retos de la Politica Tributaria Costarricense, en El Sistema Tributario Costarricense, Contraloria General de la Republica, Costa Rica 2003.

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legislative agenda, CAFTA has now been approved, while the approval of laws for the implementation of CAFTA is evolving.

1.55 Another possibility of generating fiscal space for needed expenditures is via new taxes. The administration sent several bills to the National Assembly in August 2006 aimed at generating the equivalent of 2.0 to 2.5 percent of GDP in revenues by: (i) transforming the existing sales tax into a broader-base value-added tax, while maintaining a tax rate of 13 percent; (ii) imposing a tax on luxury residences; and (iii) establishing a flat tax on business registration. Discussion of these bills has been postponed to 2008.

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Chapter 2 ENHANCING THE EFFICIENCY AND TARGETING OF SOCIAL EXPENDITURES

2.1 This chapter discusses the effectiveness of public expenditures in the social sectors with a view to identifying policy reforms that could enhance efficiency and better direct expenditures towards the poor. It is organized into five sections. The first section provides an overview of public expenditures on social programs (PESP).15 It describes their size, structure and composition over time and comments on their distribution impact. The following three sections provide a deeper analysis of public expenditures in education, health and social protection programs respectively. These sectors account for the bulk of PESP expenditures. After describing the organization, coverage, and composition of various types of services in each of the three sectors, efficiency and targeting are discussed. The final section includes the main recommendations.

2.2 Several messages emerge from the chapter: First, total resources allocated to social programs by the government are above the average by international standards and have increased over the last decade, whether measured in real per capita terms, as a share of total public expenditures, or as a share of GDP. Second, the share of social expenditures allocated to wages and salaries is high, while the share of capital expenditures is low. Third, social programs as a whole benefit the poor more than the non-poor, thereby helping reduce inequality in the country. Fourth, in primary and secondary schools, expenditures on salaries are extremely high, while the categories of goods and services and investments receive almost no resources. Fifth, while there have been significant improvements in education, serious problems remain, such as the high rates of repetition and dropout in secondary schools and administrative barriers to select and keep the best teachers. Sixth, Costa Rica has very good health outcomes and a fairly efficient public health sector. Further improvement and support for the poor would require increased assistance to primary health care, mainly for its community-based health facilities and the programs to prevent malaria, dengue and AIDS, and higher capital investment in the sector. Seventh, social protection programs are relatively well financed, but there are serious imbalances in individual programs. Eighth, social protection programs suffer from a lack of continuity in their management, a lack of coordination, and almost no monitoring and evaluation. Ninth, social promotion and social assistance programs spend disproportionately on the poor, helping improve their wellbeing; however, more could be done expand coverage and reduce leakages. Tenth, the contributory pension system is highly regressive, exacerbating income inequality.

15 In this chapter, PESP include expenditures in education, health, social protection, housing, leisure and culture, consistent with the definition of the Comptroller General’s Office. For more detail, see Box 2.1.

29

A. Overview

Size and Evolution of Public Expenditures on Social Programs (PESP)

2.3 Both as a percent of GDP and in per capita terms, the size of Costa Rica’s PESP is among the highest in the region, comparable only to Panama in Central America and to Uruguay, Argentina and Chile in South America (CEPAL/ECLAC 2006). Table 1.16 shows that expenditures on social programs (PESP) ranged between 15.0 and 18.5 percent of GDP during 1997 and 2005. In per capita terms, real PESP (in constant 2000 Colones) have ranged between C160,000 and C190,000 in the same period, showing a downward trend in recent years (Figure 2.1). This is also reflected in Table 1.15 where the share of PESP in total public expenditures fluctuated between 40 percent (1997) and 35 percent of total spending (2005).

Figure 2.1: Per capita PESP in Costa Rica, 1995 to 2005 (in thousands of constant 2000 Colones)

120130140150160170180190200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Note: The June 30, 2000 inter-banking exchange rate was $1 = C307.33. Source: Calculations by World Bank staff based on Government methodology.

Box 2.1: Data Source for PESP There are two sources of data for PESP in Costa Rica: (i) the Technical Budget Authority (Secretaría Técnica de la Autoridad Presupuestaria - STAP) within the Finance Ministry, which classifies institutions by function, and (ii) the Comptroller General’s Office (Contraloría General de la República - CGR), which classifies them by program. The STAP data are available from 1987 for the entire public sector (includes financial and non-financial public enterprises) while the CGR data are available only from 1998 and cover only the central and local governments. As the focus in this chapter is on social expenditure programs, the CGR data are more relevant. However, this chapter also uses new annual series (using CGR methodology) going back to 1987 that was prepared for a recent background study.1 For the period 1998-2006 the new series is almost the same as the CGR series. And although there are differences with the STAP numbers used elsewhere in the report, both series show similar trends. ___________________

1. Trejos J. Diego (2007), “Evolución del Gasto Público Social en Costa Rica en la década: 1995-2005.” Report prepared for the World Bank.

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PESP Structure and Composition

2.4 Education, health and social protection account for well over 90 percent of PESP. Their share has stayed fairly stable over time. In 2005, 30 percent of PESP was allocated to education, 31 percent to health and 32 percent to social protection, with only small changes over the last decade, mainly a slight increase in the share of education and slight decrease in the share of health. The average per capita yearly expenditure on each of the three major programs in 2005 was around C55,000, or US$180 at the prevailing exchange rate (Table 2.1).

Table 2.1: PESP by sector, 1995, 2000, 2005 1995 2000 2005

(000)a % (000)a % (000)a % Education 43.7 27.0 52.1 28.2 53.4 30.3 Health 57.9 35.8 59.3 32.1 55.0 31.3 Social Protection 50.4 31.1 62.9 34.0 56.9 32.3 Otherb 9.9 6.1 10.4 5.6 10.8 6.1 TOTAL 161.9 100.0 184.8 100.0 176.1 100.1 a. Per capita, in constant 2000 Colones. b. Housing, leisure and culture programs. Source: World Bank staff estimates, using CGR methodology.

2.5 The economic classification of PESP shows wages and salaries to be the largest item, accounting for almost half of PESP expenditures (Table 2.2). It has grown at 0.6 annually in real per capita terms. Current transfers, accounting for over one-third of PESP expenditures, have grown at an annual rate of 2.1 percent, reflecting increased support for decentralized and autonomous institutions in the social sectors. At an annual per capita growth rate of 3.6 percent, investment has experienced the fastest growth, albeit from a low base. Moreover, because capital transfers have fallen at an even faster rate, overall capital expenditures have declined at annual per capita rate of 1.4 percent. This trend is worrisome, especially because capital expenditures are such a small part of PESP to begin with.

Table 2.2: Economic Classification of PESP

(percent) 1995 Share Growth, 1995-2005 Total 100.0 0.8 Current Expenditure 94.5 1.1 Wages and Salaries 45.6 0.6 Goods and Services 14.0 0.3 Current Transfers 34.8 2.1 Interest 0.2 2.2

Capital Expenditure 5.5 -1.4 Investment 3.2 3.6 Capital Transfers 2.4 -5.4 Source: World Bank Staff estimates, using CGR methodology.

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Distribution of PESP Benefits

2.6 In calculating the distributional impact of social expenditures, the standard methodology assumes that benefits are equal to the expenditure level and that there are constant benefits per beneficiary, independent of where the service was provided or of beneficiary characteristics such as age or sex. It then classifies social expenditures as progressive, neutral or regressive depending on whether the poor receive a greater, the same, or lesser share of expenditures than their share in population. The progressive expenditure category is also known as pro-poor. However, this methodology considers only the distribution of benefits and ignores how the expenditure resources were raised—for instance, a program that raises 90 percent of the resources from the wealthiest 10 percent of the population but distributes 15 percent of the benefits to the same group would not be considered pro-poor even though there is a redistribution of resources towards the poor.

2.7 Using this methodology, Costa Rica is one of the few countries with pro-poor or progressive PESP (excluding Social Protection Programs16).It has the second lowest concentration coefficient or quasi-Gini17 of the selected countries in the region (Figure 2.2). Interestingly, other countries with pro-poor social expenditures also have relative high levels of PESP. Social protection programs have been excluded because only a few countries had available data.

Figure 2.2: PESP Concentration Coefficient, Excluding Social Protection

-0.30-0.25-0.20-0.15-0.10-0.050.000.050.100.15

Chile

Cost

a R

ica

Urug

uay

Arge

ntin

a

Colo

mbi

a

Gua

tem

ala

Méx

ico

Bras

il

Perú

Boliv

ia

Nic

arag

ua

Source: CEPAL/ECLAC 2006. 16 Including education and health programs 17 The quasi-Gini for PESP plots the cumulative public expenditures going to various households, from poorest to richest. When the curve lies above the 45-degree line (i.e. when the poorest households receive a disproportionately high share of expenditures), the Gini is said to be negative. A quasi-Gini therefore varies between -1 and 1, with positive values denoting regressive expenditures and negative values progressive expenditures.

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2.8 While overall PESP18 in Costa Rica are regressive, they turn slightly progressive if contributive pensions are excluded.19 Indeed, PESP without the contributive pensions are progressive and have become increasingly pro-poor over time, with all of the major social programs turning pro-poor by 2004. With its philosophy of universal coverage, it is unsurprising that health and education expenditures are only mildly progressive. Social protection programs, which are oriented towards the poor, have an appropriately pro-poor quasi-Gini of -0.41. In 2004 contributive pensions are even more regressive (quasi-Gini of 0.66) than household income (quasi-Gini of 0.60). (Table 2.3)

Table 2.3: Distribution of PESP Benefits by Sector 1988, 2004 quasi-Gini

1988 2004 Total Household Income 0.504 0.602 Total PESP 0.011 0.030 Contributive Pensions 0.540 0.661

PESP (without Contributive Pensions) -0.006 -0.071 Education 0.168 -0.014 Health -0.067 -0.041 Social Protection -0.175 -0.409 Others 0.197 0.143 Source: World Bank staff estimates based on income and expenditure surveys conducted by INEC.

B. Education

Organization, Size and Funding

2.9 The Ministry of Public Education (MPE) is responsible for all public education at the pre-primary, primary, and secondary levels. It is also responsible for regulating private education at these levels. Other important public entities in the sector include the decentralized public institutions, comprising state universities and colleges that provide higher education and the National Apprentice Institute (INA) that promotes, teaches and certifies technical education. Private institutions that provide preschool to university education, without state subsidies, complete the education picture.

2.10 In 2006 there were 1.2 million students and 68 thousand teachers in 75 hundred establishments and 33 thousand classrooms. The public education system accounted for about 90 percent of students at the pre-primary, primary, and secondary level and about half of the higher education students. Table 2.4 gives a breakdown on the number of students, teachers, establishments and classrooms at the four levels of schooling, as well

18 Including health, education and social protection programs 19 Costa Rica has a pension system that covers mainly older persons who are unable to provide for themselves. Because these pensions do not require the beneficiaries to have contributed to the system, they are called the non-contributive pensions as opposed to the traditional pensions requiring prior contributions.

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as the public education share of the total. Interestingly, while the student-teacher ratios at pre-primary, primary and secondary public schools are about twice those at private schools, this ratio at the higher education level is similar in public and private schools.

2.11 Children generally enter pre-primary school at age 3 and stay for three years, moving on to primary school for the next 6 years. Secondary school takes five or six years depending on whether one takes an academic or technical program. This decision is made after the first three years of secondary school. There are two other modalities of education: special education for students with special needs and “open education” for students 15 to 18 years of age who have not finished their primary or secondary education on time and who do not attend school regularly.

Table 2.4: Students, Teachers, Establishments and Classrooms, by Sector 2006

Pre-

Primary Primary Secondary Higher Total

Number of Students 114,202 521,460 338,508 246,208 1,220,378 Public (percent) 84.9 92.6 89.0 50.6 82.4 Private and semi private (percent) 15.1 7.4 11.0 49.4 17.6

Number of Teachers 7,384 28,571 21,748 10,230 67,933 Public (percent) 67.0 84.8 80.6 63.0 78.2 Private and semi private (percent) 33.0 15.2 19.4 37.0 21.8

Number of Establishments 2,750 4,026 752 n/a 7,528 Public (percent) 86.5 92.4 72.7 88.3 Private (percent) 13.5 7.6 27.3 11.7

Number of Classrooms 5,102 18,529 9,774 n/a 33,405 Public (percent) 76.2 87.1 79.9 83.3 Private and semi private (percent) 23.8 12.9 20.1 16.7 Source: MPE and EHPM.

2.12 The Costa Rican constitution establishes that pre-primary,20 primary and the first three years of secondary school are mandatory and the government provides these services, as well as the rest of the secondary education, free of charge to all citizens.21 The constitution also guarantees the provision of higher education, with government support for students unable to pay for it.

2.13 The national budget finances the bulk of the education sector. The funds are distributed via the MPE. This Ministry not only provides pre-primary, primary and

20 Pre-primary education was not mandatory until the constitutional reform of 1997. 21 The last years of secondary education is not mandatory for the government nor to provide the service free of charge but there is the obligation of the citizens to enroll.

34

secondary education but also transfers funds to the public higher education institutions, mainly public universities. The annual transfer to the public universities is negotiated every four or five years and until recently, the total amount transferred was constant in real terms despite increases in enrollment.

2.14 A constitutional reform passed in 1997 requires the government’s budget for education to be no less than 6 percent of GDP. However, this has not always been implemented. Using Ministry of Finance data, educational expenditures have not exceeded 5.5 percent of GDP (2002) since the constitutional reform took place, and they were as low as 3.9 percent of GDP in 1999 (Table 1.15). Using WDI data, educational expenditures as a share of GDP for the peak year 2002 were even lower—just 5.2 percent (Table 2.5). A bill to increase the minimum allocation for education to 8 percent of GDP has recently been introduced (with no allocation mandates). Even though this is less likely to be binding once it is approved, there will almost certainly be increased pressure to spend on education at the expense of other equally needy sectors.

Table 2.5: Educational Expenditures, International Comparisons, 2002

Expenditure per student (% of GDP per capita)

Country Primary Secondary Higher

Education spending as % of GDP

Costa Rica 16.2 22.9 50.6 5.2 Upper middle income 15.8 18.7 32.4 5.2 Latin America & Caribbean 12.3 14.9 31.3 4.7 Chile 16.0 15.7 18.0 4.2 Argentina 10.9 14.9 13.1 4.6a

Colombia 17.2 17.7 30.1 N/A Panama 10.4 15.8 32.5 4.2 a. Value for 2000. Note: 2002 was the most recent year with available data Source: WDI, World Bank, and Panama Public Expenditure Report, World Bank.

Public Expenditures by Educational level

2.15 While Costa Rica’s spending on education as a percentage of GDP is comparable to those in other upper middle-income countries, its spending per student (relative to GDP per capita) is well above upper middle-income countries at all levels of education. In higher education, the expenditure per student is three times higher than in Argentina and 56 percent higher than the upper middle-income country average. Only Colombia has a slightly higher spending level than Costa Rica in primary education (Table 2.5).

2.16 Table 1.15 and Table 1.16 show that Costa Rica’s public expenditures on education have been fairly stable as a share of total public expenditures but grown slightly as a share of GDP between 1997 and 2005. Changes in the composition of public expenditures in education in the period 2000-2005 have been small. The main change has been in the allocation for pre-primary and special and open education at the expense of primary education, which now accounts for just over one-third of the total and

35

professional training that accounts for less than six percent of the education expenditure (Table 2.6).

Table 2.6: Expenditures in Public Education by Level, 2000-2005 (percent of total public educational expenditures)

2000 2001 2002 2003 2004 2005 Pre-primary 4.8 6.0 6.2 6.4 6.8 6.9 Primary 37.7 37.2 36.9 35.3 34.9 33.9 Secondary 23.0 23.4 23.3 22.8 23.3 22.3 Other (special and “open” education) 6.0 5.7 6.2 6.0 7.0 8.0 Higher Education 22.3 21.2 20.1 23.0 22.8 23.3 Professional Training 6.2 6.6 7.3 6.5 5.2 5.6 Source: World Bank staff estimates based on CGR methodology.

2.17 Since higher education has much higher costs per student, the budget allocation is also much higher on a per student basis. To assess the degree of budget concentration by student, a “Budget Share Enrollment Percentage” index was created for each education level by dividing the share of student population enrolled by its budget share (Table 2.7). Thus, an index value below one means that students are getting fewer resources than their student population share, and values above one represent students receiving a budget share above their population percentage. This shows higher education students receive twice their population share while primary and secondary students receive around 85 percent of their population share (90 percent). Since higher education institutions have the lowest percentage of poor students in the entire educational system, this makes higher education expenditures highly regressive. The combined effect of these two characteristics will be analyzed later on in this chapter. However, at this point, it is worth highlighting that expenditures have been less regressive over time. Between 1985 and 2005 higher education’s share of the budget decreased from 41 percent to 21 percent.

Table 2.7: Budget Share Enrollment Index by Educational Level, 2005

Pre-

Primary Primary Secondary Higher Total Enrollment Percentage 9.6 48.0 29.9 12.4 100.0 Budget percentages for selected levels 7.1 41.2 26.4 25.3 100.0 Budget over Enrollment percentages 73.6 85.8 88.1 204.4 100.0 Source: World Bank staff estimations.

Structure of Public Expenditures in Education

2.18 Almost four-fifths of educational expenditures are allocated to salaries and wages. At the general education level—meaning pre-primary, primary and secondary school—almost 90 percent of expenditures are spent on salaries and wages. Even after recent increases in expenditures on goods and services and investment, the share of education expenditures going to these categories is just one percent each (Table 2.8). Moreover, the meager one percent spent on goods and services is almost entirely used to fund MPE paper work requirements, leaving no resources for other goods such as classroom materials, including textbooks. Since only 13 percent of public primary schools and 55 percent of secondary schools have a library, textbooks is a major expense, especially for

36

students from poor households. Similarly, the one percent budget share assigned for investments is well short of what is needed to maintain school infrastructure. According to Mope’s own evaluation, only three out of ten classrooms in primary and secondary public schools were considered adequate to meet basic teaching requirement needs in 2002. Although there has been strong growth in investment allocations in general education since 1995, they are insufficient to prevent further erosion in infrastructure.

Table 2.8: Economic Classification of Public Education Expenditures by Level, 2005 (percent)

Average annual growth rate Educational Level All General

Function All General Higher Training 1995-2005

2000-2005

1995-2005

2000-2005

100.0 100.0 100.0 100.0 2.0 0.5 3.6 0.4 Total 96.0 99.1 88.4 88.7 2.0 0.8 3.6 1.0 Current Expenditure

Wages and Salaries 79.2 87.8 63.0 37.9 1.8 -0.2 3.1 -0.3 Goods and Services 5.8 1.2 13.2 34.3 -2.1 -2.6 -4.0 1.6 Current Transfers 10.9 10.2 12.0 16.5 7.4 13.9 13.3 19.2 Interest 0.1 0.0 0.2 0.0 2.9 -16.7 n.a. n.a.

4.0 0.9 11.5 11.3 3.0 -5.3 1.7 -25.4 Capital Expenditure Investment 3.9 0.9 11.5 11.3 4.3 5.8 8.5 6.2 Capital Transfers 0.0 0.0 0.0 0.0 -37.0 -72.8 -45.0 -80.5

Source: World Bank staff estimates based on official government reports.

2.19 As the bulk of expenditures are on wages and salaries, any reallocation of resources towards the under-funded goods and services and investment categories must focus on improving the efficiency of teachers. This is not an easy task. The MPE is in charge of handling about one-third of central government positions, mostly teaching positions. Each year it transfers, substitutes, replaces, and creates new positions as it is under constant pressure to find more permanent positions for teachers that are hired on a temporary or fixed-term basis or for limited number of teaching days. The system is very centralized with politics playing an important role and technical criteria a secondary role. New positions are often not filled on time; nor are the best applicants necessarily selected. Salaries are also not set in a transparent or fair manner. Teachers with two-year degrees at private universities receive the same treatment as teachers who have a five-year teaching degrees from a public university.

2.20 In 2007 the MPE registers three thousand teachers with only a high school degree and ten thousand teachers with no teaching degree, although they have university degrees in other areas. These thirteen thousand persons represented around one-quarter of all teachers on the MPE payroll. An undetermined number of teachers with teaching degree are in charge of courses outside their field (pre-primary teachers in charge of primary classes, English teachers in charge of social studies courses, etc.).22 Moreover, it is frequent to find absentee or “ghost” teachers, who receive salaries even though they do not show up to work or show up only a few times a year.

22 MPE administrative Vice-Minister Silvia Viquez’ declarations to the press (La Nación, November 19, 2007).

37

2.21 While politically difficult, any significant improvement in teaching quality cannot be obtained without reforming the system for teaching appointments and salary determination. Similarly,without tackling the problem of irregular teachers described earlier (lack of the appropriate degree for the course being taught, ghost and absentee teachers), it will be difficult to improve the quality of education. Nor it will be possible to provide increased job security to the hundreds of temporary workers, redressing unfairness and increasing teacher motivation. Some of the measures that could help improve educational quality and efficiency in the medium term are as follows:

• Launch an initiative to eradicate irregular teachers.

• Within the next three to five years, increase the share of education budget going towards goods and services and investment to ensure adequate teaching materials and reverse the erosion in school infrastructure.

• Introduce a transparent system of teacher evaluation and provide bonuses to strong performers and better-qualified teachers, linking pay to performance.

• Reform rules and regulations for hiring and firing permanent staff to provide improved flexibility and appropriate performance incentives.

• Bring more temporary teachers into the current more flexible permanent cadre, thereby motivating such teachers and enhancing fairness.

Coverage of Public Expenditures in Education

2.22 As Costa Rica has had near universal education at the primary school level for a number of years, official gross and net enrollment23 rates at the primary school level have been fairly stable since 1995 at 104 percent and 90 percent respectively (Figure 2.3). However, preliminary comparisons with other methodologies suggest that enrollment rates, especially the net enrollment rates, are overestimated.24

2.23 In contrast, secondary school enrollment rates, while significantly lower than primary school rates, have shown a steady improvement. As a result, the gap between primary and secondary enrollment rates, both net and gross, decreased from 45 to 28 percentage points.25 As is often the case, the improvements in net secondary enrollment from 1999 to 2006 (13.5 percentage points) were not as impressive as the changes in

23 Gross enrollment rate is the total number of students enrolled in any given grade, regardless of their age, divided by the number of persons that, according to their age should be at that specific grade. Net enrollment rate is the number of students with the appropriate age enrolled in any given grade, divided by the number of persons that, according to their age should be at that specific grade. The key difference is that the gross enrollment rate includes in the numerator students that are not at the appropriate grade according to their age and the net enrollment rate does not. 24 Using the EHPM 2004, the net enrollment rates for primary and secondary are estimated at 81 and 47 percent compared to official net enrollment rates of 89.6 and 57.0 percent, a difference of nine percentage points in primary and ten percentage points in secondary. 25 It is interesting to note that the secondary school gross enrollment rate in 2000 was almost the same as the gross enrollment rate of 1980. After the debt crisis of 1980-1982, secondary gross enrollment rates fell significantly; it took the country 20 years to recover to the rate it had in 1980.

38

gross rates (19.1 percentage points). This is because improvements in gross rates are normally accompanied with higher repetition and higher desertion rates, exerting a high burden on the cost of education, and because of increased opportunities to students via initiatives such as “open education”26 that have motivated some former dropouts to go back to school.

Figure 2.3: Gross and Net Enrollment Rates by Education Level, 1995-2006

Gross Net

405060708090

100110

1995 1997 1999 2001 2003 2005

405060708090

100110

1995 1997 1999 2001 2003 2005

Primary Primary

Pre-primary

Secondary Pre-primary

Secondary

Source: Ministry of Public Education, selected years.

2.24 Pre-primary enrollment rates by age have dramatically improved (five-year olds). Significant improvements are also found in primary education for the six-year olds as well as in secondary education for the fourteen to eighteen-year olds. According to the EHPM,27 five-year olds doubled their enrollment rate in the last ten years (from 35 to 70 percent) and the six and fourteen to eighteen year-olds increased their enrollment rate by more than ten percentage points.

2.25 On average, educational attainment28 improved between 1995 and 2005 for all levels of education. Over this period attainment increased by seven percentage points at the primary school level and nine percentage points at the secondary school level (Table 2.9). However, secondary school attainment, at 42 percent, is well below the Latin American and the upper middle-income country average. After taking into consideration repetition and drop out rates, by 2006 only one out of four 20- to 21-year olds Costa Ricans had a high school degree. Similarly, WDI data show that for other indicators such as the secondary gross enrollment rate, Costa Rica’s 2004 value of 77 percent is well below the Latin American average of 86 percent and the upper middle-income country average of 86 percent. Interestingly, women have a better record on educational attainment.

26 For persons 15 to 18 years of age who have not finished their primary or secondary education on time and who do not have to go to school regularly. 27 Official statistics are not complete enough to estimate coverage by age or to relate outcomes to other household characteristics. Therefore this analysis uses EHPM, which show small differences with official data. 28 Educational attainment is defined as the percentage of students finishing each educational cycle at a specific age.

39

2.26 While differences in attainment level by income group and area are very low at the primary school level, they persist at the secondary school level. By 2006, 83 percent of rural dwellers, 14 to 15 years old, had finished primary education compared to 90 percent of persons living on the Central urban region of the country (Table 2.9).29 On the other hand, at the secondary school level, 20- and 21-year-olds from the richest quintile had attainment levels almost three times as high as the poorest quintile, while urban households’ attainments levels were one and a half times higher than rural households. This suggests a need to focus on raising secondary school educational attainment of the poor and rural populations.

Table 2.9: Educational Attainment by Level and Expected Years of Completed Education, 1996-2006

PrimaryaBasic

Educationb Secondaryc

Expected Years of

Education 1996 2006 1996 2006 1996 2006 1996 2006

National 82% 89% 44% 51% 33% 42% 11.1 12.2 By income level Highest quintile 97% 99% 77% 82% 62% 71% 13.6 15.0 Lowest income 68% 81% 25% 39% 12% 18% 9.4 10.7 Gap highest/lowest quintile 1.4 1.2 3.1 2.1 5.2 3.9 1.4 1.4 By area Central Urban Region 88% 90% 58% 58% 50% 53% 12.8 13.1 Rural 73% 83% 27% 38% 12% 21% 9.4 10.7 Gap Urban/Rural 1.2 1.1 2.2 1.6 4.1 2.5 1.4 1.2 By gender Male 81% 86% 37% 47% 31% 38% 11.0 11.9 Female 84% 91% 50% 56% 35% 46% 11.2 12.5 Gap male/female 1.0 0.9 0.7 0.9 0.9 0.8 1.0 1.0 a. Persons 14 and 15 years of age with at least primary education completed. b. Persons 17 and 18 years of age with at least three years of secondary education completed. c. Persons 20 and 21 years of age with at least secondary education completed. Source: World Bank Staff calculations based on the EPHM.

2.27 Although overall education expenditures are mildly progressive as seen earlier, there are marked differences between different levels. Pre-primary and primary education is very progressive, with the poorest quintile capturing 26 and 32 percent of the benefits, while the richest get only 9 percent. In sharp contrast, expenditures on higher education are highly regressive, with the poorest quintile of the population capturing just 5 percent of benefits, while the richest quintile receives 44 percent (Table 2.10).

2.28 To reduce this implicit subsidy to family’s from the richest quintile one could consider increasing user fees, along with a bigger program of need-based scholarships for those in lower income quintiles. However, this will be insufficient, as entry into the public universities is limited to a fixed number of students. With secondary completion rates of only 18 percent for people in the lower quintile,30 quality problems especially in

29 Urban households in the Central Region were selected to show the biggest disparities. Including all urban households would show even smaller differences. 30 World Bank 2007b.

40

the more poor and isolated schools, and lack of motivation from poor students, poorer students are unlikely to receive high enough exam scores to secure admission into a public university. A more practical and desirable solution would be to devote resources to improving the quality of secondary education, as well as to disseminate information on the benefits of secondary and higher education, which appear to have grown over time. Not only this would improve learning, it would help raise Costa Rica’s below-average performance in secondary education, reduce repetition and dropout rates, and help improve educational attainment for the lower quintiles. It is also likely to result in increased higher education enrollment by lower income quintiles.

Table 2.10: School Enrollment by Income Quintile and Educational Level, 2004 (percent)

Income Quintile Pre-primary Primary Secondary Higher Totala

I (poorest) 26 32 21 5 22 II 24 26 23 10 21 III 23 20 24 14 20 IV 18 14 20 27 19 V (richest) 9 8 12 44 18 Total 100 100 100 100 100 a. Average for primary, secondary and higher education, weighted by the corresponding budget shares. Source: World Bank staff calculations using the 2004 EHPM and MPE budget report.

Figure 2.4: Secondary Net Enrollment Rate and Educational Public

Expenditure in Latin America, 2003

Adjusted R2= 0.37; t and F value significant at p=0.5%,

Arg.

Ecuador

Domi. R.

Uruguay

El Salv.

Peru

Nic.

Brazil

Chile

Par.

Panama

C.R.

Colo.

Mexico

Bolivia

Cuba

30354045505560657075808590

0 2 4 6 8Public Expenditure in Education as % of GDP

Sec

onda

ry N

et E

nrol

lmen

t Rat

e

10

Honduras 1999/2001; Ecuador, Brazil and Cuba= 2002; all others, 2003. Source: UNESCO, Institute for Statistics, WEB page: http://www.uis.unesco.org/ev.php?URL_ID=5187&URL_DO=DO_TOPIC&URL_SECTION=201

2.29 Overall secondary education enrollment levels in the country are very low, especially if compared to other sectors or to other countries. Indeed, given Costa Rica’s level of public expenditure on education, net enrollment rates should be 10 percentage points higher (Figure 2.4). Repetition and dropout rates are an important cost of

41

http://www.uis.unesco.org/ev.php?URL_ID=5187&URL_DO=DO_TOPIC&URL_SECTION=201

secondary education and require especial attention. Any strategy to reduce repetition and drop out rates should include not only economic incentives but also an improvement on the quality of education, a better environment (i.e. better infrastructure) and an effort to inform people on the advantages of education. The premium pay-off for education in Costa Rica has increased over time. This is an excellent “selling point” but has not as yet been sufficiently exploited.

Efficiency of Public Expenditures in Education

2.30 One common and comprehensive measure of educational efficiency is how much it costs to provide one year of education for a student (Figure 2.5). From 1995 to 2005, per capita costs in primary school education rose substantially, while secondary school costs rose substantially between 1995 and 1998 before starting to fall.

Figure 2.5: Average Annual Cost per Student (in constant 2000 thousands of Colones)

0

50

100

150

200

250

1995 1997 1999 2001 2003 2005

Secondary (academic stream)

Primary

Source: CGR, Budget Authority (STAP) and Coto 1992.

Figure 2.6: Failure Rates by Educational Level (percent)

0

5

10

15

20

25

30

35

1995 1997 1999 2001 2003 2005 Note: 1. Failure rates are a combination of drop-out and repetition rates. 2. “Open” education is not included in secondary. Source: MPE.

2.31 Repetition and dropout rates in Costa Rica are very high, especially for secondary education. The MPE estimates that for each high school graduate with five years of

Secondary

Primary

42

completed education, a total of ten school years have been taught. In other words, secondary education is costing double the amount it would cost without dropouts and repetition. Failure rates in secondary education have decreased from 31 percent in 1995 to 25 percent in 2005 (Figure 2.6). They have also fallen slightly in primary school from 15 to 12 percent. Nevertheless, they are still high and cost the country dearly.

2.32 This study estimates that repetition and dropout rates cost the government at least 0.5 percent of GDP (Table 2.11). These are under estimated, as they do not take into consideration likely side effects. For example, the negative impact on the quality of education from having more students per classroom or per teacher has been ignored.

Table 2.11: Primary and Secondary Failure Rates Cost Estimate, Costa Rica 2000-2005 (percent)

Indicator 2000 2001 2002 2003 2004 2005 Average Failure percentage 15.9 16.7 16.0 15.5 15.5 16.6 16.0

Primary 13.2 13.8 12.3 12.2 11.5 11.7 12.4 Academic Secondary 23.0 24.2 24.2 22.0 23.0 25.5 23.6 Technical Secondary 19.1 19.3 19.7 19.7 20.1 21.8 19.9

Total failure rate costs as % of: General Education 14.6 15.0 14.2 13.4 13.2 14.0 14.1 Total Formal Education 11.3 11.8 11.3 10.2 10.2 10.8 10.9 GDP 0.5 0.6 0.6 0.5 0.5 0.5 0.5

2.33 This study made also an attempt to measure the relationship of government spending and repetition and dropout rates. Using data from 1980 to 1995, it found that a one percent increase in per capita government spending on education31 is associated with a reduction of primary education repetition rates of 0.58 percent, a reduction in secondary education repetition rates of 1.06 percent, and a reduction of secondary education drop out rates of 0.87 percent (Table 2.12).32 In secondary education, public expenditure spending explained only a small part of the variation in failure rates, as revealed by their R squared values.33 However, the high elasticity of secondary education expenditure with respect to both repetition and dropouts support earlier recommendations to focus efforts on improving secondary education.

Source: World Bank staff calculations using MEP and STAP statistics.

Table 2.12: Relationship of Public Expenditure and Repetition and Dropout Rates, 1980-2005 Secondary

Elasticity Primary Academic Technical Repetition rate public/expenditure elasticity -0.58 (0.55) -1.06 (0.33) 0.10 (0.00) Drop out rate public/expenditure elasticity n.s. -0.74 (0.28) (0.00) -0.02

(0.35) Failing rate public/expenditure elasticity n.s. -0.87 (0.00) -0.02 a. R square values in parenthesis are not significant. Source: World Bank staff calculations using MEP and STAP statistics.

31 That is a one percent increase in the corresponding level of education. 32 The drop out rate in primary education is so small that the results were not significant. 33 An “R-squared” value of zero means that no relationship between public expenditures and failure rates exist, while a value of one means that changes in expenditure levels explain all the variation in the rates.

43

C. Health

Organization and Funding

2.34 Costa Rica’s enviable health and social indicators depicted earlier (Table 1.1) are a consequence of a long-term commitment. The commitment dates back to the end of the nineteenth century and the creation of a Ministry of Health (MH) in the early twentieth century. It was further consolidated by the creation of the Costa Rican Social Security Institute or CCSS,34 an autonomous state institution created initially to administer health insurance for workers and embedded in the 1949 Political Constitution. Subsequently CCSS’ role was further expanded by: (i) the 1961 law that made social security coverage universal, (ii) the 1973 transfer of hospitals to the CCSS, (iii) the 1975 extension of the disability, old age and death insurance to agricultural workers, (iv) the 1978 creation of the Voluntary Regime for Protecting Independent Workers and their Families and (v) the 1993 Law on Improving the Health of Costa Ricans, which transferred primary care responsibility from the MH to CCSS.35 This allowed the MH to focus on its regulatory functions and policy development, although it still administers an important nutrition and integral care program for children.

2.35 Three other institutions play a significant role in the public health system: the National Insurance Institute (INS),36 the Costa Rican Water and Sewerage Institute (AYA),37 and the University Of Costa Rica (UCR). INS’ role in the health sector is to administer workers’ compensation and traffic accident insurance, which provide medical, surgical, hospital, pharmaceutical, rehabilitative-care and economic benefits for work-related and traffic accidents. AYA provides potable water supply, sewage and industrial waste liquid collection and treatment services, charging users for the services. UCR’s involvement in the health sector comprises: (i) educating and training professionals and technicians in health, (ii) hosting and participating in research and social action projects involving health, and (iii) providing health services.

2.36 CCSS provides health services at the primary, secondary (doctor visits), and tertiary (hospital care) levels. Primary care is provided via a network of over 900 basic health care establishments or EBAIS, each comprising one doctor, one nurse, and one primary technician. EBAIS exist in each planning region of MH, providing service for 3,300 to 5,500 persons on average (Figure 2.7). These establishments have grown almost four-fold since 1995 and are now strategically located so that over 90 percent of communities are within a short walk to an EBAIS. Secondary and tertiary levels of health care are provided by CCSS’ network of 29 hospitals and clinics, with over six thousand beds in total.

34 Caja Costarricense de Seguro Social, also known as “La Caja.” 35 See the Poverty Assessment (World Bank 2007), for additional details and analysis. This section is broadly based on this report. 36 Instituto Nacional de Seguros. 37 Acueductos y Alcantarillados.

44

Figure 2.7: Number of Coverage of EBAIS by Region, 2004

45 66 6794 103

255 263

0

5 0

1 0 0

1 5 0

2 0 0

2 5 0

3 0 0

3 5 0

4 0 0

NorthHuetar

CentralPacific

Brunca Chor. AtlanticHuetar

NorthCentral

SouthCentral

Country

# of EBAIS

Population per EBAIS

Source: World Bank staff calculation with CCSS report.

2.37 There is also a private health sector in Costa Rica, which is concentrated primarily on ambulatory care and pharmaceutical products.38 Its size has been estimated to vary from 20 percent to 30 percent of the health sector, depending on the source and definition

2.38 Public funding for health institutions varies. The MH receives the bulk of its resources from the national budget, although it also receives funding from the Social Development Fund (FODESAF)39 and the national lottery. The INS and AYA funding comes almost entirely from the fees charged to customers. In contrast, the UCR is funded almost entirely via transfers from the national budget.

2.39 The bulk of CCSS funding comes from payroll tax contributions from employees and employers, while it receives modest transfers from the national budget, mainly to cover the health needs of the poor and uninsured. In fact, since major reforms in the early 1990s raised the contributions from independent workers and retirees, the contributive portion of CCSS ran a surplus. However, this surplus starting falling in 2000 and disappeared by 2003 as: (i) visits to health care professionals by children and retirees became more frequent, (ii) the cost per visit kept creeping up, and (iii) the number of people contributing to the system decreased.

2.40 In order not to put additional strain on the system in the future, there needs to be a concerted effort to identify the causes of this decline in coverage and to implement a plan to reverse it. This may require strengthened enforcement of existing rules as well as openness to changing contribution rates so that young and healthy workers pay lower contribution rates than other workers.

38 SANIGEST 2005. 39 Fondo de Desarrollo Social y Asignaciones Familiares.

45

Size, Structure and Composition

2.41 Even after excluding health-related expenditures by the AyA, INA and UCR, Costa Rica spent about 5.2 percent of GDP on health between 2002 and 2006 (Table 1.16), somewhat higher than the 4.8 of GDP spent in the previous five-year period, but significantly higher than the LAC average of 3.8 percent of GDP and the upper middle-income average countries average of 3.9 percent of GDP. Public expenditures on health have fallen in recent years. The average for 2005 and 2006 of 4.9 percent of GDP is significantly lower than the 5.5 percent average during 2002-2004.

2.42 The structure of public expenditures in health is heavily oriented towards tertiary care—it accounted for about half of all public health expenditures between 2000 and 2005 (Table 2.13). Secondary care, mainly doctor visits, accounted for about one-quarter, while primary care accounted for less than one-fifth of public expenditures in the sector.

Table 2.13: Public Expenditure in Health by Level, 2000-2005

(percent of total) 2000 2001 2002 2003 2004 2005

Health Ministry 2.0 2.8 3.7 5.0 3.5 3.5

Primary level (preventive) 16.9 17.0 17.7 18.7 19.6 17.6 Secondary level (doctor visits) 28.9 27.9 26.1 25.1 25.2 23.7 Tertiary level (hospital care) 48.5 49.6 49.2 48.2 48.9 52.5 Drug Prevention 0.4 0.3 0.5 0.4 0.3 0.3 Nutritional Programs 3.3 2.4 2.8 2.6 2.6 2.4

Source: World Bank staff estimations based on CGR methodology.

2.43 Preventive health has been shown to have very high economic returns. One of the most cost-effective ways of Costa Rica to improve its health indicators and at the same time target the poor would be to increase public expenditures in primary care, specifically in community based clinics or EBAIS. In the long run, a better preventive health care system would reduce the need for secondary and tertiary levels of health care.

2.44 Table 2.14 shows the composition of health expenditures of the MH and CCSS by economic classification. These two institutions account for the bulk of public health expenditures, although arguably public expenditures on water and sewerage as well as garbage collection and disposal, which are not included here, have an important impact on health. The table demonstrates that well over half of expenditures of the MH and CCSS go to wages and salaries. In contrast, the share of expenditures going to investment, at 4 percent, is very low. For example, Panama devoted 12 percent of the public health budget to physical investment during 1999-2003 and El Salvador devoted 6 percent of its health budget to capital expenditures. However, the Costa Rica’s investment numbers may be underestimated as purchases of some items such as medical instrument are classified under goods and services.

46

Table 2.14: Health Expenditures by Economic Classification and Institution, 2005 (percent)

Average annual growth rate Institution Total MH CCSS

Function Total MH CCSS

1995-2005

2000-2005 1995-2005

Total 100.0 100.0 100.0 -0.5 -1.5 -5.7 0.0

Current Expenditures 96.3 95.6 96.3 -0.8 -1.1 -5.6 -0.3

Wages and Salaries 57.5 62.7 57.1 -0.1 0.5 -7.6 0.4

Goods and Services 29.3 18.0 30.0 2.2 2.6 0.0 2.2

Current Transfers 9.4 14.8 9.0 0.6 -9.1 12.4 3.4

Interest 0.1 0.0 0.1 -0.6 -5.5

Capital Expenses 3.8 4.4 3.7 -14.3 -24.6 14.3 0.0

Physical and Financial Investment 3.6 1.3 3.7 0.0 -10.5 0.0 0.0

Capital Transfers 0.2 3.1 0.0 0.0 0.0 0.0 0.0 Source: World Bank staff estimations based on CGR methodology.

2.45 The low level of investment and its recent decline are a source of concern. Continuing with this trend risks losing Costa Rica’s impressive health achievements of past decades. The favorable health indicators in the country are in part a product of policies and practices from past decades, including sizeable investments. Because most investments in health produce results in the long run, the impact of lower investments in recent years on health performance indicators is not yet visible. However, without reversing the decline in investment today it would be difficult to maintain the highly positive health performance indicators in the long term or to improve the areas where Costa Rica fares less well.

Health Performance and Coverage

2.46 Table 1.1 showed that Costa Rica’s health indicators were significantly better than those in the rest of LAC and comparable to those of richer countries in the region. Similarly, the another World Bank report (2006)40 finds that out of 15 health indicators analyzed, Costa Rica was better off in: (i) all indicators compared to the world average; (ii) nearly all of the indicators compared to the other five Central American countries,41 and (iii) five out of nine indicators (55 percent) compared to the Latin American average (it ranked first, second or third in nine out of fifteen indicators, or 60 percent, compared to individual Latin American countries).42 Even compared to Northern America, Costa Rica had similar or better values in five out of eight indicators (63 percent) for which data is available.

40 World Bank 2006c. 41 With the exception of Nicaragua in HIV/AIDS prevalence. 42 For six of the indicators, no data was available for the Latin American average. Caribbean countries are not included in the table.

47

2.47 Equally encouraging is the improvement of most performance indicators since the major health reform of the early 1990s, which put increased emphasis on primary health and sought to increase coverage of the public health insurance program to cover the poor and independent sector workers. Of the 11 key health indicators in Table 2.15, seven have shown improvement. However, there has been a dramatic increase in dengue and while AIDS cases have reduced during the last decade, they are still higher than in 1990-1991. There have also been modest, though still worrisome, declines in measles and polio vaccinations. This suggests that the information campaign to educate households on reducing the incidence of dengue and AIDS needs to be stepped up, as are efforts towards universal vaccination against measles and polio.

Table 2.15: Key Health Indicators: 1990-2004 Indicator 1990-91 1995-96 2003-04 Change 1990-2004

Gross birth rate 26.4 22.7 17.3 -34% better Infant mortality rate 14.3 12.5 9.7 -32% better Life expectancy at birth (all) 76.7 76.5 78.6 +2% better Men 74.7 74.3 76.4 +2% better Women 78.9 78.8 80.9 +3% better % Children with low birth weight 6.3% 7% 7% -11% better Dengue per 100,000 inhabitants 0.0 109.7 347.0 + ∞ worse Measles per 100,000 inhabitants 103.2 1.4 0.0 -100% better AIDS per 100,000 inhabitants 2.9 4.7 3.7 +28% worse Vaccination SRP-measles (% of 1-yr olds) 91.0 88.0 89.0 -2% worse Vaccination VOP3-polio (% of 1-yr olds) 92.0 86.0 89.0 -3% worse Total population served by water system ND 92% 99% +8% better Source: State of the Nation Project 2005; MIDEPLAN web page; and Observatorio de Desarrollo UCR.

2.48 An important factor for the progress made since the reform has been improved access to primary health care at the community based health facilities or EBAIS, which now covers over 95 percent of the population (Valverde, 2007). EBAIS is pro-active. Every year it carries out a basic household and medical information survey for each member of each household.

2.49 In addition to Costa Ricans having near universal access to primary health care, there is a constitutional guarantee that public health care cannot be denied. Over 80 percent of the population has health insurance, mostly via the publicly run CCSS and through a number of private health insurance providers. Over two-thirds of Costa Ricans have access to health insurance through formal jobs, either their own or of a family member. The self-employed and retirees account for an additional 5 percent each. Finally, the government subsidizes certain individuals and families that are considered poor or vulnerable.

2.50 The main advantage of having insurance is that without it, there may be delays for certain services.43 Unsurprisingly, it is the poor who are most likely not to have health 43 For example, some EBAIS keep non insured waiting until the end of the day to obtain services; and service are provided only to a limited number of patients.

48

insurance and therefore may suffer delays, pay for private care, or forgo medical attention. About 26 percent of the poor and 31 percent of the extreme poor are without health insurance as opposed to 16 percent of the non-poor (Table 2.16). Fortunately, lack of insurance does not seem to affect doctor visits. The rates of doctor visits were not remarkably different for the richest and poorest quintile; nor did they vary significantly by region, between urban and rural zones, or between immigrant and non-immigrant population. Among people who visited doctors, the average number of visits was practically the same for all income groups. Similarly, there is no strong relationship between poverty and hospital access or between rate of vaccinations and income level. What does change is the use of public establishments. The bulk (94 percent) of households from the poorest quintile use public establishments as compared to just over half of the households in the highest quintile.

Table 2.16: Health Insurance Coverage by Poverty Level, 2004 (percent)

Source of Insurance

Poverty Not

insured Self Salary Work Retired

Govern-Ment Others Total

Non Poor 16.3 5.4 69.9 5.8 1.2 1.5 100.0 All Poor 26.0 3.3 58.1 5.8 4.7 2.1 100.0 Extreme Poor 31.4 2.1 53.8 5.8 5.1 1.7 100.0 National 18.6 4.9 67.1 5.8 2.0 1.6 100.0 Source: World Bank staff calculations using the EHPM.

Equity of Public Expenditures in Health

2.51 Given existing utilization patterns (self selection), overall public health spending is progressive. In 2001, the poorest quintile, which receives 5 percent of the national income, received almost 30 percent of health public spending benefits, while the richest quintile, which receives 48 percent of the national income, received only 11 percent of health public spending benefits. However, the poor receive about the same share of benefits as their share in the population. For example, the share of public health benefits received by the poorest three deciles is 30 percent, equal to their share in the population. Thus the overall concentration coefficient or quasi-Gini is only slightly progressive—it was -0.07 and -0.04 in 1998 and 2004, respectively (Table 2.17).44 Nonetheless, there are significant distributional differences between levels of attention. Primary level care is highly progressive with quasi-Ginis of -0.16 and -0.14 in 1998 and 2004 respectively. This supports the earlier recommendation to enhance resources going to preventive care, whether through the community base health facilities (EBAIS) or via enhanced education campaigns to control malaria, dengue, and AIDS or the promotion of vaccination against polio and measles.

44 See footnote 13 for a description of the properties of the quasi-Gini.

49

Table 2.17: Distribution of Public Health Expenditures by Income Decile, 2004 Share of Public Health Expenditures

Primary level (preventive)a

Secondary level (doctor visits)

Tertiary level (hospital stays) Total

Income Groupb 100% 100% 100% 100% Decile 01 13% 11% 12% 12% Decile 02 12% 10% 5% 8% Decile 03 13% 11% 8% 10% Decile 04 11% 11% 7% 9% Decile 05 12% 11% 8% 10% Decile 06 10% 10% 13% 12% Decile 07 10% 11% 29% 21% Decile 08 8% 9% 6% 7% Decile 09 7% 10% 8% 8% Decile 10 4% 6% 4% 4%

quasi-Gini 1988 -0.16 0.02 -0.10 -0.07 2004 -0.14 -0.06 0.00 -0.04

a. Including the MH and other public health programs. b. According to the EPHM. Source: Trejos and Saenz (2006) and Trejos (2007) based on the Income and Expenditure Survey, INEC.

Efficiency of Public Expenditures in Health

2.52 Costa Rica’s public health expenditures appear to be efficiently spent. Using one measure of efficiency, Table 1.17 in Chapter 1 showed the efficiency of public health expenditures to be roughly on par with comparable countries in LAC. The World Bank Poverty Assessment for Costa Rica calculated another measure of efficiency as follows. First, it calculated the relationship between health performance indicators and per capita PPP45 health spending (both public and private) in nineteen Latin American countries.46 Significant relationships between expenditure and fifteen indicators were found.47 It then measured efficiency for an individual country as to whether its outcomes were better or worse than predicted by the model. Under this measure, Costa Rica performed better in all health indicators, other than children under weight for age, where it was only slightly worse (Table 2.18). Only two countries, Chile and Cuba, achieved outcomes that were better than predicted in all categories.

45 The expenditures were compared using purchasing power parity (PPP) exchange rates in order to avoid biases from currency overvaluation or undervaluation. 46 Argentina, Uruguay, Chile, Brazil, Panama, Mexico, Colombia, El Salvador, Paraguay, Dominican Republic, Venezuela, Cuba, Peru, Nicaragua, Guatemala, Ecuador, Bolivia, Honduras and Costa Rica. 47 The same exercise was carried out tracking the 18 indicators and government spending as a percentage of GDP (instead of per capita health expenditures in PPP). There was no statistically significant relationship (at p≤5 percent) between any of the indicators and the level of spending. For total health expenditures (public and private) as a percentage of GDP, only three of the 18 indicators were significantly related to the level of spending.

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Table 2.18: Relationship of Health Indicators and Expenditures in Latin America, 2002 Health indicator Adj. R2 p = Fitteda Costa

Rica 1-Contraceptive Prevalence rate (1995-2003) 0.21 4.2% Linear Better 2-% Births Attended by Skilled Health Personnel (1995-2003) 0.50 0.0% Inverse Better 3-Pop. with Sustainable Access to Improved Sanitat. (% in 2002) 0.34 0.7% Linear Better 4-Population Undernourished: % of total (2000/2002) 0.34 0.0% Comp. Better 5-% Children < 5 Year-Olds Under-Weight for Age (1995-2003) 0.34 0.6% Inverse Worseb

6-% Children < 5 Year-Olds Under-Height for Age (1995 - 2003) 0.42 0.2% Inverse Better 7-Infants with Low Birth Weight (%) (1998-2003) 0.31 0.8% Inverse Better 8-Tuberculosis Cases per 100,000 People (2003) 0.33 0.6% Inverse Better 9-Cured Under DOTS (%) (2003) 0.32 0.0% Comp. Better 10-Life Expectancy at Birth in Years (2000-2005) 0.37 0.0% S-curve Better 11-Infant Mortality Rate per 1,000 Live Births (2004) 0.29 1.0% Inverse Better 12-Under-Five Mortality Rate per 1,000 Live Births (2004) 0.36 0.4% Inverse Better 13-Prob. at Birth of Surviving to Age 65 Female % (2000-2005) 0.50 0.0% Inverse Better 14-Prob. at Birth of Surviving to Age 65 Male % (2000-2005) 0.24 1.8% Inverse Better 15-Maternal Mort. Ratio Adjusted per 100,000 Live Births (2001) 0.23 0.0% Comp. Better a. Linear Y = b0 + (b1 * x); Inverse Y = b0 + (b1 / x); Compound Y = b0 * (b1**x) or ln(Y) = ln(b0) + (ln(b1) * x); S-curve Y = e**(b0 + (b1/x)) or ln(Y) = b0 + (b1/x). b. Costa Rican value was 5.0 percent compared to an expected value of 4.5 percent. Source: World Bank 2007b.

D. Social Protection

Organization and Sources of Finance

2.53 Social protection programs are public interventions aiming at: (i) improving the ability of all individuals, families and communities to manage risk and (ii) assuring a basic level of welfare for all the poor and vulnerable. These programs can be divided into two main groups: (i) social insurance and (ii) social promotion and assistance (Figure 2.8). In Costa Rica, social insurance consists of three programs: (i) illness and maternity, (ii) worker compensation and traffic accidents, and (iii) contributive pensions. Because the first two deal primarily with health and were dealt with in the last section, the analysis of social insurance in this section will be limited to contributive pensions.48

2.54 The second broad category of social protection programs comprises social promotion and assistance. Social promotion programs support the development of human capital, with an emphasis on children. The biggest of such programs is a system of childcare centers administered by the Ministry of Health. Other programs are aimed at promoting school enrollment and retention and are run by the Ministry of Education. There are also housing programs and initiatives to help adults improve their productivity and incomes. Social assistance programs are targeted at the poor and vulnerable. They include a non-contributive pension scheme and financial assistance schemes to those suffering a temporary shock. They also include a number of programs at combating exclusion and discrimination. A more detailed description of the contributive pensions and social promotion and assistance programs and their funding follows below.

48 Costa Rica also has a non-contributive (social assistance) pension program aimed at the elderly poor who are not covered by any of the contributive pension systems.

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Figure 2.8: Organization of Social Protection Programs Social Protection Programs

Social Insurance Social Promotion and Assistance

Social Assistance Network

Job related Risks

Contributive Pensions

Social Promotion

Illness and Maternity

Old Age, Disability and Death Fund

(RIVM)

Human Capital Housing/Environment Production Support

Compensatory National Budget Regime (RPN) Assistance

Anti-Exclusion

2.55 Contributive Pensions (CP) comprises two broad categories: (i) an Old Age, Disability and Death Fund, known as RIVM49 by its acronym in Spanish, and (ii) the National Budget Program or RPN,50 which comprises fourteen programs, the largest of which is a pension scheme for teachers. It accounts for 70 percent of RPN expenditures.

2.56 Financing for RIVM comes from three sources in equal measure: (i) a payroll tax paid by employers, (ii) a payroll tax paid by workers, and (iii) government budgetary support. The RIVM, along with a pension fund for judicial workers, are the only programs that have a reserve fund, giving it financial sustainability. However, demographic changes, informal labor force increases, outdated contribution rates, and a large share (40 percent) of salaried workers failing to make contributions threatened the solvency of the fund. In 2004, it was projected that contributions would fail to cover expenses by 2011, that interest on the reserve funds plus contributions would fail to cover expenses by 2022, and that the reserve fund itself would disappear by 2028.

2.57 To avoid a collapse of the RIVM, several reforms were enacted in 2005: (i) the monthly contributions needed to retire were increased from 240 to 300; (ii) the percentage contribution is to increase by 0.5 percent every five years until reaching the maximum 10.5 percent of the salary; (iii) the reference period to estimate the pension’s value was increased from the last four to the last ten years of salary; (iv) benefit payments were changed so that they are no longer a fixed percentage of the salary but decreased as the salary increased,51 (v) early retirement options were introduced to reduce incentives for fraudulent disability claims, and (vi) efforts were made to enforce universal coverage. With these changes the RIVM system estimated that the point when contributions no longer covered expenses had been postponed to 2041. However, recent increases in 49 Régimen de Invalidez, Vejez y Muerte. 50 Régimen del Presupuesto Nacional. 51 Payments now vary from 53 to 62.5 percent of the reference salary. In the past, a fixed 60.9 percent rate was paid to everybody.

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benefits to the teachers’ pension scheme and opposition to making contributions universal have brought forward this deadline.

2.58 In contrast to the RIVM, pensions under the National Budget Program (NPS) system that are targeted to certain public employees, do not have a reserve fund, and are managed by the National Pension Administration52 unit of the Ministry of Labor (MTSS).53 Moreover, personnel files are still kept on paper rather than in electronic format; and irregularities and long delays for processing payments are common.

2.59 Several measures carried out during 1980s increased benefits and coverage substantially. Although reforms implemented during the 1990s closed access (entry) to the system, the commitments to the people already in it will burden the national budget for several decades to come.54 For instance, the budgetary burden in 2005 was significantly higher than in 2000. Payments were seven times greater than the income from employee and retiree contributions, implying an implicit subsidy equivalent to 86 percent of payments (Table 2.19). If the government, as employer, were to make an equal contribution, the implicit subsidy would still have remained high at 73 percent of payments. Even if the government were to contribute twice (once as the employer and once as the government, as it does for the RIVP), the implicit subsidy—or unfunded liability—would have amounted to 59 percent of payments in 2005.

Table 2.19: Finances of RPN Contributive Pensions, 2000-2005 (in millions of current Colones)

2000 2001 2002 2003 2004 2005 Contributions 18,677 21,151 23,091 25,116 28,014 30,854 Judicial System 3,405 3,547 4,281 4,604 4,983 5,354 Employed Teachers 9,413 10,315 9,610 9,667 9,380 9,086 Retirees 5,858 7,289 9,200 10,845 13,651 16,414 Pension Payments 103,772 127,464 151,442 174,911 205,086 227,530

Contributive 100,866 123,895 147,202 170,013 199,344 221,159 Non-Contributivea 2,906 3,569 4,240 4,898 5,742 6,371

Subsidy w/out employer contrib. 85,095 106,313 128,351 149,795 177,072 196,676 As share of payments 82% 83% 85% 86% 86% 86% Subsidy with employer contrib.b 66,418 85,162 105,260 124,679 149,057 165,822 As share of payments 64% 67% 70% 71% 73% 73% Sub. w/ employee & govt. cont.c 47,741 64,010 82,170 99,563 121,043 134,968 As share of payments 46% 50% 54% 57% 59% 59% a. RPN includes a few pensions, such as for ex-Presidents of the Republic, which are non-contributive. b. Unfunded liability if the government, as employer, were to pay the employer contribution. c. Unfunded liability if the government were to contribute as employer and as government, as it does for RIVM. Source: National Comptroller General Office, Annual Reports 2000-2005.

52 Dirección Nacional de Pensiones. 53 Ministerio de Trabajo y Seguridad Social. 54 No new members can join the system but as members already in the system retire the financial burden increases. The costs will start decreasing once all the members retire and people leave the program.

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2.60 The social promotion programs generally support initiatives to improve human capital, housing, and the environment, whereas social assistance programs provide funding for those suffering a temporary shock and those suffering from extreme or chronic poverty, as well as anti-exclusion programs aimed at empowering the minorities and the vulnerable and protecting those suffering discrimination.

2.61 The Comptroller General’s Office estimated that there were 46 social promotion and assistance programs managed by twenty-two institutions in 2006. This figure is uncertain, in part because some programs are self-standing, while others are components of larger programs or sets of activities. Past efforts to produce a complete list of programs and institutions, beneficiaries and spending have not been fully successful. Moreover the efforts to keep track of various programs have not been sustained, with each new administration ignoring previous work and starting from scratch.

2.62 The main social promotion programs are childcare centers run by the Ministry of Health and the school lunch program run by the Ministry of Education. Other important social promotion programs include a family housing subsidy and programs to increase the productivity and incomes of working-age adults, all run by different institutions. The main social assistance program is a non-contributive pension program administered by CCSS for the elderly poor who are not covered by any of the contributive pension regimes.

2.63 Among the institutions involved in both social promotion and social assistance activities, IMAS deserves a mention. Although it only accounts for 12 percent of expenditures on social promotion and assistance, it is specifically oriented to the extreme poor and has more flexibility than any other institution as to how it uses its resources. Unfortunately, IMAS has a administrative budget representing about 30 percent of expenditures and it has under-executed its budget by as much as 20 percent between 2000 and 2005. It is not surprising, therefore, to learn that its budget was reduced by about one third over this period. Finally, the National Development and Family Allocations Fund (FODESAF) funds about four-fifths of social promotion and assistance programs.55 The resources originate mainly in payroll taxes and the national budget, but also from hotel taxes, profits from the operation of Duty Free stores in airports and the Golfito duty-free zone.

Composition of Social Protection Expenditures

2.64 The social protection sector comprises a plethora of overlapping and duplicative programs with little coordination between them and without clear leadership or accountability. Data on social protection program spending disaggregated by program are not easy to obtain. Government initiatives to improve accounting practices have met with limited success. Additionally, as Costa Rica’s accounting system only provides information by institution, rather than by program, no aggregate expenditures reports for individual programs are available and there is no information on unit or average costs,

55 Fondo de Desarrollo Nacional y Asignaciones Familiares.

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which make program monitoring and evaluation very difficult. For this reason, the data used in this section come from different sources and do not necessarily represent official figures.56 (Table 2.20)

Table 2.20: Composition of Social Protection Expenditures by Program (percent)

As Share of Total Expenditures

As share of Program Category

2000 2005 2000 2005 Contributive Pensions 69.3 74.1 100.0 100.0 Old Age, Disability and Death 27.3 27.4 39.5 36.9 National Budget Program 42.0 46.8 60.5 63.1

Social Promotion and Assistance 30.7 25.9 100.0 100.0 Social Promotion 21.2 16.5 69.2 64.0 Social Assistance 9.5 9.3 30.8 36.0

Social Promotion and Assistance 100.0 100.0

Human Capital 7.9 7.8 25.8 30.1 Childcare centers CEN-CINAI 2.6 1.9 8.6 7.3 School Lunch Program 2.6 2.3 8.5 8.8 Support to poor women 1.6 3.2 5.2 12.3 Other Human Capital programs 1.1 0.4 3.6 1.6

Housing and Environment 10.8 6.5 35.1 25.2 Family Housing Subsidy 7.5 5.6 24.4 21.7 Other Housing and Environment programs 3.3 0.9 10.6 3.5

Production Support 2.5 2.3 8.3 8.7

Compensatory Programs 0.4 0.4 1.3 1.6

Anti-Exclusion 2.2 2.7 7.1 10.5

Non-contributive pensions 4.7 4.1 15.2 16.0

Other Assistance Programs 2.2 2.0 7.3 7.9 Source: World Bank staff estimates.

2.65 Given the importance of the sector, consideration should be given to the creation of a permanent institution or body entrusted with coordinating the various programs. For such an institution to work effectively, it should have some control over the programs’ plans, budgets and budget allocation. It also needs to ensure that disaggregated information on program costs and beneficiary profiles are collected and analyzed on a timely basis, in order to better monitor and evaluate the programs in search of improved efficiency and effectiveness.

2.66 Table 2.20 shows a breakdown of social protection expenditures between the major programs for 2000 and 2005. The contributive pension system accounted for 74 percent of all expenditures in 2005, up from 69 percent in 2000. The amount spent on contributive pensions in real terms increased slightly over this period, even as the share of social expenditures in GDP declined (Table 1.16). In contrast, the share of social promotion and assistance programs fell from 31 percent to 26 percent, with the largest percentage declines occurring in housing and environment and non-contributive pensions.

56 For a more detailed description of the methodology see Trejos 2007.

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Coverage and Effectiveness

2.67 Especially since many of the social protection programs claim to support poor or vulnerable groups, an evaluation of the extent to which the benefits flow to these groups is essential. In addition, it is useful to see the extent to which benefits from social insurance programs such as the contributive pensions programs are distributed among the population. The target groups of interest selected for this analysis include poverty groups, gender, the young, the elderly, and the rural population. Given the great diversity of programs and the lack of reliable information for many of them—especially the very small ones—the analysis on the distribution of benefits was limited to the largest programs in terms of expenditures. The results are presented below.

2.68 The poor population (23 percent) receives only about 5 percent of the benefits of contributive pensions (Table 2.21). The extreme poor receive just one percent as opposed to their 6 percent population share. By their nature, contributive pension benefits—a social insurance scheme—would be skewed towards those who made contributions.

Table 2.21: Coverage of Selected Social Protection Programs. 2006 (percentage of total)

Poverty

Extreme

Poor Poor Non-Poor

Women < 18 year- olds

> 64 year- olds Rural

Share in Population 6.0 22.4 77.2 50.7 33.6 6.5 41.0 Contributive Pensions No. of Beneficiaries 1.7 14.1 85.9 49.2 1.3 62.1 27.0

RIVM 1.9 16.4 83.6 45.2 1.6 66.4 29.4 RPN 0.6 4.7 95.3 65.5 - 45.1 17.5

Value of Benefits ($) 0.6 5.6 94.4 48.7 0.4 50.0 18.5 RIVM 0.8 8.4 91.6 40.5 0.7 57.7 22.1 RPN 0.1 1.0 99.0 62.4 - 37.0 12.3

Social Promotion and Assistance Childcare Centers 15.1 44.9 55.1 52.6 91.1 0.0 65.6 IMAS 14.2 39.4 60.6 73.6 12.2 14.5 51.4

Non-cash Programs 5.6 25.8 74.2 67.4 13.6 7.3 45.8 Cash programs 21.2 50.5 49.5 78.5 11.0 20.3 56.0

Scholarship Programs 8.2 33.5 66.5 56.0 65.8 0.0 50.4 FONABE 12.2 40.0 60.0 54.0 86.4 0.0 60.3 Others 3.2 25.6 74.4 58.5 40.0 0.0 38.1

School Lunch 10.5 36.7 63.3 47.8 98.2 0.0 54.8 School Subsidy 14.9 49.7 50.3 50.1 98.9 0.0 62.3 School Transport 10.3 36.2 63.8 53.0 91.0 0.0 92.2 Housing Subsidy 5.9 22.2 77.8 50.8 36.2 4.7 46.2 Non-contrib. Pensions 23.5 55.2 44.8 58.6 2.0 69.7 58.7 Source: World Bank Staff calculations based on the 2006 EHPM household survey, INEC.

2.69 Since most of the poor did not make contributions and, in any case, made smaller contributions than the non-poor, it is no surprise to find that the poor make up only 14 percent of beneficiaries and 5 percent of the value of benefits. If the pension scheme were self-financing one could argue that this is a fair outcome. However, even the RIVM is partially subsidized by the government, while in the RPN pension system, individual

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contributions accounted for only 14 percent of payments in 2006 (Table 2.19). Even after taking into account that the government, as employer, should be contributing to the system, the implicit government subsidy amounted to 73 percent of payments in 2006, making RPN pensions a highly regressive government intervention. Restricting new entrants to the RPN pensions is an important first step. What is needed now are politically acceptable ways to gradually reduce benefits in order to reduce the gross inequity of the RPN pension system. At a minimum calls to increase benefits, such as the recent reinstatement of certain benefits for teachers, should be strongly resisted.

2.70 In contrast, almost all the major social promotion and assistance programs are progressive, given that the share of benefits of the poor and extreme poor are higher than their share in the population.57 For the poor the non-contributive pensions are the most progressive of the major programs, followed by the IMAS cash program (50.5 percent) the school subsidy (49.7 percent), and childcare centers (44.9 percent). One major social assistance program, the housing subsidy, is neutral in its redistributive effect.

2.71 The above results on the coverage of the poor are consistent with the results of the distributive impact analysis carried out for selected social protection programs (Table 2.22).

Table 2.22: Distributive Impact of Selected Social Protection Programs, 2004

School Lunch

Childcare Centers

Work Regulation

Non-Contributive

Pension

Cash Transfers to Vulnerable

Groups

Housing &

Water Total For 2004a 100% 100% 100% 100% 100% 100% 100%Decile 01 19% 31% 8% 46% 43% 18% 32%Decile 02 19% 17% 13% 13% 11% 15% 14%Decile 03 14% 17% 13% 10% 13% 12% 12%Decile 04 12% 7% 12% 9% 7% 13% 10%Decile 05 10% 10% 14% 14% 4% 10% 9%Decile 06 7% 4% 12% 2% 4% 11% 6%Decile 07 5% 8% 12% 2% 12% 10% 8%Decile 08 6% 5% 10% 4% 0% 7% 4%Decile 09 4% 0% 4% 1% 0% 3% 2%Decile 10 4% 0% 2% 0% 6% 0% 2%Quasi-Gini 1988 -0.250 -0.433 -0.112 -0.455 -0.213 0.090 -0.175 2004 -0.314 -0.469 -0.123 -0.569 -0.471 -0.279 -0.409 a. Household decile classification, with the first decile being the poorest. Source: World Bank Staff estimates based on INEC data using the methodology of Trejos and Saenz (2006) and Trejos (2007).

All the six programs analyzed showed that the population of the poorest two deciles received a disproportionate share of benefits. As before, the non-contributive pension program, jointly with the cash transfer program, was the most redistributive, with 59 percent of benefits accruing to the poorest two deciles. Childcare centers and school lunch programs followed with 48 percent and 38 percent of benefits respectively accruing 57 The exception is “other” scholarship programs.

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to the poorest two deciles. The redistributive aspect is also reflected in the quasi-Gini, which were almost all found to be strongly negative. Encouragingly, the quasi-Gini improved between 1988 and 2004 for all programs, going from slightly regressive to strongly progressive in the case of the housing and water interventions. For the six programs as a whole, the quasi-Gini increased from -0.175 to -0.409.

2.72 The effectiveness of social programs is often measured by estimating the coverage of the program within the target population as well as the leakage or the amount of resources that did not go to the target populations. SPA programs in Costa Rica do not generate the necessary information to estimate these parameters. Fortunately, the EHPM has incorporated questions about some SPA programs in selected years. Using the EHPM for 1999 and 2006, efficiency parameters were estimated for the four biggest SPA programs: Childcare Centers (CEN-CINAI), School Lunch, Non-Contributive Pensions and the Family Housing Subsidy. The results are illustrated in Table 2.23.

Table 2.23: Coverage, Exclusions and Leakages for Selected Social Protection Programs, 1999 and 2006

(percent)

Program ==>

Childcare Centers School Lunch

Non-Contributive

Pensions

Family Housing Subsidy

Target Population => < 7 year-olds 5 to 7 year-

olds students

Unemployed, older than 60 &

no pension

Families without own

house or shacks 1999 2006 1999 2006 1999 2006 1999 2006 Potential coveragea 18.4 15.3 84.9 103.1 84.2 70.8 80.5 84.4 Effective coverageb 14.2 10.3 54.3 66.1 40.5 39.5 38.9 42.4 Excluded target pop. 85.8 89.7 45.7 33.9 59.5 60.5 61.1 57.6 Leakagesc 17.5 21.8 34.7 34.3 22.8 22.2 51.7 49.6 a. Total population beneficiaries/target population. b. Target population beneficiaries/target population. c. Non-target population beneficiaries/total beneficiaries. Source: World Bank staff calculations based on the 1999 and 2006 EHPM household surveys.

2.73 Assuming that the programs aimed to target all the poorest 40 percent of the population, the school lunch program proved to have the highest coverage, from 54.3 percent in 1999 to 66.1 percent in 2007. Childcare centers have the lowest effective coverage, falling from 14.2 percent in 1999 to 10.3 percent in 2006. However, even if childcare expenditures had been perfectly targeted they would not have been able to cover more than 15.3 percent of the population in 2006. In contrast, perfect targeting during 2006 would have allowed the government to reach all of the school lunch target population, 70.8 percent of the non-contributive pension population, and 84.4 percent of the family housing subsidy population.

2.74 In terms of the share of benefits going to the non-poor, leakages in the housing subsidy and school lunch programs are the highest, at 49.6 and 33.9 percent respectively. While it may be logistically difficult to separate school lunch beneficiaries and doing so could be associated with a social stigma, this is not true for the housing subsidy, leading one to question if the goal of this program is to provide housing for the middle class,

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rather than just the poor. The next chapter delves into greater detail in these and other issues for two social protection programs: school lunches and childcare centers.

E. Policy Options

General Options

2.75 Social expenditures in Costa Rica are above average by international standards; further increases are only justified if clear sources of financing are identified and the extra resources are targeted specifically to the poor by means of efficient programs with low administrative costs and low leakage. In the long run, a healthier social sector would require increasing the share of capital expenditures in the budget.

2.76 Based on anecdotal evidence and a survey of selected centers providing childcare services and school lunches, the sector appears to have a serious problem with absentee employees. To address this problem and generate fiscal savings that can be used to fund neglected activities, there is an urgent need to reconcile payroll data with attendance records at the field level.

2.77 Better informational systems and monitoring and evaluation programs are needed throughout the social sector. Independently generated and timely information is essential to evaluate the different social programs, identify their strengths and weaknesses, and improve the programs. As yet, Costa Rica has not made a real commitment towards improving its social sector informational system.

Options for the Education Sector

2.78 The share of primary and secondary education expenditures in wages and salaries is too high, leaving few resources for goods and services or for infrastructure. Increases in education resources could be usefully directed to infrastructure and goods and services.

2.79 Rules and regulations for hiring and firing permanent staff have to be reformed to provide improved flexibility to hire the best person for the job and appropriate performance incentives; at the same time, more temporary teachers need to be brought into the permanent cadre, providing such teachers with increased job stability.

2.80 Overall secondary education enrollment levels in the country are low, while repetition and dropout rates are high, greatly increasing the cost of service delivery. The teacher reforms mentioned above will help address this but they need to be complemented by measures to include quality via increased funds for maintenance and school materials and by an campaign to enhance awareness as to the advantages of education, especially to the growing premium on secondary and higher education.

Options for the Health Sector

2.81 The impact of health policies takes time and the favorable health indicators in the country are in part a product of policies and practices from past decades. To ensure that the health outcomes continue in the long-term, Costa Rica needs to ratchet up its

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investments on health infrastructure now. Delaying investment today would only make things more difficult in the future.

2.82 Preventive health is the most efficient (least costly) of all health care levels. To improve the efficiency of the health care system and at the same time target the poor, Costa Rica should increase its support to primary care, especially via its community based clinics or EBAIS, but also via enhanced education campaigns for the control of malaria, dengue, and AIDS and via the promotion of vaccination for polio and measles—all areas where Costa Rica lags behind comparable countries. In the long run, a better preventive health care system would reduce the need for secondary and tertiary levels of health care.

Options for the Social Protection Sector

2.83 Costa Rica has scores of social protection programs with wide and varied coverage, often uncoordinated and without clear leadership or management stability. Efforts at coordination taken every four years with each administration have not worked. Considerations should therefore be given to creating a more permanent institution to manage and organize the sector. For such an institution to work effectively, it should have some control over the programs’ plans and budgets.

2.84 With almost three quarters of total expenditures, the contributive pension system (CP) is by far the biggest program of all. The CP is also a highly regressive program in terms of coverage and benefits. To improve its efficiency and coverage, ways to encourage or enforce participation by the currently uninsured need to be devised. If a better distributional impact is desired, consideration could be given to more progressive rates on premium payments,58 although this would increase incentives for evasion.

2.85 Excluding the CP system, all the other major social protection programs are progressive, though some have high leakages in terms of providing benefits to the non-poor. However, it is not clear if this is due to a lack of clarity as to the target population, an inefficient distribution of resources between programs, or deficiencies in accounting practices and in monitoring and evaluation activities. Therefore the policy options above to better organize and coordinate the sector and to carry out increased monitoring and evaluation are very welcome. These could be complemented by the use of tools such as the public expenditure tracking survey discussed in the next chapter in order to identify strengths and deficiencies in each program.

58 Easy to implement from a technical and practical point of view but politically very difficult to establish.

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Chapter 3 EFFICIENCY AND EFFECTIVENESS OF TWO SOCIAL PROGRAMS THROUGH THE LENS OF AN EXPENDITURE TRACKING SURVEY

3.1 This chapter presents the results of the application of a public expenditure tracking survey (PETS) to two social protection programs in order to evaluate the effectiveness of expenditures and draw lessons for other social sector spending. The two programs—Education and Nutrition Centers and Integrated Care Centers for Children (CEN-CINAI) and the School Lunch Program (CE)—were chosen because of their potential contribution to breaking the inter-generational reproduction of poverty. The CEN-CINAI program comprises 617 centers providing day-care, food, pre-school education, and parental training to some 115,000 beneficiaries. The CE program covers 98 percent of public schools, targeting vulnerable children.

3.2 The main findings of the study are as follows. First, in 2006 the Ministry of Finance allocated to the two programs less than half the amount mandated by law, thereby seriously limiting the planning ability of the executive entities. Second, program leakages of 25 and 35 percent in the CEN-CINAI and CE programs, respectively, in terms of the share of benefits accruing to the top 60 percent income-group, are very high compared to other social protection programs, such as Vaso de Leche in Peru, and OPORTUNIDADES in Mexico59, and could be reduced, in part by charging an overall service fee, but subsidizing the poor population. Such measures could allow needed expansion in rural areas in the case of the CEN-CINAI program. As for the CE program which in reality is considered a universal program with cost-sharing with the communities, a study of the possible program savings from better targeted subsidies is recommended, taking into account the additional costs this would entail in terms of student screening and the possible adverse effect on community contributions. Third, while quantification was not possible, the study found evidence of significant losses from administrative control difficulties, with large discrepancies between payroll data and staff working in the programs, large variances in the prices of procured goods, and significant quantities of missing and stolen materials. Central administration oversight could be improved via frequent audits and by strengthening information systems and the information technology processing capabilities. Fourth, neither program has carried out impact evaluations. Therefore, while the study can point out inefficiencies in the expenditure chain, it cannot determine the desirability of proceeding with the programs, or whether increasing funding for these programs is worthwhile or not. It is therefore

59If for reasons of comparability we look at the rates of infiltration of the non-poor into the program (i.e. beneficiaries not belonging to the lowest income quintile), then they are higher in the CEN-CINAI and School Lunch Program (45 and 64 percent, respectively) than in the comparable Glass of Milk Program (Vaso de Leche) in Peru, in which the non-poor were found to represent 36% of program beneficiaries, and significantly higher than in the poverty focused Conditional Cash Transfer Program OPORTUNIDADES in Mexico, where the leakages were found to be 16 and 18 percent in rural and urban areas, respectively.

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crucial to begin to continuously evaluate the nutritional effects on beneficiaries of both programs, as well as, the effects on class attendance and school performance in the case of the school lunch program, and the psychomotor development of the children and labor market participation of mothers in the case of the CEN-CINAI program.

A. Scope and Methodology

3.3 As described in Chapter 2, Costa Rica’s social protection programs include 14 social insurance programs and an additional 46 social promotion and assistance programs. The school lunch program and childcare program account for 2.3 percent and 1.9 percent respectively of social protection expenditures (Table 2.20), which itself accounts for 32 percent of social sector expenditures. As a share of GDP, these programs together account for only 0.2 percent of GDP, but despite their small size, they could be an important component of the poverty reduction strategy. Also some of the issues that affect these programs, such as shortfalls in funding and targeting, have broader implications, especially for other social promotion and assistance programs. However, these findings indicate that significant returns could exist within current budget levels through strategic resource re-allocations to high impact areas, higher internal efficiency in public expenditure, and the consolidated use of targeting instruments to reach the poor and vulnerable.

3.4 Although several studies have analyzed social sector program access and coverage in Costa Rica, little information exists regarding resource channeling mechanisms, the manner in which budgets are prepared and resources assigned, and the impact that funded activities have on the target population. The main objectives of this study were to: (i) analyze the flow of financial and physical resources from the national budget to the final beneficiaries (school students in the case of CE, and mothers and their pre-school children in the case of CEN-CINAI); (ii) identify the main bottlenecks, problems, deficiencies and strengths within each stage of this flow; and (iii) develop recommendations to improve program efficiency and effectiveness.

3.5 After presenting a detailed description of the two programs in Section B and C, the study discusses three types of analysis used to evaluate the programs, based on information from three types of sources: (i) direct sources from the relevant institutions; (ii) complementary data sources, such as the Population and Housing Census and the Multiple Purpose Household Survey (EHPM)60; and (iii) the PETS-2007, based on sampling, visits and interviews to a group of key people providing and receiving the services. This way of evaluating the effectiveness and efficiency of social services has been used by both the World Bank and Inter-American Development Bank (IADB) since 1999. To date, ten countries have used PETS with success (Philippines, Macedonia, Uganda, Tanzania, Albania, Ghana, Burkina Faso, Peru, Honduras and Brazil). The evaluation methodology used in the Glass of Milk program in Peru and the health system in Brazil, both jointly conducted by the IADB and the World Bank, have served as a guide for the survey carried out in Costa Rica.

60 In particular for 2006, which included the module on social programs.

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3.6 The sample was constructed so as to maximize the number of interviews given the relatively limited budget available, while striving to have representation from the different regions, areas (urban/rural) and socio-economic levels. For the School Lunch Program, 68 schools and 351 households with beneficiary children were selected, while interviews were conducted in 32 centers and 132 beneficiary households of the CEN-CINAI Program. Further details on the methodology and sample characteristics can be found in the background paper.

3.7 The first type of analysis, which is presented in Sections B and C, compare the actual outcomes, in terms of the extent to which the budgeted expenditures reached their targeted beneficiaries, with what would have been possible if the programs: (i) had been fully funded as per law, (ii) had managed to spend every Colon that had been allocated to them, (iii) had excellent administrative controls so that there were no diversions of funds towards salaries for staff that did not work there or towards paying more for procuring goods than did other centers or schools, (iv) had no goods that were stolen or damaged, and (v) had no beneficiaries that did not belong to the poorest 40 percent of the population. The differences between actual and possible outcomes for (i) and (ii) have been termed “program shortfalls”, in the sense that these funds were used for other worthwhile activities, whereas the difference between the actual outcomes as compared to the hypothetical scenarios (iii) to (v) above have been termed “program losses,” in the sense that the funds were utilized by the undeserving.

3.8 The second type of analysis, which is presented in section D, evaluates the organization and performance in five areas: (i) planning, budget and execution, (ii) administrative controls, (iii) management of facilities, (iv) management of materials, and (v) management of personnel. Finally, Section E reviews the findings regarding coverage and perceptions regarding quality and impact of the two programs.

3.9 Mainly because of data limitations and a lack of impact evaluations, the study is unable to evaluate whether the benefits of the programs outweigh the costs. Therefore, while the study can point out inefficiencies in the flow of resources and shortfalls in funding as compared to what is legally mandated, it cannot determine whether increasing funding for these programs—whether by budgeting greater amounts or by enhancing the programs’ ability to spend all the resources allocated to them—is worthwhile or not or whether technical capacity to scale up the program is available. Similarly, the study did not evaluate the cost-implications of reaching hypothetical goals such as that of not subsidizing beneficiaries that do not belong in the lowest 40 percent income-bracket of the population. The screening to determine which students should get subsidized or free meals and which would have to pay for the service would carry certain costs, however the savings would clearly outweigh these and would allow for a better coverage of the target group.

3.10 Similarly, when discussing administrative controls, it is beyond the scope of the study to determine whether differences in procurement costs for goods are due to differences in local market costs or due to inefficiencies or corruption in procurement processes. It is also beyond the study’s scope to determine whether it was corruption or errors in data entry when staff, registered at the Ministries, as having received salaries,

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were not found to be working in the programs or when staff actually working in the centers did not appear on Ministry payrolls. Nevertheless, by providing broad orders of magnitude on where these “losses” and other inefficiencies lie and do not lie, some recommendations are possible.

B. Description of the Integrated Care Centers for Children (CEN-CINAI)

3.11 Present in all 81 municipalities of the country, the CEN-CINAI program began in 1950 with the establishment of the Costa Rican Complementary Food Program through an agreement between the Ministry of Health (MH) and UNICEF. The program’s core goal is to allow poor and vulnerable children to receive good nutrition in order to develop normally. This translates into the following specific objectives: (i) providing pre-school children the opportunity to develop their psychomotor, cognitive and social potential; (ii) systematically preparing children for high performance during the school life; (iii) promoting the participation of the family and the community in education and nutrition issues; and (iv) enabling Costa Rican mothers to participate in the labor market.

3.12 Management of the CEN-CINAI Program takes place at three levels. At the first level, the Department of Child Nutrition and Development Centers (DCNDI) is responsible for standardizing, planning, evaluating and directing the program, in addition to preparing the Annual Operating Plan consistent with the budget. The second level comprises the Regional Units of Nutrition Centers and Child Development (URCNDI), the heads of which are responsible for any advice, supervision, control and planning required by the operational units and for the distribution of food packages and whole milk. These units come under the nine Regional Departments of the Ministry of Health (MH), which are MH’s representatives in the region and which supervise the health program.

3.13 The third level consists of the Local Nutrition Center and Child Development Teams (ECENDI). These local units are headed by coordinators and are responsible for coordinating services and supervising several operating units. Finally, each operating unit has a head or director responsible for unit administration. Each center also receives the support of a Pro CEN-CINAI Development Association (ADPCC). These associations, which are legal entities, represent the participating communities, manage the government resources earmarked for the purchase of perishables, promote fund-raising among the communities for operational expenses and improvements to the centers, and collaborate in the selection of program beneficiaries.

3.14 A new initiative introduced in 2004 allows children to attend the child center only two or three times a week. It also offers in-situ food services for these children as well as for other minors living close to the center, for children enrolled in the school lunch program, and women who are pregnant or breast-feeding. The service includes breakfast, snack and lunch, depending on the attendance schedule, and since 2006, it includes milk for children who are enrolled in just the lunch program. Nutrition education on nutrition is also provided and some centers organize workshops for both students and parents.

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3.15 The program is complemented with extramural food support. It consists of powdered milk (1.6 Kg. per month) for children living outside the CEN-CINAI perimeter (normally a one kilometer radius) and food to households with children exhibiting moderate or severe malnutrition. The latter service consists of a monthly package containing 8 Kg. of rice, 3.6 Kg. of beans, 4 Kg. of sugar, 2 liters of vegetal oil, 1 Kg. of pastas and 6 cans of tuna. The delivery of food is complemented with training for mothers on nutritional aspects.

Table 3.1: Average Monthly Population Served in CEN-CINAI Program, By Mode and

Population Group, 2006

Population Served Relative Weight

Children

Service Mode Total Children School

Children Mothersa Fathers Incidence Distrib.

Distrib. of

Benefi- ciaries

Integrated services 21,696 21,696 0 0 0 100.0 22.6 17.5

Intramural 12,539 12,539 100.0 13.1 10.1

Extramural 9,157 9,157 100.0 9.5 7.4

Complementary foodb 124,258 95,903 2,277 13,663 12,415 77.2 100.0 100.0

Relative distribution 100.0 77.2 1.8 11.0 10.0

Served food 45,053 30,113 1,732 2,791 10,417 66.8 31.4 36.3

Intramural 27,289 22,766 1,732 2,791 0 83.4 23.7 22.0

Extramural 17,764 7,347 0 0 10,417 41.4 7.7 14.3

Whole milk distribution 92,498 79,049 0 13,449 0 85.5 82.4 74.4

1,600 g. Packages 63,883 0 10,872 85.5 66.6 60.2

800 g. packages 17,743 15,166 0 2,577 0 85.5 15.8 14.3

Food distribution to familiesc 4,450 1,907 545 0 1,998 42.9 2.0 3.6 a. Pregnant or breast-feeding women. b. Beneficiaries of 800 g. milk packages are not added, since they are also counted under served food. c. Estimate using historic average of 3.5 family members and assuming 1.5 children per household. Source: MS, DCNDI, Information Unit.

3.16 Table 3.1 shows the distribution of beneficiaries reported by the program for 2006 by mode and type of beneficiary. By assuming that children attending integrated services receive food, the number of complementary food recipients has been used as a way to estimate the total beneficiary population. The beneficiaries of the 800 grams of milk packages were not added to this number, since the recipients also regularly attend the food services. With this estimate, a beneficiary population of nearly 125 thousand people was obtained as a monthly average for 2006, of which 77 percent were children under seven years 11 percent pregnant or breast-feeding mothers, 10 percent parents attending training workshop, and only 2 percent children attending school. Among beneficiary children, 23 percent receive integrated services, 9 percent just food, 67 percent just the 1,600-gram milk package, and 2 percent just the food packages to combat malnutrition. Among all beneficiaries, milk distribution captured an even higher percentage of beneficiaries (74 percent), while food package distribution reached the smallest number of beneficiaries (4 percent).

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3.17 Given their higher incidence of poverty and malnutrition, the peripheral regions account for 57 percent of beneficiaries, although the central region has two-thirds of the overall population (Table 3.2). Nevertheless, intramural integrated service, the most sophisticated and costly service is concentrated in the Central Region (62 percent). In particular the south sub-region, which includes the capital, accounts for 27 percent of such beneficiaries. The low density of the peripheral regions makes it more costly to expand intramural services there.

Table 3.2: Average Monthly Population Served in CEN-CINAI Program, By Region, Mode and Population Group 2006

Population Serveda

Integrated Services Served Food Whole Milk

Region Total Child-

ren

School Child-

ren Mothersb Fathers Intra-mural

Extra-mural

Intra-mural

Extra-mural 1600g 800g

Distrib. of Food

Total 124,255 95,903 2,275 13,662 12,415 12,539 9,157 27,286 17,764 74,755 17,743 4,450

Relative Structure 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Central Region 43.5 45.1 22.6 40.2 38.6 62.0 47.6 52.9 40.4 41.0 53.4 39.4

Central South 12.3 13.1 2.6 9.3 11.6 27.4 13.7 17.1 12.9 10.7 12.3 8.7

Central North 10.9 10.6 4.2 7.0 18.2 16.8 21.2 10.7 20.1 8.7 13.4 11.1

Central West 7.8 8.2 2.4 7.7 6.1 5.2 5.9 5.8 6.1 8.9 7.3 8.6

Central East 12.4 13.1 13.5 16.2 2.6 12.6 6.8 19.3 1.2 12.7 20.4 11.0

Peripheral Regions 56.5 54.9 77.4 59.8 61.4 38.0 52.4 47.1 59.6 59.0 46.6 60.6

Chorotega 13.8 14.3 14.6 15.0 8.8 15.1 8.6 14.0 7.5 15.2 13.0 14.9

Central Pacific 7.0 6.8 1.9 10.2 5.9 6.0 7.4 5.8 6.7 7.6 6.6 6.8

Brunca 15.3 13.2 54.1 9.0 31.4 4.4 21.7 12.7 30.0 12.6 8.4 19.1

Huetar Atlantic 10.9 10.9 5.4 18.8 3.3 8.4 1.7 10.7 0.7 13.2 13.8 15.6

Huetar North 9.4 9.6 1.4 6.7 11.9 4.2 12.9 3.9 14.7 10.5 4.8 4.3 a. To avoid duplication, the beneficiaries of 800 g. milk packages and integrated service have not been included. b. Pregnant or breast-feeding women. Source: MS, DCNDI, Information Unit. 2006 Data.

3.18 The CEN-CINAI program includes three types of centers: (i) CINAI, which provide child day care for twelve hours per day, thus allowing women to join the labor force; (ii) Education and Nutrition Centers, which operate eight hours a day in the morning and afternoon; and (iii) Education and Nutrition Centers and School Lunch Programs (CENCE), which also provide services to rural communities without school lunch programs. By 2006, there were 617 centers, of which 460 were CEN, 38 CENCE,

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68 CEN extramural, and 51 CINAI. In addition, 23 rural health posts distributed whole milk. Two of every three centers provided integrated services.61

3.19 The selection of beneficiaries is managed by a team comprising the CEN-CINAI coordinator, the director or head of the center and a member of the ADPCC and depends on whether they: (i) have a per capita family income equal to or below the poverty line, (ii) reside or work within the geographic area served by the center; and (iii) exhibit malnutrition or development problems, are a social risk, or are children of working mothers. In the selection of pregnant or breast-feeding women, priority is given to teenage mothers or women exhibiting low weight during the pregnancy or who have low birth weight children.

3.20 Targeting appears to work reasonably well. At least 80 percent of the households receiving integrated services are below the poverty line, and the percentage is even higher for extramural services. Although the data may overestimate the number of poor households served, the most sophisticated and costly integral care service reaches the highest number of non-poor beneficiaries. (Table 3.3)

Table 3.3: Characteristics of CEN-CINAI Program Beneficiaries, 2006 Type of Care

Integrated

Care Served Food

Whole Milk

Food Packages

Beneficiary Children % light to severe malnutrition 21.5 27.0 44.0 100.0 % low development in :

Gross motor skills 3.1 4.8 6.3 Fine motor 4.3 6.2 6.9 Language 9.4 12.1 12.3 Socio-affective 4.9 5.4 6.6 Cognitive 15.8 11.7 13.9 Habits 5.1 7.4 9.2

% at social risk 14.0 12.1 10.9 19.0 % with disabilities 1.6 0.8 1.3 8.3 % foreign beneficiaries 2.7 3.8 3.7 0.8

Households % below poverty line 79.3 88.6 96.3 96.2 % unemployed head of household 4.1 3.0 3.3 3.7 % inactive head of household (housewife) 12.1 13.6 15.2 17.9 % technical-professional head of household 25.3 11.3 5.4 4.4

Mothers % primary school completed or less 50.8 72.0 81.2 86.4 % high school completed or less 20.4 6.5 4.3 2.5 % heads of household 29.4 16.8 20.3 23.0 % teenage mothers 1.6 3.0 4.1 1.4 Source: MS, DCNDI, Information Unit. 2006 Basic Data.

61 Ministry of Health “Programa de Nutrición y Desarrollo Infantil” (2006).

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3.21 The CEN-CINAI program has five funding sources, four institutional and one generated by the community. Of the public sector funds, 99 percent come from just two sources: the Ministry of Health’s ordinary budget and FODESAF, which is managed by the Office of International Cooperation in Health (OCIS) in the MH.. Unfortunately, data on (private) community resources is unavailable. Between 2000 and 2006, expenditures on the program increased by 10 percent, with all of the increase coming from direct budgetary support (Table 3.4). Payment of salaries , which are funded from the central government budget, account for close to 60 percent of program expenditures in recent years. While salary expenses remained essentially stagnant, food expenses, which are funded exclusively by FODESAF, increased by almost 50 percent and now account for one-third of all expenditures.

3.22 Using certain assumptions on payroll structure and non-salary expenses, administrative expenses are found to be 6 percent of all expenditures, implying that 94 percent are spent on the operational units, where salaries account for almost 60 percent of the costs. This is important because salary costs are heavily biased toward the integrated service mode, which is neither the largest nor the best targeted. While there is great variation in costs across different sub-programs, the average cost per beneficiary has remained roughly constant over 2000-2006, although the food component per beneficiary has increased at an annual average rate of 5.2 percent (Table 3.4).

Table 3.4: CEN-CINAI Program Expenditures by Source and Item. 2000-2006 (in constant 2000 Colones)

Indicator 2000 2001 2002 2003 2004 2005 2006 Ave. Total Expenditure (mlns.) 5,236 4,907 5,135 6,121 5,753 5,192 5,736 5,440.0

2000 index = 100 100.0 93.7 98.1 116.9 109.9 99.2 109.5 Percentage variation -6.3 4.6 19.2 -6.0 -9.8 10.5 1.5

Relative Structure By source 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

National budgeta 43.0 34.2 27.3 54.9 60.5 66.1 61.4 49.6 OCIS-FODESAF 57.0 65.8 72.7 45.1 39.5 33.9 38.6 50.4

By item 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Salaries 65.3 59.0 62.6 56.0 58.2 62.8 59.1 60.4 Food 26.6 29.7 34.4 41.9 39.0 33.9 36.0 34.5 Others 8.1 11.3 3.0 2.1 2.8 3.3 4.9 5.1

By execution level 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Central and regional administration

7.0 6.3 6.7 6.0 6.2 6.7 6.3 6.5

Local execution 93.0 93.7 93.3 94.0 93.8 93.3 93.7 93.5 In local execution 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Salaries 63.9 57.3 61.1 54.2 56.5 61.3 57.5 58.9 Food 28.5 31.7 36.9 44.5 41.6 36.3 38.5 36.9 Others 7.5 11.0 2.0 1.2 1.9 2.3 4.1 4.3

Total Expenditure per Beneficiary

49,891 44,097 61,387 57,363 48,103 45,526 49,713 50,869

2000 index = 100 100.0 88.4 123.0 115.0 96.4 91.2 99.6 Percentage variation -11.6 39.2 -6.6 -16.1 -5.4 9.2 -0.1

Food Expenditure per Beneficiary

13,250 13,085 21,133 24,028 18,779 15,434 17,916 17,661

2000 index = 100 100.0 98.7 159.5 181.3 141.7 116.5 135.2 Percentage variation -1.3 61.5 13.7 -21.8 -17.8 16.1 5.2

a. Managed by CTAMS until 200 and for 2006 includes the CTAMS Trust Fund. Source: UCR, based on MS DCNDI data.

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3.23 Of the food expenditures in 2006, about 30 percent were for served meals, 60 percent for milk purchases, and the remaining 10 percent for food packages. The latter two are purchases by the Ministry of Health via competitive bidding, which sometimes leads to delays and shortages. These food packages are distributed to the regional departments and from there to the various CEN-CINAI. These centers manage physical inventories of milk and food packages, and keep monthly records that are forwarded to the regional and central units. The staff is appointed and paid directly by the central department. The centers themselves purchase only the perishables for served meals, which consitutes roughly 11 percent of all expenditures. As a result, any gains in efficiency are likely to come from better management of staff and more efficient purchasing and distribution milk and food packages.

3.24 Assuming full use of the resources,62 this study roughly estimated that in 2006, the public sector cost of providing monthly integrated service per child, including food, was C30,986 (about US$60) for a CINAI with a 100 children capacity and C24,293 (about US$50) for a CEN with an installed capacity for 80 children in two shifts. The monthly cost per beneficiary for the served meals, excluding preparation costs, was around US$7, while the monthly cost per family was US$5 for the milk package and US$20 for the food package, in both cases excluding purchase, transportation and delivery costs. While these costs do not include community funding, they are lower than in IMAS’ childcare services or in the Ministry of Education’s pre-schools, and even lower than those in private centers, some of which do not even provide food services.

Resource Flow and Assessment of Shortfalls and Losses in the CEN-CINAI Program

3.25 This section analyzes the flow of financial and physical resources of both the childcare centers and school lunch programs. It seeks to estimate the program shortfalls and the program losses. Tax revenues that were due to the programs but not received or not spent, have been defined as revenue shortfalls, whereas the program losses stem from: (i) difficulties in administrative control that allow ghost workers or inefficiencies in procurement; (ii) theft or damage of food, materials and equipment; and (iii) benefits being received by households who are not in the lowest 40 percent of the population.

3.26 Under a complex set of arrangement involving various actors described in a flowchart (Figure 3.1), the CEN-CINAI program receives most of its funding from a share of the 5 percent payroll tax on employers and a share of the 20 percent sales tax collected by the Ministry of Finance, both of which are transferred to FODESAF. The received funds are further subject to co-financing arrangements between several actors and earmarking of certain revenues for activities such as maintenance, milk, perishable food, or food packages. Details on the collection and distribution of FODESAF resources are described in the background paper.

62See “Costos de los programas de atención integral de la primera infancia.” UNICEF, San José, Costa Rica (2006).

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Figure 3.1: CEN-CINAI Program Resource Flowchart

Source: Background paper prepared by UCR.

3.27 In 2006, unavailable revenue was estimated at C4.5 billion, which is equivalent to 35 percent of program expenditures in 2006 (Table 3.5). This estimate is based on the assumption that the shortfalls in FODESAF funding have led to a proportional shortfall in funding for CEN-CINAI. The bulk (93 percent) of the shortfall in 2006 were from lack of transfers from FODESAF, mainly because FODESAF did not receive in full the 20 percent sales tax revenues that it is expected to receive by law, presumably because the Ministry of Finance diverted it for what it considered higher priority uses, and because some employers failed to pay their social security contributions. If the government wants more flexibility in the allocation of the budget, it should carefully review the desirability of keeping the current system of earmarking of funds, and if it would like to keep resources flowing to the programs at the legally prescribed levels, the recommendation is to strengthen financial support to FODESAF, through alternative sources either for the Fund or for the Ministry of Finance itself. As for the collection of contributions, the recommendation here is to negotiate inter-institutional agreements to collect employer debts, joining efforts with other affected institutions like CCSS, INS, IMAS, and Banco Popular, which are currently trying to collect individually. It may also be necessary to

FODESAF C.C.S.S.

Social burdens (5% Salary for

FODESAF)

20% Sales Tax

Community Activities

Vendors

Food

FOD

ESA

FR

es.

Rec

.Fid

eico

mis

oM

S

MS-

Cen

tral

Gov

. Res

.

Other Central Government Resources

Ministry of Finance

Ministry of Health (MH)

DCND

*Instit. Purveyorship Unit*Financial Resources Unit *Infrastruct.Unit

*Operating Permits *Medicine Authorization

OCIS

CEN-CINAIPro CEN-CINAI

Development Association

MS Trust Fund

70

empower these institutions, or an organization on their behalf, to take legal measures against the debtors.

Table 3.5: Childcare (CC) Program Losses from Unavailable Revenues (billions of Colones)

2000 2001 2002 2003 2004 2005 2006

Total program revenue 6,447.9 6,147.8 6,952.1 9,236.9 10,646.4 10,573.5 13,040.3

Funds not transferred to FODESAF-CC 1,573.8 2,389.6 1,776.8 1,873.8 2,163.7 2,025.6 3,537.3

Sales tax 1,436.9 2,303.3 1,762.0 1,711.6 1,985.0 1,914.3 2,531.9

Employers in arrears 137.0 86.3 14.9 162.2 178.7 111.3 86.3

DESAF-DCNDI execution problems 0.0 0.0 0.0 0.0 0.0 0.0 919.1

Revenue from budget priority (FODESAF) 1,095.0 1,312.6 1,285.2 96.8 675.3 428.7 0.0

Funds not transferred to DINADECO-CC 0.0 0.0 0.0 57.4 365.4 618.2 988.2

Sales tax 0.0 0.0 0.0 57.4 365.4 618.2 988.2

DINADECO-ADPCC execution problems -- -- -- -- -- -- --

(in percent)

Total program revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Revenue from budget priority (FODESAF) 17.0 21.4 18.5 1.0 6.3 4.1 0.0

Funds not transferred to FODESAF-CC 24.4 38.9 25.6 20.3 20.3 19.2 27.1

Funds not transferred to DINADECO-CC 0.0 0.0 0.0 0.6 3.4 5.8 7.6

Funds not transferred to FODESAF-CC 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Salex tax 91.3 96.4 99.2 91.3 91.7 94.5 71.6

Employers in arrears 8.7 3.6 0.8 8.7 8.3 5.5 2.4

DESAF-DCNDI execution problems 0.0 0.0 0.0 0.0 0.0 0.0 26.0

Funds not transferred to DINADECO-CC -- -- -- 100.0 100.0 100.0 100.0

Sales tax -- -- -- 100.0 100.0 100.0 100.0

DINADECO-ADPCC execution problems -- -- -- -- -- -- --

Source: UCR, with DESAF and Ministry of Finance data.

3.28 The second largest category of deficit (8 percent of expenditures) stemmed from the community development associations’ (DINADECO) shortfall in financing, although this appears to be mainly the result of teething problems with the new decentralized procedural arrangements for disbursements to the centers (ADPCCs) that were begun in 2006. There appears to be a need to simplify and standardize these requirements. Other reasons for shortfalls in the past have been decisions taken by the Executive to divert budget-approved funds to other activities that were considered higher priority.

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3.29 Another source of shortfalls stems from obstacles faced by the centers (DCNDI) in spending all of the money they are authorized to receive. Between 2000 and 2006, the share of actual expenditures to authorized expenditures has ranged from 82 percent (in 2000) to 100 percent (in 2001). There are several reasons for this. First, until recently, vendors had to register for approval each year. The approval process took from 3 to 6 months, leading to delays. With a change in regulations under Contracting Law 7494, this has been corrected. Vendors can now receive approval for four years, except where there is negligence or inappropriate administrative oversight.

3.30 A second reason for less than full execution of authorized amounts is the recent requirements on ADPCCs (also mentioned above) under which the ADPCCs need to provide such information as annual work plans, budgets, ADPCC and Ministry of Health agreements, monthly account statements, and bi-annual compliance reports. The counter-signing of the agreements has been a particularly severe problem in 2006. A recommendation, therefore, is to continue standardizing the implementation of ADPCC controls, making it less onerous on APDCCs to provide the documentation. Other reasons affecting smaller amounts include delays in reimbursement from the central government budget (per diems and the purchase of certain materials and equipment) and delays in the MH Trust Funds earmarked for maintenance of program vehicles and facilities. There were also delays in disbursements from the Medical Social Assistance Council.

3.31 Lastly, the PETS carried out a detailed analysis of the revenues and expenditures of 17 CEN-CINAI centers in both urban and rural areas. While there was not much difference in the execution rates between urban and rural (85 versus 82 percent), there were large differences between centers, with one center having a 17 percent execution rate. Deficiencies from internal CEN-CINAI under-execution show both central and local budget execution restrictions. Local restrictions account for 8 percent of shortfalls and affect 16 percent of ADPCC-managed funds, mainly because ADPCC fails to comply with procedures described above. Central restrictions account for 5 percent of the total shortfall, much of which are caused by the MH shutting down for the Christmas holidays. At present, the community often contributes the shortfall, which in turn leaves many centers with end-of-period surpluses. A recommendation is therefore to improve the system so that first quarter resources can be processed before the MH Central Offices close for the holidays.

3.32 Losses from administrative control difficulties. For the purposes of this study, administrative control difficulties were limited to include inconsistencies with personnel listings and price variability in the purchase of certain goods. The losses this brings about to the program were not quantified, but the analysis is still useful. For example, significant differences were observed between the personnel registered at the Ministry of Health and the personnel actually working at the Centers. Unfortunately, the study does not include sufficient data to determine if this is because mistakes were made when entering personnel location data in the system, or because salaries are paid to “ghost” workers, or that Centers are diverting resources to pay non-registered personnel. A thorough review of the program personnel records is therefore recommended.

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3.33 Losses from price variability in the purchase of certain products. These losses were also analyzed. Spending on food increased significantly between 2000 and 2006 (almost 50 percent in real terms), and is currently one-third of the total expenditures. Of this, thirty percent is managed by the ADPCCs to purchase and process food products internally. To look for possible inefficiencies in the procurement process, the PETS examined 9 centers in detail, obtaining receipts for the procurement purchases made. The products more frequently purchased by the centers were selected, and one invoice per product per center was examined (the invoice dated closest to 28 March 2007). Average prices and price variability for 12 food products were calculated. No difference was made between urban and rural price variability because the sample was not representative enough for such desegregation

3.34 Table 3.6 shows the results of this examination. The analysis on the coefficient of variation shows that the products with most uniform prices were: onions (7.5), potatoes (10.2), and sugar (11.7), while the greatest variability was in: cabbage (26.8), ground beef (22.5), carrots (19.2), beans (17.8), and tomatoes (17.4). This variability appears to be mostly due to regional differences in grocery prices. Whatever the relative weights of factors, savings in purchases of food items may be possible by centralizing food procurement, allowing economies from consolidating purchases and using procurement techniques described in Chap. 6 such as longer-term contracts for recurring purchases.

Table 3.6: Price Variability for Purchase of Certain Products at CEN-CINAI

Product U.M. Centers Max. Price

Min. Price

Ave. Price

Standard Deviation

Variation Coeff.*100

Salt Pckg. 6 195 105 153 29.3 19.1 Carrots Kg 7 425 250 335 69.3 20.7 Cabbage Kg 10 583 250 351 91.9 26.1 Sugar Kg 10 488 351 406 39.3 9.7 Potatoes Kg 9 467 350 415 38.3 9.2 Rice Kg 10 553 361 450 76.2 16.9 Tomato Kg 18 950 105 479 240.0 50.1 Beans Kg 6 620 425 521 92.5 17.8 Onions Kg 7 595 480 537 43.6 8.1 Tuna fish Can 4 845 665 779 81.6 10.5 Cheese Kg 12 2500 1350 1919 316.8 16.5 Ground beef Kg 9 3972 1600 2573 666.1 25.9 Source: PETS-07.

3.35 Lossses due to theft. The PETS included questions regarding theft in the survey and the main conclusion is that almost half of all centers have experienced theft, particularly in urban areas (62 percent). These events occur, in general, more than once a year, and often more than twice. Annual losses have been estimated at about $200 per affected center, equivalent to $3 to $5 per urban and rural beneficiary, respectively. Theft of food products is the most serious problem, accounting for more than half of the losses.

3.36 Benefits received by the non-poor were calculated, with non-poor being defined as belonging to the richest 60 percent of the population. Results showed that 25 percent of beneficiaries were non-poor. The selection criteria allow children of working mothers and those with nutritional deficiencies to attend, even if they are not poor. Nevertheless,

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the fact that no data were made available to verify whether those 25 percent of non-poor beneficiaries were indeed malnourished leaves one to conclude that targeting could be improved. It is recommended that if it is decided that the program should continue to provide services to the whole universe of children, then the non-poor could be required to pay for the services.

C. Description of the School-Lunch Program

3.37 Officially known as the Food and Nutrition Program for School Children and Adolescents (PANEA), the school lunch program has two objectives: (i) to reduce malnutrition in students by providing them with a nutritional meal and nutrition education and (ii) facilitating attendance and reducing dropouts of children from families in poverty or extreme poverty. The program is operating in 4,109 primary schools (98 percent of all public schools) distributed around the country and, although it also includes a small number of high school students, 83 percent of the budget is devoted to primary schools. The food service may consist of breakfast, lunch or a snack, depending on the schedule and priority assigned to each school, although the amount allocated by the central administration is for lunch. The program began in the first quarter of the twentieth century. (Box 3.1)

3.38 PANEA is managed at three levels: central, regional and local. At the central level, the Food and Nutrition Division for School Children and Adolescents (DANEA) of the Ministry of Education (MEP)is responsible for standardizing, planning, evaluating and directing the program. DANEA also prepares the Annual Operating Plan (PAO) and calculates the amount to be transferred to each school. It also manages the funds for equipment and maintenance and with MH support, prepares menus, which reflect regional tastes and food availability. The second management level is with the 20 (MEP) Regional Departments, where their respective Boards oversee procurement. At the local level, the school Director is responsible for the staff and day-to-day operations, while the Education Board manages the resources for purchasing food and hiring temporary servers. There is also a set of servers on the MEP payroll, who are hired centrally.

Box 3.1 The School Lunch Program

The school lunch program in Costa Rica has three important characteristics not always found in other food programs in Latin America: First, it was design as a universal program to reach all public primary schools in the country. It was not design to reach only a small proportion of the population but as a benefit to anybody enroll in the public system. Second, community participation is high, creating a sense of ownership by the parents, teachers and other members of the community. A general approval by the public has provided the basis for strong political support. And third, community contributions are an important share of the total budget. Most of the contributions are in the form of labor and goods (mainly food). Indeed, the Ministry of Education estimates shows that the budget allocated for the program by itself, is not enough to cover all the benefits nor to reach all the beneficiaries.

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3.39 PANEA’s main service is to provide supplementary food, usually lunch, by paying schools to buy food and hire cooks or to outsource meals provision. PANEA also provides funds for equipping and maintaining school lunchrooms. In addition, PANEA encourages healthy eating habits among students, in part by providing nutritional foods and reinforcing good hygiene and behavior in their daily meals. As such it promotes nutrition education. The program also supports vegetable gardens by providing agricultural inputs to primary schools and teaching materials and training for the agricultural education study programs for primary schools. Finally, it supports health education at all school levels.

3.40 Article 2 of the Family Allocations Law provides that “the beneficiaries of this fund are all low-income Costa Ricans.” The vagueness of the statement opens the doors for many Costa Ricans to qualify as beneficiaries. In fact, according to PANEA Work Guidelines program beneficiaries include all pre-school, primary and secondary school students, as well as some students enrolled in special education and adult education. The program concentrates on primary schools and on a basically universal design in these schools in an attempt to avoid stigmatizing poor children and on the difficulty of making children under 12 understand why some can have lunch while others cannot.

3.41 The Costa Rican school feeding program mixes public funding and community participation. Public funding depends on the location of the school, with schools located in poorer districts receiving additional resources. Even though the targeting of this program is quite poor (all students benefit from the program regardless of income levels), it can correct for deficient caloric intake. As funding is insufficient to provide meals to the entire student population, since the mid-1980s PANEA has focused on ensuring that all primary and secondary school students in schools in extreme poverty-stricken areas receive the subsidy, with the exception of PROMECUN schools and those on expanded schedules. Other schools are regarded as lower priority, where lower percentages of students receive the subsidy. The per-student subsidy remains the same: C183/day (about US$0.40/day). Either the teacher in charge or the nutrition committee bases its selection of eligible students on the following criteria: (i) priority 1: students who are poor, have nutritional deficiencies, and are at psycho-social risk; (ii) priority 2: poor students with nutritional deficiencies; (iii) priority 3: students with nutrition problems and who are at psycho-social risk; (iv) priority 4: students with nutrition deficiencies; and (v) priority 5: students at psycho-social risk only.

3.42 Since almost all schools (98 percent) are covered under the program and the minimum enrolment coverage of students in any primary school is 76 percent, this program is clearly not just restricted to the poor or even the lowest income groups. In fact, the program allows school lunches to be provided even to people who meet none of the criteria above, as long as they make a small payment. Many schools strive to raise funds among the community to serve all students if there is sufficient installed capacity.

3.43 The available information on beneficiaries tends to include only those authorized to receive the service rather than the total population served, due to the lack of systematized information. The situation was made worse since 2003 when the program ceased to report to FODESAF, upon interpretation that the 1998 reform, by assigning a

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percentage of the Fund to CE, empowered it not to submit reports. Information, when it exists, is not presented by type of center or priority and education level attended, even though the school has this database for its programming purposes. Given these qualifications, the program appears to have grown. Between 2000 and 2006, the number of schools increased by 10 percent, the number of beneficiaries by 23 percent and the share of students being served at the center by 12 percent. The average number of students served per lunchroom was 143.

3.44 CE program funds come from two public sources and one private source. By far the largest source is FODESAF, which has provided 93 percent of the public funding on average between 2000 and 2006 (Table 3.7). For 2006, these resources totaled C12.7 billion and, until 2005, constituted the only official funding source for food purchases, subsidies for payment of staff hired locally, and maintenance. FODESAF resource allocation is carried out pursuant to Law 7763 of 1998, which assigns between 10 and 15 percent of the Fund to the CE program, of which a maximum of 30 percent can be spent on salaries. Law 7097 of 1988 assigns an additional 0.5 percent of FODESAF resources for CE equipment and maintenance.

Table 3.7: CE Program Expenditures by Source and Line Item, 2000-2006 (in constant 2000 Colones)

Indicator 2000 2001 2002 2003 2004 2005 2006 Ave. Expenditure (mlns.) 7,325 6,491 6,482 5,290 6,950 6,508 5,834 6,411.4

2000 index = 100 100.0 88.6 88.5 72.2 94.9 88.9 79.7 Percentage variation -11.4 -0.1 -18.4 31.4 -6.4 -10.4 -3.7

Relative Structure By source 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

National budget 1.5 2.4 2.2 17.5 8.8 6.5 13.1 7.4 FODESAF 98.5 97.6 97.8 82.5 91.2 93.5 86.9 92.6

By line item 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Central admin. 1.5 2.4 2.2 2.5 1.4 1.6 1.7 1.9 Local execution 98.5 97.6 97.8 97.5 98.6 98.4 98.3 98.1

Salaries 26.4 27.7 26.6 22.5 14.8 12.9 7.8 19.8 Food 71.5 69.2 71.0 75.0 79.3 81.1 89.4 76.6 Others 0.7 0.7 0.2 0.0 4.4 4.5 1.1 1.7

By local execution 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Salaries 26.8 28.4 27.2 23.1 15.0 13.1 7.9 20.2 Food 72.6 70.9 72.6 76.9 80.5 82.3 90.9 78.1 Others 0.7 0.7 0.2 0.0 4.5 4.5 1.2 1.7

Total Expenditure by Beneficiary 15,548 13,791 13,749 11,254 13,125 11,195 10,061 12,675

2000 index = 100 100.0 88.7 88.4 72.4 84.4 72.0 64.7 Percentage variation -11.3 -0.3 -18.1 16.6 -14.7 -10.1 -7.0

Food Expenditure per Beneficiary 11,115 9,541 9,764 8,444 10,410 9,075 8,990 9,620

2000 index = 100 100.0 85.8 87.8 76.0 93.7 81.6 80.9 Percentage variation -14.2 2.3 -13.5 23.3 -12.8 -0.9 -3.5

Source: UCR, DANEA data.

3.45 A second source of funding is the (MEP). These correspond to DANEA costs and payment of the salaries of personnel appointed by MEP to work on the CE program, specifically cooks. In 2006, the MEP transferred C1.3 billion from its budget to support

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food purchases and the 2007 budget included an additional allocation of C11.3 billion, practically doubling the resources available to the program for uses traditionally funded by FODESAF. The transfer may have been motivated by the desire to move closer to the 6 percent of GDP that the law requires be used for public education—a measure that historically has not been fulfilled.

3.46 The third source of resources derives from community activities. These include the activities of the Education Boards (JE) of each school to raise funds in support of the CE program, as well as volunteer work and the support of the private sector to this program. Although no official figures exist to report private contributions to the program, there is an agreement by the (JE) to undertake the necessary activities to extend the school lunch program to all students rather than selecting beneficiaries by socio-economic or nutritional priority. Thus, there is a strong likelihood such private resources fund a significant portion of the lunch program.

3.47 Making certain assumptions, this study finds that a 20 percent real decline in expenditures and a 35 percent decline in public expenditures per beneficiary occurred between 2000 and 2006. What is not clear is whether this is due to increased efficiency, poor data or increased contributions from the community. The share of funding from the regular budget also increased and will have increased substantially in 2007 if the budgeted amounts are actually released and spent. Central administration expenditure is small at 2 percent of the total, while School Boards spend the vast bulk.

3.48 Local salary expenditures as a share of total public costs fell from 27 percent in 2000 to only 8 percent in 2006. This suggests that the decision to transfer this line item to the School Boards, who outsource the activity, has resulted in savings, possibly because labor contracts signed by the Boards are temporary and paid only when the lunchroom is in operation. The automatic annual raises enjoyed by public employees do not apply. This also means that food is now the most significant line item and that this is where further efficiency savings will need to arise. However, efficiency in food purchases and use may depend on the quality of staff doing the purchasing and food preparation, so that increased attention to the human resource aspect, including the possibility of salary increases, cannot be ignored.

Resource Flow and Assessment of Losses in the School Lunch Program

3.49 As seen earlier, FODESAF funds are allocated to the PANEA program as provided in Law 5662 and account for the lion’s share of public funding for the school lunch program. However, the funds flow back to the Ministry of Finance instead of to the MEP, although the latter is responsible for managing these funds through DANEA. Other actors include the CCSS, the Ministry of Finance, the Boards of Education, and the community associations. Figure 3.2 depicts a resource flowchart for the School Lunch Program.

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Figure 3.2: Resource Flowchart for the School Lunch Program

Source: UCR.

3.50 The Ministry of Education’s (MEP) resources may be divided into two categories: for program operation (food, maintenance and subsidies to schools to pay contract cooks) and for payroll (cooks hired under the MEP regime). Just as with FODESAF, the MEP manages its resources through DANEA and the Human Resources Department, but the Ministry of Finance keeps the funds and makes the disbursements. Coverage depends on the priority assigned to each school and decreases as the number of children enrolled increase. Once the sum assigned to each school is determined, the MEP Finance Department allows the Ministry of Finance to transfer the funds to the Education Board’s account.

3.51 PETS estimated the shortfalls and losses to the School Lunch Program from the same five factors as presented in section B. The analysis of the program shortfalls due to unavailability of revenues was restricted to FODESAF resources as the other two sources—Ministry of Education budget and private resources—are not relevant. This is because the MEP budgetary funds are fully earmarked the moment they are budgeted by the central government, while there is no obligation on the private sector to provide any funds. Since 2000, the resources due FODESAF for the school lunch program not transferred amounted to 57 percent of the funds actually transferred, mostly because of problems relating to the collection and assigning of its portion of sales taxes and payroll taxes.

FODESAF C.C.S.S.

Social Burdens (5% Salary for

FODESAF)

20% Sales Tax

Community Activities

Other Central Government Resources

Ministry of Finance

School

School Lunchroom

Board of Education

Ministry of Public Education (MEP)

DANEA

Financial Department

MEP

-Cen

tral

Gov

. Res

.

FOD

ESA

FR

es.

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3.52 Shortfalls from internal execution. These may originate in DANEA or in the School Boards themselves.As information to distinguish between the sources was not available, the execution losses estimated are the sum of the two. Moreover, as seen earlier, DANEA stopped providing information on the execution of FODESAF funds after 2003. Based on an analysis of data from 1992 to 2003, there did not seem to be any serious losses from execution shortfalls. In almost all years the average execution rate was 98 percent or better.Even for the 19 centers that were part of the PETS, the disbursement rates were found to be 95 percent.

3.53 Losses from administrative control difficulties. As in the case of the CEN-CINAI, the focus of the calculations was on losses associated with inconsistencies in recording personnel, specifically cooks, and with price variability for the purchase of a specific list of products. In both cases, a quantification of losses was not possible, but some indicators give an assessment of the problem. Of the 67 schools studied in the PETS-2007, eleven (16 percent) show inconsistencies in personnel records from: (i) personnel being found on the MEP payroll but were not working in the schools—this occurred mostly in schools in urban areas; (ii) personnel at schools but not in MEP records for the respective school, which occurred mostly in rural areas. The reason for such inconsistencies is not yet known. It appears that payments are being made to persons who are not working, and that schools are diverting funds to pay personnel that is not in the MEP payroll. The problems could also originate from errors when entering personnel location in the MEP system. Nevertheless, this is a loss to the program. In the first of these cases, resources assigned are not being utilized in the program, and in the latter the program has not been assigned the resources to pay its personnel. A careful cross-checking of personnel registers would therefore be very desirable, allowing savings from reducing or eliminating incorrect payments.

Table 3.8: Price Variability of Certain Products Purchased by CEs

Product Unit School Max. Price

Min. Price

Ave. Price

Standard Deviation

Variation Coeff.*100

Salt Pckg. 18 167.0 100.8 130.1 26.6 20.4 Carrots Kg 10 400.0 184.0 268.2 68.4 25.5 Cabbage Kg 19 400.0 250.0 305.5 56.8 18.6 Milk Liter 7 453.0 295.0 390.9 62.2 15.9 Potatoes Kg 11 698.0 253.0 404.1 115.2 28.5 Rice Kg 7 564.0 217.4 405.2 76.9 19.0 Sugar Kg 18 596.3 360.4 424.3 65.4 15.4 Tomatoes Kg 12 600.0 325.0 472.7 84.7 17.9 Onions Kg 6 600.0 300.0 490.0 85.4 17.4 Tuna fish Can 10 945.0 800.0 866.8 43.8 5.1 Cheese Kg 10 2150.0 1200.0 1705.4 291.8 17.1 Ground beef Kg 10 2600.0 1800.0 2198.0 309.5 14.1 Source: PETS-07.

3.54 Losses from different purchasing prices. The analysis of the losses derived from a range of prices for 12 frequently purchased foodstuffs was estimated (Table 3.8) According to the variation coefficient, the most uniform prices are for: tuna fish (5.1),

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ground beef (14.1), sugar (15.4), and milk (15.9). The biggest price variability is seen in: potatoes (28.5), carrots (25.5), salt (20.4), and rice (19.0). These differences are explained by standard prices for some products, and by regional differences. Although rice prices are fixed nationwide, these vary depending on the quality and quantity in the package. Here also, the use of longer-term supplier contracts and consolidating purchases could generate savings.

3.55 Losses from theft. As in the case of child care centers school directors were asked if they had suffered from loss of theft or damage, specifically food products, materials and equipment. The question applied to overall school assets, not just the school lunch program, so the interpretation of results applies only to assets under the categories of materials and equipment. The results showed that about half of the centers examined had suffered some type of loss or theft. Percentages are very similar for both urban and rural areas. The frequency of incidents is less than one per year (0.7), and the average value is about $300 per center. Rural areas are more affected both in absolute and in relative terms. Loss incidence63 of all three categories of assets was relatively homogenous, particularly in rural areas. In urban areas, the loss incidence of food and materials was approximately half that for equipment. Although the losses are only a small part of expenditures, options to reduce these losses (and avoid them from increasing) by improving security may be worth exploring. Finally, with respect to food wastage, directors and representatives have different views: directors claim there are no leftovers, while some representatives indicated that these are given away to other persons.

3.56 Finally, the benefits accruing to children who did not come from the 40 percent poorest families were estimated at 35 percent. This is not surprising since, although the program establishes criteria for eligibility, including poverty, nutrition deficiencies, and psycho-social vulnerability, the reality is that it is considered a universal Program with cost-sharing with the communities. Although no study has been carried out to investigate the community willingness to contribute resources to the program as a function of its coverage, the MEP officials believe that targeting of the subsidized (or free) meals only to students from poor households, while letting other students pay, could adversely affect these contributions. A detailed study of the possible program savings from better targeted subsidies, taking into account the additional costs this would entail in terms of student screening and the possible adverse effect on community contributions, is recommended.

D. Evaluation of Organization and Performance

3.57 This section seeks to asses the management quality of both programs in order to determine the strengths and weaknesses that directly affect service quality. Five major areas are evaluated: (i) planning, budget and execution; (ii) administrative controls; (iii) facilities management; (iv) management of materials; and (v) personnel administration.

63 Although the question addressed lost or stolen assets, fieldwork showed that responses mostly focused on reporting theft events.

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Planning, Budget and Execution

3.58 Planning and budgets operate under budget caps set by the Central Government, in this case FODESAF and individual Ministries. Subsequently, the entities responsible for managing each program allocate the resources among the different executing units depending on the number of beneficiaries and other criteria like the type of service rendered or its socio-economic priority. Thereafter, Directors and community association members develop an annual work plan, with a corresponding budget, which is submitted to the higher administrative authorities for approval before the resources can be transferred. This process is much more standardized and regulated in the CE program than in the CEN-CINAI program, in part because of the operating simplicity of the former.

3.59 Both programs enjoy high resource execution particularly in recent years and especially CE, which has a more consolidated organization. As seen earlier, recent execution problems in the CEN-CINAI were probably caused by difficulties in implementing the organizational model established in 2005, under which resource transfers are conditioned upon providing a wide set of documents. However, since these problems were large--they occurred in 25 percent of the sample childcare centers examined--it would be advisable to examine how funds are transferred to the centers, especially in the first semester.

3.60 In the CEN-CINAI, 75 percent of Directors interviewed thought their participation in the planning process was high. Somewhat unusual for such programs, 30 percent of the beneficiaries claim to have participated in the planning and budget process by making recommendations. Most centers prepare an annual budget and work plan; however many Directors, especially from urban areas (44 percent), said these do not meet center needs. Twenty-four percent of the Directors admitted to having encountered inconsistencies, and about half claim to have suffered from approval delay. Twelve percent of the CEN-CINAI Directors declared having faced difficulties in getting their work plans approved, and although not all of them gave the reasons, some pointed at ADPCC organization problems and lack of the necessary documentation as the major issues. Most Directors (55 percent) declared that the centers suffered from resource transfer delays, particularly in the urban area (69 percent). This has resulted in non-payment to providers, and, to a lesser degree, a reduced scope of services.

3.61 While most directors of school lunch programs considered their budgets adequate, 31 percent said that the budget was not aligned with Center needs, 22 percent claimed to have experienced internal incoherencies, and 21 percent had experienced approval delays. A few CE Directors claimed they had no budget. While resource transfer delays were not as serious an issue as for CEN-CINAI, 28 percent of the school lunch Directors admitted to having faced delays caused mainly by DANEA. Although this had not resulted in the cancellation of services, it had triggered delays in payments to providers, reductions in the amount of food service, and delays in paying personnel salaries.

3.62 Both programs claim to have a wide variety of operational controls, including inventories, income, expense, purchase, equipment and furniture records and beneficiary

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records. However, the CEN-CINAI materials controls and CE food controls are not as sturdy. The directors and representatives of both programs agree on the need to improve the central administration oversight system through more frequent audit processes. Another deficiency observed in both program relates to IT processing at central level of the statistics and accounting reports forwarded by the local centers. This is the case for accounting reports from the CEN-CINAI program centers, as well as reports on the effective beneficiaries of the school lunch program. It would be advisable to set up databases with individual records by center, to be inputed by the centers themselves, in real time, using the information technology network.

Facilities Management

3.63 The capacity and condition of facilities of both the childcare centers and school lunchrooms are essential to safe service delivery. Thirty-five percent of CEN-CINAI Directors and about half of CE Directors and JE representatives considered the facilities were inadequate or very inadequate to the number of beneficiaries. For urban childcare centers and school lunchrooms the problem appeared to be one of capacity, rather than equipment or facilities, but in rural area facilities were a problem, particularly the lack of indoor play areas, essential in a country where the rainy season can last for 9 or 10 months. Rural childcare centers also reported discontent with lack of equipment. Many schools also reported maintenance problems. This appears to be a priority area and one where the central government probably needs to assign more resources.

Materials Management

3.64 For purposes of this analysis, materials were divided into three categories: food, materials (office, teaching aids, or kitchen supplies), and equipment (electrical appliances, computers, televisions, etc). Materials management includes mainly vendor selection and contracting and stolen or lost materials. Under the CE program, the survey identified isolated cases of anomalies in vendor contracting. Contracts were sometimes awarded directly by recommendation of the Director even though the regulations called for competitive bidding. About 30 percent of the directors and representatives admitted to having suffered the loss of food, materials or equipment.

3.65 Regarding the purchasing process, both programs feature significant variations in the prices of the most important products purchased by the centers, with unit prices exhibiting differences of up to 100 percent between centers. As will be seen in Chapter 6 this is not usual and particularly in the case of food could be entirely due to differences in local prices rather than any sinister reasons.

Personnel Management

3.66 The personnel needs of both programs are different. In addition to directors and community representatives required by both programs, the CE program requires cooks and janitors, whereas the CEN-CINAI program requires administrative staff, personnel with teaching skills, as well as staff specialized in nutrition and other health fields. In this program, a slight dissatisfaction was detected among representatives in relation to the

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motivation and expertise of staff. More program service and administrative staff are needed, and community work in urban areas needs to be encouraged. In the CE program, general satisfaction was expressed with personnel motivation, expertise and compliance, but a shortage of administrative staff was highlighted.

E. Quality and Impact Assessment

3.67 The objective of the present section is to enhance the information available related to the quality of program services, and the impact of such services on the beneficiary population. The analysis is based on program expenditure data, and on program revenue and expenditures, and from comments by representatives of beneficiary households surveyed by the PETS.

Quality

3.68 In the CEN-CINAI program, quality was assessed for the three types of services: food distribution (extramural), childcare (integral care), and meals (food service). The highest dissatisfaction was with food distribution, with 26 percent of the beneficiary households being dissatisfied, claiming it is insufficient to meet the needs of their children. There were few complaints on distribution irregularities, while the highest satisfaction was with integrated care: 85 percent of the beneficiary households responded that the service is provided regularly and 66 percent considered the quality “good” or “very good.” The recommendations included expanding the schedule, increasing personnel, and encouraging greater parent participation.

3.69 Satisfaction was also high with the workshops offered by some CEN-CINAI, both for parents and for children. Although some did not answer, most users (62 percent) considered their quality as “good” or “very good.” In the school lunch program, most mothers of beneficiary children ranked the quality as “good” and “very good” (77 percent), especially on the quality of food and the frequency of service, followed by “regular” (19 percent). Finally 96 percent of the respondent mothers expressed interest in continuing to receive the service.

Impact

3.70 Despite data limitations, some analysis on the impact of the two programs was possible. Two approaches were used: (i) estimating the extent to which the programs target poor households using INEC’s broad household and expenditure survey and (ii) enquiring from beneficiaries as to their satisfaction with the programs. A summary of the results for each program follows.

3.71 For the childcare program, the results were grouped into three categories corresponding to the three main objectives: (i) to reduce malnutrition among children during pregnancy, breast-feeding or before attending school; (ii) to facilitate employment opportunities for their mothers; and (iii) to improve quality of life among children by tending to the health and socio-economic needs of their core families through workshops.

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3.72 On the malnutrition front, the survey found very few cases of severe malnutrition but found that the percentage of beneficiaries with mild malnutrition ranges between 19 to 37 percent suggesting that the program is fairly well-targeted and seems to prevent severe malnutrition. However, information to determine the extent to which it was the CEN-CINAI that prevented severe malnutrition or reduced the incidence of mild malnutrition was not available. On the effectiveness with respect to allowing mothers to work, the program appeared to be fairly successful. Sixty-five percent of mothers stated that the program helps them maintain or obtain jobs, although the unemployment rate for women in rural areas was still high (36 percent), reflecting a combination of the limited job market and the limited coverage of the integral care service in rural areas.While services have grown over the last three years, opinions were divided as to their quality. The majority (53%) cited improvement, and others claimed they had remained stable (35%). Finally, while most directors and representatives felt that citizen participation had remained stable (48% and 42%, respectively) others claimed that it had decreased (21% and 24%, respectively). This explains why parents and representatives would like to better involve parents in CEN-CINAI activities.

3.73 The impact of the school lunch program was evaluated in terms of the perceptions of directors and community representatives as to the extent the program met its three fundamental objectives: (i) improving the nutrition of children; (ii) improving school attendance; and (iii) improving learning capacity. Because no information on groups of students was available, it was not possible to make an objective evaluation as to whether the CE program improved nutrition. Directors and community representatives did not perceive that it did. Most beneficiaries felt that attendance and learning did improve as a result of the program. However, 26 percent of them stated that the program was not indispensable for their family wellbeing, which is consistent , which is consistent with the fact that the school lunch program has broad coverage and includes many non-poor. As to the extent the quality has improved over the last three years, while most directors (65 percent) felt quality had improved, about half the representatives indicated it had remained stable

3.74 Finally, in order to decide on the desirability of proceeding with the next phase of the programs,, it is crucial to continuously evaluate the nutritional effects on beneficiaries in both programs, as well as the effects on class attendance and school performance in the case of the school lunch programs, and the psycho-motor development of the children and labor insertion of beneficiary parents in the case of the CEN-CINAI program.

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Chapter 4 ACHIEVING A GOOD ROAD NETWORK

4.1 This chapter analyzes the current situation of Costa Rica’s road network and concludes that it has suffered from long years of neglect and underinvestment. The GDP share of public expenditures in road infrastructure decreased significantly from its 1984 peak of 2.1 percent to around 0.6 percent between 1999 and 2005. Reasons for the decline have been incomplete budget allocations or transfers of legally mandated funds—a situation that the government began correcting since 2006. A simulation of these resources for the next 14 years showed that their full use by the road agencies could theoretically cover the maintenance and rehabilitation needs. However, even under these assumptions, additional funding would be required for new construction and widening of roads, as well as for bridges and urban projects.

4.2 Apart from funding constraints, considerable management, technical and human resource constraints remain, which prevent road agencies from fully spending the assigned funds or utilizing them effectively. To resolve this for the national roads, the Ministry of Public Works and Transport (MOPT) could utilize the technical skills in CONAVI and the national road research laboratory (LANAMME), as well as external assistance, to develop a road maintenance strategy based on up-to-date industry standards and international best practice. Broader use could be made of performance-based management contracts in the maintenance of roads. Municipalities, responsible for cantonal roads, could significantly benefit from training and assistance in: (i) planning, implementation and supervision of works, (ii) budget and financial management, (iii) preparation and processing of funding requests, and (iv) contracting with the private sector.

4.3 The legal framework for public-private partnerships in Costa Rica is quite advanced and provides an effective basis for private participation in the roads sector. Despite this, no private road concessions or long-term performance-based rehabilitation and maintenance contracts have begun implementation yet. The reasons have been a lack of sustained political support and consensus and a lack of capacity and expertise to effectively manage public-private partnership arrangements. Public-private partnerships in the sector could be promoted by determination of a political “champion”, thorough design of processes, via capacity building on the basis of other countries’ experiences, and by a clearer definition of institutional roles and coordination mechanisms. Some additional legislative modifications, already drafted and considered in Congress, could further enhance the prospects for private participation.

A. Network Overview

Institutional framework

4.4 Costa Rica reformed its organizational structure for the road sector in 1998 as part of its reform of the Ministry of Public Works and Transport (MOPT). The reform created several administrative entities under the auspices of MOPT. These included (i) the National Roads Council (CONAVI), which was responsible for road construction and maintenance of the national road network, (ii) the National Road Safety Council

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(COSEVI), entrusted with road safety, and (iii) the Public Transport Council (CTP), which designs regulations and policy.64 Highway design and capacity planning remained with MOTP. The intention was to establish an institutional framework that would more clearly focus on the needs of the sector and be endowed with executive powers to speed up processes and increase efficiency in key areas such as tendering and contracting for road maintenance.

4.5 Despite such institutional specialization, the quality of roads did not improve. The reforms failed to meet the objective of maintaining a sustainable, safe and structurally sound network. In particular, problems with contract execution continued as the reforms failed to establish a mechanism for enforcing accountability.65 There were no legal or financial instruments for demanding or enforcing increased efficiency and service delivery, in part because CONAVI is essentially a government department. For instance, in spite of a large number of technical audit reports showing that CONAVI failed to perform, no action was taken to make MOPT and CONAVI accountable.

Road network classification

4.6 The total length of Costa Rica’s road network is estimated at 35,709 kilometers (Table 4.1).66 Paved roads account for 26 percent of the network, while 74 percent of roads are unpaved (earth or gravel). Costa Rica’s roads have been classified into two categories: (i) the “national road network,” consisting of 7,435 kilometers, of which 62 percent is paved and (ii) the “cantonal road network,” covering 28,274 kilometers, 88 percent of which is unpaved. The national paved network is under CONAVI’s management, while responsibility for the cantonal network lies with municipalities. The role of the national non-paved network is not well defined: the responsibilities for its upkeep are not clear, an inventory of roads is not available, and maintenance of these roads appears to be largely neglected.

Table 4.1: Road Network, 2005 Description Distance (km)

Total 35,709 Paved 8,994 Unpaved (earth and gravel) 26,715

National Road Network (CONAVI-managed) 7,435 Paved 4,643 Unpaved (earth and gravel) 2,792

Cantonal Road Network (Municipalities-managed) 28,274 Paved 4,351 Unpaved (earth and gravel) 23,923

Source: MOPT (2006).

64 In addition to the Civil Aviation Council (CETAC) and the National Concessions Council (CNC). 65 See, for example, Mrawira (2006) for more detail. 66 MOPT 2006.

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4.7 National roads are meant to include the trunk network, connecting urban areas, while cantonal roads include the feeder roads, as well as urban roads. For practical and incentive considerations, national roads are the responsibility of CONAVI, while feeder and urban roads are the responsibility of the relevant municipality. Over the last 20 years, urban expansion and increased urbanization of the rural sector, coupled with the growth of new activities, has resulted in many of the roads being misclassified. The government is currently carrying out a reclassification of roads. This should enhance investment planning, allow identification of priorities, facilitate more effective coordination of road network management, and ease identification of technical assistance needs.

Road network quality

4.8 Until 2002, there was a lack of solid technical criteria for road quality evaluation, which limited effective planning and investment programming. Since 2002, LANAMME,67 which is responsible for quality control, has developed scientific studies to determine the quality of roads, based on established international methodologies and technical standards. However, these road quality assessments have focused primarily on paved roads of the “national network.” Based on structural capacity standards,68 only 11.6 percent of the national paved network is in good condition, while 64 percent of the network is in poor or very poor structural condition (Figure 4.1).69 Moreover, more than two-thirds of the national paved roads were categorized as “mediocre” or “very poor” according to their smoothness or International Roughness Index (IRI). The latter is a crucial determinant of vehicle speed and operating costs, and thus transportation charges.

Figure 4.1: Quality of National Paved Roads, by Province (2006)

0%

10%

20%

30%

40%

50%

60%Good Regular Poor Very Poor

Good 11,6% 17,4% 7,9% 4,6% 3,8% 7,2% 23,9% 11,6%

Regular 21,9% 29,2% 22,5% 15,6% 12,2% 11,9% 27,3% 39,0%

Poor 29,9% 30,1% 35,8% 34,5% 31,5% 24,8% 19,6% 39,1%

Very Poor 33,9% 22,9% 33,8% 43,9% 48,9% 56,0% 17,5% 10,4%

NATIONAL San José Cartago Alajuela Heredia Guanacaste Puntarenas Limón

Source: LANAMME (2006b).

67 LANAMME is the National Laboratory for Materials and Structural Analysis at the UCR. 68 Structural capacity refers to the ability of the road to support vehicle transit load (the FWD indicator). This is the principal long-term indicator for the status of road infrastructure and is a key determinant for maintenance costs and schedules. 69 LANAMME (2006b).

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4.9 Costa Rica lags behind other Latin American countries in the quality of its main road network. For example, in 2005, paved roads in poor condition accounted for only 21 percent and 8 percent in Mexico and Colombia, respectively. However, rapid progress is possible. In 1994, 57 percent of Mexico’s roads were found to be in poor condition.

4.10 According to LANAMME, there has been little progress in road quality in recent years. Between 2004 and 2006, the share of roads in good condition increased by just 0.8 percent, while roads in regular condition increased by 0.5 percent, based on an assessment of about 81 percent of the network (Table 4.2). However, if roads that were unable to be assessed because of their advanced stage of deterioration are also included, the share of poor and very poor roads increased by about the same degree. Such roads accounted for about 1.5 percent of the total length assessed in 2006.

Table 4.2: Structural Quality Comparison of National Paved Roads, 2004-2006

Road Quality (FWD Index, Percent of Assessed Roads)

Road Length Assessed

(km) Good Regular Poor Very Poor

Not Assessable due to Deterioration

2004 3,776.8 13.6 22.1 29.5 34.8 0

2006 3,776.8 14.4 21.6 29.8 34.2 1.5

Source: LANAMME (2006b).

4.11 Among provinces, Alajuela, Heredia and Guanacaste suffer from the worse roads—less than 10 percent of their paved road networks is in good condition, despite the importance of Alajuela and Heredia in being Export Processing Zones and the importance of Guanacaste as a tourist destination. The growth of tourism and export competitiveness in Guanacaste, in particular, would be seriously affected by poor road infrastructure. From a regional point of view, only 11.2 percent of paved roads in the Central Region of the country are of good structural quality, even though this region generated more than 80 percent of the country’s export earning in 2006 (Figure 4.2). The Chorotega region faces similar road infrastructure constraints to the development of its tourism potential. In contrast, 57 percent of the roads in the Central Pacific region—another priority area for tourism—are of good or regular quality.

4.12 The quality of the cantonal road network is more difficult to assess. According to available data, only 8.6 percent of cantonal roads are in good condition, while 47 percent are in poor or very poor state (Table 4.3). However, taking into account the substantial portion of roads in regular condition (44 percent), the cantonal network appears to compare favorably with the national network. Moreover, the quality of paved cantonal roads seems to substantially exceed that of the paved national network, with about 25 percent in good and 64 percent in regular condition.

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Figure 4.2: Quality of National Paved Roads, Exports and Tourism, by Region (2006)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Roads in Good Quality 11,2% 11,6% 3,1% 29,5% 11,1% 19,7%Roads with Regular Quality 19,0% 39,0% 13,9% 27,3% 11,9%Exports 80,4% 10,2% 3,2% 2,2% 2,0% 2,0%

Tourism (Room Availability) 35% 5% 8% 24% 24% 3%

Central Huetar-Atlantica

Huetar-Norte Central Pacific

Chorotega Brunca

Source: LANAMME (2006a), PROCOMER (2007) and ICT (2006).

4.13 However, the comparison between the national and the cantonal network is misleading, as the information on the quality of cantonal roads is far inferior to that for paved national roads. Quality measurements on cantonal roads, except for the most important ones, are unreliable. Measurement methods do not generally follow strict international norms as they do for the paved national network, and many municipalities lack equipment and human resources to properly carry out road quality assessments. The quality of the cantonal road network is likely to be substantially below what is reported in Table 4.3. A much larger share of the non-paved cantonal roads is probably in poor or very poor condition. This conclusion is supported by information included in the National Development Plan 2006-2010, which suggests that currently only about 13,350 km or 47 percent of the cantonal road network is being maintained on a regular basis.

Table 4.3: Costa Rica: Quality of Cantonal Roads (2006)

Total Paved Not Paved

Condition Km Percent Km Percent Km Percent

Good 2,436.6 8.6 1,076.2 24.7 1,360.4 5.7

Regular 12,579.0 44.5 2,766.0 63.6 9,813.0 41.0

Poor 9,669.7 34.2 467.5 10.7 9,202.2 38.5

Very Poor 3,589.0 12.7 41.3 1.0 3,547.7 14.8

Total 28,274.2 100.0 4,350.9 15.4 23,923.3 84.6

Source: MOPT (2006).

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B. Roads Expenditures and Institutional Issues

Size and evolution of roads expenditures

4.14 The GDP share of public expenditures in road infrastructure decreased significantly from its 1984 peak of about 2.1 percent of GDP, remaining well below 0.5 percent during the 1990s, and rising slightly thereafter, fluctuating around 0.6 percent since 1999 (Figure 4.3). Between 1990 and 2005, annual expenditures in roads averaged US$52 million.70 However, they have risen since and are estimated to be 0.75 percent of GDP in 2007. While these figures are still projections, this level of expenditures has a good chance of being attained as the 2007 budget allocation did—for a change—include allocations for CONAVI (US$140 million) and the municipalities (US$32 million) as required by law.71 For the 2008 budget the government has again proposed a full allocation of designated resources again, including US$160 million from the fuel tax, and intends to complement these funds with a US$80 credit from BCIE. This represents a clear contrast to recent years in which budget allocations remained consistently below the legally designated resources.

Figure 4.3: Costa Rica – Evolution of Public Expenditures on Transport Infrastructure

0.0%

0.5%

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1983

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xpen

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Source: Ecoanálisis elaboration with data from Ministry of Finance. 4.15 Between 1998 and 2006, CONAVI spent US$622 million on construction and maintenance of the national road infrastructure, i.e. about US$69 million annually (Table 4.4). About 57 percent of these expenditures were on road maintenance, with the balance on road construction. Expenditure information on cantonal roads, which are only

70 Ecoanálisis estimates, based on data from the Ministry of Finance. 71 The law stipulates that certain revenues of fuel and vehicle taxes need to be allocated to roads.

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available since 2002, amounted to US$76.5 million (about US$15 million annually) between 2002 and 2006. Most of this was for maintenance on unpaved roads.

Table 4.4: CONAVI´s Road Expenditures (National Paved Network, 1998-2006) (US$ ‘000)

Year 1998-2000

(ave.) 2001 2002 2003 2004 2005 2006 Maintenance 86,261 59,244 27,814 56,978 44,235 39,503 43,262 Construction 34,456 53,099 33,528 30,078 31,179 42,335 40,495 Total 120,717 112,343 61,342 87,055 75,414 81,838 83,758 Source: CONAVI.

Funding Sources and Issues

4.16 Road infrastructure expenditures are funded mainly via taxes on fuel, representing around 70 percent of the road budget, followed by vehicle taxes (20 percent) and tolls (10 percent). A 2001 fuel law (Law 8114) stipulates that 30 percent of taxes on fuel are to be dedicated to road financing, of which 75 percent is earmarked for the Road Fund—CONAVI’s principal funding source.72 The remaining 25 percent is assigned to municipalities for cantonal network maintenance. In addition, Law 7798, which created CONAVI in 1998, and Law 7088, passed in 1987, requires 50 percent of total vehicle tax collection to be transferred to CONAVI. CONAVI also receives 100 percent of toll revenues.73 The Road Fund, Cantonal Road Fund and Toll Fund are simply accounts through which budgetary resources are channeled to CONAVI and the municipalities for road activities. The funds are not legal entities with their own independent management and oversight structures, as is the case in some countries.

4.17 Between 1998 and 2006, CONAVI received less than three-quarters of the tax revenues earmarked for the Road Fund—US$ 658 million out of a total US$894 million collected (Figure 4.4).74 The government withheld the balance. Had this not happened, CONAVI could have invested a much-needed additional US$25 million annually into road maintenance, which is equivalent to a 37 percent increase. The lack of these funds has been an important obstacle to road infrastructure development. Essentially, when faced with a fiscal squeeze, successive governments have found it easier to reduce allocations to road infrastructure than other activities. There appears to be a change in priority with the current government, which increased budgetary allocations to the sector in 2006 and announced that all of the Road Fund resources would be transferred to CONAVI in 2007. Based on information to date, this appears to be the case.75 The government also intends to increase toll revenues in the future by introducing electronic tolling.

72 Six percent of the Road Fund resources are distributed to the Courts of Law and three percent to LANAMME. 73 In addition to tax funds, CONAVI also receives some non-tax revenues. However, they are tiny, amounting to just US$200,000 in 2006. 74 Ecoanálisis, based on data from CGR and CONAVI. 75 See www.mopt.go.cr.

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http://www.mopt.go.cr/

Figure 4.4: CONAVI´s Revenues and Expenditures, 1998-2007

0

20

40

60

80

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120

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US$

Mill

Ion

Available Funds (by Law) 37 84 120 124 97 103 106 105,3 117,6 140,2

Funds Transfered to CONAVI 8,0 36,0 79,3 97,0 90,0 83,0 71,9 98,2 98,2 140,2

Toll Funds 7,8 6,8 5,6 5,6 5,9 8,1 7,9 7,2 7,3 10,3

Total Public Funds 15,8 42,8 84,9 102,6 95,9 91,1 79,7 105,4 105,4 150,5

Investment on Roads 1,94 39,49 79,29 112,34 61,34 87,06 75,41 81,84 83,76 150,5

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Note: (1) In 2005, CONAVI received additional US$33 million transfers. (2) Figures for 2007 are assumed to as mandated by law. Source: Ecoanálisis, based on data from CGR and CONAVI.

4.18 Having the government commit to earmarking a share of tax revenues from the fuel tax and vehicle ownership tax and all of the revenues from tolls as required by Law 7798 of 1998 and Law 8114 of 2001 would go a long way to reverse the decline of the Costa Rica’s road network. Several countries in both developed and developing countries have established or are actively considering establishing road funds to mitigate road maintenance problems due to insufficient funding. They include Philippines and Lao PDR in East Asia; Benin, Ethiopia, Ghana, and Kenya in Africa; Uzbekstan in Central Asia, and Guatemala, El Salvador, and states of Brazil in Latin America. Among developed countries, the United States, Japan and New Zealand have set up such funds. These funds aim at bringing roads into the marketplace, putting them on a fee-for-service basis, establishing surrogate market discipline and managing roads like a business. These so-called second-generation road funds operate on the principle that road maintenance should be financed by road users. They are designed to be budget neutral.

4.19 Other advantage to these road funds is that they typically have a governance structure and oversight function that includes participation by users, in addition to the government. Having such an independent road agency would allow decisions on road rehabilitation and maintenance to be made on technical and economic grounds rather than in the political realm, ensuring greater transparency making more effective use of resources. This is an option that Costa Rica could explore. Technical assistance will be required to evaluate the feasibility of the proposal, to recommend on the appropriate organizational structure, and to see the extent to which CONAVI can be folded into it.

CONAVI’s Institutional and Operational Constraints

4.20 Insufficient budgetary allocations are only one of the reasons behind the poor performance of the national paved road network. Operational, institutional, and

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administrative constraints are equally, if not more, important. Scaling up road network expenditures without addressing these constraints does not make economic sense.

4.21 At first glance, CONAVI appears to be reasonably efficient. Between 1998-2006, it spent just 3 percent of income on administrative expenditures, staying well below the 5 percent ceiling stipulated by law. Over this period, CONAVI spent an average of 86 percent of its budgetary allocation. However, the quality of the national paved road network, as measured by smoothness, has deteriorated since CONAVI’s creation and the structural quality of the paved road network has failed to improve. This was partly because of inappropriate managerial decisions on the choice of expenditures as well as operational and institutional problems discussed below.

4.22 At first glance, CONAVI appears to be reasonably efficient. Between 1998-2006, it spent just 3 percent of income on administrative expenditures, staying well below the 5 percent ceiling stipulated by law. Over this period, CONAVI spent an average of 86 percent of its budgetary allocation. However, the quality of the national paved road network, as measured by smoothness, has deteriorated since CONAVI’s creation and the structural quality of the paved road network has failed to improve. This was partly because of inappropriate managerial decisions on the choice of expenditures as well as operational and institutional problems discussed below.

4.23 A recent report by the Comptroller General also concluded that CONAVI has not achieved its main stipulated objective, which is to manage the Road Fund resources efficiently, and to design and implement a comprehensive road development program. The report (CGR 2006) identified the following reasons for this failure:

• Absence of a clear government policy for road infrastructure development; • Limited planning and lack of an updated road inventory: the 2003-2007 plan

was not implemented, neither was it used for decision making; • Insufficient coordination between MOPT, CONAVI and other public

organizations such as COSEVI; • Unavailability of modern information systems for effective management and

accountability; • Unequal and inconsistent remuneration scheme for employees; • Political interference over project development and resource allocation

decisions; and • Inefficient internal control systems, with limited use of external audits.

4.24 Dozens of technical audit reports carried by LANAMME since 2001 also identified several factors contributing to the deterioration of the national paved roads network:

• Lack of accountability: CONAVI appears to be immune from executive directives to require it to deliver better roads;

• Frequent changes in staffing and lack of critical mass in needed expertise: following every election, CONAVI leadership and priorities are changed, which makes strategic planning or program continuity difficult;

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• Excessive bureaucratic oversight and control, resulting in non-competitive pricing, contractual inefficiencies and poor project performance;

• Inappropriate division of roles and functions between CONAVI, which deals only with road maintenance and construction; and COSEVI, which deals with transportation safety, yet fails to install road signs or promote other tools to improve safety performance and cost-effectiveness.

4.25 Thus, beyond funding constraints that have been prevalent over the past few years, the main problems affecting the management of the national paved road network are the lack of sound technical selection criteria for road investment and maintenance planning and maintenance by CONAVI. Basic questions, such as what type of maintenance or repair to do for which pavement type, or which section of road to invest in at which particular time, are addressed based on non-technical and thus less cost-effective considerations. As stated by Mrawira (2006), most of the road expenditures in Costa Rica are wasted on major rehabilitation and reconstruction of very poor roads, while less deteriorated, but already structurally deficient pavements receive only thin overlays that are not suitable to stop a further decline in road quality. Current maintenance methods are not consistent with the basic principles of pavement conservation that represent international good practice.

4.26 Thus, simultaneously with resolving the inadequate and volatile funding for road maintenance, institutional capacity and management issues need to be tackled. Under MOPT leadership, CONAVI could develop a road maintenance strategy based on up-to-date industry standards and international best practice. LANAMME, whose work on improving road sector design and management practices needs to be more effectively utilized, could play a helpful role in formulating the strategy. Road maintenance and rehabilitation activities based on sound technical criteria and cost-benefit principles could greatly improve the design, feasibility, quality of materials, and durability of construction. Also, CONAVI’s capacity for contracting with private companies could usefully be enhanced, with particular emphasis on the introduction and broader use of performance-based management and maintenance of roads (i.e., CREMA). Finally, MOPT needs to urgently subject the national non-paved road network to a thorough reconnaissance and to clearly assign responsibility for its management and maintenance.

Operational constraints of municipalities

4.27 Cantonal roads suffer from some of the same budgetary problems as national paved roads. First, the allocated budget is well below what is due to them under the road fund arrangement—over 2002-2006, they received less than four-fifths (Table 4.5). Second, not the entire reduced amount was transferred to them. During the budget crisis of 2002, only 55 percent of the budgeted amount was transferred; in other years it ranged from 93.5 percent to 96.8 percent. Thirdly, municipalities were unable to spend even what was transferred to them. This was mainly because municipalities did not have the implementation capacity; they are often unable to prepare feasibility studies that are necessary to request a transfer of budget resources for larger investments.

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Table 4.5: Cantonal Road Network Funding, 2002-2007 (US$ million, unless otherwise specified)

2002 2003 2004 2005 2006 2007a

Tax Resources due the Cantonal Road Network 27.29 28.85 26.97 26.99 28.27 31.77

Budget Allocated to Municipalities 21.27 15.21 25.80 26.70 19.06 31.77

Budget Transferred to Municipalities 11.6 14.22 24.59 25.99 18.45 n.a.

Share of Budget Transferred to Budget Allocated 54.7% 93.5% 95.3% 97.4% 96.8% n.a.

Actual Expendituresb 7.7 8.6 11.6 n.a. n.a. n.a. a. Projected. b. Figures for expenditures from purely budgetary sources for 2005 and 2006 were unavailable. Source: CGR (2006) and MOPT’s Municipal Management Office.

4.28 The lower than mandated budget releases appear to have been well justified. Because of these technical and administrative constraints, municipal road expenditures do not appear to be spent efficiently. Only one-third of municipalities have an updated road inventory that is based on solid scientific criteria and consistent monitoring. Engineering capacity in municipalities is scarce and not specialized enough. Despite these shortcomings, municipalities carry out 80 percent of cantonal road works; only about 20 percent are contracted out to private sector companies, according to a CGR study (CGR 2006). The same study identified several managerial and operative obstacles to effective road management, including:

• Limited understanding of the stipulations of Law 8114 on budgetary rules; • Inadequate budget planning and management skills; • Insufficient capacity and experience in the preparation of funding requests; • Lack of human and financial resources for long-term road development

planning; • Limited technical evaluation and quality control capacity; and • Insufficient capacity for private contract management.

4.29 Additional technical assistance to strengthen the capacity of municipalities to address some of the issues in the bullets above would be very worthwhile. Municipalities could usefully receive training and assistance in: (i) planning, implementation and supervision of works, (ii) budget and financial management, (iii) preparation and processing of funding requests, and (iv) how to contract with the private sector.

4.30 Cantonal roads have received a recent boost in the form of a loan from the German Development Bank (KfW) to rehabilitate rural roads unpaved roads. A group of municipalities with high levels of poverty have been targeted, with a total 1,109 kilometers of roads to be rehabilitated. Since the KfW loan is for $23.3 million and is co-financed by MOPT (US$7 million), municipal funds (US$3.8 million) and communities’ participation (US$1.9 million), the average cost per kilometer works out to US$32,529. In addition, an IADB-funded project will provide assistance to municipalities in the areas identified above to improve cantonal roads.

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C. Private Participation in Roads

4.31 For over a decade now, Costa Rica has sought to attract private sector financing and contracting capacity to expedite the development of key logistics corridors. Several laws to promote private participation in road infrastructure investments and management were passed in support of the initiative. These included: the Public Procurement Law, which allows for private contracting, and the Concession Law, issued in 1994 and amended in 1998, which specifies the framework for public- private partnerships (PPP) and explicitly permits and regulates the use of several alternatives for private funding, such as trust funds, shadow tolling, or second-floor banking (Box 4.1).76 Yet another law sets up a regulatory authority. The above laws have been buttressed by the Competitions Law to protect consumers against anti-competitive behavior and the Expropriation Law to protect investors against arbitrary expropriation of assets.

Box 4.1: Legal Framework for Private Participation in Infrastructure/Roads 1994 Concession Law (Ley de Concesión de Obra Pública) 1995 Public Procurement Law (Ley de Contratación Administrativa (LCA)) 1995 Competition Law (Ley de Promoción de la Competencia) 1995 Expropriations Law (Ley de Expropiaciones) 1996 Law on Public Services Regulatory Authority (Ley de la Autoridad Reguladora

de los Servicios Públicos) 1998 General Concession Law for Public Works with Public Services (Ley General de

Concesión de Obras Públicas con Servicios Públicos [LGCOP]) 1998 Law Establishing the National Roads Council (Ley de Creación del Consejo

Nacional de Vialidad [CONAVI]) 2006 Preparation of Reforms to LCA and LGCOP 2007 Approval of LCA Reform; LGCOP Reform Postponed

Source: Ecoanálisis. 4.32 Despite the efforts above, no private road concessions or long-term rehabilitation and maintenance contracts have begun implementation yet. Private participation in the road sector has been limited to traditional public works contracts with MOPT, CONAVI, and the municipalities for maintenance, conservation, and construction. No efforts at long-term, performance-based contracts (CREMA) for road maintenance have been used by CONAVI, let alone by the municipalities. No major public-private partnership has succeeded in raising private financing for the modernization of part of the road network. Very few projects have even been designed for public-private risk sharing in roads and none has begun implementation as yet, although two projects (San José-Caldera and San José-San Ramón) are expected to start in 2008 (Table 4.6). Even so, it will have taken these two projects seven and five years respectively to get to the stage of starting construction from the time invitations for bids were sent out. Unless the concession process can be speeded up and made less costly, it will not be an attractive and reliable option for raising additional funds to finance road investment and maintenance.

76 Second-floor banking means that international financial organizations or development banks serve as trustees of local banks and allocate resources to road investment projects.

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Table 4.6: Private Road Concessions in Costa Rica

Project Length (Km)

Concession Period (Years)

Investment (US$ Million) Status

San José – Caldera Road 78 25 140 Invitation to bid in 1998. Construction start in 2008

San José - San Ramón Road 65.8 25 170 Invitation to bid in 2002. Construction start in 2008

San José – Cartago Road 20.5 30 86 Invitation to bid in 2007.

San José – Limón Road 156 25 Alternative 1: 95 Invitation to bid in 2004. Alternative 2: 102 Alternative 3: 259

Ring Road (Greater San José) 24 25 Not available Feasibility study in 2004 Source: Consejo Nacional de Concesiones (CNC). 4.33 The legal framework for public-private partnerships is quite advanced and provides in principle an effective basis for private participation in the roads sector. After certain drawbacks of the 1994 Concession Law became evident, the 1998 LGCOP established CNC, which has responsibility for project preparation (i.e., feasibility studies, definition of tariff structures, environmental impact assessments), stipulates competitive bidding as the selection mechanism, outlines the contents of bidding documents, permits the use of concession revenues and government contributions as financing security, and provides rules and compensation mechanisms for contract modifications and cancellations.

4.34 The main reason for the little progress in public-private partnerships in the sector has therefore not been the legal framework, but the lack of sustained political support and of a “champion” for the initiative. This has impeded Costa Rica’s roads institutions such as MOPT, CONAVI, as well as CNC to develop the capacity or expertise to effectively manage a pipeline of public-private partnership arrangements from inception through to contract signing, implementation and monitoring. In many cases the institutions lack the capacity to fully understand the legal framework, let alone launch initiatives to utilize it for road construction and maintenance. This has resulted in poor project preparation, mid-way design changes entailing substantial cost increases, an undesirable outcome of attracting only bidder, and weak performance of the government as negotiating partner when confronted with issues such as late consortium changes, compensation in the case of new competing roads, and minimum revenue guarantees. A lack of coordination between the road institutions mentioned above and other key public agencies, such as the Comptroller’s Office and the Ministry of the Environment, poses additional problems. Together, these factors have perpetuated the impression among investors and operators of an unfriendly climate for private participation in the road sector, which in turn, has prevented the country from effectively competing in this market.

4.35 As the broad legal framework for public-private partnerships is quite good, the focus needs to be on building political support and developing a consensus on the useful role the private sector could play in improving road infrastructure. A champion—perhaps at CNC or within MOPT—should be given a strong mandate and the authority on behalf of the government to coordinate concession processes and shepherd them through the

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complex assessment and decision stages. The champion could also help disseminate the experience of PPPs in LAC. A study tour to Chile and Brazil, which have had considerable private sector involvement in roads via concessions and performance-based management contracts, would be very useful, especially if the conclusions could receive good press coverage. The tour should include both policy makers and technical staff of MOPT, municipalities and CNC. The participants would learn how private sector involvement is managed in these countries and which process improvements would be desirable at home. They could more fully exploit the opportunities in Costa Rica’s legislation and advise on adapting processes and regulations to allow more effective private sector participation. More effective process management would not only entail better-defined responsibilities and better coordination, but also the establishment and implementation of clearer rules below legislative level. This would in particular imply the specification of risk allocation criteria in bidding documents and guidelines for difficult events such as design changes, modifications in bidding consortia or non-achievement of financial close.

4.36 Notwithstanding the essential process improvements laid out above, experience to date has also shown a need for legislative modifications in specific areas including joint and several liabilities in project financing structures, partial guarantees for investors and/or lenders, transfer of concessions, streamlining of bidding documents/procedures, expropriation, tax regime, and the administrative structure and role of CNC. These modifications have been recognized as legislative weaknesses and draft legislation incorporating many of these changes in an amended LGCOP has already been prepared and is being considered in Congress.

4.37 Finally, increased use of medium to long-term performance-based contracts can greatly help to improve road management and maintenance. They are being successfully used in an increasing number of countries to improve efficiency and reduce road rehabilitation and maintenance costs. For example, Argentina, Uruguay, Chile, Brazil, Guatemala and Peru have all used them successfully. To promote this activity and ensure its success, MOPT should lead an effort to train staff in relevant sectoral institutions on such matters as interpretation of the procurement legislation, preparation of model agreements and dissemination among private contractors.

D. Roads Sector Expenditure Needs and Financing Requirements

4.38 The National Development Plan 2006-2010 prepared jointly by the Sectoral Planning Department of MOPT and CONAVI, had three main goals for 2010 relating to road infrastructure:

• Thirty percent of the national paved network was to be in good condition. • An additional 5,000 km of the cantonal network was to be routinely

maintained. • The share of public expenditures in transport infrastructure as a percentage of

GDP was to be increased from 1 percent to 2 percent.

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4.39 To achieve these goals, the Plan envisaged road expenditures of US$1,001 million (Table 4.7). The Plan assumes that tax revenues under the road fund were to finance less than half of the expenditures. Two-fifths was expected to come from private concessions and the remainder from external borrowing by the government.

Table 4.7: Road Infrastructure Goals of the National Development Plan 2006-2010 Strategic Action Goals for 2007-2010 Estimated Budget

Private Concession of San José-Caldera, San José-San Ramón and San José-Cartago highways

100% construction of three projects

US$270, US$126 and US$76 Million, respectively

5,700 Km under maintenance US230 Million 475.5 Km under rehabilitation US$99 Million

Rehabilitation and maintenance of the National Strategic Road Network

49 new bridges built US$38 million

4.40 The plan is ambitious, representing significant expenditure increases in road expenditures as compared to the last two decades. Expenditures on roads by CONAVI and municipalities were only slightly more than US$100 million in the first year of the Plan, well under half the annual average envisaged under the Plan. This was due to: (i) lower than legally stipulated allocations to the roads sector, (ii) delays in private investment from road concessions coming on board, and (iii) institutional obstacles that did not allow CONAVI and municipalities to fully utilize their road budgets. However, the government has recently taken decisive measures to remove at least the traditional funding constraints by fully budgeting all legally mandated resources to the sector for 2007. This brought total available funding for 2007 to about US$180 million, much higher than in 2006, but still well below the targeted US$250 million annual average for the plan period. Given the institutional issues described earlier, it will be difficult to spend even these amounts effectively. While tackling the institutional issues is key to moving towards Plan goals, the goals themselves appear out of reach now given the slow start on private concessions and since addressing the institutional issues takes time

Getting to good roads: point estimates on needed expenditures

4.41 Only 11 percent of Costa Rica’s national paved road network and 9 percent of the cantonal road network is in good structural condition. The condition of unpaved national roads is much worse. An interesting exercise is to calculate what it would take in terms of expenditures to get 100 percent of the road network to good structural condition. This is an unrealistic goal and may not even be technically feasible or even desirable, given institutional and implementation constraints, insufficient traffic on some roads, and other

890 Km rehabilitated US$24 Million Improvement of the cantonal network quality 18,346 Km under maintenance US$118 Million

6.7 Km of bridges under maintenance

US$20 Million

Source: MIDEPLAN (2006).

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demands on scarce public resources. Nevertheless this academic exercise could allow one to get an upper bound on the broad magnitude of needed expenditures.

4.42 This is a difficult and imprecise exercise, mainly because there is no long-term plan providing a realistic perspective of expenditure needs and because data on road quality is incomplete. Furthermore, a long-term planning model for road investment and maintenance is not available; currently, planning does not extend beyond the four-year mandate of the respective government. As a result, historic dollar expenditures have been used. To get roads, particularly paved roads, to reach “good” structural condition, the costs per kilometer ranged from US$35,000 for maintenance to between $1.5 million and $4.0 million for structural reconstruction (Table 4.8).

Table 4.8: Estimated Road Construction, Maintenance and Rehabilitation Costs (US$000 per Km)

Type of Intervention Lower Bound Upper Bound Routine Maintenance (Routine surface repair, partial resurfacing) 35 Periodic Maintenance (Periodic resurfacing) 90 Rehabilitation (Structural improvement) 150 Reconstruction, Rural (Structural reconstruction) 350 500 Reconstruction, Urban (Structural reconstruction) 1,500 4,000 New Road Construction (New construction, including

expropriation expenses) 1,700 9,000 Source: ACCCR (2006).

4.43 Based on this cost structure and the most recent quality measurements by LANAMME, this study estimated that expenditures required to bring the entire national paved road network to “good,” as measured by the FWD indicator, ranged between US$838 and US$1,065 million in 2006 dollars, equivalent to 3.8 and 4.9 percent of 2006 GDP (Table 4.9). The assumption is that all works could be carried out in the short run. If they were delayed, costs would increase due to further deterioration in the road network.

Table 4.9: Expenditures Needed to Improve the National Paved Road Network, Disaggregated by Road Condition

Current Road Quality Good Regular Poor Very Poor Total Length (km) 516.1 979.2 1,335.7 1,517.6 4,388.4 % of total network 11.6 21.9 29.9 33.9 Required intervention Routine

maintenance Periodic

maintenance Rehabilitation Reconstruction

Expected life (years) 5 5 7 over 10 Unit cost (US$000/km)

lower bound 35 90 150 350

Unit cost (US$000/km) upper bound

500

Total expenditure (US$000) lower bound

18,063.5 88,128 200,355 531,160 837,707

Total expenditure (US$000) upper bound

18,063.5 88,128 200,355 758,800 1,065,347

Source: ACCCR (2006) and LANAMME (2006b).

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4.44 From a provincial perspective, San José, Alajuela and Guanacaste require the highest share of expenditures (Table 4.10). From the viewpoint of economic activity or exports, San José and Guanacaste deserve priority in allocating scarce public resources on road expenditures. However, other non-economic goals, such as sub-regional integration objectives, rural access to markets, or level of human development, could also be used as indicators to allocate road resources. In fact, the government already allocates funds for the cantonal network based on two criteria: (i) road length and (ii) the inverse of a social development index. Historically, municipalities in Alajuela have benefited from this methodology (CGR, 2006).

Table 4.10: Province-wise Expenditures Needed to Improve the

National Paved Road Network Lower Bound Upper Bound Lower Bound Upper Bound

Province Length (km) US$000s Share in Expenditures (%) San José 791.7 125,293 152,578 15.0 14.3Cartago 392.8 76,589 96,494 9.1 9.1Alajuela 1,131.1 253,470 328,950 30.3 30.9Heredia 239.4 57,286 75,496 6.8 7.1Guanacaste 715.7 176,431 236,550 21.1 22.2Puntarenas 695.6 97,404 118,104 11.6 11.1Limón 382.3 51,247 57,202 6.1 5.4TOTAL 837,719 1,065,373 Source: ACCCR (2006) and LANAMME (2006b).

4.45 The same exercise was then carried out for the paved cantonal road network, using the same cost structure and road quality information from MOPT. According to these estimates, the lower and upper bounds to bring the cantonal paved roads to good structural condition were US$371 and US$377 million respectively, equivalent to 1.70 percent and 1.73 percent of 2006 GDP, if carried out in the short term (Table 4.11). Finally the same exercise was undertaken for the unpaved cantonal road network, using the average road costs of US$32,500 derived earlier. Assuming that most of these roads are in poor or very poor condition, this yielded a figure of US$741.5 million, equivalent to 3.4% of 2006 GDP.

Table 4.11: Estimates of Required Expenditures to Improve the Structural Quality of the Cantonal Paved Road Network

Road Quality Good Regular Poor Very Poor Total Length (Km) 1,076.2 2,766.0 467.5 41.3 4,351 % of Total Network 24.7 63.6 10.7 0.9 Unit cost (US$ '000/Km) lower 35 90 150 350 Unit cost (US$ '000/Km) upper 500 Total Expenditure (US$ '000)

lower bound 37,667 248,940 70,125 14,455 371,187 Total Expenditure (US$ '000)

upper bound 37,667 248,940 70,125 20,650 377,382 Source: ACCCR (2006) and LANAMME (2006b).

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4.46 In summary, the expenditures required to bring all roads (except national non-paved roads) to “good” structural condition are estimated to be between US$1.95 and US$2.18 billion (Table 4.12). These figures do not include the costs of any new roads or expenditures on national unpaved roads on which little data exist.

Table 4.12: Summary Point Estimates of Required Expenditures to Improve the Structural Quality of the Total Road Network

National Paved Roads

National Unpaved

Roads

Cantonal Paved Roads

Cantonal Unpaved

Roads Total Lower Bound (US$ '000) 837,707 NA 371,187 741,500 1,950,394 Upper Bound (US$ '000) 1,065,347 NA 377,382 741,500 2,184,229 Source: ACCCR (2006) and MOPT (2006).

Sectoral expenditure needs – dynamic estimates

4.47 While point estimates are useful in providing orders of magnitude of needed expenditures, dynamic estimates can capture—in a more practical and realistic manner—the inter-temporal distribution of expenditures, the re-investment and maintenance requirements, the likely availability of funds, and the institutional implementation capacity. The most comprehensive assessment of roads expenditure requirements was undertaken by ACCCR (2006). For the exercise, ACCCR considered six categories: main highways, main corridors, national paved roads, national non-paved roads, and the cantonal road network. Taking funding and capacity constraints into account, ACCCR assesses that Costa Rica will need to spend US$3,731 (in constant 2006 dollars) over the next 15 years to bring its road network to good quality levels (Table 4.13). The estimates include the necessary funds to adapt the road network to the needs of traffic patterns through extension, widening and more efficient road and traffic management. This amount is equivalent to 17.1 percent of 2006 GDP.

Table 4.13: ACCCR Estimates of Required Expenditures to Improve the National Road Network Over 15 Years

Length (km)

Required Expenditures (US$ Million) Funding Source Description

Highways with Access to GAMa 346 973 Private Concessions Main Corridor Reconstruction 899 376 External Borrowing Other Projects 781 202 CONAVI (Taxes) National Paved Roads Maintenance 2,474 1,523 CONAVI (Taxes) National Non-Paved Roads Maintenance 2,838 12 CONAVI (Taxes) Cantonal Road Network Maintenance 27,000 450 Taxes Bridges Maintenance and Construction NA 120 CONAVI (Taxes) Urban Projects NA 75 CONAVI (Taxes) TOTAL 34,338 3,731 a. Gran Área Metropolitana (Main Urban Area). Source: ACCCR (2006).

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4.48 If this amount were to be spent in equal sums each year, it would imply road expenditures of 1.1 percent of GDP in 2006, falling to less than 0.6 percent of GDP by 2020, assuming annual growth of 5 percent and constant dollar exchange rate in real terms (in recent years the Colon has appreciated against the dollar in real terms). This is quite realistic as Costa Rica has already committed public resources of about 1 percent of GDP in 2007 and given the significant private investments expected to flow to the sector starting in 2008.

4.49 However, given the large pent-up demand for network rehabilitation and upgrading, ACCCR believes that annually about US$320 million will be necessary during the first six years of the program, decreasing to US$255 million for three years and to about US$176 million for the last six years. While the figures appear to be technically sound, they imply an increase in road funding to about 1.5 percent of GDP in early years. With public funds from taxes and tolls budgeted at 1 percent of GDP, this implies that about one-third of the financing must come from private investment and external borrowings.

4.50 The ACCCR study did indeed assume that over one-third of financing would come from a combination of private investment (27.5 percent) and external borrowing (10.5 percent). About 62 percent of the resources were envisaged to come from the public sector. However, this is currently unrealistic due to the delays in starting the operation of private concessions. Moreover, institutional constraints will not allow full budget implementation, even if CONAVI and the municipalities receive all of the public resources mandated under the constitution.

4.51 Using a technically more detailed approach, LANAMME (2006a) carried out a similar exercise as ACCCR but limited itself to improving the quality of the important 4,478 Km of national paved roads. The estimated cost is US$2,587 million over 14 years in constant 2006 dollars (Figure 4.5). Investments were to grow gradually from US$30 million in 2006 to US$240 in 2017 while all roads categorized as “poor” and “regular” would reach the “good” level within four years.

4.52 Public funding could well cover this level of investment; however, there would be little left for cantonal roads, new roads, and the unpaved national network. Recognizing this, LANAMME concluded, like ACCCR, that public funding alone would not be sufficient to cover the sector’s needs: private investment via public-private partnership arrangements and external financing, especially for new roads, would also be needed.

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Figure 4.5: Estimates of Required Expenditures to Improve the National Paved Road Network, 14-Year Period (by LANAMME)

Source: LANAMME (2006a).

0

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Good 557 1679 2221 2552 2718 2894 3079 3273 3474 3682 3896 4117 4342 4479

Regular 964 0 0 0 0 0 0 0 0 0 0 0 0 0

Poor 1323 873 249 0 0 0 0 0 0 0 0 0 0 0

Annual Investment 130 140 150 160 170 180 190 200 210 220 230 240 210 157

Very Poor 1635 1926 2009 1927 1760 1584 1399 1206 1005 797 582 362 136 0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Financing requirements and options for funding

4.53 In order to evaluate the extent to which public funding sources could finance the road expenditures required to bring the road network to a structural good condition, this study projected vehicle and fuel taxes and toll revenues for 2007-2020, assuming that all legally mandated taxes would flow to the sector and assuming that growth rate in vehicle and fuel tax collections during 2007-2020 was the same (6.1 percent per year) as during 2001-2006 (Figure 4.6). The figures were then discounted by a dollar price escalation of 3 percent per annum. This resulted in a cumulative total of US$3,712 million (in constant 2006 dollars), which is roughly the same as the US$3,731 million estimated by ACCCR.

Figure 4.6: Sources of Public Financing for Road Infrastructure, 2001-2020

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Vehicle Tax 26.4 30.6 28.5 31.8 32.4 35.9 36.7 37.5 38.4 39.2 40.0 40.9 41.8 42.7 43.7 44.6 45.6 46.6 47.6 48.6

Fuel Tax 84.2 96.3 108.3 108.2 108.0 121.0 124.8 128.7 132.8 136.9 141.2 145.6 150.2 154.9 159.7 164.7 169.9 175.2 180.7 186.4

Toll Fund 5.6 5.9 8.1 7.9 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7

Total Public Funds 116.3 132.8 144.8 147.8 147.6 164.2 168.9 173.7 178.6 183.7 189.0 194.3 199.9 205.6 211.5 217.6 223.8 230.2 236.9 243.7

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: CGR and CONAVI.

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4.54 It might therefore be tempting to conclude that public funding could cover the needs of the entire road sector. However, this would be incorrect. The institutional constraints described earlier would prevent the public sector from being able to execute the entire budget. Neither CONAVI nor municipalities have been able to spend all the money allocated to them. In addition, the government may well fail to transfer the full amounts to CONAVI and the municipalities, as it has done in the past, given other priority needs on scarce fiscal resources and in case macroeconomic conditions require fiscal tightening. Also, these assumptions ignore expenditure needs for bridges and urban projects and for new construction and widening of roads in line with traffic growth and changing traffic patterns. It also fails to compensate for neglected rehabilitation and periodic maintenance: if these expenditures are not done soon, parts of the network are likely to deteriorate further, some of them quite rapidly, pushing expenditure needs in the future even higher. This deterioration in roads could negatively affect economic activity, especially export and tourism revenues, leading to a vicious cycle of lowered tax revenues, lowered road expenditures, and lowered economic activity. To reduce this risk, road expenditures could be front-loaded as recommended by ACCCR. However, this makes it even less likely that public resources financing alone could meet the enhanced financing needs or that the institutional capacity needed to implement a more ambitious investment program exists.

4.55 For these reasons it would be wise to implement measures discussed earlier to encourage private sector participation in roads both via long-term concessions and via performance-based management contracts. The potential is enormous. The 2006-2010 National Development Plan envisages concessions with a total investment volume of US$500 million. Another $500-$900 million of concession projects are past the feasibility stage and the ACCCR proposal calls for about US$1 billion. However, large-scale private investment will only be possible if the issues related to political support and changes in rules and regulations discussed earlier are addressed. Simultaneously the capacity of both CONAVI and municipalities needs to be strengthened both to award and monitor public-private initiatives and to implement the projects that they will carry out under the force account. CONAVI’s capacity for contracting with private companies should be enhanced, with particular emphasis on the introduction and broader use of performance-based management and maintenance of roads (i.e., CREMA-type contracts). Finally, in addition to increased funding for road maintenance from tax revenues, the feasibility of increasing toll revenues could be further explored. The electronic use of tolling being considered by the government holds promise.

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Chapter 5 THE POLITICAL ECONOMY OF THE BUDGET PROCESS: RULES, ACTORS AND INCENTIVES

5.1 In recent years Costa Rica has substantially updated the legal framework that rules the national budgeting system. The budget processes are well-documented, internal controls are effective, and adequate accountability mechanisms exist, thanks to an independent and capable Office of the Comptroller General (CGR). However, the budget system still suffers from many structural limitations, inadequate procedures, and technical capacity constraints. This chapter identifies these shortcomings and suggests how they might be redressed. It begins with a description of the constitutional rules and actors involved in the national budgeting process, followed by an analysis of the political economy dynamics and the fiscal outcomes resulting from such interaction. It concludes that excessive budget rigidity is a crucial barrier to strategic formulation of public policies. It has led to a repression of public investment, increased debt, and to political and legal conflict as the Executive has systematically breached legal and constitutional mandates in order to maintain macroeconomic stability. This has obstructed reform and often led to an intervention by the Constitutional Court.

5.2 Next, it analyses the different phases of the budgeting process—preparation, approval, execution, control and evaluation—and suggests several policy options. At the Executive level, the Ministry of Finance could improve planning and budget by submitting a three-year budget and an investment plan that is consistent with its five-year development plan. It could also require all entities to use the same certified accounting system and ensure consistency with budget approved figures and procurement systems. At the legislative level, Congress could usefully build up its technical capacity for meeting its obligations to independently assess budget proposals and carry out its own appraisal of budget execution and evaluation. It could also request the major decentralized entities to send annual updates on budget execution, using the standard accounting system and linking expenditures to policy objectives. In addition, Congress could be better briefed on decentralized entities by devoting a few plenary sessions each year to reviewing the CGR and Ombudsman reports. Finally, making voting decisions by Congress public would enhance transparency and accountability.

5.3 At the level of decentralized entities, CGR could provide technical assistance to the internal audit departments of the decentralized entities. It could also devote more attention to ex-post rather than ex-ante controls and make public certain stages of the budgeting process for decentralized entities now hidden from public scrutiny. Consideration could also be given to signing performance agreements with the Boards of select decentralized entities, to improving the procurement process, to assessing the technical capacity to manage government resource transfers, and to encouraging greater participation by civil society in monitoring budget execution and evaluation. Improving the budget process in this manner could do much to allocate public expenditures so as to achieve better outcomes.

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A. Budget Institutions, Actors and Fiscal Outcomes

5.4 In the last two decades public budgets in Costa Rica have been characterized by their increasing rigidity, the repression of public investments to meet fiscal targets, and the absence of sound rationale in budget formulation towards public policy objectives. Recent improvements in Central Government tax revenue, thanks to a stronger and more efficient tax collection, have eased the fiscal pressure, softening expenditure and investment constraints on public companies and institutions. However, the improvements have still not been sufficient to fund legal and constitutional mandates. Moreover, although the improved situation has enabled a decrease in the central government fiscal deficit in the last two years and tempered the impact of some expenditure triggers (such as Central Bank losses and public debt service), the improvement is fragile: continued high tax receipts depend in part on continued high economic growth.

5.5 Costa Rica’s budgets are increasingly constrained by constitutional mandates and rules, such as directives on minimum spending and earmarking. To instill fiscal discipline, the constitution also requires that expenses cannot exceed expected revenues and obliges the legislative to ensure that new mandates or calls for expenditure increases are fully funded. The articles in the Constitution apply to central and municipal governments as well as to decentralized entities consisting of decentralized institutions, public enterprises, autonomous and semi-autonomous entities and public financial institutions (Table 5.1).

Table 5.1: Government Structure and Constitutional Rules No. of

Institutions Constitutional Rules

Central Government 161 Art 176: Total expenses cannot exceed likely revenue Art 184: All expenditures require CGR approval Executive Branch1 156 Art 177: Executive is to prepare the central government budget, with

the President settling any disputes among ministries Art 180: Expenditure budget limits actions Legislative Branch2 3 Art 124: Congress must approve central government budget Art 179: Congress cannot increase expenditures without identifying

corresponding sources of revenue Art 183: CGR, while under the legislative branch, must have “absolute

functional and administrative independence from government" Judicial Branch 1 Art 177: Must receive at least 6 percent of central government revenue TSE (Election auth.) 1 Art 177: Executive branch cannot object to election budget

Decentralized Entities3 114 Art 176: Total expenses cannot exceed expected revenues Art 184: All expenses require CGR approval Art 73: Share of social security contributions earmarked for specified

decentralized agencies Art 85: Devotes resources to a special higher education fund Municipalities4 95 Art 176: Total expenses cannot exceed likely revenue Art 184: All expenses require CGR approval TOTAL 370 1. Includes 19 Ministries and 136 subordinate bodies, programs, projects, funds and directorates created by law. 2. Includes the legislative assembly and the offices of the Comptroller General and Ombudsman. 3. Includes public enterprises, autonomous and semi-autonomous institutions, and non-governmental public entities. 4. Includes 81 municipalities and their subordinated bodies. Source: Programa Estado de la Nación, 2003.

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5.6 A number of laws specify additional minimum expenditure in various areas. The budget should assign: (i) six percent of GDP for education, (ii) ten percent of revenues for municipalities, (iii) three percent for housing subsidy, and (iv) two percent for community development. In addition, specific laws stipulate that certain activities and institutions should receive a portion of taxes and fees, for example, FODESAF is to receive 20 percent of the sales tax for poverty alleviation programs; CONAVI is to receive 50 percent of the vehicle property tax; 30 percent of the fuel tax, split between CONAVI (75 percent) and municipalities (25 percent) should go to the road sector; and the forestry fund is to receive 3.5 percent of the fuel tax. In order not to exceed spending limits and given these rigidities, the government has often resorted to cutting back on public investment, putting pressure on service delivery. One of the most evident results of public investments restrictions is the deterioration in the quality of most of Costa Rica’s infrastructure services.

5.7 This budget rigidity and the lack of rationale in budget formulation are the byproduct of political dynamics, i.e. the chronic inability of the Executive to drive ambitious fiscal reforms, the reciprocal blocking among political actors and forces and the use of legal and constitutional norms that restrain public expenditure as a means to impose public policy objectives on the Executive. Successive governments have needed to borrow in order to meet constitutional mandates. The level of public debt, at over 50 percent of GDP between 2002 and 2005, makes Costa Rica one of the highly indebted countries in the region. Debt service has put pressure on inflation and interest rates, keeping both in double digits for most of the last decade.

5.8 Another consequence of the constitutional mandates is the political and legal conflict generated in attempting to get rationality in expenditures. The Executive has systematically breached legal and constitutional mandates in its efforts to achieve or maintain macroeconomic stability. This, in turn, has hardened congressional positions, with legislators increasing even more earmarking. The result is often a stalemate between the Executive and Legislative branches.

The Costa Rican Political Regime and its Implications for the Budget Process

5.9 To better understand the dynamics of the budget process, including the formal and informal powers, this section describes in greater detail some of the constitutional rules and the actors involved.77 The 1949 Constitution sets out the organization of the Costa Rican state embodying what Bruce Ackerman calls the New Separation of Power (Ackerman, 2006). Under this model, strong horizontal accountability dynamics prevent any branch or sector of the state to emerge as a primary holder of power. In the case of Costa Rica, the new separation of power was the constitutional solution to endemic political conflict before 1949. The resulting constitutional design, in the presence of a two party system during most of the second half of the century, has contributed to

77 See “Revisión integral del Gasto Público en Costa Rica,” Report RS-T1027, IADB 2007.

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effective public policies while simultaneously reducing the stakes of political conflict and promoting consensual styles of policymaking (IDB, 2007)

5.10 In line with the divided nature of power in Costa Rica, the executive branch has limited authority under the Constitution, especially as compared to other Latin American countries.78 For example, the Executive: (i) has to abide by laws passed by a simple majority in the legislature, while two-thirds of Congress is needed in order to grant emergency powers to the Executive; (ii) cannot veto the budgets approved by Congress; (iii) influences, but is not required to approve, most public expenditures; and (iv) is obligated to sign laws approved by the legislature. Its most powerful tool is its ability to partially veto laws approved by Congress. A veto can only be overturned by a two-thirds majority of the Plenary (38 of 57 Legislators). The Executive is also subject to “horizontal accountability” kept in check by an independent Comptroller General’s office and the Judiciary.

5.11 Congress, on the other hand, has weak political powers to control public expenditures, whether of the central government or the decentralized institutions. The Judiciary has great power in influencing budgetary outcomes, through a specialized branch of the Supreme Court (Sala Constitucional). The Constitutional Court exercises active constitutional control over public policies in general, and public expenditures in particular, by means of: (i) clarifying the role of the Legislative and Executive branches in budget formulation and approval and (ii) settling budget allocation disputes between public institutions, as well as between citizens and pubic institutions. Finally, the Office of the Comptroller General (CGR) plays a vital role in controlling public policy implementation. The CGR in addition to doing an ex-ante review of the budget, is responsible for approving most public expenditures, including all public procurement (see next chapter). Over the last decade, several laws have expanded its powers.

5.12 Both the Executive and the Legislature have limited ability to influence the policies or expenditures of decentralized entities, which are self-governed. The decentralized entities account for almost two-thirds of unconsolidated public sector expenditures (Table 1.11) and generate surpluses for the public sector (Table 1.5), both by making profits from their sales of services and from the portion of tax revenues, earmarked by law, they receive. Their budgets are approved by the Comptroller General’s office, without any congressional intervention or supervision, and with only indirect intervention by the Executive. Such a strong decentralized sector is fairly unique to Costa Rica and is fundamental for understanding the political economy of the national budgeting process.79

5.13 Reform efforts are also greatly hampered by the inability to develop a champion to push for reform either in the executive or legislative branches. Many reforms take time in order to build a consensus and require experience. This has been difficult in Costa Rica 78 See Carey 1997 and Urcuyo 2003 for further detail. 79 The 1949 Constitution considered that certain areas of public administration should be excluded from legislative budget approval, provided there was ex-ante control by a specialized, independent body, such as the Office of the Comptroller General.

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as there was a ban on consecutive terms in both branches of government and, until 2005, when the law was changed, the President could serve only one term. Even though members of Congress can run for a second term as long as it is not consecutive, the vast majority of them are in office for only one term.80 This lack of experience is further complicated by the short four-year simultaneous terms for all publicly elected positions. Reforms often require political give-and-take but this gets difficult in this lame duck environment, especially in the last two years before elections. Finally, increasing fragmentation of the bipartisan political regime over the last 20 years has further exacerbated the situation, making passage of major reform all but impossible.

5.14 The narrow political space left by all the constitutional, legal and administrative mandates limits the ability of the Executive to broaden the tax base, thereby increasing revenues in a fairer manner, or to allocate those potential new sources of revenue to specific activities or sectors. The dispersed centers of power and multiple points where actors could effectively veto public policy changes shape a policy dynamics that makes the status quo difficult to change. As a result, historically the dominant strategy of both the Executive and Congress to secure resources for desired policy goals has been to impose constitutional and legal earmarks and minimum levels of expenditure in the desired areas. This dynamics has contributed, on the one hand, to the stability and coherence of public policies in the country. On the other hand, as described later on in this chapter, constitutional and legal mandates have been at the center of the budget rigidity that prevented the Executive--and Congress--to channel resources according to strategic policy goals.

Three Budgeting Arenas

5.15 Costa Rica has three distinct budget processes, each with their own rules, actors and political economy. The first determines the central government budget, which includes the executive branch and its agencies, the legislative branch, and the judicial branch. It accounts for about one-third of unconsolidated public expenditures. The second determines the decentralized sector budget, which accounts for about two-thirds of such expenditures. The third comprises the municipal budgets, accounting for less than 2 percent of overall unconsolidated public expenditures (Table 1.11).

Central Government Budget

5.16 Under a relatively straightforward procedure, the executive branch prepares, implements and evaluates the budget for the central government, while the legislative branch approves it. Among the three budget processes, this is the only one where the Executive has strong and direct control. However, it has limited discretion, given its obligation to service the debt and meet legal mandates, while revenue collection, averaging below 14 percent of GDP in recent years, is very modest for a welfare state. The budget preparation is a multi-tiered process, but the Ministry of Finance is

80 Between 1953 and 1994, about 90 percent of the members of Congress were elected only once (Carey, 1996), and for the 2006-2010 period, only 7 of the 57 members had prior experience in Congress.

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effectively in charge. Although each entity within the central government, including all ministries, prepare their own budgets, they must follow the guidelines set out by the Ministry of Finance, which ultimately decides expenditure caps and submits draft legislation to Congress for approval.

5.17 The Congressional “Comisión de Hacendarios”81 or Finance Commission is a key player in the budget approval process. It is responsible for reviewing draft budgets submitted by the Executive and is empowered to make changes as necessary, but at the end the plenary of Congress has the right to approve or to reject the reports of the Finance Commission.82 Congress is empowered to increase expenditures budgeted by the Executive, provided that it first identifies the corresponding revenue and the Comptroller General’s Office verifies its fiscal effectiveness. However, given the rigidities described earlier, the likelihood of Congress reallocating expenditure is quite limited. Finally, Congress also has an oversight role through its special investigative commissions and evaluates the annual reports prepared by CGR and the Budget Authority.

Decentralized Sector Budget

5.18 The second of the budget processes deals with the decentralized sector. As there are over one hundred such entities, there are over a hundred independent budget processes. However, six decentralized entities account for over 80 percent of the public sector’s expenditure.83 As the decentralized entities account for about two-thirds of public sector expenditures, equivalent to about one-third of GDP, this budget process is important.

5.19 Each decentralized entity carries out its own budget preparation and execution. The budgets are approved directly by the CGR, without formal intervention of the legislative branch, but with the indirect influence of the executive branch. However, the Ministry of Finance issues general guidelines and provides the macroeconomic assumptions that are to be used by the entities in the budget preparations. The CGR bases its approval on an examination of the legality of revenues and expenses, both during the budget preparation as well as in its execution. It focuses on how each entity prepares and executes its expenditure, especially as it relates to the interaction with other institutional players and with contractors and vendors.

5.20 In theory, the Constitution does not allow CGR to modify budgets, as it would violate the principle of decentralized institution autonomy. In practice, however, budget analysts at CGR have considerable informal power to modify budgets, since they can reject expenditures they consider excessive or unjustified. CGR resolutions are binding

81 Traditionally, the party chairing Congress strives to obtain a majority in the Commission (6 of 11 members), as this would allow its control. A sub-commission in charge of the budget analysis consists of 5 or 6 Legislators. Except for the 2002-2006 period, the ruling party has dominated the sub-commission, with or without the support of minority members. 82 The sub-commission receives technical support from the Congress’ Budget Analysis Unit, the Ministry of Finance, and the Comptroller General’s Office. 83 ICE, CCSS, INS, RECOPE, BNCR and BCR.

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and can only be appealed to the Comptroller General himself. When the CGR declines a budget, the previous year’s budget applies while the institution introduces the corrections requested. In general terms, this process is highly regulated, with deadlines, reporting arrangement, and pre-established forms and requires formal bilateral interaction between the CGR and each institution. Additionally, under Article 184 of the Constitution, the CGR participates directly in budget execution and its evaluation. It approves amendments and all procurement of goods and services. As seen in the next chapter, procurement by decentralized entities accounts for the bulk of public procurement (92 percent). Its focus is almost exclusively on the legality of such expenditures and its ex-post evaluations are usually triggered by complaints or external audits. Although the CGR has been expanding its evaluation functions, about 70 percent of its work is still focused on ex-ante controls or approvals and on budget execution.

5.21 While the Chief Executive Officer or head of a decentralized entity is responsible for preparing the budget, its Board of Directors must approve it before submission to the CGR. The Board also approves all major purchases. The selection of the Chief Executive Officer and Board members is therefore fundamental to the political economy in this budgeting process. The executive branch of the government is entrusted with making these appointments, which gives it substantial formal powers that it can use to place loyal party members. However, once appointed, the Executive can do little if the appointees choose not to toe the party line or take a contrary view on expenditures. The members do not report to the Executive, their appointments are for a longer period than the President of Costa Rica, and they cannot be removed without a fair cause. This constitutes a safeguard against power concentration in the hands of one political party and in favor of some stability in the organizational structure and functioning of the entities.

5.22 Within the executive branch, the Ministry of Finance has the most ability to influence the budgeting process of the decentralized sectors. It can control expenditure at a macro level via setting growth objectives and surplus reinvestment guidelines and by limiting the lines of credit of the non-financial public entities. This effectively limits the ability of the entities to make certain expenditures. However, the Ministry of Finance has no legal power to recommend or approve expenditures, which are the sole responsibility of the institutional leadership and the CGR. This dynamic has led in the past to conflicts between ICE, the CCSS and the executive branch regarding expenditure and investment levels.

Municipality Budget

5.23 The third budget process deals with municipality budgets, which account for less than 2 percent of public sector expenditures. In one way it is similar to the decentralized entities’ process, since the approval process involves the Municipality and the CGR, with the CGR only verifying the legality of proposed expenditures. However, from a different point of view, the municipal process is similar to the central government process, in that it involves interactions between the executive branch (Mayor) and legislative branch (City Council). Just as in the central government procedure, public scrutiny and participation vary greatly. In addition, since much of the municipality budget originates

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in transfers from the central government, the municipalities’ budgets also have to be approved by Congress as part of the national budget approval process.

5.24 The Constitution and the 1998 Municipal Code provide for the budgetary autonomy of municipalities. However, because of a weak tax base (close to 1 percent of the GDP), municipalities, especially the less developed ones, depend on transfers from the central government. Such transfers, regulated by Law 7755, ensure that they meet basic local, community or regional needs in the form of investment projects or social interest programs. This Law has prevented legislators from political patronage. It is also a powerful tool for Congressional leaders to ensure partisan discipline and to negotiate with minority parties by approving projects or programs of their interest (Carey, 1996). The law sets a series of objective indicators for allocating expenditures in inverse proportion to the municipality’s level of development. Ruling party legislators, however, do have leverage to add transfers to a budget, but contrary to past practices, this requires negotiating with the Ministry of Finance both the inclusion of a line item in the budget and its later disbursement.

Modernizing the Legal Framework

5.25 The legal framework for the three budget processes have been updated in the last decade, with the aim of introducing stronger controls and making greater use of technical criteria in decision-making. The executive branch was given new instruments to influence the overall budgeting process, and the CGR received more powers to control expenditure based on their legality. In general, the Executive, namely the Ministry of Finance, now has a stronger grip on overall public sector budgets than a decade ago, but fewer opportunities to exceed its constitutional and legal limits by resorting to its informal powers.

5.26 At the national level this was done mainly at the request of the Ministry of Finance, which insisted on better budget controls and ways to enforce expenditure discipline, given its inability to increase the tax burden significantly and given its debt-service obligations. Thus a new Budgetary Authority (AP) was created in 1982 by Law 6821, and amended in 1998 through Article 21 of the LAFRPP. Presided by the Minister of Finance, the Budgetary Authority’s core function is to develop public sector budget policy guidelines, including matters related to investment, debt and salaries. However, CCSS, the public universities, and some other decentralized entities are excluded: Article 21 excludes from AP control the “public entities whose revenue, through special legislation, results from contributions by the productive sectors they represent.” Greater access to and control over budget information gives the AP an indisputable decision-making advantage over other actors, including Congress.

Political Economy of the Budget Process and its Fiscal Outcomes

5.27 Costa Rica’s Central Government has generated chronic, though moderate, fiscal deficits over the last decade. Because of high economic growth and a crackdown on tax evasion, data from 2006 and the first six months of 2007 show a small surplus in the central government balance (Table 1.4). With the exception of 1998, election years

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tended to produce larger fiscal deficits over the last two decades, suggesting that incumbents tended to increase expenditures on their way out and/or that incoming governments increased expenditures in line with electoral promises.

5.28 In addition to earmarking laws and minimum funding mandates that are constitutionally secured, Congress has contributed to the fiscal deficit via budget amendments during the year. Such amendments have been moderately correlated with increasing fiscal imbalances in the period 1994-2003 (see the section in this chapter on Budget Execution). In the last four years, while the number of modifications has been higher than in the previous five-year period, the amounts requested have fallen, contributing to an improvement in the overall fiscal balance (Figure 5.1).

Figure 5.1: Extraordinary Budgets, Modifications Approved by Legislature, and Fiscal Deficit 1990-2006

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5.29 As observed in Chapter 1, the Ministry of Finance has taken several measures in recent years to improve its fiscal balance, resulting in an overall surplus in 2006 as well as a small surplus on the central government balance in the first six months of 2007. The measures included: (i) improved tax and customs administration,84 which raised revenues as a share of GDP from 13.2 percent during 20021-2004 to 14.2 percent in 2006 and projected even higher in 2007; (ii) better debt management, resulting in a lower share of debt/GDP, although a weak dollar probably helped too; and (iii) expenditure controls, although these have fallen disproportionately on capital expenditures and social protection expenditures. 84 Some examples of this are: the introduction of the so-called Information Technology for Customs Control (Tecnología de Información para el Control Aduanero or TICA), income tax statement crosschecks, and broader use of sanctions to discourage sales tax evasion. Improved tax collections have allowed an increase in expenditures, especially investment expenditures, in 2007.

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5.30 In line with government policy to better match its assets and liabilities, the government has decreased its share of foreign-denominated debt at the expense of increased domestic debt. To finance this it has forced government-issued domestic debt on decentralized public entities that were running surpluses. As a result the amount of government securities held by decentralized entities has tripled in nominal Colones between 1998 and 2006, while the share of domestic debt held by decentralized entities—mostly ICE, CCSS and INS—has increased from 75 to 79 percent (Table 5.2). An important consequence of this mopping up of surpluses of decentralized entities is that the Ministry of Finance has effectively restricted the ability of these institutions to use their resources in other forms of expenditure.

Table 5.2: Public Sector Investment Portfolio as at December 31, 1998-2006 (in billions of current Colones, unless otherwise stated)

1998 2000 2002 2004 2006

GDP 3,627 4,915 6,061 8,127 10,213

Total government securities issued 501 597 666 867 1,438

Public purchases of government securities 377 471 534 631 1,138

Of which ICE, CCSS and INS 271 345 430 540 993

Public sector securities/GDP (%) 14 12 11 11 14

Public sector purchases/total securities (%) 75 79 80 73 79

Of which share of ICE, CCSS, INS (%) 72 73 80 86 87 a. Includes Ministry of Finance and BCCR securities, but excludes securities issued by public banks. Source: IADB staff calculations based on data from Secretaría Técnica de la Autoridad Presupuestaria.

5.31 In order to maintain fiscal balances over the last two decades the Central Government has dropped public investment below the levels needed to sustain strategic sectors (mostly infrastructure). Consequently, as thoroughly analyzed in the previous chapters, the road infrastructure has suffered and per capita social investment levels are well below those that existed prior to 1980-82, when Costa Rica suffered an economic crisis. In 2003-2006, the budget line items with the greatest reductions were current transfers and capital expenditures. Although stronger tax collections in 2006 and 2007 have allowed public investment to increase, the tax collection is still insufficient to fund the legally mandated allocations.

The political economy of budget inflexibility

5.32 As in many countries, the Central Government budget is highly inflexible. Pensions, wages and salaries, and debt service (the so-called “expenditure triggers”) accounts for three-quarters of central government expenditures (Figure 5.2). These are essentially non-discretionary items, given the nature of debt-service and pension

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obligations and the rigidity of the civil service regime in Costa Rica.85 As observed in Chapter 1, public employment in Costa Rica is much higher than in other LAC countries, in part because Costa Rica provides many services that are usually provided, at least in part, by the private sector. In 2006 it represented about 13 percent of the labor force, which is almost twice the average for Central America (7.1 percent) and considerably higher than the 4.3 percent observed in other middle-income countries.

Figure 5.2: Importance of Non-Discretionary Central Government Expenditures (as percent of total central government expenditures)

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1. Excludes amortization amounts. 2. Includes social security contributions. Source: Ministry of Finance.

5.33 As seen earlier, the political economy associated with the strong horizontal accountability system in the country has led to Congress issuing constitutional and legal spending mandates and earmarked revenues for certain activities, as a strategy to secure funding for medium- and long-term policy priorities. These minimum spending mandates and earmarks have arisen for different reasons and have historically had a different impact on the budget. The minimum spending mandates ensure that the government budget reflects the wishes of Congress (i.e. the electorate) on expenditure priorities. Their funding sources are not identified and the Executive is meant to find the resources to finance the activities. Earmarking taxes, on the other hand, have arisen following negotiations between the executive and legislative, under which Congress agrees to raise taxes as long as the additional revenues are used for the priorities identified by Congress. In principle, the earmarks are revenue neutral, while the minimum-spending mandates are not. However, earmarking is significant. According to the draft budget law submitted by the Ministry of Finance for 2006 and 2007, they represented, on average, about half of all tax revenues.

5.34 The impact assessment of expenditure mandates and earmarks must be approached cautiously. On the one hand, taking a medium-long term perspective, they were instrumental to a considered political decision to exclude from political bargaining 85 The civil service regime, which covers all employees of the executive branch, puts up serious barriers to laying-off employees, making it difficult to lower the wage bill (Vargas Cullell, 2006). A salary-setting tripartite group (Government, employees and employers) is a further hindrance to labor flexibility.

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certain social policy priorities defined consensually and democratically. In this regard, Costa Rica must be praised for its positive social outcomes in the last 50 years--thanks in part to several social funds secured by expenditure mandates and earmarks (FODESAF is, as seen in Chapters 2 and 3--is probably the best expression of them, in addition to the 6 percent for education established in the Constitution). In addition, as discussed in Chapter 4, Costa Rica has one of the largest roads system in the region in relation to the country’s size and population, which is partly a result of past earmarking.

5.35 The former positive assessment of expenditure mandates and earmarks was altered in the last decade due to fiscal pressures faced by successive governments. Those against earmarks and expenditure mandates blame them for being a source of policy rigidity for managing public funds, for restricting the ability to allocate resources to where they have a high return, and for being an obstacle in formulating good public policy in different sectors. In the case of the transport infrastructure, for example, critics cite earmarks as a barrier to greater use of public-private partnerships in order to fund road rehabilitation and provide better incentives for road maintenance.

5.36 In the context of fiscal pressures that prevailed between 1997 and 2005, the effective allocation of earmarked funds and minimum spending mandates became a hot political issue. Various administrations seem to have chosen the line of “least resistance,” fulfilling only the mandates that are likely to lead to serious problems. In the last ten years, the mandatory six percent of the budget to be assigned to the Judicial Branch has, in fact, been exceeded (Programa Estado de la Nación, 2005)—thus avoiding confrontations with the powerful judicial branch. Similarly, the Ministry of Finance comes close to meeting the six percent of GDP mandate for education, which is popular and affects many people. However, as seen in Chapters 2, 3 and 4, it did not come close to fulfilling its mandates on earmarking taxes for expenditures on roads or social protection.

5.37 Many stakeholders have resorted to challenging the legality of the failure of the Ministry of Finance to abide by minimum spending mandates and earmarked taxes. Of the 33 cases heard by the Constitutional Court in this regard during 2003-2006, twenty were ruled in favor of the plaintiff. In general, the Court tended to reject appeals that challenged the Executive’s failure to fully or partially apply a law or executive decree, but favored those that refer to alleged violations in a specific public action. In a noteworthy case, the Court ordered the Executive to include budget items to cover specific allocations provided for by law, but also accepted that the government is responsible for ensuring fiscal discipline and expenditures need to be limited in order not to jeopardize government solvency.

B. Budget Preparation and Approval

5.38 This section analyzes the budget preparation and approval process in Costa Rica, distinguishing between the approval from Congress in the case of the Central Government budget and the approval from the CGR of the budgets of the decentralized entities and municipalities.

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Central Government Budget Preparation and Approval

5.39 The executive branch prepares the central government budget, with the two most relevant players being the President and the Minister of Finance. Their main function is to define the budget caps and consolidate the budgets for all institutions within central government, including line ministries and their agencies such as the CGR and DHR, the judicial and legislative branches, and the TSE, into a single draft law that is submitted to Congress for approval. A third major actor is the Ministry of Planning (MIDEPLAN), which is responsible for developing the five-year National Development Plan (Plan Nacional de Desarrollo or PND).

5.40 The 2001 LAFRPP further expanded MIDEPLAN’s mandate by requiring all public sector institutions to create a binding link between the PND and institutional plans and budgets. While the PND is meant to serve as a guide for budget preparation and evaluation (CGR 2004, 2005, 2006), it has not been fulfilling its role, mainly because it does not contain sufficient information for effective budget preparation and evaluation. For example, PND (2006-10) was the first plan ever published that contained performance indicators (Box 5.1). Neither the Ministry of Finance nor the legislature uses the PND in the manner envisaged by LAFRPP. For instance, only after the resources are allocated are they then matched to the PND and the legislature does not carry out any monitoring or oversight that links actions or decisions to the PND.

Box 5.1: Citizen’s Contracts under the National Development Plan, 2006-2010 Submitted in January 2007, the 2006-10 PND revolves around five major areas--social policy, production policy, environmental policy, institutional reform, and foreign policy--and 16 sector groupings. The President and most line Ministers signed contracts with their citizens (Contratos con la Ciudadanía) for 2007-10, under which they pledged a series of the actions, all of which are under the purview of the executive branch and could be taken without the need for any congressional action. For example, the health sector contract sets out goals in five major areas. A goal typically specifies a quantitative target such as: “Expand Illness and Maternity Insurance coverage to 60.2 percent of the work force,” designating the Minister of Health as responsible for ensuring that the rest of the sector complies with such goals. However, the design and implementation of these contracts, as well as of the PND, face important obstacles. First, it requires the full cooperation of other institutions, which can often be a major challenge. For instance, achieving the Ministry of Health’s goals relies very heavily on actions taken by the CCSS and AYA. The degree of control of the Ministry of Health over a much stronger, larger, and independent institution such as CCSS or AYA is minimal. Second, the evaluation design, whereby the same individuals responsible for meeting goals is responsible for evaluating them, is flawed. Third, the goals themselves are questionable. In the example above, 61 percent of the population was already covered by insurance in 2005, higher than the goal set out in the contract. And fourth, as MIDEPLAN itself recognizes, the technical capacity of many ministries and MIDEPLAN has been declining, raising questions as to the soundness of the goals or the ability of those responsible for reaching them. Source: IADB staff and MIDEPLAN 2007.

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5.41 Guidelines issued by the Ministry of Finance at the start of the budget process have been its main instrument to ensure fiscal discipline during the last two decades. The policy guidelines, issued annually, contain mandatory budget caps for each of the central government ministries, branches, or agencies, as well as macroeconomic assumptions, such as GDP growth, price and wage inflation, and the exchange rate. As can be expected, actual outcomes are almost always different from the forecasts. In recent years, while the differences have sometimes been significant, there does not appear to be a bias in any direction. For each of the major indicators other than the exchange rate, the variation from the forecast has been both positive and negative. While exchange rate forecasts were somewhat too conservative during 2003-2005; in 2006 the forecast was essentially perfect (Table 5.3).

Table 5.3: Comparison of Select Macro-Economic Assumptions with Actual Outcomes, 2003-2006

Inflation rate (%)

Annual salary increases (%)

Actual GDP growth (%)

Avg. Exchange Rate (Col/$)

2003 Projected 9.0 7.0 4.0 392.7 Actual 9.9 7.0 4.4 417.9 Difference 0.9 0.0 0.4 25.2 2004 Projected 10.0 7.0 4.2 437.3 Actual 13.1 8.5 2.2 457.8 Difference 3.1 1.5 -2.0 20.5 2005 Projected 10.0 4.0 2.9 479.9 Actual 14.1 8.0 5.9 496.2 Difference 4.1 4.0 3.0 16.3 2006 Projected 11.0 12.5 6.8 516.0 Actual 9.4 8.5 8.2 517.9 Difference -1.6 -4.25 1.4 1.9 Source: IADB staff, based on draft budgets, PEN 2006, BCCR Macroeconomic Program (2007) and Executive Decrees 33515, 33287, 32480, 2184, 31580, 32005, 32025, 31580 and 31268.

5.42 Despite efforts being conducted in that direction, Costa Rica still has no national investment system (SNIP) that consolidates public sector investments for the entire public sector. It does not even consolidate the investments for the executive branch. However, the current administration is working under IADB’s Public Sector Effectiveness Enhancement Program (Programa de Mejoramiento de la Eficiencia del Sector Público or PRODEV) to develop a national public investment system.

5.43 Once the draft budget law is submitted, Congress can modify it. Not only can it move resources from one line item to another, it can require earmarking certain taxes to specific programs or activities and it can change budgetary envelopes, but only after identifying the funding source. In practice, Congress finds it difficult to increase allocations substantially because of three articles in the Constitution: (1) article 179, which provides that Congress must identify revenue to cover any increased budgets, (2) article 176, which requires that the proposed expenditures cannot exceed expected revenues, and (3) article 180, which treats the budgeted amount as an upper bound, but does not obligate the Executive to disburse the amounts. Since approval of these articles the number of motions in Congress—requesting a shift of resources from one item to another—have fallen dramatically from 2713 in 1992 to 300 in 2006. While seldom used

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now, Congress can still authorize the Ministry of Finance to issue internal debt to cover additional items or increased allocations added by Congress to the original proposal.

5.44 These restrictions do not imply that legislators have lost their leverage entirely. The mechanism most often used nowadays is known as “execution tags,” which are motions filed in a sub-committee (see below), where no records or minutes are kept. Tags do not change the amounts but instead determine their destination, reflecting the interests of certain members of Congress, often from the opposition. For example, a line item in the 2007 budget requested by the Ministry of Finance for CONAVI is tagged “Sum includes 3 percent transfer to LANNAME.” This tag forces the Ministry of Finance to allocate those resources, which it would not have been the case otherwise. Execution tags may also direct resources to flow to a specific legislator’s constituency.

5.45 The Congressional Finance Commission is the sub-committee of Congress that first passes a judgment on the Ministry of Finance’s submission. Traditionally controlled by the largest party in Congress, its members had a very high turnover during the 1990s, suggesting that there were few incentives for the legislators to remain. Lately, however, the situation has changed: many of the current members have previously occupied that position and a few specialized advisors have been assigned to the same Congressional member for the duration of the term. Although the Finance Commission can call on officials of the Comptroller General’s Office, the Budget Office and the Central Bank to serve as advisors, its own technical capabilities are quite limited as compared to the Ministry of Finance. For instance, the Congressional Budget Analysis Unit finds it difficult to adequately systematize budget data, in part because it has only four advisors and limited physical space. As a result they can seldom challenge the Executive’s proposal, although in most cases legislators toe the party line advanced by the President and Minister of Finance.86 Budget approval calls for a simple majority, both in the Commission and in the Plenary (6 and 29 votes, respectively), and the Executive cannot veto it.

5.46 Citizens or special interest groups rarely lobby Finance Commission members, even though there are no legal impediments to doing so. During the last congressional terms, citizen participation in the budget process was at its lowest according to Latin American Budget Transparency Index (Índice Latinoamericano de Transparencia Presupuestaria, 2006). Without such pressure from the public and with the constitutional straitjacket and technical limitations described earlier, Congress introduces few modifications to the draft budget submitted by the Ministry of Finance. The overall budget envelope differs little from the Ministry of Finance submission. For reasons explained below.

5.47 Until 1998, legislators had the leeway to register and disburse resources to their constituents with minimal controls. However, after a series of misappropriation cases, the 86 In recent years only once was there a serious conflict between the Official Party, which controls the Finance Commission, and the Ministry of Finance: in 2005, the Legislative Budget Analysis Unit detected an excessive debt interest payment by the Ministry of Finance, and the funds were transferred to social programs (Valerio, 2007).

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Legislature passed Law 7755 (1998) , which required that transfers to municipalities be based on development indicators, favoring the less developed municipalities, and specified a procedure under which the Ministry of Finance was to do it.. As a result of these controls, congressional “pork barrel” projects (partidas específicas) have been limited to less than one-tenth of one percent in most recent years. An ordinary least square (OLS) regression analysis was used to examine how the allocations to municipalities were made. The results confirm that the social development index of the municipalities was found to be the main explanatory variable, followed by size of the population. The outcome was only slightly affected by whether or not the ruling party candidate had won the local election.

5.48 Since 1992, all loan agreements signed between the Executive and other countries or multilateral organizations are subject to legislative approval. Given that Costa Rica’s Constitution mandates annual budgets, Congress is unable to approve multi-year budgets or give blanket approvals within a specified borrowing ceiling. Congress must examine and approve any new debt initiative, with the exception of open market operations of the Central Bank or the Ministry of Finance, as long as they are within the expenditure limits set by Congress. A two-thirds majority of members is required for ratifying loans, forcing partisan agreements. Legislators cannot modify the loan document; they can only approve or disapprove it and add administrative controls such as specifying the executing agency or requiring biannual reports. Occasionally, the Legislature has asked for a restructuring of loans that fail to comply with the law or lack clear objectives. For instance, the law prohibits funding current expenses by foreign borrowing. Commission discussions usually include a debt impact assessment to verify if the foreign loan request cannot be met through normal administrative channels, and an analysis of the merits and demerits of financing consultancy and advisory fees.

5.49 For 2000-2006, the Assembly approved 15 bilateral and multilateral loans totaling US$669 million. Ratification of half of them took less than three months. Interestingly, seven of the fifteen loans were signed in the last year of the electoral term, showing clear “seasonality.” In the first and second years, the legislative agenda is dominated by projects of the previous government, which the new government may not be interested in approving. Negotiations on loans and agreements for priority projects of a new government might take up two or three years of the term, with most approvals taking place in the last two years. However, since 2004, Congress has blocked or been slow to ratify loans because of the polarized positions taken by rival parties on the contentious fiscal reform and CAFTA issues. As a result several important loan agreements have failed to be signed or ratified, leading to delays in implementation of strategic initiatives.

Budget Preparation and Approval for Decentralized Entities and Municipalities

5.50 Although the budgets for decentralized entities and municipalities must be approved by the CGR, the lead actors in the budget preparation process are the decentralized entities and the local governments. The Ministry of Finance is another important actor since, under the National Financial Administration Law (LARFPP), it sets out mandatory budget guidelines, including expenditure ceilings and macroeconomic parameters, for all entities, excluding CCSS, public universities and, more recently, ICE.

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Besides these guidelines, the Ministry has no power to intervene in the budgeting process for decentralized institutions and municipalities.

5.51 The head and Boards of the decentralized entities draft the budget proposals, ensuring that they comply with relevant legislation, before submitting to CGR for approval. At the municipal level, the mayor and municipal council perform the role of the head of the institution and its Board respectively. The processes are very varied across entities depending on their size. For example, ICE has hundreds of officers in its Budget Department, just as many as the General Budget Directorate of the Ministry of Finance. Despite these variations between decentralized entities and the autonomous nature of these institutions, as mentioned earlier, the Executive manages to influence the process via the nomination of both the heads of the institutions and Board members. Once the decentralized entities and municipal councils submit their budget proposals, CGR performs a legal and accounting review, to make sure the budgets comply with all CGR norms. Expenditure caps, combined with strong institutional and legal controls, leave little room for change. Consequently, the entities usually resort to the execution phase to reallocate resources via budget modifications. The technical and legal criteria used by CGR for approval does not address the appropriateness of expenditure, except in cases of obvious embezzlement.87 The CGR may issue its opinion about the budget-PND linkage, or could suggest improvements, but that does not determine budget approval or rejection.

5.52 Since each decentralized entity prepares its budget independently and since CGR only determines its overall legality, there is no mechanism to ensure that the decisions made by each entity are compatible with overall public policy goals or that there is no duplication or service shortfalls. As seen in Chapter 2, expenditures on social protection, in particular, are rife with such problems. Given that such expenditures account for about one-third of consolidated public expenditures, there is a need to ensure that sufficient information is available to allow analysis and coordination. Overall information for decentralized entities tends to be less available than for the Central Government.

C. Budget Execution

Central Government Budget

5.53 Central Government contracts and procurement operate under the Single Account (Cuenta Única) principle, which aims to manage all government revenue in one single account aimed at preventing under-utilization and guaranteeing liquidity. This principle applies not only to Ministries and central government agencies, but also to about 160 decentralized entities, transfers to individual municipalities, education boards, and others. Besides being a strategic financial planning tool for the Central Government, the single account principle is a powerful political instrument in hands of the Ministry of Finance.

87 For example, if it determines that an entity is assigning resources for programs beyond its purview the CGR can demand clarifications and corrections, and could eventually disapprove that line item. On the other hand, the CGR has internal limitations regarding its budget approval role. For example, the CGR team responsible for approving the CCSS budget consists of just three CGR technical experts even though the budget includes expenditures of every public hospital and clinic.

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The National Treasury manages the Central Government single account and, therefore, is the main actor in the execution phase. Public budgets are expenditures authorizations, not obligations. That is, the Executive is not bound to make the expenditures provided for in a law, except for constitutional and legal mandates. Executive decrees may change certain budget assignments. However, Executive discretion is limited by the controls of CGR prior to budget execution.

5.54 Budget executions are subject to modification, sometimes in the form of internal transfers (decrees) and other times in the form of increased or additional resources (supplemental or extraordinary budgets). The Presidency uses such decrees to transfer amounts not spent at the end of the year to the next year’s budget. The number of budget-amending decrees has increased in recent years, from 23 per year in 2004-2005, to 70 in 2006. In CGR’s opinion, this is worrisome as it reflects a deficient budgeting technique (CGR, 2006). During 1990-2006, Congress approved at least two extraordinary budgets per year. However, the additional amounts requested have fallen in recent years. Between 1995 and 2000, extraordinary budgets added an average of 48 percent per year to the originally approved budget, but dropped to an average of 15 percent in the following five-year period. Budget execution of all approved ordinary and extraordinary expenditure ranged between 85 percent and 98 percent in the last decade.

5.55 A review of approved extraordinary budgets from 1990 to 2006 reveals a range of expenditure items: from salary increases, internal debt servicing, and infrastructure projects, to additional funding for education and housing programs. The Executive also uses extra-budgetary funds to fund foundations or associations for expenditures that would otherwise not likely be approved in the budget. A large share of the budget is spent in the last months before the close of the financial year. This is true whether or not there is an election early the next year and is probably due to institutions raising their execution rates to avoid losing any year-end balances and to reduce the chance of budget cuts the following year.

Budgets of the Decentralized Entities and Municipalities

5.56 The heads of the decentralized entities and their respective Boards are responsible for executing their respective budgets. Contrary to the entities within the Central Government, decentralized entities can use their own revenues generated through sales of services, for instance. For the decentralized entities, CGR does not set expenditure caps or determine how expenditures are to be allocated, and although budgets approved by the Comptroller General have execution schedules, these are flexible. Decisions, therefore, are entrusted to the heads of the institutions and/or to their financial departments and Boards. CGR guidelines dictate only how to present the data in their quarterly and annual financial reports.

5.57 However, the CGR possesses a powerful tool to control budget execution: contract countersigning. Every procurement contract has to be reviewed and countersigned by CGR. The CGR must also approve modifications to the approved

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budgets during the execution phase. However, the head of the entity can make so-called “internal” modifications without CGR approval.88 Currently, the CGR accepts only five modifications or extraordinary budgets per year. While there is no institution-wide information published as to the number of modifications and to their fate, this study selected a few for review. It found that the CCSS, for example, repeatedly exceeded the current limit of five modifications, only one of which was declined. Smaller entities tended to show few changes throughout the year. Recently regulations by the Comptroller General attempts to reduce and organize the constant flow of budget modification requests, which, as mentioned earlier, have been increasing. In general, the CGR tends to give its approval or partial approval so that entities can execute part of the expenditure, and reduce the number of declined modifications.

5.58 Modifications are used in decentralized institutions to “correct” those portions of the budget not approved by the CGR. For example, the 2004 and 2005 ICE budgets were turned down because the CGR believed that the revenue estimates were overstated. ICE revised and re-submitted the budget as an extraordinary budget. Public service institutions also resort to modifications to incorporate earnings from rate increases. According to the CGR, rate increase estimates cannot be included in revenue budgets until the regulatory authority (Autoridad Reguladora de los Servicios Públicos or ARESEP) approves them.

5.59 Without an effective medium- or long-term sectoral plan to follow, the heads of decentralized entities are free to decide upon what to spend, within the overall budget parameters. Given the high weight of entities such as ICE, CCSS, RECOPE and INS in public expenditures, the heads of the chief officers effectively control a large share of the public sector budget. As will be seen in the next chapter, the weight of these institutions in public procurement is much greater than their weight in public expenditures.

The Constitutional Court as Arbitrator in Budget Execution Conflicts

5.60 In Costa Rica, national or decentralized institution budgets may be modified after approval by resorting to the Constitutional Court. Citizens who feel their rights have been violated in the budgeting process can file protection or appeals before this Court. For example, the Court has ordered the CCSS to purchase anti HIV-AIDS medication for patients after CCSS had refused to buy the medication, alleging high costs. Pensions are another good example: the Constitutional Court has ordered the Ministry of Labor to streamline and expedite pension applications. In both cases, the Court has intervened during the budget execution phase, instructing the Executive as to the amount and destination of budget items (Box 5.2).

88 Internal modifications within a program or among programs can be made under sub-items of the same group or among sub-items of different groups, provided that they do not alter the overall total. In institutions without program-based budgets, allocation of specific resources cannot be changed for any reason without CGR consent.

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Box 5.2: Some Constitutional Court Interventions on Specific Allocations July 1998: The Office of the Attorney General of the Republic filed an unconstitutionality appeal with the Constitutional Court against specific allocations, claiming that they violated the “single fund” principle established in Article 185 of the Constitution. In July 1999 the Court rejected the appeal declaring that the budget law (which determines how taxes are spent) was subordinated to the ordinary law (which establishes specific allocations). April and May 2001: The Constitutional Court issued three rulings ordering the disbursement of specific allocations: C14.0 billion to Patronato Nacional de la Infancia (Nacional Children’s Board), C400 million to technical professional high schools, and C5.1 billion to several other entities. October 2001 – May 2002: Publication of the Law of Financial Administration of the Republic and Public Budgets. One of its Articles provides that the Government shall disburse funds as they become available. In December 2001, the Ministry of Finance asked the Attorney General of the Republic about the implications of this new Law. It responded that the Ministry could not subordinate allocations to the possibility of funds, and should instead develop a schedule. In May 2002, based on a query from the Centro Nacional de Estudios de Educación y Capacitación Cooperativa (National Center for Cooperative Training and Education Studies), the Constitutional Court held that the single fund principle and limited resources enable the Government to not disburse specific allocations. April 2003: The Constitutional Court ordered the Government to disburse specific allocations, stressing that the Constitution lists the intrinsic rights of individuals, including the right to development. October 2004: The Constitutional Court ordered the Ministry of Finance to assign funds to municipalities to repair county roads. In its view, the Ministry was violating the fundamental rights of municipal inhabitants. Source: (Leitón 2004).

5.61 The Constitutional Court has not been involved in loan approvals, stating that this is not a Constitutional matter, and that instead it lies within the Legislative scope. However, as noticed earlier, the Constitutional Court does get involved in cases where entities or sectors have not received the full constitutional allocations. FODESAF, IMAS, INAMU, CONAVI, and the Ministries of Education and Health have been the worst affected in this regard. When social programs are involved, the Court has strived to restore funding; however, most often the Ministry of Finance has not complied, citing its obligation to keep fiscal balance.

D. Budget Control and Evaluation

5.62 This section discusses the control and evaluation phase of the budgeting process in Costa Rica. It starts with the analysis of the responsibilities of the horizontal and vertical control institutions and then discusses budget evaluation, focusing on the extent to which it is possible to evaluate the physical and financial results of the various entities based on programmed objectives and goals.

Horizontal Control

5.63 The CGR is the main vehicle for horizontal control of the budget and is recognized as one of the strongest institutions of its kind in Latin America (CFAA, BID-BM, 2006). Its budget is considerably larger than the budget of its Central American counterparts. It is well regarded by the public. During the 2004-2006, the CGR was one

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of the few institutions that did not experience a reduction in citizen confidence, maintaining its level at 64 percent.

5.64 Since a ruling by the Constitutional Court in 1998, the CGR is required to countersign all public sector agreements or contracts. On average, the CGR reviews around 3,000 contracts annually, mostly relating to the provision of social services. To illustrate the workload, in 2004 alone the CGR reviewed 678 agreements or contract, of which almost three-quarters related to direct procurement purchases by CCSS. This institution alone accounted for almost one quarter of the total number of agreements reviewed that year89. The CGR also carries out ex-post controls or evaluations on already executed expenditures, focusing on compliance with laws and procedures. This is done mainly via oversight and follow-up studies (Box 5.3).

Box 5.3: CGR Instruments for Budget Control Oversight Reports: These typically result from an audit investigation or are special studies aimed at identifying specific recommendations to enhance the effectiveness of an institution or program. They may originate from a complaint by an interested party, a request by Congress, or by decision of the Comptroller General. While CGR’s Evaluation and Operational Oversight Division (DFOE) chooses its priority oversight areas, the decision as to which institutions will be studied is made after consultation with the executive authorities.

Follow-up Reports: These studies, which may be a simple desk study or require a field visit, aim to verify compliance with earlier CGR recommendations and directives. They are programmed annually according to the oversight areas and objectives defined by the DFOE. There are two types of follow-up reports: (i) Accounts of fact, establishing a causal reaction between a possible anomaly or irregularity and the allegedly guilty parties; (ii) Written communications, which serve the purpose of issuing a finding by the Comptroller General without necessarily including recommendations or directives.

Source: Villarreal, 2003.

5.65 In recent years, the CGR increased its ex-post evaluations. In 1997 such controls represented only 8 percent of the operations, by 2004 the estimated figure amounts to 34 percent. To a large extent, this is due to a greater demand by Congress, which now plays a more active role in encouraging the public to complain or request more information from the CGR. In fact, the possibility of the public to make direct complaints and requests for information has also increased.

5.66 The CGR’s ex-post budget controls have been criticized mainly for their excessive emphasis on legal considerations.90 They have also been criticized from insufficient follow-up on CGR recommendations and directives, despite deadlines given to the entities. Lack of follow-up has allowed the executive branch to often ignore CGR recommendations, even though CGR require mandatory compliance by the executive branch and CGR can impose fines and sanctions for non-compliance. In addition, although CGR is meant to take the lead for budgetary oversight, it has failed to do so.

89 See CGR Annual Report 2005. 90 See Villarreal Fernández, E. (2003). “Evolución de los mecanismos de rendición de cuentas en la década de los noventa en Costa Rica.” Paper prepared for the Programa Estado de la Nación, Costa Rica.

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There is little coordination between the different institutions involved in oversight; however, there are encouraging signs of increased coordination between CGR and Congress.91 Finally, CGR has been criticized for not having a transparent strategy for choosing the sectors or institutions to be reviewed.

5.67 Legislative budget control is even weaker. Established under Article 190 of the Legislative regulations, the Revenue and Expense Commission has been expanding the scope of its oversight of Central Government budgets in recent years, but the work is just starting. In 2000 and 2001, the Commission rejected the audit of budget accounts but, as of July 2007, it had not issued an opinion over the accounts of the last three budget cycles. In addition, from the legal standpoint, the findings have no binding consequences on the respective public entities and officials. As part of its oversight function, Congress can request consultations on draft legislation, additional information or hearings, oversight studies, summon people to Congress, or request technical support or advice for its commissions. Since 1999, the total number of such demands has almost tripled, mainly due to increases in requests for additional information as well as for consultations on draft legislation. On the other hand, investigations of claims for alleged irregularities in the management of public finances have shown a downward trend in recent years from its peak in 2001 (Table 5.4).

Table 5.4: CGR: Requests Generated by the Congress 1999 2000 2001 2002 2003 2004 2005 2006 Consultations on draft bills 43 53 70 64 74 50 82 88 Requests for information 54 69 100 125 256 374 202 158 Hearings 14 15 16 17 23 41 28 Requests for oversight studies 35 47 51 13 41 44 37 36 Appearances 4 8 8 11 9 15 10 Advice to commissions 1 5 6 7 6 5 Total 132 187 245 231 405 507 383 325 Source: CGR, 2006.

5.68 Given the large number of public sector entities, CGR is unable to do ex-post audits of all expenditures. It therefore restricts itself to review operations over a certain amount. In recent years, the CGR has tried to limit itself to being a second tier of control—the internal auditors of the entities are the first level of expenditure control--under which the Comptroller General oversees the work of the auditors, rather than attempting to audit directly. This idea has not materialized in practice, a reality highlighted by the latest Country Financial Accountability Assessment (CFAA) prepared by the IADB and the WB in 2006.

Vertical Control

5.69 Costa Ricans has excellent access to information on budget execution, which can be readily obtained, at least at the aggregated level, at the CGR website (www.cgr.go.cr). Disaggregated information is also available to the public. The Constitution protects the 91 See Villareal Fernandez, E. (2003). “Informe Transparencia Presupuestaria en Costa Rica.” Programa Estado de la Nación, Universidad de Costa Rica. San José, Costa Rica.

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http://www.cgr.go.cr/

right to freely access this information. However, information on outcomes is unavailable. Moreover, despite the legal obligation, many public institutions do not submit their annual report to Congress, although the situation has improved in recent years.92 There are no formal and substantive standards or requirements to be met by institutional annual reports, and therefore it is difficult to aggregate and compare the information over time.93

5.70 Citizen participation in budget control is protected by the Constitution. Citizens can also file complaints with the CGR and the Ombudsman’s Office. Finally, since 2001, citizens can bring claims directly to CGR. In 2005, 766 claims were filed, more than double those received five years before, when citizens could only bring their complaints via Congress and 45 of them generated oversight reports. CGR’s Evaluation and Operational Oversight Division, or more specifically, its Technical Secretariat, reviews citizens’ claims. Its purpose is, firstly, to ensure that the requests for review are under CGR’s jurisdiction, and secondly, to address issues that may be resolved quickly. It then transfers to other department any matters requiring more resources than it had at its disposal or when the issue was of strategic importance to the department. In some cases it may refer to case to an external agency.94 In recent years, the media have played an active role in exercising control over public actions, including alerting on irregularities in the use of public resources by high officials.

Assessing Budget Management

5.71 The main actors in assessing budget management are MIDEPLAN and the CGR. The LAFRPP established a mandatory link between MIDEPLAN’s development plans and budget execution and stipulated that the CGR must carry out an annual compliance assessment of the National Development Plan to see the extent to which the objectives were met. In addition, an evaluation system, SINE (Sistema Nacional de Evaluación), was introduced in 2001-2002 as a government instrument—through MIDEPLAN—to evaluate the strategic actions of the National Development Plan. However, SINE is flawed in design and lacks the technical capacity to carry out its mandate. For instance, it relies on the information provided by each entity as to the extent the goals were achieved and does not independently verify the information.

5.72 As part of the process to design and implement the evaluation and follow-up methodologies to be applied to priority programs and projects in the National Development Plan (PND), MIDEPLAN is responsible for promoting training activities among the institutional working groups associated with the plan, by carrying out verification studies of the outcomes and following up plans and projects. It is also responsible for defining the technical and methodological guidelines to prepare each

92 See: Programa Estado de la Nación 2002 and 2003. 93 Vargas-Cullell, J. and M. Gutiérrez Saxe. 1998. “Rendición de cuentas en Costa Rica.” Document prepared for the Programa Estado de la Nación, San José, Costa Rica. 94 Thus, the process uses as input any information supplied by the claimant in the request for review or denunciation, which may be filed by any means of communication. A response is normally provided within 10 working days; where the responsible official believes it will take longer, receipt of the claim is acknowledged in writing and the claimant is informed that the case may require a longer review.

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decentralized entity’s annual operating plans (PAO), “Planes Anuales Operativos”), in coordination with the Ministry of Finance and the Comptroller General’s Office. The link between the PND and institutional responsibilities occurs through the Operational Plans (PAO), and lasts approximately 2 years, from the time the methodological guidelines for preparation are issued (first year), until the final evaluation at the conclusion of the second year.

5.73 In 2002, a Commission consisting of officials from MIDEPLAN, CGR and the Ministry of Finance was established to work on the compatibility of the PND with the national budget, thus verifying compliance or progress on the PND. During 2003-2006, the CGR was not able to certify compliance with this legal provision, since neither the development plan nor the design of the public budgets allows for it. The legislation in force does not provide incentives for evaluating budget management at the central government level. LAFRPP does not contemplate any specific procedure to reward the achievement of public policy objectives. Neither does the General Law on Public Administration of 1978 (applicable to decentralized entities) provide performance rewards to decentralized entities.

5.74 In addition, while public institutions publish several reports, such as the bi-annual report and financial statements that are available to the public, they are not relevant for assessing budget performance in terms of meeting goals. There is no legal framework requiring the executive branch to publish partial progress reports on the execution of programs and achievement of tangible goals. There is not even a requirement to prepare profit and loss statements or compare the actual expenditures to those in the approved budget (Villarreal et al, 2003).

5.75 Another aspect limiting the quality of the evaluating system is the absence of a clear association between the degree of compliance with the goals and the financial and human resources required to achieve them, thus limiting the possibility to evaluate management efficiency. Some of these elements are revealed in the conclusions of the Budget General Directorate’s report (2005). The report indicates the presence of “deficiencies in the quality, accuracy and clarity of the information supplied by the entities, on topics such as achieved goals, benefits, actions . . . [which] prevents taking a relevant position on institutional management, making it impossible to provide complete, objective and dependable feedback.”

5.76 The National Development Plans themselves present abundant program objectives without focusing on strategic goals, which makes it difficult to include their findings in the decision-making process at the highest levels of the Administration. The 2006-2010 PND sought to modify this situation by focusing on a smaller number of strategic objectives and actions and assigning result and cost indicators (MIDEPLAN, 2007), but it is still early to assess the extent to which this has been successful.

5.77 To compensate for these weaknesses in budget assessment, Congress often relies on specific requests to gauge results. It does this in two ways: by requesting CGR to provide information on budget execution and through the creation of investigation commissions comprising members of the legislature. During 1999-2002, Congress

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requested the Comptroller General to investigate 838 cases, over 200 per year on various matters. Over the same period, it established 38 commissions to investigate possible irregularities in the use of public resources. However, final reports on 23 of the 38 cases had not been issued in due time and/or when the commissions did prepare reports, most had divided opinions, with each party submitting its own assessment.

E. Policy Options

5.78 Despite the budget process shortcomings described above, Costa Rica, a country of only 4 million inhabitants, has a modern legal framework for budget formulation and execution, comparable to advanced middle-income countries. While some of the shortcomings can be traced to rigidities in the Constitution or laws, it is neither realistic, nor necessary, to change them. An approach of this type would ignore some of the attributes that have made Costa Rican government a model of stability and protection of public interest. This model is supported, among other things, on an effective system of institutional checks and balances. However, gradual reform measures, operating within the legal framework and with a few changes in regulations, could achieve substantial gains. These reforms could be grouped into three broad categories: (i) those relating to the executive branch, (ii) those relating to the legislative branch, and (iii) those relating to the Comptroller General’s Office.

Policy Options Relating to the Executive Branch

5.79 The budget process could be made more effective through several measures that could be taken by the Executive, without requiring a change in laws. First, during its first year in office, the Minister of Finance could prepare a multi-year budget for the last three years of its term95 and submit it to Congress jointly with its annual budget. This would force the executive branch to develop a plan for its term in office as well as raise awareness in Congress about the importance and need to adopt an inter-temporal perspective in the budgeting process. The current government has already started to work in this line and the 2008 budget proposal includes three-year fiscal forecasts.

5.80 Second, the Ministry of Finance in coordination with MIDEPLAN could coordinate as part of the multi-annual budget, an exercise to identify investments for the public sector as a whole that will comprise the National Public Investment System. This is envisaged to be part of the PND and would serve to ensure that investment resources are forthcoming. The Ministry of Finance has already started to work on this under the Public Sector Effectiveness Enhancement Program (PRODEV).

5.81 Third, the Ministry of Finance and MIDEPLAN could better reinforce the link between the budget-planning process and the PND, as envisaged by law. This could include: (a) having the PND run through the first six months of the incoming administration; (b) establishing a requirement to quantify the objectives of the PND, with specific program and activity costs, to make the PND consistent with the annual 95 In Costa Rica, elections are held every four years in February, with the new government taking office in May. The elections are held in even years that are not divisible by 4.

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operating plans (PAO) of the institutions; (c) folding the national public investment system into the PND; and (d) developing a budget execution assessment system based on (b) and (c). These initiatives would not require legal reforms but call for high technical expertise to assist MIDEPLAN.

5.82 Fourth, the Executive should ensure that all public entities use the same single certified accounting system. At present, many public sector institutions, especially among the decentralized entities, use a different set of accounts. This dual set of accounts is costly, while making it difficult to get reliable information or allow comparisons across entities. Using the provisions of Law 8131, the Ministry of Finance should require all government institutions to prepare single global reports using consolidated revenue, expenditure and investment data. They could use the same law to seek electronic compatibility among the budget-approved figures and public purchase systems. This will require coordination between Finance and CGR and some external technical assistance.

5.83 Finally, the Ministry of Finance could complement CGR’s legal review of decentralized institution budgets with its own analysis, linking decentralized entities’ expenditure proposals to the public policy objectives planned in their budgets. A formal review mechanism for the decentralized sector could be established, using methods that could be adjusted over time and starting with the few institutions that account for the vast majority of decentralized entities’ expenditure.

Policy Options Relating to the Legislative Branch

5.84 Since Costa Rica has a modern legal framework for the budget process, the focus needs to be on implementing it rather than fine-tuning laws. First, Congress needs to enhance its technical capacity for to comply effectively its obligations in the Finance Commission and the Special Permanent Commission on Public Revenue and Expenditure Control. This could be achieved via a combination of increased support from the CGR and technical assistance to strengthen Congress’ Budget Analysis Unit, which would allow Congress not only to independently assess budget proposals but also to carry out its own appraisal of budget execution and evaluation. This recommendation requires a decision by the Legislative and the agreement of the CGR.

5.85 Second, Congress could request decentralized institutions—or at least the major ones—to send periodic updates on budget execution. The reports should use the uniform accounting system mentioned above and focus on the extent to which expenditures are in line with the proposed public policy objectives. In particular, the updates should indicate any changes in budgetary spending since the CGR's approval. This recommendation requires the joint political decision of the Ministry of Finance and the Legislative Assembly. A legal reform would not be necessary.

5.86 Third, Congress would do well to dedicate a few plenary sessions each year to analyze and deliberate on CGR and Ombudsman’s Office reports. This would give the reports higher visibility while providing Congress with valuable information for decision-making. A modification to legislative regulations and resolutions could guarantee a minimum of sessions dedicated to the analysis of the reports.

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5.87 Fourth, Congress could request a yearly round of public hearings with the heads of the major decentralized entities, where they would present a report and explain the performance of the institution, answering any questions posed by Congress. Minutes of the meetings would be published and Congress would issue resolutions (not binding) on the reports submitted. This suggestion requires modification of the legislative regulations, thereby implying Congressional approval.

5.88 Finally, two additional reforms could be considered which, although controversial, could improve the budgetary process. First, in order to enhance expertise and experience on budgetary matters within Congress, consideration could be given to allowing Members of Congress to be reelected, for one or two additional terms at a maximum. This would require a Constitutional reform. Second, to increase transparency and accountability of Congress to its constituents, Members’ voting decisions could be made public. This measure would require a reform to the legislative regulations.

Policy Options Relating to the Office of the Comptroller General

5.89 First, in order for CGR to better carry out its mandate on the internal control system as required by law, it could provide technical assistance to the internal audit departments of the decentralized entities. No legal change would be necessary.

5.90 Second, CGR could dedicate more attention to ex-post rather than ex-ante control. It could carry out in-depth audits of decentralized entities selected at random. Again, legal changes would not be necessary.

5.91 Third, CGR could achieve greater transparency by bringing to the public certain stages of the budgeting process that are now hidden from public scrutiny. Two practical measures to this end, would be to: (a) specify the audit parameters, to be published in the public institutions’ annual reports; (b) compel decentralized entities to present an annual report to Congress, simultaneously with its budget submission to the CGR. The report should include the policy objectives and a comparative summary of budget provisions.

5.92 Fourth, consideration could be given to requiring the Boards of decentralized entities to sign performance agreements, whose compliance would be evaluated by the executive as well as the legislative branches. Making this binding for the decentralized entities would require legislative approval.

5.93 Fifth, CGR could examine the system of public procurement in Costa Rica to identify any flaws in the legal framework and to suggest ways to make the process more efficient. This is discussed at length and in depth in the following chapter.

5.94 Sixth, CGR could assess the technical capacity of municipalities to manage central government transfers as well as the resources generated internally. This would contribute to prepare better legislation on the transfer of power to local governments, foreseen in the constitutional reform approved in 2002 but whose implementation is still pending.

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5.95 Seventh, the CGR could encourage civil society to participate in the monitoring of budget execution and evaluation, providing them with all necessary information and budget documents. A practical step could include encouraging exchanges among public interest organizations with broad experience on the topic (for example, CIPPEC in Argentina) or disseminate the experience of other countries in enhancing public sector accountability via monitoring by the public.96

96 Peruzzotti and Smulovitz, 2000 and Malena, Forster, Singh, 2004 describe the experience of other countries in this area.

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Chapter 6 SECURING COST SAVINGS IN PUBLIC SECTOR PROCUREMENT

6.1 An in-depth review of the overall public procurement system in Costa Rica was carried out in the 2006 Country Procurement Assessment Report.97 It concluded that Costa Rica has made significant progress in the area of public procurement over the last decade. Notwithstanding, the system could be further modernized to incorporate new and effective public procurement methods so as to strengthen economic integration policies and market liberalization in Costa Rica. While carrying out the fiduciary function that the Office of the Comptroller General (CGR) plays in the procurement process, the concurrent supervision role has contributed to slow progress in developing an integral, long-term vision and a coherent conceptual framework that adequately incorporate government procurement policy objectives.

6.2 Current public procurement practices fail to take full advantage of the procedures, practices and management tools available in the country’s modern legal and regulatory framework. For instance, public procurement fails to consolidate purchases or use standardization of specifications, both of which could lead to important cost savings. The public sector lacks reference prices, information on supply industries or benchmarks on unit costs for standardized services.

6.3 Based on an analysis of public procurement expenditures through the implementation of available procurement tools, this study finds that savings of 13-18 percent of the budget are possible, depending on the aggressiveness of the reforms. The analysis is based on a review of four broad procurement categories: (i) office supplies, (ii) computer equipment and office software, (iii) vehicles, and (iv)general maintenance services, and the procurement expenditures of three large decentralized entities (RECOPE, ICE and CCSS) and three government ministries (Finance, Public Security, and Public Works and Transport).

6.4 .To fully implement the efficiency-enhancing reforms, a high-profile, well-publicized program for cost reduction could be introduced with the full support of the main players: the Ministry of Finance, the major decentralized entities, and the Office of the Comptroller General. The implementation strategy can be structured in phases or a series of waves starting on a pilot basis with a few public sector entities and with commonly used categories that rely on standard specifications and have low technical complexity. Notwithstanding, in order to achieve a significant impact there are two approaches that can be followed (i) the selection of a sector with specialized Goods such as medicines, or (ii) General Goods and Services, which would include the selection of public entities that have the highest purchasing volumes and at least two line ministries.

97 Country Procurement Assessment Report Review (CPAR). Report No. 39594-CR World Bank 2006

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After establishing the program in these institutions for any selected categories, the system can be replicated across other institutions.

A. An Overview of Public Sector Procurement in Costa Rica

6.5 During 2003-2005, governmental purchases of goods and services (other than government salaries) in Costa Rica averaged US$3,687 million98, equivalent to over 20 percent of GDP.99 This amount was just 3.6 percent higher in real terms than during 2001-2003. Only six percent of these purchases were carried out by central government entities and less than two percent by local governments. Autonomous agencies and public enterprises accounted for 92 percent of procurement expenditures. Chief among them were the Costa Rican Social Security Fund (CCSS), the Institute of Electricity (ICE), and the Oil Refinery (RECOPE). Together these four entities accounted for 62 percent of all procurement expenditures (Figure 6.1).

Figure 6.1: Public Sector Procurement

Distribution of Expenditures for Goods and Services by Public Sector Entity (2003-2005)

6%

92%

2% Central Government

Decentralized Entities Local Governments

Source: Contraloría General de la Republica (CGR) .

6.6 Given the importance of procurement in public expenditures, a strategy for government acquisition that reduces procurement costs while improving the quality of delivered goods and services would have high benefit. This is particularly important now that Costa Rica’s economic growth is substantially higher. This growth is generating increased demands for public services, public infrastructure, and social programs, which in turn, is leading to higher demand for procurement. Moreover, advances in information technology have created new opportunities for efficiency gains in procurement. Costa Rica, considered a leader in information technology in Central America, has already improved its financial management systems via computerization. It can now do the same for procurement.

98 Using an average exchange rate of 467.23 Colones/1 US$. See “Country Procurement Assessment Report” (CPAR). World Bank and Inter-American Development Bank. Washington, DC: November 2006. 99 Procured fuel is counted twice and explains why procurement is such a high share of public expenditure.

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6.7 Costa Rica’s legal and institutional frameworks for procurement are strong and its control systems are satisfactory. The procurement law applies to all procurement of goods, services, and contract works in the public sector, including the state-owned enterprises and local governments—there are no off-budget public expenditures. Two institutions carry out supervision and oversight of procurement by public entities: (i) the Goods and Administrative Procurement Supervision Office (DGABCA), which was established in 2006 within the Ministry of Finance and which covers all central government agencies and (ii) the Office of the Comptroller General (CGR), which also covers the rest of the public sector and so is vastly more important.

6.8 Within this overall legal and oversight framework, each public sector entity is free to set its procurement rules and procedures. Based on their size and budget, different institutions have different thresholds for deciding on when to use specific sorts of procurement methods (i.e., direct purchase, local bidding, international bidding). Moreover, the procedures (design of tenders, minimum number of bidders, etc.) for the procurement methods themselves vary between institutions. This leads to a fragmentation of contracts and excessive use of direct contracting, which results in higher costs. In addition, the autonomy given to each public sector entity for procurement makes it difficult to do centralized planning or to consolidate purchases across institutions.

6.9 Neither the public sector entity nor government makes good use of existing information technology to plan, manage or control procurement. While each public sector entity generates information on purchases, the quality and reliability of the information vary. In many cases, precise purchasing statistics are not available and there are only weak links between procurement plans, the budget process and various aspects of the financial management at the budget execution stage. The data used currently to evaluate the performance of public procurement are based on budget allocations rather than budget execution. This absence of complete statistics on procurement and procurement methods makes it difficult to identify patterns, learn from mistakes, carry out performance evaluation, and design efficient procurement policies. Efforts to determine if the public spending system is achieving its development objectives efficiently are thus hampered.

6.10 Progress in developing a vision and strategy consistent with government procurement objectives has been hampered by the dual role of the General Comptroller’s Office as being responsible for both external control where its opinions carry considerable weight in legal interpretation, and a specialized procurement agency, albeit with limited scope. This explains why efforts to improve the procurement system have been centered on specific technical and practical aspects, as opposed to systemic reforms to make procurement more effective and efficient. Key to this would be having greater transparency in the awarding processes and applying a variety of purchasing strategies to reduce costs and increase efficiency. These include greater standardization of specifications and the use of consolidated purchases, as well as more effective and widespread use of electronic tools, such as electronic catalogues and reverse auctions. The following section elaborates on how to generate efficiencies and cost savings in procurement.

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B. Size and Structure of Public Procurement

6.11 During 2006, the Government of Costa Rica spent a total of about US$4,086 million on procurement of goods, services and infrastructure, representing 35 percent of the total public sector procurement budget (Figure 6.2), though the central government accounted for only 3.7 percent of this amount. Decentralized institutions and public enterprises accounted for the bulk of purchases. Any strategy to improve procurement will therefore need to have the support of the heads of these entities.

Figure 6.2: Overall Distribution of Purchases in Public Sector in 2006

Contracted Labor 1,550,884

Other Costs 2,392,058

Central Government, 78,608

Decentralized Institutions 2,045,931

Goods, services & infrastructure, 2,124,539

2006 EXECUTED BUDGET FOR PUBLIC SECTOR (in millions of Colones/year)

Source: General Comptroller’s Office and Finance Ministry. 6.12 Fuels and lubricants accounted for one-third of all public procurement expenditures, making it by far the most important. (Figure 6.3). This reflects in part the resale of petroleum products to other public entities by RECOPE, which has a monopoly in both import and distribution of petroleum products. The fuel procured is counted twice: first, when it is imported by RECOPE and when it is sold to other public entities.

Figure 6.3: Distribution of Purchase of Goods, Services and Infrastructure in 2006

Purchases of Public Sector – 2006

33%

28%

28%

6% 5%Fuels andLubricants

O the rProducts andS uppliesS ervice s

Equipment

Source: General Comptroller’s Office (CGR).

138

6.13 Procurement purchases are concentrated in a few public entities. Just four institutions account for 80 percent of procurement expenditures, with RECOPE being by far the major purchaser, followed by the electricity company, the social security agency and public insurance company (Figure 6.4). Involvement of these institutions is crucial to the success of a procurement strategy aimed at lowering costs without sacrificing quality.

Figure 6.4: Concentration of Purchases in Public Sector in 2006 (in millions of Colones/Year)

Source: General Comptroller’s Office and Finance Ministry.

Concentration of purchases in the Public Sector

–

2006 [millions

Colones

/ year]

0 100,000200,000300,000400,000500,000600,000 800,000 900,000 1,000,000

Otros

Instituto Nacional de Aprendizaje -INA-

Ministerio de Obras Públicas y Transportes

Ministerio de Educación Pública

Banco Popular y de Desarrollo Comunal

Empresa de Servicios Públicos de Heredia -ESPH-

JJ unta Administrativa de Servicios Eléctricos de Cartago -JASEC-

Universidad de Costa Rica -UCR-

Instituto Costarricense de Acueductos y Alcantarillados -AYA-

Banco de Costa Rica -BCR-

Banco Nacional de Costa Rica -BNCR-

Consejo Nacional de Vialidad -CONAVI-

Instituto Nacional de Seguros -INS-

Caja Costarricense del Seguro Social -CCSS-

Grupo ICE (ICE, CNFL, RACSA)

Refinadora Costarricense de Petróleo -RECOPE-

80%

75

% fuels and

lubricants

C. Measures for Greater Procurement Efficiency and Cost Savings

6.14 With the aim of identifying a strategy to lower procurement costs, the rest of this chapter analyzes the purchasing practices of the entire public sector in Costa Rica. This includes all the 18 ministries and President’s office within the central government as well as the decentralized agencies, public financial institutions, public enterprises, and local governments. Using data on purchases of goods and services from the 2005 and 2006 executed budget, this study estimates the fiscal savings that could be generated if the identified cost reduction measures here were to be implemented.

6.15 The analysis focused on selected purchases in common categories, examining purchase processes across different public institutions during the 2006. In addition to using published data, the study reviewed procurement documents and held interviews with the: Ministry of Finance, Costa Rican Social Security (CCSS), Costa Rican Institute of Electricity (ICE), Costa Rican Petroleum Refinery (RECOPE), Ministry of Security, Ministry of Public Works and Transport (MOPT), Municipality of San Jose, and the Office of the Comptroller General (CGR).

139

6.16 In broad terms, Costa Rica’s regulatory framework follows best international practice as reflected in the procurement practices of OECD member countries. It allows for such advanced purchase mechanisms as “contratos marco” for well-planned, recurring bulk or volume purchases, and reverse auctions, under which suppliers make price, specifications and quality proposals to the buyer. The procurement framework has strict controls on budgetary expenditures and contracts, with above-average transparency and the Comptroller General approving every contract. An assessment of where Costa Rica stands relative to comparable countries is provided below (Figure 6.5).

Figure 6.5: Assessment of Costa Rica’s Public Procurement System Components

Procurement Plans

Category Segmentation

Regulatory framework

Consolidation

Transparency of Purchase

E

- Procurement

Purchasing Method Contract Sharing

Control of Execution

• Proper regulation for consolidation, including Central Government and

decentralized institutions • Lack of integrated programs by strategy •

“Compra red” functions as a transparency platform

• “Compra red” is not used much by decentralized institutions

• Existing regulation •

First efforts to implement reverse auction

• Purchasing methods well developed

• Bidding procedures take too much time

• “ Contratos marco” can be used by all public institutions

• First efforts to use “contrato marco”

• Strict control on contracts and transparent execution

• Contraloría aproves every contract and every budget

High

Low

Medium

High

Low

Medium

High

Low

Medium

Degree of development

• Categories are based on budget items •

Different catalogs for Central Government and decentralized institutions

• Deficient programming in the procurement plan

• Applies for Central Government and decentralized institutions

• Considers advanced purchase mechanisms including “contratos

marco” and reverse auction High

Low

Medium

High

Low

Medium

High

Low

Medium

High

Low

Medium

High

Low

Medium

Source: World Bank Staff estimates. 6.17 The two weakest areas in Costa Rica’s public procurement system are: planning and consolidation of purchases, where the institutions are failing to take advantage of the opportunities offered by regulatory framework. Despite initial efforts by the Ministry of Finance, there is an absence of clear leadership and there is little consolidation process of public purchases, which could result in significantly lower purchasing costs. In addition, the public procurement system lacks reference prices for standard goods or information on suppliers. Nor does it seek out international best practices. The focus is on complying with existing legislation such as the procurement law and budget ceilings, rather than on using international best purchasing practices for higher efficiency and cost savings in government procurement.

6.18 More specifically, Costa Rica could take better advantage of certain “levers” that have to the potential to reduce procurement costs for goods and services. Based on

140

interviews and other information provided to the team, few public sector institutions use these currently. Seven levers are commonly used in well-functioning OECD countries:

(1) Demand consolidation: This involves having a minimum volume of purchases across institutions, where the bulk volume of the purchase can be leveraged to obtain lower unit prices. This can be done via reverse auctions as in Brazil or through e-systems that facilitate above-board negotiations for lower prices.

(2) Economies of scale: Significant costs savings are possible by consolidating and centralizing purchases even within the same institution.

(3) International bidding: By inviting international firms to bid on contacts, government can benefit from greater competition, while also inducing local firms to become more efficient.

(4) Appropriate specifications: Institutions can often lower costs by ensuring that the specifications of what is being purchased are in line with needs. This is particularly true for computers, which often have features that are never used, or vehicles, where they are often larger or more powerful than necessary.

(5) Standardization: Defining standards for the purchase of such items as computers and vehicles so as to result in a narrower range of products can result in lower unit costs.

(6) Service catalogs: Compiling and publishing benchmarks on unit costs for standard services such as car maintenance and security and janitorial services can help public sector entities ensure that they are getting good value for money.

(7) Substitution Possibilities: Often a generic or non-brand item is a perfectly acceptable substitute at significantly lower prices (i.e., clones in computer equipment).

D. Analysis of Common Procurement Expenditure Categories

6.19 This section analyzes the potential for procurement savings in select expenditure categories by evaluating procurement methods and product and service specifications. The categories were chosen with four characteristics in mind: (i) they are part of the current expenditures budget; (ii) their specifications are relatively simple; (iii) they are generic purchases that can be made by all public sector entities; and (iv) they can be bought independently by public institutions (Figure 6.6).

141

Figure 6.6: Purchase Expenditure Grouping in Common Categories

General Services, 19,297

Computer Equipment, 17,838

Special Services and Consulting, 14,301

Food for People, 10,884

Travel Expenses, 10,681

Office Supplies, 5,367

Publicity Services, 4,981

Office Equipment, 3,755

Vehicles and Accessories, 2,533

Other*, 7,810

PUBLIC SECTOR PURCHASES – 2005 ESTIMATES (in millions of Colones/year)

Source: World Bank Staff estimates.

6.20 The categories selected for further analysis are: (i) office supplies, (ii) computer equipment and software, (iii) vehicles, and (iv) general maintenance services. Although fuels meet the four characteristics described above, they were excluded for further analysis in this study since the government has a monopoly in the purchase of petroleum products and also sets the sale prices to public sector entities. As not all entities had potential for savings in all categories, this study chose a subset of categories depending on its potential for procurement savings in the respective entity as seen below (Table 6.1).

Table 6.1: Sample of Selected Agencies and Analyzed Categories Analyzed Categories

Office Supplies

Computer Equipment Institution Vehicles

General Services

Ministry of Finance

Ministry of Public Security

Ministry of Public Works and Transport

Costa Rican Institute of Electricity (ICE)

Costa Rican Social Security (CCSS) Costa Rican Petroleum Refinery (RECOPE) Source: World Bank staff estimates.

142

Category 1: Office Supplies

6.21 Comprising office furniture and equipment and supplies, this category incurred procurement expenditures of over US$10 million equivalent in 2005.100 CCSS accounted for almost half of expenditures under this category, followed by ICE, BNCR, and BCR (Figure 6.7). This category has a large number of suppliers (104) that are registered with Comprared, which is the system of government databases of approved vendors.

Figure 6.7: Office Supply Purchase Distribution

CCSS46%

ICE12%

BNCR10%

BCR7%

BPDC5%

Min Education3%

Other17%

Source: World Bank Staff calculations.

6.22 Within office supplies, paper accounted for 65 percent of expenditures, dominated by white bond paper for photocopying and printing. While more specialized paper, such as paper with water seals for invoices, is usually bought via a bidding process, the white bond paper is generally bought directly in small quantities through different suppliers, thereby foregoing the volume discounts available via bulk purchases. Direct purchases represented half the total value of purchases by the central government. For other parts of the public sector the percentage bought directly is likely to be much higher. For example, even though CCSS has a monthly consumption of 20,000 reams of letter size white paper, the acquisitions are all done by direct purchase.101

6.23 Some institutions have begun to consolidate their purchases of standard paper for their offices, utilizing a competitive bidding process that secured provisioning for the entire year. Using this method, the Ministry of Public Works and Transport was able to achieve the lowest unit price of all the contracts analyzed in this study. Similarly ICE was able to obtain significantly better prices by making bulk purchases. More institutions need to follow their lead, as there appears to be tremendous potential for cost savings. For instance, the analysis of different purchases of bond paper (letter size) shows a price 100 Based on spending by 19 central government institutions and 25 of the largest decentralized institutions. 101 The CCSS recently prepared a study that recommends the consolidation of annual purchases of paper for the 28 units within CCSS, using a competitive bidding process.

143

differential of up to 20 percent between institutions and up to 40 percent within the same institution (Figure 6.8). This is a clear indication that no formal process to determine reference or benchmark prices exists.

Figure 6.8: Distribution of Prices for Purchase of Paper

Source: World Bank staff estimates.

Min.

of

Finance

Price of Paper Colones

/ per ream]

Min. of

Public

Security

Bond

Paper 75g,

letter size

1,475

87 reams

1,340

250 reams

1,575

238 reams

Min. of Public

Works and

Transport

1,285

8208 reams

Social Security

Range 1175

- 1,950

20,000 reams

Monthly

consumption

of paper of 28 units

Institute of

Electricity

1,415

995 reams

1,440

600 reams

1,378

103120 reams

1,603

1200 reams

1,300

2042 reams

1,350

300 reams

Δ

40%

1,373

Weighed

Average

+

Δ

14%

- Δ

6%

Costa Rican

Category 2: Computer Equipment and Software

6.24 This category for electronic data processing, including both hardware, such as central processing units, digital readers, and printers, as well as software and licenses. The largest 25 autonomous public entities and 19 central government institutions spend about $34 million annually on this category. ICE, BCR, and CCSS had the largest shares of these expenditures (Figure 6.9).

Figure 6.9: Computer Equipment and Software Purchase Distribution

6.25 A large number of computer suppliers (306) are registered on Comprared’s database. It includes companies with exclusive representation of the international top commercial brands, as well as smaller companies that sell proprietary and secondary brands of equipment. The bulk of computer equipment purchases were made through competitive bidding processes; in the central government and in decentralized institutions. Only 15 percent of the purchases by value were made directly.


ICE 34%

BCR 28%

CCSS 13%

BNCR 8%

INA 5%

Finance 2 %

10%

144

6.26 Although the common method of purchase has been by bidding processes, the lack of standardization in the configurations of information made it difficult to have comparable prices and to execute consolidated purchases. The lack of standardization of equipment opens the door to overly specified purchases relative to its application, resulting in excessively higher costs in the procurement of computer equipment. For example, fully equipped computers (DVD, flat screens, 3+Ghz processors, etc.) were purchased and assigned to end-users without further consideration as to the nature of staff tasks.The allocation of equipment with different hardware configuration needs to be customized to the needs of staff in order to obtain cost savings. Only in isolated cases could the purchase of highly specialized or highly specific equipment be justified.

6.27 The direct comparison of equipment bought in the same segment of application demonstrates differences in prices of 20 to over 40 percent (Table 6.2) in the three segments analyzed: (i) administrative, for daily basic tasks like administrative, accounting and secretarial activities; (ii) operative, for applications of programming, drawing, computer science and design; and (iii) specialized, for special applications like drawing of planes, computer-assisted drawing (CAD) and portable presentations.

Table 6.2: Price Results from Computer and Software Purchases

Source: World Bank Staff estimates

Category 3: Vehicles

6.28 This category corresponds to the purchase of vehicles, and the estimated expenditure in this category is C2535 million (US$4.9 million equivalent) annually.102

102 Value based on executed budget for 2005 that includes 19 central government institutions and the top 25 decentralized institutions with the greatest amount of budget resources.

145

The public institutions with the highest expenditure in transport equipment were the Costa Rican Institute of Electricity, the Costa Rican Social Security agency, the Bank of Costa Rica and the Costa Rican Water Department (Figure 6.10).

6.29 The number of supply companies in this category is the most limited of the 4 categories analyzed, with only 32 suppliers of vehicles registered in the databases of Comprared. The vehicles commonly bought by the public sector are automobiles, light trucks, buses, motorcycles, and other similar vehicles. Even though competitive bidding was the method commonly utilized, a lack of consolidated purchases by institutions resulted in lost potential savings from failing to take advantage of bulk purchases. The lack of suitable planning led to repetitive purchases (smaller per unit purchases) in the same period for different prices for the same vehicle—and this occurred within the same institution (Table 6.3).

Figure 6.10: Vehicle Purchase Distribution

ICE27%

CCSS23%

BCR14%

ICAA11%

INA7%

RECOPE7%

Other11%

Source: World Bank staff estimates

Table 6.3: Price Variations in Purchases of Vehicles

U n its

D e scrip tion

P r ice /un it

M in

. P ub lic

S ecur ity

In st

.

E lec tricity 1

In st

. E lec tricity

2

In st

. E lec tricity

3

P etroleum R efin er

1

P etroleum R efin er

2

A p p lica tion S eg m e nt

Δ 4 4

%

3 4 5 1 5 6

9 .9 17 ,0 1 9

1 8 ,78 7,9 6 1 1 8 ,83 9,7 4 7 1 5 ,79 4,7 4 7 1 4 ,37 0,6 1 5 1 7 ,78 8,4 9 1

P ick -up T ruck s

M od e l 2 0 06 *, d ou b le cab in , 4 x4 , d iesel, 2.5 0 0 cc, m anu al shift

M od e l 2 0 07 *, d ou b le cab in , 4 x2 , d iesel, 2.5 0 0 cc, m anu al shift M od e l 2 0 07 *, d ou b le cab in , 4 x4 , d iesel, 2.5 0 0 cc, m anu al shift

* T oyo ta H ilu x

M od e l 2 0 07 * *, d ou b le cabin, 4x 4, d iesel, 2.5 0 0 cc, m anu al shift

* * N issa n Fro n tier

M od e l 2 0 07 * *, d ou b le cabin, 4x 4, d iesel, 2.5 0 0 cc, m anu al shift

M od el 2 0 06 *, d ou b le cab in , 4 x4 , d iesel, 2.5 0 0 cc, m anu al shift

D if. ’0 6

vs

‘0 7 Δ 2 4 % D if. 4 x 4 v s 4x 2

Source: World Bank Staff estimates. 6.30 The specifications of the vehicles did not seem to reflect its final use; for example, the rationale for buying pick-ups 4x4 versus 4x2, or double cabin versus single cabin was not clear. The lack of specifications regarding the use of purchased vehicles resulted in higher costs and price differentials of up to 24 percent.

6.31 All car dealers in the market offer lower prices for the past year models and generally maintain the same specifications and guarantees. The analyzed examples

146

suggest potential savings of up to 44 percent of a unit price if models from the previous year had been bought.

Category 4: General Services

6.32 This expenditure category includes the hiring of services for security, cleaning, maintenance and repairs to buildings, facilities and other works. The public institutions that contracted the highest volume of general services were the Costa Rican Social Security agency, the Costa Rican Institute of Electricity, the Bank of Costa Rica and the Costa Rican Institute of Aqueducts. Figure 6.11 shows the percentage distribution of general services purchases across public sector.

Figure 6.11: General Services Purchase Distribution

Source: World Bank staff estimates

ICE27%

CCSS23%

BCR14%

ICAA11%

INA7%

RECOPE7%

Other11%

6.33 The Comprared database included 82 suppliers of cleaning services and 103 suppliers of security services. In general, smaller maintenance tasks like painting and cleaning were carried out by employees of the institutions, while specialized repairs to buildings and maintenance of elevators were conducted through contracted companies and service providers. However, some institutions had contracts for cleaning and janitorial services, generally awarded for one year and usually through a competitive bidding process (84 percent of the time in the case of central government). Some institutions included several departments (i.e., Ministry of Finance) but with different contracted service prices for each department while other institutions made separate contracts for each department (i.e., CCSS).

6.34 In the service contracts and expenditures analyzed, no contracts were based on standard area measurements (square meters, or m2) of cleaning surface; neither were catalogues of services utilized, under which the service contracts and provisions are valued according to the number of labor hours required. The lack of service catalogues and unit prices of reference (i.e., price per m2) led to higher prices in the contracted services of cleaning, over the international benchmark, and often over the incremental cost of having the work done in-house (Figure 6.12).

147

Figure 6.12: Price Distribution for Cleaning Services (in Colones/month)

s

Min. Public Works

320.54

7 550 m

2

15 people

Min. Finance

Area 4: 347.59 4130

m

2

Area 7: 671.09

800

m

2

Area 2: 299.07

1800

m

2

Area 1: 283.44

1917

m

2

Area 5: 400.90

1500

m

2

Area 6: 523.52

2500

m2

Area 8: 971.71

550

m

2

Area 3: 343.59

1000

m

2

Costa Rican Social

Security

Contract 3: 352.11

2935 m

2

Contract 5: 654.76

168 m

2

Contract 2: 298.71

2545 m

2

Contract 1: 175.80

4000 m

2

Contract 4: 405.00

3400 m

2

Personnel On Payroll

Various Contracts

Corporate contract

Δ

45% benchmark at

Similar markets

160 m 2

Source: Ministry of Finance and World Bank staff estimates. 6.35 Security service contracts have only recently emerged, and are already being implemented in some institutions. The contracts are usually awarded for a one-year period, and follow competitive bidding processes (62 percent of the time in the case of central government institutions). The value of contracts was determined according to the number of agents required for each schedule or shift.

6.36 In the contracts and expenditures analyzed, no contracts had been based on unit prices posts and no catalogues of services were used. This resulted in higher costs for contracted services. In Table 6.4, the analysis of CCSS contracts illustrates significant differences in prices for the departments/clinics. The contracted prices are even higher than the incremental costs of having public sector employees carry out the security.

Table 6.4: Contracted security services by Costa Rican Social Security Agency

Δ

49%

Average salary for payroll personal in security working in the Ministry of Finance = 2,157,000 to 2,414,250 colones per year

Institution

Total Contract (colones/year)

No. of Eq. Positions of 8 hours

Unit Value per Position

(colones/year) Clinica Dr. Carlos Duran

18,257,498

3

6,085,833 Clinica Oftalmologica

14,399,400

3

4,799,800 Clinica Santo Domingo

13,560,000

4 3,390,000 Area de Salud de Santo Domingo

13,560,000

4 3,390,000 Hospital Dr Max Teran

48,600,000

15

3,240,000 Area de Salud de Alajuelita

30,401,808

9.5

3,200,190 Area de Salud de Acosta

7,800,000

2.5

3,120,000

148

E. Determination of the Saving Potential

6.37 Based on an analysis of the budget, evaluation of the procurement system, concrete example of purchases, and international experience, the potential for annual savings in the public sector of Costa Rica was estimated between C160 billion and C225 billion (about US$300 to US$430 million and 13-18 percent of budget execution), depending on how aggressively the procurement procedures are implemented (Table 6.5). The savings will come from using the levers described earlier, such as consolidating purchases, defining standards, and using service catalogs and contratos marco. The savings can be realized without the need to reform any laws or regulations but they will require the support of CGR and major decentralized entities.

Table 6.5: Savings Potential from Improved Procurement Procedures


F. Strategy and Methodology for Implementation of a Cost-Reduction Program

6.38 To fully capitalize on the potential savings in public procurement, a high-profile, well-publicized program for cost reduction must be implemented with the full support of the main players: the Ministry of Finance, the handful of decentralized entities that account for the majority of public procurement, and the Office of the Comptroller General. The implementation strategy can be structured in a series of phases or waves for more systematic learning as to how to organize the process, in order to ultimately deliver a solid platform of continuous savings (Figure 6.13).

Savings

Potential

[

Colones

Mill./year]

Values

%

C a t e g o r y

C o n s u l t i n g

a n d t e m p o r a r y l a b o r

S e r v i c e s

Products and supplies * *

T o t a l V a l u e

Total

14,301

567,715

577,320

121,317

1,280,652* ($2463 mill)

Conserv.

5%

15%

10% 15% 12.6%

Agress.

8 %

20% 15% 20% 17.6 %

Conserv.

715

85,157

57,732

18,198

161,802 ($300 mill)

Agre s s .

1,144

113,543

86,598

24,263

225,546 ($430 mil l )

* E x c l u d i n g p r o c u r e m e n t o f i n f r a s t r u c ture 2006

* * E x c l u d i n g p u r c h a s e o f f u e l s a n d l u bricants

S p e n t B u d g e t f o r P u b l ic

S e c t o r

2 0 0 6

C o l o n e s

m i l l . /y e a r *

Equipment

149

Figure 6.13: Program Implementation Strategy

Source: World Bank staff.

Savings Potential High

Low Easy

Hard

Complexity

For

Implementing

1st

Wave

Office Supplies (Paper)

15%

Printing

Services

2nd Wave

General Services (Cleaning and Security)

Computing E quipment

Food

Transport Equipment (Vehicles)

Recommendation for a Cost-reduction program

T emporary Labor and Consulting

Trips

Advertising

Insurance

Office Equipment

Clothing

6.39 It would be advisable to start on a pilot basis with a few public sector entities and with commonly used categories that rely on standard specifications and have low technical complexity. On this basis, the following three categories are suggested: (i) Office Supplies; (ii) Computer Equipment and Software; and (iii) General Services. For maximum impact it will be necessary to include the public entities that have the highest purchasing volumes and at least two line ministries. The following institutions are suggested: the Costa Rican Social Security agency; the Costa Rican Institute of Electricity; the Bank of Costa Rica; the National Bank of Costa Rica; and the Ministries of Finance and Education. The amounts of procurement done by these institutions in these areas are given in Table 6.6. After establishing the program in these institutions for the selected categories and ironing out any kinks, the system can be replicated across other institutions.

Table 6.6: Procurement Budget Spent in Selected Categories

Institution Category

CCSS

ICE

BCR

BNCR

Min. of Finance

Min. of Education

Other

TOTAL

Office Supplies

2,464

638

393

521

68

188

1,095

5,367

Computing equipment and programs

2,350

6,019

4,993

1,413

396

317

2,350

17,838

General services

8,166

3,610

1,033

853

371

32

5,232

19,297

TOTAL

12,980

10,267

6,419

2,787

835

537

8,677

42,502

Spent Budget for Public Sector in selected categories

–

Estimated values from January to December 2005 [ Colones

mill./year]

Source: World Bank staff calculations.

150

6.40 The sequencing of the procurement program can be carried out in 6 stages as shown in Figure 6.14 below and described in greater detail subsequently.

Figure 6.14: Sequencing of Program Implementation

Source: World Bank staff.

Data

gathering

and identifica tion

of key participants

Consoli dation

of D emand

Strategy for purchasing

Bidding Process

Award

Monitoring

•

Common categories

recommended: 1 . Computer

equipment

2 . General

services

3.

Office

supplies

Recommended

c ategories

and

participants

•

Formation of procurement te am

Determination of demand

patterns and bidding cycles • Classification of purchases

• Homologation

of specifications

•

Exploration of markets:

1.

Installed capacities 2.

Prices of reference 3.

Suppliers and geographic

location Design of

bidding docs responsible

and scheduling

• Launching of bidding

process and publication

of bids • Submission of proposals •

Evaluation of tech. and financ. proposals

Award

• Contract of good /services

for individual requirements or group of institutions •

Definition of metrics for follow up

•

Monitoring of savings

• Evaluation of operative metrics of delivery and

quality

•

•

•

Stage 1: Data Gathering and Identification of Key Participants

6.41 The objective of this first stage is to finalize the categories and the participants for the implementation of the pilot—experience suggests a maximum of three categories for the pilot program. The participating institutions must be able to reach certain compromises in order to develop an effective framework for the consolidation of purchases and to work within existing regulations. The leadership should be established accordingly to the priority that the Government of Costa Rica assigns to the execution of consolidated purchases program. Three different scenarios relating to the aggressiveness with which the pilot program is implemented were considered and are explained in the final section of this chapter.

Stage 2: Consolidation of demand

6.42 The objective of this stage is to consolidate the demand of the different participant institutions and to make sure that the budget commitments support this. Specifications on the goods or services to be bought need to be finalized at this stage, as do minimum volumes and when and where the goods and services are to be consumed. In this step, the use of a series of “levers” should be discussed, such as substitution of products, more effective use of technology, and simplification of specifications. Technical leadership on reaching a consensus on the minimum amounts to purchase could be provided by the institution that has the highest purchases in the category and must also consider reference

151

prices and logistical arrangements. Ensuring the participation of the major decentralized entities at this stage will be instrumental to the success of the cost-reduction program.

Stage 3: Purchasing Strategy

6.43 The next stage envisages identifying potential suppliers, evaluating their capacity to deliver the required goods and services in a timely manner. At this stage, references prices would be updated and logistical arrangements made as to the supply base and its channels of distribution. It would also be advisable to discuss how public procurement policies could assist the development of small and medium companies, exploring diverse models of consolidation on both the demand and supply side. The aim is to reduce the risk of any collusive practices and formation of cartels in cases where the market is limited to only few suppliers. The final objective is not to buy from a single supplier, but to achieve a reduction of total costs, while ensuring the participation of small and medium companies in competitive bidding processes, under standardized contracts. Once the strategy of purchases has been finalized, the procurement method and bidding documents need to be designed.

Stages 4 and 5: Bidding and Award of Contracts

6.44 At this stage, the bidding process would be launched within the framework of the existing procurement legislation in Costa Rica. If the legislation does not allow aggregating the budgets of several institutions in the same contract, each participating institution could enter also into a contract with the winning bidder after the award of the original contract. It is important to decide on the relevant benchmarks for evaluating the contracts, such as unit costs and levels of service, as well as criteria such as on-time delivery/distribution and quality. This type of information can be useful to evaluate past performance of potential suppliers in preparation for future bidding processes and to contribute to establish a baseline for development of "market intelligence.”

Stage 6: Monitoring

6.45 Based on the benchmarks defined in the previous stage, this stage envisages monitoring the established benchmarks in the contracts. This is crucial in order to be able to generate an intelligence database of markets and suppliers, particularly important in the heavily decentralized public sector environment of Costa Rica. Consideration should be given to creating a dedicated technical team responsible for developing market intelligence and documenting best practices as well as systematizing specifications and categorizing the goods and services. A good starting point for the latter is the United Nations code.

G. Leadership and Action Plan

6.46 Getting the cooperation of all public sector entities to radically change their procurement procedures in a highly decentralized environment will not be easy. However, the deeper the reforms, the higher the likely savings from procurement. The decision as to how aggressive to be in changing procurement policy depends on the decisions of the main actors. Three possible scenarios are described below (Figure 6.15).

152

Figure 6.15: Proposed Implementation Scenarios

Source: World Bank staff. 6.47 “Aggressive” Scenario. In this scenario, an entity such as the Ministry of Finance and/or the Ministry of Planning would provide overall program leadership and coordination for the consolidation of joint (consolidated) purchases by central government entities and decentralized institutions. It would need the strong institutional support of the Office of the Comptroller General (CGR) and technical advice from the Department of Goods Administration and Administrative Contracting (DGCABA) of the Ministry of Finance.

6.48 CGR involvement would be instrumental because of: (i) its access to vital information on procurement needed for the design and execution of consolidated purchases; (ii) its influence in getting the major decentralized entities to participate; (iii) its strong control capacity and responsibility for management of public procurement. The (DGCABA) would assist the decentralized entities in such areas as definition of classification codes for goods and services, bases for the development of electronic tools, and standardization of bidding documents for competitive bidding. In this, Costa Rica would be following the example of Mexico, which recently issued a decree by the Office of the President that mandates the public entities to use consolidated purchases. This approach requires strong political will from the highest level of Government.

6.49 “Moderate” Scenario. This scenario represents the continuation of activities being carried out by the Ministry of Finance, which have had limited impact so far, but with one major difference: the CGR would assume control of the consolidation processes and determine whether the processes had been executed under the principles of lowest total cost. This kind of auditing role is beyond what CGR currently does, which is simply to ensure the legality of the process. CGR will need to build up its capacity to carry out this new role over time. In this scenario, the Ministry of Finance would need to create inter-institutional agreements that assure commitment to the purchase consolidation process. Such a model would not allow the strong gains envisaged under the aggressive

Inter

institutional Consolidat ion

Leadership

Requirements

• Convoking of participants by Ministry of Finance

• Inter

- institutional contracts •

Inspection and auditing by C

ontraloría

MF / MIDEPLAN

• Emission of an austerity decree from the Presidency (

México) •

Convoking of participants by MF or MIDEPLAN

• Technical assistance by DGABCA

of Ministry of Finance

• Consolidation of expenditure for each institution referring to

own annual plan • Convoking by leadership of each institution

• Auditing by

Contraloría

Impact in public expenditure

National Consolidation

Individual Consolidation

Ministry of Finance

Each Institution

High

Low

“Aggressive” scenario

“Moderate” scenario

“Conservative” scenario

153

scenario above, but would be a substantial improvement over current efforts, which are based solely on the voluntary participation of the institutions.

6.50 “Conservative” Scenario. Under this scenario, the institutions would begin an in-house consolidated purchase program but the purchases would not be consolidated across institutions. This scenario generates the least savings in public sector procurement but is a good first step. In this scenario, the CGR should supervise purchasing units within the institutions in their effort to consolidate purchases.

6.51 The Ministry of Finance and major decentralized agencies have confirmed their interest and commitment in implementing, on a pilot basis, a program to obtain quick gains from a new procurement strategy. The design of a final, comprehensive government strategy for the execution of a full-fledged program of cost savings on a much larger scale would be contingent upon the evaluation of results on the pilot. Based on the experience of comparable countries, the cost of designing and implementing the comprehensive purchasing strategy is estimated between $400,000 and 450,000. The final cost will depend on the scope of implementation and government expectations in terms of the savings ultimately sought.

154

STATISTICAL APPENDIX

Public Sector Expenditure

Tab

le A

.1.1

: C

OST

A R

ICA

- Pu

blic

Sec

tor

Rev

enue

by

Inst

itutio

nal G

roup

(n

et o

f int

er-in

stitu

tiona

l tra

nsfe

rs;m

illio

ns o

f Col

ones

) T

OT

AL

RE

VE

NU

E19

9719

9819

9920

0020

0120

0220

0320

0420

0520

06A

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lC

entra

l Gov

ernm

ent

318,

436.

438

5,52

4.8

472,

129.

350

5,38

6.1

616,

275.

679

3,20

7.9

933,

706.

01,

082,

250.

51,

298,

761.

31,

616,

823.

2

Dec

entra

lized

Inst

itutio

ns21

6,49

8.4

262,

000.

731

0,06

5.9

357,

234.

840

9,75

1.4

397,

779.

443

1,98

0.2

503,

366.

161

4,83

2.8

814,

530.

4

Publ

ic E

nter

prise

s99

,264

.610

8,72

2.9

111,

833.

411

5,42

0.5

136,

136.

224

8,20

2.8

193,

976.

522

6,04

8.5

280,

062.

827

9,59

3.3

Fina

ncia

l Int

erm

edia

ries

68,7

66.6

16,2

33.3

81,2

14.1

51,9

65.0

56,9

10.3

132,

226.

913

8,08

3.2

196,

208.

720

6,36

9.1

246,

162.

5

Dec

once

ntra

ted

Entit

ies

57,9

79.4

65,7

01.7

78,4

25.9

111,

400.

212

3,79

4.7

64,4

55.3

93,5

23.4

85,8

19.4

107,

782.

912

6,28

7.8

Loca

l Gov

ernm

ent

19,1

41.8

19,8

00.9

23,3

42.1

32,2

27.2

39,1

79.8

49,1

84.9

58,9

81.7

64,2

64.7

74,4

39.8

100,

338.

9

TO

TA

L78

0,08

7.2

857,

984.

31,

077,

010.

91,

173,

633.

81,

382,

048.

01,

685,

057.

21,

850,

251.

02,

157,

957.

92,

582,

248.

73,

183,

736.

2

Sour

ce:

Min

istry

of F

inan

ce a

nd C

entra

l Ban

k of

Cos

ta R

ica.

157

Tab

le A

.1.2

(a):

CO

STA

RIC

A -

Publ

ic S

ecto

r E

xpen

ditu

re b

y In

stitu

tiona

l Gro

up

(net

of i

nter

-inst

itutio

nal t

rans

fers

; mill

ions

of C

olon

es)

CU

RR

EN

T E

XPE

ND

ITU

RE

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Cen

tral

Gov

ernm

ent

349,

976

425,

958

516,

311

585,

631

695,

100

822,

467

926,

324

1,06

3,95

51,

210,

508

1,38

7,14

6

Wag

es a

nd S

alar

ies

119,

942

150,

957

182,

430

218,

007

262,

892

314,

749

362,

441

409,

155

463,

686

534,

618

G

oods

and

Ser

vice

s14

,243

18,0

5718

,734

19,4

9722

,875

36,1

4631

,303

40,8

9943

,618

56,3

10

Cur

rent

Tra

nsfe

rs12

0,31

315

7,75

017

4,55

619

8,16

422

5,59

021

2,15

623

5,31

328

0,84

030

9,40

735

9,51

5

Deb

t Int

eres

t95

,477

99,1

9414

0,59

114

9,96

318

3,74

325

9,41

729

7,26

733

3,06

139

3,79

743

6,70

2

Dec

entr

aliz

ed In

stitu

tions

178,

222

215,

739

259,

682

304,

396

357,

645

476,

564

543,

263

622,

511

712,

686

862,

820

W

ages

and

Sal

arie

s81

,995

101,

781

125,

644

141,

525

161,

394

214,

719

252,

934

286,

865

331,

786

402,

532

G

oods

and

Ser

vice

s43

,731

52,6

7258

,323

70,5

9784

,120

126,

516

134,

537

151,

396

167,

192

201,

344

C

urre

nt T

rans

fers

52,4

1861

,184

75,4

7791

,799

111,

158

134,

232

155,

038

183,

517

212,

923

257,

400

D

ebt I

nter

est

7910

223

947

597

31,

097

755

733

785

1,54

4

Publ

ic E

nter

prise

s12

,024

13,0

6923

,819

19,7

6016

,451

2,34

22,

371

3,62

22,

387

3,61

3

Wag

es a

nd S

alar

ies

7,47

19,

611

11,8

1414

,195

14,3

59n.

a.n.

a.n.

a.n.

a.n.

a.

Goo

ds a

nd S

ervi

ces

00

00

0n.

a.n.

a.n.

a.n.

a.n.

a.

Cur

rent

Tra

nsfe

rs4,

553

3,45

812

,005

5,56

42,

092

4743

46

759

1,83

3

Deb

t Int

eres

t0

00

00

n.a.

n.a.

n.a.

n.a.

n.a.

Fina

ncia

l Int

erm

edia

ries

7,10

38,

399

18,3

0913

,625

25,1

3584

,442

124,

158

128,

866

138,

021

129,

401

W

ages

and

Sal

arie

s5,

907

7,02

38,

444

9,53

710

,865

n.a.

n.a.

n.a.

n.a.

n.a.

G

oods

and

Ser

vice

s0

00

00

n.a.

n.a.

n.a.

n.a.

n.a.

C

urre

nt T

rans

fers

1,19

51,

376

9,86

54,

088

14,2

71n.

a.6,

447

7,32

813

,939

10,1

22

Deb

t Int

eres

t0

00

00

n.a.

n.a.

n.a.

n.a.

n.a.

Dec

once

ntra

ted

Ent

ities

39,9

5942

,076

50,6

2861

,900

64,9

9057

,933

57,2

2858

,857

74,4

5180

,026

W

ages

and

Sal

arie

s8,

714

10,1

4912

,380

14,1

1312

,668

14,3

0012

,293

12,0

1115

,516

18,2

20

Goo

ds a

nd S

ervi

ces

7,96

68,

822

10,5

4210

,737

11,4

5714

,664

19,7

0220

,892

17,1

3020

,903

C

urre

nt T

rans

fers

23,2

7823

,098

27,6

7536

,963

40,8

1528

,923

25,1

7325

,793

41,7

7440

,873

D

ebt I

nter

est

06

3187

5045

6116

131

29

Loc

al G

over

nmen

t16

,107

17,2

4921

,011

23,8

8333

,746

41,5

7340

,598

56,9

6670

,433

68,6

05

Wag

es a

nd S

alar

ies

7,95

08,

249

10,0

7313

,504

17,2

2923

,124

21,2

4528

,390

32,3

4535

,498

G

oods

and

Ser

vice

s6,

047

5,28

96,

708

6,63

912

,076

15,5

3912

,113

21,0

6928

,591

22,3

00

Cur

rent

Tra

nsfe

rs1,

642

3,01

03,

427

2,87

43,

605

1,60

56,

175

6,46

77,

880

9,69

5

Deb

t Int

eres

t46

870

180

286

683

71,

304

1,06

51,

040

1,61

71,

112

TO

TA

L60

3,39

072

2,48

988

9,76

01,

009,

196

1,19

3,06

81,

485,

320

1,69

3,94

21,

934,

777

2,20

8,48

52,

531,

610

Not

e: n

.a. r

efer

s to

non-

avai

labl

e da

ta.

Sour

ce:

Min

istry

of F

inan

ce a

nd C

entra

l Ban

k of

Cos

ta R

ica.

15

8

T

able

A.1

.2 (b

): C

OST

A R

ICA

- Pu

blic

Sec

tor

Exp

endi

ture

by

Inst

itutio

nal G

roup

(n

et o

f int

er-in

stitu

tiona

l tra

nsfe

rs; m

illio

ns o

f Col

ones

) C

API

TA

L E

XPE

ND

ITU

RE

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Cen

tral

Gov

ernm

ent

40,4

1040

,600

46,4

9156

,711

61,8

3826

,845

20,3

7626

,570

26,0

4133

,456

C

apita

l Inv

estm

ent

16,0

6515

,385

17,0

8513

,789

13,5

9821

,729

16,1

4415

,146

21,1

8824

,243

F

inan

cial

Inve

stm

ent

656

1,02

41,

876

3,83

30

661,

824

2,71

193

11,

055

C

apita

l Tra

nsfe

rs23

,689

24,1

9127

,531

39,0

8948

,240

5,05

02,

408

8,71

33,

922

8,15

8

Dec

entr

aliz

ed In

stitu

tions

13,9

4512

,004

17,5

8416

,737

22,5

7045

,288

59,9

0229

,960

41,5

7635

,333

C

apita

l Inv

estm

ent

10,0

709,

516

13,2

0913

,370

17,7

5639

,708

52,3

2427

,632

28,3

8731

,968

F

inan

cial

Inve

stm

ent

2,54

21,

650

1,24

62,

297

2,46

94,

231

4,79

090

07,

280

918

C

apita

l Tra

nsfe

rs1,

333

838

3,12

91,

070

2,34

51,

349

2,78

81,

429

5,90

92,

447

Publ

ic E

nter

prise

s56

,870

74,0

9782

,302

74,6

0291

,738

166,

611

175,

605

197,

098

208,

880

220,

808

C

apita

l Inv

estm

ent

55,4

0970

,613

75,9

9672

,483

88,6

9216

0,16

817

3,43

119

3,11

019

9,51

120

0,12

3

Fin

anci

al In

vest

men

t90

71,

413

933

1,23

62,

323

4,90

01,

554

3,06

58,

160

2,55

3

Cap

ital T

rans

fers

554

2,07

15,

373

882

723

1,54

262

092

31,

209

18,1

32

Fina

ncia

l Int

erm

edia

ries

11,2

2618

,075

11,7

6515

,831

27,9

0822

,701

27,5

7631

,113

49,3

8959

,886

C

apita

l Inv

estm

ent

9,73

917

,490

5,88

613

,035

26,0

8220

,933

24,2

0226

,161

22,5

7730

,267

F

inan

cial

Inve

stm

ent

1,07

711

45,

259

1,85

329

373

82,

697

168

891

C

apita

l Tra

nsfe

rs41

047

162

094

31,

533

1,03

067

74,

953

26,6

4428

,728

Dec

once

ntra

ted

Ent

ities

13,9

7123

,079

35,6

7144

,089

61,3

6944

,956

39,2

1146

,479

46,1

3054

,369

C

apita

l Inv

estm

ent

3,73

45,

917

17,6

5123

,420

34,5

4443

,030

36,9

7443

,319

34,4

6245

,667

F

inan

cial

Inve

stm

ent

297

149

7320

428

01,

058

1,78

32,

388

3,95

47,

582

C

apita

l Tra

nsfe

rs9,

940

17,0

1217

,948

20,4

6426

,545

868

454

772

7,71

41,

121

Loc

al G

over

nmen

t3,

572

4,26

27,

207

6,15

13,

554

5,16

611

,751

7,21

510

,048

26,6

25

Cap

ital I

nves

tmen

t2,

676

1,02

44,

309

5,88

42,

985

4,38

710

,761

5,86

69,

125

24,1

21

Fin

anci

al In

vest

men

t24

73,

238

9347

192

254

700

280

166

256

C

apita

l Tra

nsfe

rs64

90

2,80

521

937

652

529

01,

069

758

2,24

8

TO

TA

L13

9,99

317

2,11

820

1,02

021

4,12

126

8,97

631

1,56

533

4,42

133

8,43

538

2,06

443

0,47

7N

ote:

n.a

. ref

ers t

o no

n-av

aila

ble

data

. l B

ank

of C

osta

Ric

a.

Sour

ce:

Min

istry

of F

inan

ce a

nd C

entra

159

Tab

le A

.1.2

(c):

CO

STA

RIC

A -

Publ

ic S

ecto

r E

xpen

ditu

re b

y In

stitu

tiona

l Gro

up

(net

of i

nter

-inst

itutio

nal t

rans

fers

; mill

ions

of C

olon

es)

NE

T L

EN

DIN

G19

9719

9819

9920

0020

0120

0220

0320

0420

0520

06A

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lC

entra

l Gov

ernm

ent

0.0

0.0

0.0

-4,6

00.0

0.0

0.0

0.0

0.0

0.0

0.0

Dec

entra

lized

Inst

itutio

ns61

4.2

289.

72,

232.

44,

947.

01,

385.

23,

140.

13,

637.

894

1.9

64.6

-2,6

16.1

Publ

ic E

nter

prise

s97

3.8

-395

.380

4.4

1,18

4.2

1,70

0.0

1,02

6.3

507.

82,

228.

372

3.6

292.

2

Fi

nanc

ial I

nter

med

iarie

s3,

986.

08,

007.

67,

255.

613

,343

.822

,648

.523

,421

.411

,530

.517

,574

.8-3

,986

.25,

391.

6

Dec

once

ntra

ted

Entit

ies

208.

90.

041

.50.

042

.098

.085

.710

8.9

-45.

70.

0Lo

cal G

over

nmen

t-2

.953

.289

.615

.4-0

.824

5.3

-18.

657

5.7

35.3

-167

.3T

OT

AL

5,77

9.9

7,95

5.2

10,4

23.5

14,8

90.4

25,7

74.9

27,9

31.1

15,7

43.2

21,4

29.6

-3,2

08.4

2,90

0.4

Not

e: n

.a. r

efer

s to

non-

avai

labl

e da

ta.

Sour

ce:

Min

istry

of F

inan

ce a

nd C

entra

l Ban

k of

Cos

ta R

ica.

Tab

le A

.1.2

(d):

CO

STA

RIC

A -

Publ

ic S

ecto

r E

xpen

ditu

re b

y In

stitu

tiona

l Gro

up

(net

of i

nter

-inst

itutio

nal t

rans

fers

; mill

ions

of C

olon

es)

TO

TA

L E

XPE

ND

ITU

RE

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Cen

tral G

over

nmen

t39

0,38

5.3

466,

557.

856

2,80

1.9

637,

742.

875

6,93

8.0

849,

311.

694

6,69

9.1

1,09

0,52

4.9

1,23

6,54

8.7

1,42

0,60

1.9

Dec

entra

lized

Inst

itutio

ns19

2,78

0.9

228,

033.

127

9,49

8.8

326,

080.

338

1,59

9.9

524,

991.

160

6,80

3.3

653,

412.

475

4,32

6.5

895,

536.

4Pu

blic

Ent

erpr

ises

69,8

68.3

86,7

70.5

106,

925.

995

,545

.910

9,88

9.4

169,

979.

117

8,48

4.1

202,

947.

621

1,99

0.5

224,

712.

9Fi

nanc

ial I

nter

med

iarie

s22

,314

.434

,481

.637

,329

.542

,799

.575

,691

.313

0,56

4.2

163,

263.

717

7,55

4.0

183,

423.

919

4,67

8.5

Dec

once

ntra

ted

Entit

ies

54,1

38.1

65,1

54.7

86,3

40.9

105,

988.

912

6,40

0.8

102,

986.

096

,525

.110

5,44

5.4

120,

534.

913

4,39

4.6

Loca

l Gov

ernm

ent

19,6

75.7

21,5

64.4

28,3

07.3

30,0

49.7

37,2

99.1

46,9

83.6

52,3

30.6

64,7

56.4

80,5

16.6

95,0

62.8

TO

TA

L74

9,16

2.7

902,

562.

21,

101,

204.

31,

238,

207.

11,

487,

818.

61,

824,

815.

62,

044,

105.

92,

294,

640.

72,

587,

341.

12,

964,

987.

1N

ote:

n.a

. ref

ers t

o no

n-av

aila

ble

data

. So

urce

: M

inis

try o

f Fin

ance

and

Cen

tral B

ank

of C

osta

Ric

a.

16

0

969,

305.

21,

155,

484.

91,

336,

015.

61,

616,

432.

01,

797,

483.

62,

020,

058.

32,

304,

091.

92,

671,

202.

878

7,63

7.8

959,

526.

21,

130,

051.

91,

337,

003.

21,

493,

288.

41,

711,

048.

51,

961,

290.

12,

312,

074.

4W

ages

and

Sal

arie

s20

5,22

0.2

249,

776.

130

8,87

9.7

359,

546.

941

4,75

4.9

485,

547.

455

6,80

6.0

629,

961.

771

7,47

7.2

843,

894.

9So

cial

Sec

urity

31.0

15.3

1,77

0.7

3,36

6.2

4,47

1.1

2,93

9.0

2,44

6.1

3,95

8.3

4,39

8.6

4,95

7.9

Goo

ds a

nd S

ervi

ces

63,0

15.1

76,6

01.0

83,2

51.2

94,1

33.2

111,

171.

214

8,36

4.5

150,

852.

517

4,51

4.7

187,

543.

223

2,33

9.1

Inte

rest

s11

3,6

839

4,36

4.0

437,

946.

2Tr

ansf

ers

198,

50

657,

507.

279

2,93

6.3

Cap

ital E

xpen

ditu

re12

5,91

1.6

149,

467.

193

.730

6,31

0.8

342,

704.

536

1,11

4.5

Net

Len

ding

1,92

7.4

218.

73,

304.

31,

492.

83,

482.

14,

025.

64,

301.

52,

699.

197

.3-1

,986

.1

Bal

ance

-34,

935.

5-3

0,26

0.0

-70,

386.

6-9

7,22

4.2

-93,

765.

2-2

39,7

92.5

-203

,179

.7-1

86,1

00.9

-81,

803.

686

,655

.6

Ta

r/1

ble

A.1

.3:

CO

STA

RIC

A -

Non

-Fin

anci

al P

ublic

Sec

to(m

illio

ns o

f Col

ones

) 19

9719

9819

9920

0020

0120

0220

0320

0420

0520

06A

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

l

Tot

al R

even

ue67

3,36

6.9

809,

140.

189

8,91

8.7

1,05

8,26

0.7

1,24

2,25

0.5

1,37

6,63

9.5

1,59

4,30

3.9

1,83

3,95

7.4

2,22

2,28

8.2

2,75

7,85

8.5

Cur

rent

Rev

enue

672,

363.

681

0,15

3.5

889,

053.

31,

056,

793.

91,

237,

954.

21,

374,

915.

11,

574,

662.

51,

832,

562.

22,

218,

903.

52,

754,

039.

2Ta

x R

even

ue54

9,82

4.2

662,

486.

479

3,30

8.7

893,

351.

51,

037,

216.

31,

174,

902.

71,

351,

722.

51,

561,

663.

71,

882,

184.

82,

320,

675.

7N

on-T

ax R

even

ue2/

122,

539.

414

7,66

7.1

95,7

44.6

163,

442.

520

0,73

7.9

200,

012.

322

2,94

0.1

270,

898.

533

6,71

8.7

433,

363.

5C

apita

l Rev

enue

1,00

3.3

-1,0

13.4

9,86

5.4

1,46

6.8

4,29

6.3

1,72

4.4

19,6

41.4

1,39

5.2

3,38

4.7

3,81

9.3

Tot

al E

xpen

ditu

re70

8,30

2.4

839,

400.

1C

urre

nt E

xpen

ditu

re58

0,46

3.4

689,

714.

3

10.2

116,

108.

716

4,30

2.2

175,

938.

321

4,77

0.6

260,

090.

029

7,95

5.1

333,

633.

86.9

247,

213.

222

8.6

568,

980.

229,

434.

032

6,54

1.6

384,

884.

144

0,06

2.4

485,

178,

363.

119

4,46

5.9

202,

481.

727

5,40

3.1

299,

8

1. C

onso

lidat

ed o

f the

Red

uced

Non

-Fin

anci

al P

ublic

Sec

tor c

ompo

sed

by th

e C

entra

l Gov

ernm

ent a

nd a

sam

ple

of e

ntiti

es (c

urre

ntly

this

sam

ple

incl

udes

: CN

P, F

AN

AL,

AY

A, I

CE,

INC

OP,

JPS

SJ,

CC

SS, C

TAM

S, F

OD

ESA

F, IC

T, ID

A, I

NA

, REC

OPE

, OC

IS).

2. I

nclu

des c

urre

nt tr

ansf

ers.

Sour

ce:

Min

istry

of F

inan

ce a

nd P

ublic

Cre

dit.

161

T

ecto

r

CU

RR

EN

T E

XPE

ND

ITU

RE

19

97

1998

19

99

2000

20

01

2002

20

03

2004

20

05

2006

able

A.1

.4(a

): C

OST

A R

ICA

- Pu

blic

Sec

tor

Exp

endi

ture

by

S)

(mill

ions

of C

olon

s

A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l

Gen

eral

Ser

vice

s 36

,879

.5

38,1

34.6

36

,562

.4

43,2

19.7

49

,780

.8

72,5

05.7

57

,915

.6

69,0

82.5

70

,889

.7

98,4

84.1

Publ

ic S

ecur

ity

38,0

24.5

51

,479

.0

61,9

21.3

73

,174

.5

87,9

96.1

10

9,38

9.6

121,

029.

1 13

7,21

3.7

157,

267.

5 17

7,36

2.9

Educ

atio

n 11

7,06

0.6

146,

691.

1 17

0,51

2.5

213,

169.

9 25

7,41

6.5

314,

266.

7 36

1,60

9.1

415,

747.

5 47

6,58

3.0

553,

375.

4

Hea

lth

122,

391.

3 15

7,68

3.7

188,

800.

7 22

6,19

7.7

263,

385.

5 31

1,58

1.6

355,

224.

2 39

5,75

4.5

447,

202.

0 54

3,01

1.3

Soci

al P

rote

ctio

n

162,

183.

2 18

8,42

8.1

213,

895.

8 25

3,24

2.2

301,

499.

8 33

7,69

8.2

379,

459.

0 44

1,08

0.5

508,

113.

6 59

8,76

9.6

Hou

sing

, urb

an a

nd ru

ral

plan

ning

34

,981

.4

36,5

43.7

41

,464

.4

47,7

03.7

64

,898

.6

80,7

57.3

93

,129

.0

123,

698.

0 11

0,64

4.1

120,

009.

1 C

ultu

ral a

nd re

ligio

us

activ

ities

4,

334.

9 4,

859.

4 5,

348.

7 6,

371.

5 8,

936.

3 8,

268.

6 9,

294.

6 10

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.5

11,6

84.8

13

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.7

Ener

gy a

nd o

il 15

0,76

1.4

167,

632.

9 19

6,29

1.3

264,

657.

7 33

5,36

8.8

468,

473.

4 57

6,06

9.4

745,

923.

9 96

5,47

5.8

1,26

7,53

2.4

Agr

icul

ture

, Silv

icul

ture

, Fi

sher

ies

16,5

24.1

16

,929

.0

23,3

12.2

25

,431

.9

30,8

88.5

32

,316

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33,1

11.7

41

,945

.6

45,7

76.9

41

,197

.9

Min

ing

and

min

eral

re

sour

ces

4,06

5.8

5,39

2.1

7,62

8.8

6,48

4.8

6,42

9.2

3,09

5.6

2,84

9.3

3,69

6.3

3,87

1.9

4,51

0.8

Tran

spor

t and

0.

3

9 31

8,97

8.5

343,

985.

3 33

6,69

1.0

399,

940.

8 48

1,49

8.4

548,

679.

8 69

0,05

9.5

811,

253.

8

175,

973.

8 24

1,20

3.3

267,

952.

6 33

4,79

5.8

392,

794.

6 44

1,12

7.0

477,

562.

6 58

1,07

9.4

635,

896.

9

TO

TA

L

1,04

4,73

2.2

1,29

7,01

7.3

1,57

8,90

6.3

1,85

3,69

2.9

2,20

8,04

5.2

2,66

6,34

7.3

3,08

7,35

0.7

3,59

5,83

3.5

4,27

6,68

3.9

5,10

0,93

4.2

Sour

ce:

Min

istry

of F

inan

ce a

nd P

ublic

Cre

dit.

Com

mun

icat

ions

41

,115

.4

52,0

62.9

72

,986

.4

82,1

01.3

12

9,95

8.2

135,

259.

2 17

5,03

4.3

184,

696.

0 20

8,03

5.6

236,

42

157,

853.

5 25

5,20

6.Ec

onom

ic se

rvic

es

Unc

lass

ified

15

8,55

6.5

16

2

T

able

A.1

.4(b

): C

OST

A R

ICA

- Pu

blic

Sec

tor

Exp

endi

ture

by

Sect

or

(m

illio

ns o

f Col

ons)

CA

PIT

AL

EX

PEN

DIT

UR

E

19

97

1998

19

99

2000

00

1 00

2 03

04

5

6 2

220

2020

020

0

Act

ual

ctua

l ct

ual

ctua

l tu

al

ual

ual

al

al

l

3,59

9.4

,958

.9

241.

2 73

3.7

05.2

9.

8 8.

5 .6

.6

3

AA

AA

cA

ctA

ctA

ctu

Act

uA

ctua

Gen

eral

Ser

vice

s

23,

2,3,

24,

864,

093,

104

5,23

45,

296.

Publ

ic S

ecur

ity

4,47

7.9

,740

.3

571.

8 43

2.0

85.7

6.

2 3.

2 .8

.0

9

7,56

9.,8

87.0

764.

707

4.0

49.7

0.

4 2.

8 .8

.0

9

0,45

8.,6

84.7

710.

966

5.9

02.3

6.

1 8.

2 .8

.9

7

3,06

8.,0

14.7

425.

463

2.6

67.4

3.

0 4.

3 .0

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2

lann

ing

0,42

3.2

,370

.1

782.

9 34

2.0

67.7

23

.9

6.5

2.9

.4

0

ctiv

ities

1,

225.

1 59

7.5

Ean

d oi

l 88

7.65

1.97

2.13

6.91

8.92

8.2

7 4

7

Fish

er4,

564.

511.

748.

819.

982.

297.

2

Mm

iner

al re

sour

ces

111.

198.

127.

7 6.

7 .1

2

unic

atio

ns

9,87

7.6

,017

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459.

7 70

4.0

97.1

8.

2 0.

1 9.

9 .4

9

0,20

1.0

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.0

832.

6 37

3.1

49.6

05

.5

6.2

2.6

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6

4,56

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5.8

085.

4 02

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67.1

7.

2 9.

2 .1

7

2,02

9.6

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5.7

544.

0 89

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73.0

6.

6 1.

9 .2

7

nist

ry o

f Fin

ance

and

it.

2

3,4,

4,8

6,51

3,51

5,39

08,

485

7,56

6.

Educ

atio

n 1

9

6,

10,

10,8

16,5

119

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20,9

4120

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19,6

53.

Hea

lth

16

10

15,

12

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,530

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42,7

015

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16,1

6515

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.

Soci

al P

rote

ctio

n

11

18

21,

24

,25

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021,

972,

172

4,00

34,

224.

Hou

sing

, urb

an a

nd ru

ral p

114

17,

1,35

2.1

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11,2

583.

0 47

3.6

843.

7

15,0 1,

21,1

6

260.

9 1,

143.

7

15,9

441

,254

61,5

87.

2,14

0.3

1,72

3.4

Cul

tura

l and

relig

ious

a

nerg

y 31

,3

38,

1 42

,6

39,

0 47

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74,

0 78

,895

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0,76

0.10

1,58

3.11

4,83

7.

Agr

icul

ture

, Silv

icul

ture

,

inin

g an

d

ies

6 5,

7 5,

0 10

,4

4,1

13,

1 7,

241.

7 6,

641.

4 6,

336.

4 5,

882.

4 9

1 72

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17.

137

29.0

90

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056

.

Tran

spor

t and

Com

m3

5074

,76

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4,8

120,

2413

4,22

140,

6515

0,40

116

1,37

6.

Econ

omic

serv

ices

1

1613

,13

,24

,116

,520

,41

25,3

624

,645

32,2

90.

Unc

lass

ified

TO

TA

L

2

17

3

2,

20

8,

6,

215,

6,4

272,

3

5,1

307,

5

6,05

340,

71

3,00

340,

29

1,82

0

382,

271

1,23

3.

430,

892.

14

Sour

ce:

Mi

Pub

lic C

red

163

T

able

A.1

.4(c

): C

OST

A R

ICA

-Pub

lic S

ecto

r E

xpen

ditu

re b

y Se

ctor

(m

illio

ns o

f Col

ons)

T

OT

AL

EX

PEN

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19

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Tab

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: C

OST

A R

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- R

even

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nd E

xpen

ditu

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f the

Cen

tral

Gov

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2003

2004

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Act

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lA

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459,

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097

3,27

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603

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Ext

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Sour

ce:

Min

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of F

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dit.

16

6

st

itutio

n

CU

RR

EN

T E

XPE

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ITU

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1997

19

98

1999

20

00

2001

20

02

2003

20

04

2005

20

06

Tab

le A

.1.7

(a):

CO

STA

RIC

Ant

Exp

endi

ture

by

In -

Cen

tral

Gov

ernm

e(m

illio

ns o

f Col

ons)

A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l Le

gisl

ativ

e A

ssem

bly

3,62

3.0

4,49

1.1

5,42

5.7

7,07

1.1

9,33

0.5

9,64

7.8

9,29

7.4

10,4

61.6

10

,795

.8

12,9

94.9

C

ompt

rolle

rs O

ffic

e 2,

469.

2 2,

951.

6 3,

804.

1 4,

383.

5 5,

233.

8 5,

778.

2 6,

148.

8 6,

959.

6 7,

604.

3 8,

682.

9 Pr

esid

ency

1,

370.

5 1,

589.

6 1,

702.

5 2,

249.

2 3,

434.

3 4,

611.

4 4,

244.

0 4,

808.

3 5,

316.

5 5,

856.

9 M

inis

try o

f Pre

side

ncy

833.

2 1,

186.

3 1,

531.

7 1,

625.

3 1,

707.

4 2,

055.

8 2,

360.

4 2,

524.

2 3,

018.

6 3,

345.

8 M

inis

try o

f Int

erna

l Aff

airs

1,

889.

6 2,

565.

4 2,

202.

8 2,

314.

1 3,

443.

1 4,

831.

5 6,

684.

0 4,

934.

1 7,

562.

5 6,

475.

4 M

inis

try o

f For

eign

Rel

atio

ns

3,97

1.7

5,86

6.1

6,20

1.7

6,14

9.6

6,48

5.9

8,13

4.6

8,70

1.6

10,1

49.6

10

,663

.5

12,1

56.8

M

inis

try o

f Pub

lic S

ecur

ity

13,4

43.4

17

,543

.5

19,5

59.8

22

,631

.8

28,0

07.9

35

,027

.6

36,4

73.3

42

,069

.8

44,4

22.0

49

,028

.7

Min

istry

of F

inan

ce

21,1

57.8

13

,383

.4

12,9

57.6

13

,758

.3

13,7

97.6

25

,894

.1

17,8

43.5

22

,625

.7

20,1

22.9

24

,284

.5

Min

istry

of A

gric

ultu

re

4,26

2.2

4,89

6.5

5,95

6.4

6,98

6.6

8,07

9.7

9,28

1.2

10,7

29.9

14

,997

.6

12,3

02.5

12

,216

.0

Min

. of T

rade

, Eco

n. In

dust

ry

975.

9 1,

370.

8 1,

486.

6 3,

269.

1 2,

308.

6 2,

363.

0 2,

304.

7 2,

631.

0 3,

153.

9 3,

657.

5 M

in. o

f Pub

lic W

orks

& tr

ansp

. 4,

409.

1 4,

865.

4 5,

498.

8 6,

367.

0 6,

893.

9 9,

279.

5 13

,058

.9

10,2

49.5

15

,810

.7

19,1

11.4

M

inis

try o

f Edu

catio

n 10

8,96

9.5

136,

108.

5 16

3,44

5.3

195,

982.

3 23

7,37

4.1

288,

396.

8 33

6,62

6.1

386,

157.

0 44

8,26

4.9

528,

220.

5 M

inis

try o

f Hea

lth

5,54

1.0

13,8

53.0

11

,410

.0

18,1

38.2

20

,222

.9

25,3

74.0

30

,043

.5

32,1

94.6

38

,780

.9

44,4

75.8

M

in. o

f Lab

or &

Soc

. Sec

urity

13

,046

.9

14,9

40.5

10

,063

.6

15,9

10.2

14

,215

.0

21,9

02.0

22

,579

.7

13,7

31.5

12

,041

.0

23,9

16.7

M

inis

try o

f Cul

ture

3,

317.

2 3,

550.

7 4,

121.

4 4,

695.

7 6,

709.

3 7,

574.

4 6,

986.

7 8,

356.

7 9,

232.

9 9,

333.

7 M

inis

try o

f Jus

tice

5,75

1.8

7,73

0.0

9,47

6.1

11,2

75.0

13

,983

.0

16,6

26.3

17

,015

.3

19,7

84.8

22

,886

.6

26,5

86.0

Ju

dici

al P

ower

18

,007

.2

24,2

95.5

32

,567

.5

38,4

78.9

44

,155

.4

55,2

64.1

62

,106

.6

71,5

18.2

84

,143

.6

96,3

45.1

C

itize

ns' R

ight

s Off

ice1

426.

7 47

5.1

550.

3 66

9.8

905.

3 96

6.6

1,11

9.0

1,27

9.9

1,46

0.1

1,54

5.1

Min

istry

of H

ousi

ng

214.

3 30

3.9

318.

8 74

9.0

390.

0 53

1.2

430.

6 68

8.8

561.

8 4,

415.

8 El

ecto

ral S

upre

me

Trib

unal

2,

133.

1 6,

361.

0 2,

569.

6 2,

800.

5 4,

615.

0 11

,967

.5

5,48

8.8

6,49

6.9

7,52

9.2

24,5

03.5

M

inis

try o

f Com

mer

ce

19,2

61.9

28

,750

.6

37,9

02.6

25

,437

.5

13,4

12.8

1,

897.

0 1,

066.

4 1,

314.

1 1,

600.

4 1,

697.

2 M

in. o

f Pla

nnin

g &

Eco

n. P

ol.

577.

9 67

2.6

690.

4 69

7.5

738.

2 94

2.2

982.

7 1,

112.

8 1,

310.

1 1,

564.

0 M

in. o

f Sci

ence

& T

echn

olog

y 35

6.6

475.

6 48

3.5

560.

4 1,

103.

2 1,

587.

0 1,

455.

0 1,

386.

2 1,

454.

0 1,

771.

1 M

in. o

f Ene

rgy

& E

nviro

nmen

t 3,

480.

1 2,

678.

5 5,

067.

0 6,

283.

7 8,

425.

5 5,

652.

4 5,

073.

7 5,

751.

7 6,

573.

5 7,

160.

0 Pe

nsio

ns

62,7

72.5

81

,270

.1

93,9

22.8

11

2,01

0.3

136,

942.

3 16

2,81

7.3

188,

518.

0 21

9,99

3.3

245,

563.

2 28

1,83

7.8

Publ

ic D

ebt S

ervi

ce

113,

566.

8 11

5,94

1.4

164,

193.

3 17

5,44

9.2

217,

092.

1 25

9,22

4.9

301,

249.

6 33

7,56

9.8

398,

299.

6 44

1,37

7.3

Spec

ial p

urpo

se

499.

8 11

8.8

0.0

11.0

47

.7

81.6

0.

0 0.

0 0.

0 0.

0 T

OT

AL

49

8,23

5.5

603,

109.

9 68

5,95

4.8

809,

054.

5 97

7,71

0.0

1,09

8,58

8.2

1,23

9,74

7.3

1,42

0,47

4.7

1,65

2,56

0.3

1. R

efe

So

urce

: M

inis

try o

f Fin

ance

and

Pub

lic C

redi

t.

416,

328.

9 rs

to th

e D

efen

sori

a de

los H

abita

ntes

de

la R

epub

lica.

167

Tab

le A

.1.7

(b):

CO

STA

RIC

A -

Cen

tral

Gov

ernm

ent E

xpen

ditu

re b

y In

stitu

tion

CA

PIT

AL

EX

PEN

DIT

UR

E

1997

19

98

1999

20

02

2003

20

04

2005

20

06

(mill

ions

of C

olon

s)

2000

20

01

A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l eg

isla

tive

Ass

embl

y 1

43

1817

2918

0.3

Act

ual

Act

ual

Act

ual

Act

ual

L23

5.9

31.0

62

.5

77.1

9.

6 1.

6 7.

7 5

96.9

56

1.9

Com

ptro

llers

Off

ice

135.

5 30

9.7

38.9

2

213

592

95

33.

1

82

17ai

rs

1,1,

11,

27

5330

433.

2,3

1,1

216

14

17

886

679

1,6

1,1

58

69

1,In

d.

1

18,

19,

29,4

38,4

42,9

52,2

446

,69

60,0

873

,975

47,

6,7,

6,11

,97,

34,

7,2,

35

3,6,

5,8,

32

37

22

1,1

51,

11,

01,

31,

272,

01

21

1,2,

1,3,

82,

33,

13,

223,

4557

.88

.75

.15

5.13

.

62

629

510

166.

5736

21

2.23

7

421

2023

32

13,

43,

68,

701,

84,

215,

396,

754,

68,

3,

1,4

559

75,

73,

90,

7490

,10

02.6

76

.5

9.6

6.3

40.7

16

1.8

208.

3 Pr

esid

ency

Pre

side

ncy

34.2

15

.0

37.2

69

.2

88.7

0.

8 9.

4 4

80.5

27

9.4

Min

istry

of

64.8

66

99.4

43

.8

71.9

22

.4

5.6

2.7

.4

45.4

57

.0

Min

istry

of I

nter

nal A

ff2.

5 93

1.9

46.4

18

.8

20.2

3.

6 7.

1 8

86.0

45

7.6

Min

. of F

orei

gn R

elat

ions

68

.3

37.7

49

.9

22.4

66

.4

9.8

9.4

7.8

63.3

86

.1

Min

istry

of P

ublic

Sec

urity

63

9.2

143.

6 68

.8

52.4

33

.6

1.9

0.2

27.1

98

3.3

596.

5 M

inis

try o

f Fin

ance

ure

486.

2 28

5.9

804.

7 26

3.3

920.

9 34

.1

50.6

96

.7

984.

9 1,

504.

8 M

inis

try o

f Agr

icul

t1,

957.

1 1,

247.

5 79

4.9

976.

6 6

840.

0 6

76.0

5

82.3

32

.0

612.

5 94

7.7

Min

. of T

rade

, Eco

n. &

39

.1

99.6

89

.1

6.8

1.2

3.3

33.6

71

.4

74.1

37

.0

Min

. of P

ublic

Wor

ks &

Tr

ansp

. 11

6.68

8.2 7

239.

1 30

.2

81.4

22

.6

5.8

547

8.4 .2

2 5.7 .1

4 675.

0 5.

5 , 7,86

6.4

811.

6 M

inis

try o

f Edu

catio

n 3, 4,

720.

0 6, 6,

008.

6 36

5.0

, 4,64

5.6

918.

4 13

5.2

934.

,715

.9 0

906.

184.

7 9 7 46

.0

Min

istry

of H

ealth

3,

130.

5 32

5.0

405.

3 53

4.1

Min

. of L

abor

& S

oc. S

ec.

Min

istry

of C

ultu

re

, 1,12

2.2

241.

4 6,

277.

6 89

0.1

413.

1 37

4.7

40.8

32

.9

41.8

69

.8

60.8

1,

299.

7 29

7.3

307.

1 56

7.7

91.8

88

.3

28.8

71

8.6

1,73

9.9

Min

istry

of J

ustic

e 62

1.9

374.

1 28

.6

7 318.

1 4.

1 0 96

5.4

1.6

7 93.3

6.

5 1 96

.9

5.3

8 26.4

.6

6 22

3.0

2.8

, 3,88

5.0

348.

3 Ju

dici

al P

ower

, 16

2.4

212.

6 ,

16.2

69

2.2

784.

9 C

itize

ns' R

ight

s Off

ice1

8.3

17.0

47

2.3

74.4

27

.8

25.4

13

1.3

26.5

M

inis

try o

f Hou

sing

88

.3

2.0

2.3

7 9

6 1

1 9.

2 15

.6

Elec

tora

l Sup

rem

e Tr

ibun

al

Min

istry

of C

omm

erce

42

5. 2.2 4

5 8.5

7.6

76 12.9

.8

46 4.

8 .6

4. 10.8

9 11

.11

.6 9

8. 4.8 4

3 .3

2 64.6

.1

46

3.7

54.2

M

in. o

f Pla

nnin

g &

Eco

n. P

ol.

Min

. of S

cien

ce &

Tec

hnol

ogy

1,47

5.9

313.

1 51

0.5

168.

7 17

2.4

495.

1 0

9.4

62.5

60

0.6

91.3

4.

0 4.

9 .6

1. 54.6

8 5. 9.

0 3 1. 1.

4 7 0.

0 11

.8

18.0

M

inis

try o

f Ene

rgy

& E

nv.

301.

959.

0 6 8 15

4.6

2.2

30 0.0 .9

5 0.

0 .1

3.9

75.0

68

9.3

Pens

ions

0.

0 0.

0 0.

0 0 0.

0 .0

0.0

0.0

Publ

ic

ebt S

ervi

ceSp

ecia

l pur

pose

D

0.0

0.0

0.2

1.1

0.0

0.0

0.0

0.0

0.0

4,20

1.5

1,07

4.9

2,03

9.8

2,93

5.8

600.

0 85

4.5

0.0

0.0

0.0

T

OT

AL

9,

153.

4 0,

700. 7

,967

.9

351.

0 21

7.1

403.

5 ,4

72.5

10

4.6

1,11

5.3

106,

850.

1 1.

Ref

ers t

o th

e D

efen

sori

a de

los H

abita

ntes

de

la R

epub

lica.

So

urce

: M

inis

try o

f Fin

ance

and

Pub

lic C

redi

t.

168

Tab

le A

.1.7

(c):

CO

STA

RIC

A -

Cen

tral

Gov

ernm

ent E

xpen

ditu

re b

y In

stitu

tion

(mill

ions

of C

olon

s)

TO

TA

L E

XPE

ND

ITU

RE

97

98

999

000

001

2002

20

03

2004

00

5 06

1919

12

22

20

Act

ual

ual

ual

tual

tu

al

tual

ct

ual

ctua

l tu

al

al

8.9

2.1

8.2

48.2

52

0.1

819.

4 59

5.1

642.

1 92

.7

.8

Act

Act

Ac

Ac

Ac

AA

Ac

Act

uLe

gisl

ativ

e A

ssem

bly

3,85

4,62

5,88

7,4

9,9,

9,10

,11

,113

,556

Com

ptro

llers

Off

ice

2,60

4.7

1.3

3.0

86.1

10

.3

917.

8 74

5.20

0.3

66.1

.3

4.

7 4.

6 9.

7 18

.4

23.0

70

2.2

303.

4 4,

841.

7 97

.0

.3

8.0

5.7

5.5

97.2

29

.8

141.

4 38

3.1

2,54

1.6

64.0

.8

2.

1 7.

3 9.

2 32

.9

63.3

36

5.1

991.

367.

9 48

.5

.0

ns

0.0

3.8

1.6

72.0

52

.3

304.

4 72

1.0

197.

4 26

.8

.8

2.6

7.1

8.6

84.2

41

.5

889.

5 14

3.99

6.9

05.2

.2

4.

0 9.

3 2.

3 21

.6

18.5

52

8.2

994.

222.

4 07

.8

.4

9.3

4.0

1.3

63.2

19

.7

157.

2 41

2.92

9.6

15.1

.7

try

0

1,4

1,7

3,33

5.9

2,36

9.51

6.3

2,33

8.3

2,70

2.4

3,22

8.0

3,5

rans

p.

5.8

4.5

29.0

48

.4

16.5

52

5.3

,754

.33

1.6

56.1

2.

9 7.

7 3.

5 3.

7 17

.5

308.

1 30

3.7

104.

132.

7 39

.9

9 1.

0 1.

6 5.

6 68

.7

38.8

55

8.7

368.

540.

6 86

.1

.9

8.3

8.1

53.7

23

.3

89.7

24

2.8

,812

.07

3.3

10.8

7.

5 9.

4 0.

4 8.

7 02

.8

77.0

36

6.2

275.

585.

5 51

.4

.6

3.7

4.1

4.7

49.1

84

.6

702.

8 33

0.06

3.4

49.4

.3

9.

8 7.

7 2.

4 97

.0

120.

8 15

7.4

503.

644.

6 66

.5

1 9.

1 1.

3 8.

6 86

.8

77.6

04

1.0

146.

305.

3 91

.5

.5

2.9

71.1

80

6.0

1.4

8.5

8.6

6.4

47.1

90

9.9

479.

4 59

7.66

3.2

01.3

.2

4.

1 9.

1 5.

5 42

.3

23.6

90

8.6

071.

350.

4 65

.0

.4

y 3.

8 5.

7 0.

9 66

.2

10.6

43

7.3

194.

352.

2 72

.6

.6

7.

9 9.

6 8.

4 94

.0

25.0

59

2.3

456.

396.

2 65

.8

.1

ent

1.7

0.7

97.9

88

.8

80.1

87

1.4

,465

.50

5.6

48.5

9.

3 1.

5 4.

7 2.

8 10

.3

42.3

81

7.3

518.

993.

3 63

.2

8 6.

8 1.

4 1

3.5

50.3

09

2.1

224.

9 24

9.6

337,

569.

8 3

99.6

44

3 1.

3 3.

7 9.

8 46

.8

47.7

93

6.1

0.0

0.0

0.0

0 2.

3 6.

2 7.

8 05

.8

71.6

11

3.5

060.

7 85

1.9

90.0

4

Def

enso

ria

de lo

s Hab

itant

es d

e la

Re

3,26

3,84

4,5

5,5

5,6,

1 7,

7,7

8,89

1Pr

esid

ency

1,

401,

601,

732,

33,

54,

4,5,

36,

136

Min

istry

of P

resi

denc

y 89

1,28

1,57

1,6

1,8

2,2,

3,0

3,40

2M

inis

try o

f Int

erna

l Aff

airs

3,

553,

493,

343,

54,

15,

6,1

5,9,

97,

933

Min

istry

of F

orei

gn R

elat

io4,

045,

906,

356,

36,

58,

8,10

,10

,712

,242

Min

. of P

ublic

Sec

urity

14

,08

17,6

819

,72

23,3

28,8

35,

37,

5 42

,45

,449

,625

Min

istry

of F

inan

ce

21,6

413

,66

13,7

614

,014

,727

,18

,1

23,

21,1

25,7

89M

inis

try o

f Agr

icul

ture

6,

216,

146,

757,

98,

910

,11

,2

15,

13,9

13,1

63M

in. o

f Tra

de, E

con.

& In

dus

1,01

5.47

0.57

5.8

2,69

4.M

in. o

f Pub

lic W

orks

& T

inis

try

22,5

211

2,65

24,1

014

2,47

34,9

168,

3644

,820

3,1

49,8

244,

61,

296,

59 343,

1 70

,5

398,

89,7

455,

994

,92

536,

086.

Mof

Edu

catio

n M

inis

try o

f Hea

lth

10,2

619

,86

16,0

521

,223

,929

,37

,5

34,

39,1

45,0

09M

in. o

f Lab

or &

Soc

. Sec

. M

inis

try o

f Cul

ture

18

,28

21,2

113

,922

,319

,530

,22

6 14

,12

,123

,97

4,43

4,85

4,41

5,0

7,2

8,7,

0 8,

9,9

11,0

73M

inis

try o

f Jus

tice

6,37

8,10

10,6

011

,815

,017

,18

,6

21,

24,9

27,9

34Ju

dici

al P

ower

20

,21

25,9

834

,35

40,7

46,

59,

64,

5 74

,87

,310

0,23

0.C

itize

ns' R

ight

s Off

ice1

5849

556

1,3

1,1,

8 1,

1,5

1,57

1M

inis

try o

f Hou

sing

30

6 52

5.7,

013,

77

478.

9 60

6.8

585.

7 70

1.9

571.

4,43

Elec

tora

l Sup

rem

Tre

ibun

al

Min

istry

of C

omm

erce

2,

552,

843,

44,

12,

5,2

6,2

1,8,

124

,967

19,2

628

,75

37,9

125

,413

,41,

1,1,

61,

751

Min

. of P

lann

ing

& E

con.

Pol

icM

in. o

f Sci

ence

and

Tec

hnol

ogy

2,05

981,

208

91,

1,7

1,7

1,2,

02,

164

8468

687

1,1

1,1,

1,4

1,78

9M

in. o

f Ene

rgy

and

Envi

ronm

3,78

6,16

8,6

14,9

10,2

9,10

1 12

,0

219,

11,2

1 281,

837.

5,84

Pens

ions

63

,73

81,4

293

,92

112,

013

6,9

162,

188,

245,

5Pu

blic

Deb

t Ser

vice

Sp

ecia

l pur

pose

11

3,56

115,

9464

,19

175,

421

7,25

9,30

1,98

,21,

377.

4,70

1,19

2,03

2,9

3,6

1,0.

TO

TA

L

465,

4854

8,93

663,

0776

1,3

882,

21,

068,

1,17

3,1,

329,

1,52

1,5

1,75

9,41

0.1.

Ref

ers t

o th

e So

urce

: M

inis

try o

f Fin

ance

and

Pub

lic C

redi

t. pu

blic

a.

169

Tab

le A

.1.8

: C

OST

A R

ICA

: A

uton

omou

s Ent

ities

Exp

endi

ture

(m

illio

ns o

f Col

ones

) 19

9719

9819

9920

0020

0120

0220

0320

0420

0520

06A

alA

ctu

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

tual

Atu

alFO

DES

AF

1,01

4.3

39.4

3.6

68

6953

,253

,51

59,7

66.

67,8

86.0

2,71

8.3

CO

NA

VI

4.7

73

30,

40,8

37,9

242

,514

.8,

988.

5y

Pens

ion

Syst

em7,

690.

016

.80.

20

1819

,21

,121

,73

1,22

0.4,

502.

287

.18.

47

56,

7,94

8,49

8.1,

286.

42,

243.

566

.29.

45

59,

5,91

8,38

4.7,

560.

21,

993.

113

.53.

26

511

,6,

708,

401.

8,16

4.4

43,

5,30

7,40

3.3,

300.

13,

344.

861

.60.

92

54,

3,6

3,44

4,47

6.tit

ies

7,29

3.12

.93.

06

325

,30

,227

,76

8,45

6.e

4,73

7.35

.92.

59

1617

0,17

5,0

196,

026,

171.

ctu

alA

cc

442

,154

,46

6,32

9.,3

63.2

13.4

2.2

57

11,6

626

,324

.3,

149.

895

4.5

55.6

2.5

74

Non

-Con

tribu

tor

9,8

10,7

412

,485

.14

,641

.0,7

93.7

681.

486

.32.

83

2C

OSE

VI

C5,

16,

915,

808.

4,80

8.6

,659

.795

2.2

4.5

01

CTA

10,7

7,97

4,44

3.9,

277.

4,4

22.7

304.

24.

66

Reg

istro

2,8

5,31

3,34

8.4,

131.

3,3

85.5

285.

46.

14

FON

AFI

FO,9

40.2

892.

12.

28

OC

ISou

s En

3,2

3,76

4,79

5.4,

324.

5,9

39.1

066.

599

.31.

19

Res

t of A

uton

omT

otal

Exp

endi

tur

97,

30

78,0

8,11

105,

1912

,343

.13

1,08

3.12

,976

.814

8,34

8.1

6,00

2.5

0,37

2.1

056.

253

9.4

88.0

30.7

3.3

25.

621

6 66

Not

e: F

OD

ESA

F Te

cnic

o de

Avi

aciore

fers

to th

e Fo

ndo

de D

esar

rollo

y A

s Fam

iN

AV

I tej

o N

aia

lidad

to th

AC

tej

o n

Civ

il; F

ON

AFI

Fon

do N

a F

inan

cia

ores

tal;

to th

e O

Coo

pern

.

ol19

200

2001

2002

2003

2004

2005

2006

AA

cA

cA

ctA

ctu

Act

ual

Act

ual

Act

ual

ctua

lct

ual

1214

,815

,40

74,7

0612

,835

06,7

404,

582.

0,80

911

1112

0.20

811

,522

.13

,416

.24

,353

.126

,382

.96,

929.

57,

10,2

8,6

8,71

621

,224

.10

,048

.811

,373

.011

,460

.03,

965.

00,

154.

02,

2,8

3,27

6,14

65,

316

8,71

8.7,

845.

67,

926.

56,

304.

189

2,07

0-2

,781

.5,

053.

66,

241.

69,

247.

6,7,

611

,21

8,13

3.7,

035.

16,2

02.1

5,44

3.3

3,92

1.3

112

,313

,515

,647

29,8

4939

,718

.39

,232

31,1

88.8

4,37

4.1

7,44

2.4

2640

,43

,850

,384

,94

51,5

16.

89,8

2902

,843

.8,

915.

4,80

8.

sign

acio

nelia

res;

CO

o th

e C

ons

cion

al d

e V

; CO

SEV

Ie

Con

sejo

de

Segu

ridad

Via

l; C

To

the

Con

sO

to th

e F

cion

al d

em

ient

o F

and

OC

ISfic

ina

dera

cion

Inte

acio

nal d

e la

Sal

ud.

Sour

ce:

Min

istry

of F

inan

ce

Tab

le A

.1.9

: C

OST

A R

ICA

: Pu

blic

Fin

anci

al In

stitu

tions

Exp

endi

ture

(m

illio

ns o

f Con

es)

1997

1998

990

ctua

ltu

altu

alua

lal

AA

BCC

R1,

421.

49,

260.

1,1

60.9

21.7

6.8

.61

.01

.013

113

.6BA

NH

VI

100.

14.

14.

69

.95

02

BNC

R49

8.9

68.7

55.4

.97

12

BPD

C2,

155.

568

0.6

63.3

2.5

.7.4 .

91 2

INFO

CO

OP

291.

94

396.

85,

2811

8.0

428

.329

.6.

74.

38

7BC

RRe

st o

f Pub

lic E

nter

pris

es,3

73.2

0,24

9.1

5.1

98.0

12.6

22.1

4 .11 4

1 .71 1

.2 .41

1T

otal

Exp

endi

ture

,090

.040

3.5

46.8

36.8

76

1.0

21

206

221

Not

e: B

CC

R re

fers

to th

e B

anco

Cen

tral d

e C

osta

Ric

a to

Ban

cario

dda

; BN

o N

acst

a R

i B

anc

de

De

mun

alC

OO

P to

Inst

ituto

Nac

iona

l de

oope

raC

R to

os

ta

y of

Fin

ance

.

; tivo;

and

BB

AN

HV

Ic Ban

co d

e C

o H

ipot

ee Ric

a.

la V

ivie

nC

R to

Ban

cio

nal d

e C

oca

; BPD

C to

o Po

pula

r ysa

rrol

lo C

o;

INFO

Fom

ento

CSo

urce

: M

inis

tr

170

Tab

le A

.1.1

0: C

OST

A R

ICA

: Pu

blic

Ent

erpr

ises

Exp

endi

ture

(m

illio

ns o

f Col

ones

) 19

9719

9819

9920

0020

0120

0220

0320

0420

0520

06A

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lA

ctua

lIC

E31

,436

.542

,903

.959

,318

.747

,740

.649

,234

.112

7,82

3.1

161,

103.

117

8,18

3.1

172,

528.

216

7,20

5.4

REC

OPE

24,1

66.0

28,3

77.9

31,8

00.1

39,3

43.0

43,0

74.3

7,57

4.1

9,57

9.2

10,5

01.2

31,3

07.1

30,5

12.9

CN

FL10

,533

.113

,387

.015

,777

.712

,086

.815

,190

.729

,160

.76,

763.

316

,445

.113

,140

.815

,418

.2IC

AA

4,63

9.6

6,44

6.7

6,76

0.2

5,56

7.0

5,32

5.9

9,22

6.1

8,02

5.6

6,86

5.0

7,89

8.8

11,9

49.5

JPSS

J6,

536.

26,

990.

38,

033.

16,

681.

07,

080.

03,

808.

81,

876.

32,

287.

65,

740.

95,

400.

3C

orre

os29

0.2

425.

61,

046.

099

2.1

637.

552

3.6

1,17

4.6

4,16

5.2

4,68

7.1

971.

9C

NP

1,25

2.0

1,63

6.0

2,97

2.4

2,20

8.5

2,35

1.2

3,70

2.9

3,09

9.5

6,25

6.8

4,18

4.6

3,90

6.5

Res

t of P

ublic

Ent

erpr

ises

5,59

9.9

7,25

4.9

9,08

2.3

8,83

1.7

6,57

4.1

11,8

70.8

15,4

26.7

10,7

56.9

12,9

64.1

32,5

93.5

Tot

al E

xpen

ditu

re84

,453

.610

7,42

2.3

134,

790.

612

3,45

0.8

129,

467.

819

3,69

0.0

207,

048.

323

5,46

0.9

252,

451.

626

7,95

8.2

N

ote:

IC

E re

fers

to In

stitu

to C

osta

rric

ense

de

Elec

trici

dad;

REC

OPE

to R

efin

ador

a C

osta

rric

ense

de

Petro

leo;

CN

FL to

Com

pañi

a N

acio

nal d

e Fu

erza

y L

uz; A

YA

to In

stitu

to C

osta

rric

ense

de

Acu

educ

tos y

Alc

anta

rilla

do; J

PSSJ

to Ju

nta

de P

rote

ccio

n So

cial

de

San

Jose

; and

CN

P to

Con

sejo

Nac

iona

l de

Prod

ucci

on.

T

able

A.1

.11:

CO

STA

Rns

titut

ions

Exp

endi

ture

(m

illio

ns o

f Col

ones

)

.4 238

3,72

6.9

444,

385.

352

9,00

3.8

617,

234.

665

9,84

4.8

762,

157.

690

2,93

4.6

Sour

ce:

Min

istry

of F

inan

ce.

ICA

: D

ecen

tral

ized

I

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Soci

al S

ecur

ity16

2,91

7.9

198,

826.

925

1,48

6.0

291,

595.

534

2,06

5.1

401,

916.

646

1,50

1.1

497,

049.

756

5,14

2.8

683,

142.

1U

CR

19,3

04.6

21,8

16.2

23,3

23.9

28,8

33.8

32,0

20.2

33,0

14.3

45,5

01.4

48,4

32.7

58,8

52.9

63,6

39.4

INA

9,99

2.4

10,7

66.2

12,5

41.9

14,6

73.9

17,4

31.0

22,6

63.7

22,8

04.4

20,7

19.4

25,4

47.6

27,5

06.8

IMA

S11

,738

.28,

576.

110

,783

.217

,346

.515

,846

.812

,588

.713

,867

.118

,204

.023

,430

.226

,022

.7U

NA

7,08

2.8

7,98

7.8

8,58

2.7

10,5

22.8

12,4

12.0

10,6

69.6

15,5

49.6

20,6

88.2

19,6

02.5

23,7

75.4

ITC

R3,

874.

74,

658.

14,

663.

66,

203.

36,

845.

37,

335.

48,

038.

79,

178.

010

,382

.913

,070

.5ID

A5,

789.

05,

034.

54,

549.

84,

887.

95,

132.

49,

028.

97,

623.

57,

170.

59,

375.

98,

275

Rest

of D

ecen

traliz

ed In

stitu

tions

8,88

8.4

9,96

1.1

12,3

30.1

9,66

3.2

12,6

32.4

31,7

86.6

42,3

48.7

38,4

02.4

49,9

23.0

57,5

02.

229,

588.

026

7,62

6.9

328,

261.

2T

otal

Exp

endi

ture

Not

e: U

CR

refe

rs to

Uni

vers

idad

de

Cos

ta R

ica;

INA

to In

stitu

to N

acio

nal d

e A

pren

diza

je; I

MA

S to

Inst

ituto

Mix

to d

e A

yuda

; UN

A to

Uni

vers

idad

Nac

iona

l; IT

CR

to In

stitu

to T

ecno

logi

co d

e C

osta

ic

a; a

nd ID

A to

Inst

ituto

de

Des

arro

llo A

gric

ola.

So

urce

: M

inis

try o

f Fin

ance

. R

171

T

able

A.1

.12:

CO

STA

RIC

A -

Cud

get:

App

rove

d an

d E

xecu

ted

(m

illio

ns o

f Col

ons)

1997

19

98

1999

20

00

2001

20

02

2003

20

04

2005

20

06

entr

al G

over

nmen

t B

A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l

App

rove

d B

udge

t 57

0,82

3.8

659,

885.

4 78

0,60

9.5

1,16

3,59

7.1

1,11

9,45

5.3

1,31

4,63

8.9

1,65

5,00

7.2

2,04

5,39

3.4

2,30

9,69

0.5

2,77

0,32

9.2

Exec

uted

Exp

endi

ture

46

5,48

2.3

548,

936.

2 66

3,07

7.8

761,

305.

8 88

2,27

1.6

1,06

8,11

3.5

1,17

3,06

0.7

1,32

9,85

1.9

1,52

1,59

0.0

1,75

9,41

0.4

App

rove

d m

inus

Ex

ecut

ed

105,

341.

5 11

0,94

9.2

117,

531.

7 40

2,29

1.3

237,

183.

7 24

6,52

5.4

481,

946.

5 71

5,54

1.5

788,

100.

5 1,

010,

918.

8

Mem

o:

App

rove

d B

udge

t

(% o

f GD

P)

19.1

18

.2

17.3

23

.7

20.8

21

.7

23.7

25

.1

24.2

24

.4

Exec

uted

Exp

endi

ture

(15

.5

Ap E

(

3.5

3.1

2.6

8.2

4.4

4.1

6.9

8.8

8.3

8.9

: M

inis

try o

f Fin

ance

.

% o

f GD

P)

15.6

15

.1

14.7

15

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16.4

17

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16.8

16

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15.9

pr

oved

min

us

xecu

ted

of G

DP)

%

Sour

ce

172

Tab

le A

.1.1

3(a)

: C

OST

A R

ICA

- C

entr

al G

over

nmen

t Bud

get:

App

rove

d

(mill

ions

of C

olon

s)

20

04

2005

20

06

1997

19

98

1999

20

00

2001

20

02

2003

Act

ual

Act

ual

AA

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l A

ctua

l Le

gisl

ativ

e A

ssem

bly

4,28

6.0

10,4

40.2

7,

215.

4 8,

265.

0 9,

850.

6 11

,323

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10,3

78.9

11

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13,2

25.4

16

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.0

ctua

l A

ctua

l

Com

ptro

llers

Off

ice

2,5

6,76

4,78

4.5,

117.

629.

466.

0 28

.9

9.7

0 Pr

esid

ency

1,

1,99

3,54

2.4,

219.

547.

8 30

.0

8.0

7 M

inis

try o

f Pre

side

ncy

9 1,

0 1,

813.

2,06

3.27

5.41

5.66

8.9

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rnal

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airs

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n R

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1

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ance

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9,98

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58.6

23

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24,0

13.9

20

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.9

28,0

24.1

24

,503

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32,7

21.1

of

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icul

ture

7

8,4

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,865

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.7

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ry o

f Tra

de, E

cono

my

and

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str

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422.

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8 1,

867.

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609.

8 2,

760.

5 2,

449.

9 2,

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858.

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7 3,

915.

lic

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ks a

nd tr

ansp

ort

22,7

81.1

33

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96.1

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76.2

96

8.9

72,9

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83

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9 86

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.du

catio

n 11

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145,

567.

177,

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.8

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0 53

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7,3

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23.7

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1.48

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866.

0 4

39,

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and

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al S

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i2,

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55,1

81.5

1,

192.

9 49

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7.6

28

24,

ltu

re

4,9

5,62

1.9

5,32

3.6,

488.

257.

241.

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11,

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stic

e 7,

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492.

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19

,881

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w

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7

1.1

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1,10

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2 1,

9 1,

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886.

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4.9

607.

8 71

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717.

3 82

0.5

814.

0 67

3.6

4,40

5.6

3,33

8.3

4,07

8.5

4,44

6.5

6,99

6.1

8,75

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6,52

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8,76

1.3

10,5

52.7

31

,936

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Min

istry

of C

omm

erce

54

0.3

29,0

69.1

34

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.0

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5 2,

028.

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638.

7 1,

934.

5 1,

970.

0 2,

107.

9 M

inis

try o

f Pla

nnin

g an

d Ec

on. P

olic

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7 81

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Min

istry

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cien

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nd T

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Min

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d En

viro

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8,69

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Publ

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Spec

ial p

urpo

se

6,56

8.1

0.0

4,10

0.0

4,10

0.0

4,10

0.0

4,38

7.0

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5,00

0.0

2,

539.

0 T

OT

AL

57

0,82

3.8

659,

885.

4 78

0,60

9.5

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3,59

7.1

1,11

9,45

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1,31

4,63

8.9

1,65

5,00

7.2

2,04

5,39

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2,30

9,69

0.5

2,77

0,32

9.2

1. R

efer

s to

the

Def

enso

ria d

e lo

s Hab

itant

es d

e la

Rep

ublic

a.

Sour

ce:

Min

istry

of F

inan

ce.

42.7

7.

2 1

3 6,

7 6,

6,8

7,43

8,48

0.9,

783.

0 1,

549.

9 1,

075.

906.

6 46

6.2.

8 6 8 6

2,1

5,6

2,4,

77

2,5,

152,

687.

5,71

5.29

1.6,

624.

8 3,

860.

Min

istry

of I

nte

Min

istry

of F

ore

4,04

7.4

4,40

0.9

4,69

1.1

6,92

5.3

3,56

7.8

6,12

4.5

161.

8 50

2.1

7,08

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517

7.2

9,6.

3 9,

05

8,

12,3

79

11,0

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11,3

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7 11

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10.

Min

istry

of P

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8,63

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65.5

07

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Min

istry

of F

inM

inis

try

6,62

3.0

6,51

6.2

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29.9

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7 9

4 12

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13,3

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ini

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y5

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stry

of P

ubM

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try o

f E62

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6.27

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1 4 7

249,

5 22

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05,3

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762.

314.

666

3.M

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try o

f Hea

lth

Min

istry

of L

abor

ty

9.

1 84

6.9

6 6

6 8,

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.0,

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530.

122

8.M

inis

try o

f Cu

Min

istry

of

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cial

P

5 8,

oC

itize

ns' R

ight

s Off

ice

.6

1 7 5

51,

1 98

6.67

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061,

408.

416.

1,58

3.40

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3.6

Min

istry

of H

ousi

ng

Elec

tora

l Sup

rem

e Tr

ibun

al

173

T

able

A.1

.13(

b):

CO

STA

Rer

nmen

t Bud

get:

Exe

cute

d

ICA

- C

entr

al G

ovill

ions

ol

ons)

(m

of C

19

97

1998

19

99

2000

20

01

2002

20

03

2004

20

05

2006

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Legi

slat

ive

Ass

embl

y 3,

858.

9 4,

622.

1 5,

888.

2 7,

448.

2 9,

520.

1 9,

819.

4 9,

595.

1 10

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11,1

92.7

13

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Com

ptro

llers

Off

ice

s Se

curit

y

y ks

and

tran

spor

t du

catio

n 1

d So

cial

Sec

urity

ice

2034

461

11

11

1,1,

ibun

al

2, 19,

28,

37,

2513

2,

1

of E

nerg

y an

d En

viro

nmen

t

ice

115,

941

22

301,

339

8,29

9.po

se

548,

936.

2 66

3,07

7.8

761,

305.

8 88

2,27

1.6

1,06

8,11

3.5

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3,06

0.7

1,32

9,85

1.9

1,52

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0.0

1,75

9,41

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los H

abita

ntes

de

la R

epub

lica.

So

urce

: M

inis

try o

f Fin

ance

.

2,60

4.7

3,26

1.3

3,84

3.0

4,58

6.1

5,51

0.3

5,91

7.8

6,74

5.1

7,20

0.3

7,76

6.1

8,89

1.3

Pres

iden

cy

1,40

4.7

1,60

4.6

1,73

9.7

2,31

8.4

3,52

3.0

4,70

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4,30

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4,84

1.7

5,39

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6.3

Min

istry

of P

resi

denc

y 89

8.0

1,28

5.7

1,57

5.5

1,69

7.2

1,82

9.8

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Min

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nter

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ffai

rs

3,55

2.1

3,49

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8.5

7,93

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Min

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of F

orei

gn R

elat

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4,04

0.0

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3.8

6,35

1.6

6,37

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M

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try o

f Pub

lic

14,0

82.6

17

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28.6

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28,8

41.5

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Min

istry

of F

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ce

21,6

44.0

13

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13,7

62.3

14

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27

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18,9

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21,1

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Min

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of A

gric

ultu

re

6,21

9.3

6,14

4.0

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9.7

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29.6

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63.7

M

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f Tra

de, E

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my

and

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str

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4.5

Min

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of P

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Wor

22,5

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24

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Min

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12,6

57.7

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3.5

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7 20

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Min

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of H

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10

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M

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Min

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Min

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M

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try o

f Com

mer

ce

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1 75

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Min

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3,78

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6,16

0.7

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Pens

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0 0.

0 0.

0 0.

0 T

OT

AL

46

5,48

2.3

1. R

efer

s to

the

Def

enso

ria

de

17

4

175

Tab

le A

.1.1

3(c)

: C

OST

Exp

endi

ture

1997

2000

20

01

2002

20

05

2006

A

RIC

A -

Diff

eren

ce B

etw

een

App

rove

d B

udge

t and

Exe

cute

d (m

illio

ns o

f Col

ons)

1998

1999

2003

2004

A

ctua

l A

ctua

l

1

5,1

2 8

5 7

8 2

2,7

3,2

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Act

ual

Legi

slat

ive

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