Document o f The World Bank

Report No. 25791-EC

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED

PROGRAMMATIC HUMAN DEVELOPMENT REFORM LOAN I

IN THE AMOUNT OF US$50.00 MILLION

TO THE

REPUBLIC OF ECUADOR

April 28,2003

Human Development Department Peru, Bolivia, Ecuador and Venezuela Country Management Unit Latin America and the Caribbean Region

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AUS BDH BE BS CGP CPM DINEPP GDP GOE HDRL

HDRP IESS IMF INNFA ISSFA LMG LO1 MEF MEC MODERSA MOH OR1 PAE PA1 PA" SELBEN SIISE ssc STFS SIGEF

Vice President Country Director Sector Director Sector Leader

Task Team Leader

GOVERNMENT FISCAL YEAR January 1 - December 31

CURRENCY EQUIVALENTS Currency Unit = US Dollar

ACROYNMS AND ABBREVIATIONS

David de Ferranti Marcelo Giugale

Ana-Maria Arriagada Daniel Cotlear

Daniel Dulitzkv

Aseguramiento Universal en salud Bono de Desarrollo Humano Beca Escolar Bono Solidario Conjunto Garantizado de Prestaciones Conjunto de Prestaciones Minimas Direccidn Nacional de Educacidn Popular Permanente Product0 Intemo Bruto Gobiemo de Ecuador Programa de Reforma de Desarrollo Humano Prkstamo de Reforma de Desarrollo Humano lnstituto Ecuatoriano del Seguro Social Fondo Monetario Intemacional Instituto Nacional de la Nifiez y la Familia Instituto del Seguro Social de las Fuerzas Armadas Ley de Matemidad Gratuita Carta de Intencidn Ministerio de Economia y Finanzas Ministerio de Educacidn y Cultura Proyecto de Modemizacidn de 10s Servicios de Salud. Ministerio de Salud Operacidn Rescate Infantil Program de Alimentacidn Escolar Programa Ampliado de Inmunizaciones Programa de Alimentacidn y Nutricidn para Niiios Seleccidn de Beneficiarios Sistema Integrado de Indicadores Sociales del Ecuador Seguro Social Campesino

Secretaria Tdcnica del Frente Social

Universal Health Insurance Conditional Cash Transfer Program Conditional Cash Transfer Program for students Unconditional Cash Transfer Program Guaranteed Health Care Services Minimum health care services

National Office for Permanent Popular Education

Gross Domestic Product Government o f Ecuador

Human Development Reform Program

Human Development Reform Loan

Social Security Administration International Monetary Fund National Institute for Children and the Family

Social Security Administration for the Military

Free Maternal Health Care Law Letter o f Intent Ministry o f Finance Ministry o f Education

Health Sector Modemization Project

Ministry o f Health Early Childhood Development program School Feeding Program Immunization Program

Feeding and Nutrition Program for Children

Proxy Means Test

Integrated System o f Social Indicators in Ecuador

Subsidized Health Insurance for Rural Workers Technical Secretariat o f the Interministerial Social Sectors Committee

Sistema de Gestidn Financiera Government financial management system

TABLE OF CONTENTS

I . INTRODUCTION .................................................................................................................... 1

I1 . THE POLITICAL AND ECONOMIC SETTING .......................................................................... 2

I11 . SOCIAL SECTORS: REFORMS AND ISSUES ........................................................................... 4 W H Y IS A REFORM PROGRAM NEEDED? ............................................................................. 4 LONG TERM VISION OF HUMAN DEVELOPMENT IN ECUADOR ........................................... 6 PRINCIPLES OF THE REFORM . OBJECTIVES. TRIGGERS. AND BENCHMARKS ..................... 8

A . B . c .

OVERALL OBJECTIVE 1 : PROTECTION OF PUBLIC SPENDING IN THE SOCIAL SECTORS AND IN PRIORITY PROGRAMS ...................................................................................................... 9 OVERALL OBJECTIVE 2 : INCREASE EFFECTIVENESS AND EFFICIENCY OF BASIC SOCIAL SERVICES AND PROGRAMS ................................................................................................ 10 1 . SOCIAL ASSISTANCE ................................................................................................ 11 2 . EDUCATION .............................................................................................................. 14 3 . HEALTH .................................................................................................................... 16 4 . PENSIONS .................................................................................................................. 20 OVERALL OBJECTIVE 3: TRANSPARENCY AND ACCOUNTABILITY IN THE SOCIAL SECTORS AND PRIORITY PROGRAMS ................................................................................ 22

D . FISCAL COST OF THE PROPOSED PROGRAM ...................................................................... 25

I V . THE PROPOSED HUMAN DEVELOPMENT REFORM LOAN I ............................................... 28 A . LINKS TO COUNTRY ASSISTANCE STRATEGY AND OTHER BANK OPERATIONS ............... 28 B . RATIONALE FOR A PROGRAMMATIC APPROACH AND PROGRAM DESIGN ......................... 29 C . THE LOANS ....................................................................................................................... 32 D . E . BENEFITS AND R I S K S ........................................................................................................ 39

PROGRAM IMPLEMENTATION AND SUPERVISION .............................................................. 37

ANNEX 1 . LETTER OF DEVELOPMENT POLICY ............................................................................. 41 ANNEX 2 . POLICY MATRIX ........................................................................................................... 53 ANNEX 3 . LIST OF PROTECTED SOCIAL PROGRAMS ..................................................................... 60 ANNEX 4 . CHARACTERISTICS OF THE BONO DEDESAROLLOHUMANO ......................................... 61 ANNEX 5 . TARGETING INSTRUMENTS FOR SOCIAL ASSISTANCE PROGRAMS .............................. 62 ANNEX 6 . STUDIES AND ACTIONS SUPPORTING THE PROGRAMMATIC HUMAN DEVELOPMENT

REFORM OPERATION ................................................................................................... 63 ANNEX 7 . THE EDUCATIONAL SYSTEM IN ECUADOR, ISSUES AND OPTION FOR CHANGE ........... 64 ANNEX 8 . THE HEALTH SECTOR IN ECUADOR ............................................................................. 73 ANNEX 9 . MAIN ISSUES ON SOCIAL ASSISTANCE IN ECUADOR ................................................... 89 ANNEX ~O.ECUADOR AT A GLANCE ............................................................................................. 105 ANNEX 1 1.STATEMENT OF IFC’S PORTFOLIO FOR ECUADOR ..................................................... 107 ANNEX 12 . STATUS OF BANK GROUP OPERATIONS ................................................................... 108

T h i s project was prepared by a core team that included Daniel Dulitzky (Task Team Leader, LCSHH), Patricia Bernedo (Language Program Assistant, LCSHH), Marcelo Bortman (Health Specialist, LCSHH), Robert Crown (Consultant), Pablo Gottret (Sr Economist, HDNHE), Fernando Lavadenz (Consultant), Rafael Rofman (Sr. Economist, LCSHS), and Carolina SAnchez PAramo (Economist, LCSPP). In addition, a number o f people provided useful comments and revisions at different stages o f the process: Suzana Campos Abbott (Lead Operations Officer, LCSHD), Daniel Cotlear (Country Sector Leader, LCSHD), Marcelo Giugale (Country Director, LCC6C), Ana Mm’a Arriagada (Sector Director, LSCHD), Evangeline Javier (Sector Manager, LCSHH), Vicente Fretes Cibils (Sector Leader, LCC6A), JosC Roberto Ldpez CAlix (Sr. Economist, LCSPE), and Juan Gali (Consultant). Charles Griffin (Sector Director, SASHD), Norbert Schady (Sr. Economist, DECRG), Robert Hecht (Sector Manager, HDNHE), and Fred Levy (Consultant) acted as peer reviewers, and Isabella Micali Drossos (Sr. Counsel, LEGLA) provided excellent legal advice. Finally, the assistance o f the Ecuador Country Office, and the Government o f Ecuador, through Nelson GutiCrrez and Roberto Salazar has proven invaluable in preparing this operation.

REPUBLIC OF ECUADOR PROGRAMMATIC HUMAN DEVELOPMENT REFORM LOAN I (HDRL)

LOAN AND PROGRAM S U M M A R Y

Borrower: Republic of Ecuador.

Beneficiary: Ministry o f Economy and Finance

Amount: For a Fixed-Spread Loan (FSL) o f US$50.0 million.

Terms: Commitment-linked amortizing repayment Fixed Spread Loan payable in 22 years, including a 6-year grace period and level principal repayment; at six-month LBOR plus fixed spread for Fixed Spread Loans denominated in U S dollars

Front-End Fee: 1% on principal amount, to be withdrawn from Loan Account on or promptly after the Effective Date

Commitment Fee: 0.85 percent on undisbursed loan balances for the f i rst four years, standard charge o f 0.75 percent on undisbursed loan balances thereafter, beginning 60 days after signing, less any waiver.

Obiectives and Description:

The Government o f Ecuador, which took office January 15, 2003, i s undertaking a new program to establish macroeconomic stability and the conditions for the resumption o f growth and the reduction of poverty, following one o f the worst economic crisis in recent history. Both the World Bank and IMF are providing financial assistance to this effort. Concurrently, the Government has committed itself to protect and enhance social sector spending and program efficiency in the immediate term, and initiate reforms in key social sectors -health, social protection, and education- to provide a regulatory and institutional platform for medium and longer-term structural improvements in those areas. The HDRL would be the f i rs t phase o f the Bank’s support to achieving these goals.

The HDRL, like the overall program would focus on three critical aspects o f social service reforms: (i) protecting and enhancing Ecuador’s public sector investment in social sectors by supporting rationalized institutional budgets and financing for key social programs; (ii) increasing the efficiency and effectiveness o f social programs through refocusing program objectives, improving targeting o f social services, raising consistency in their administration, and promoting resource sharing among institutions; and (iii) enhancing the public consultations, transparency and accountability in the implementation o f social programs.

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Benefits and Risks: The HDRL would have an immediate benefit for several o f the groups whose well being would be most affected by reductions in social sector spending, namely: mothers and children; school- aged children; the elderly and the poor. With the loan, programs to provide health care services to over 750,000 mothers, nutrition supplements for about 76 percent o f primary school children, and income security for about 4.5 mill ion poor and elderly would be preserved. Indigenous peoples are heavily represented in these groups. In the medium term, further measures would be taken to assure the financial sustainability o f such social safety-net programs, through removing duplication in complementary programs; improved targeting to reallocate budgets for pensions and income support; and to improve the coverage and quality o f social insurance programs. These latter reforms should have the effect o f controlling the treasury cost o f the social safety net. An additional broader and less measurable social benefit w i l l come in the form o f the increased credibility o f social sector management that would accrue from the transparency o f the management process and the empowerment o f beneficiaries and stakeholders to participate in program evaluation and in shaping the future of these programs.

Achieving these benefits will, however, face risks. The social programs that have evolved over time, including a recently instituted but poorly targeted cash transfer program (Bono Solidario) have developed strong and potentially vocal constituencies. Other stakeholders including teachers, program administrators, and segments o f the business community may have vested interests in maintaining the status quo with respect to legal protections o f employment status, program survival and business interests. Such factors would create an environment in which building and maintaining commitment to and ownership o f reform w i l l be difficult. In addition, the variety and scope o f the elements o f the reform program present technical and managerial challenges, beyond those hitherto undertaken by the Technical Secretariat for Social Development or Secretaria Tkcnica del Frente Social (the implementing agency). Therefore, maintaining a sound basis for debate and decision- making and timeliness in implementing the sequence o f reforms may tax the capacity o f the Secretariat. Finally, the Ecuadorian economy itself continues to be open to shocks owing to i t s dependence on o i l revenue, i t s open trade position as a dollarized economy, and its debt. Dramatic changes in these factors could compromise the ability o f the Government to address social sector reforms in a measured and rational manner, owing to distractions, perceived costs and rising social tensions.

GOE w i l l mitigate these r isks through a number o f measures. First, it w i l l maintain a continuous process o f dialogue and public participation in key fora in which the Government, c iv i l society, and the professions can exchange information and reach

Schedule of Disbursements:

Poverty Category:

Rate of Return:

Proiect ID Number:

Map:

consensus on competing agendas. A program o f studies and analyses to permit dialogue to take place on a technically objective basis would support this process. These efforts would be complemented by the Bank’s own dialogue with representatives o f the civi l society. Second, the Technical Secretariat for Social Development (STFS) would be provided with resources for research and programming activities to strengthen i t s capacity to monitor, evaluate and manage the various actions comprising the program. Lastly, to mitigate economic and financial risks, the Government i s participating in an IMF program and i s undertaking a companion Bank-financed fiscal adjustment program, through which i t w i l l be strengthening i t s capacity to respond to shocks by replenishing the o i l stabilization fund, increasing the share o f non-oil fiscal revenues, diversifying non-oil exports, passing laws to increase labor market flexibility and encouraging private participation in key investment sectors. In addition, to help mitigate i t s debt- overburden risk, the Bank i s assisting Ecuador in resuming bilateral debt rescheduling agreements with the Paris Club and preparing a comprehensive debt-reduction strategy.

US$50 mill ion immediately after loan effectiveness, planned for July 2003. The second operation i s expected in May 2004, and the third operation i s expected in May 2005. The Bank would provide a total o f US$250 mill ion financing for the three phases o f the Human Development Reform Program.

The proposed loan i s directly focused on budget protection for priority social sectors and on improved targeting.

Not applicable.

PE-PO82395

IBRD 28022.

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I. INTRODUCTION

1. Program -HDRP- to assist the Government o f Ecuador at a time o f fiscal adjustment. The HDRP i s intended to protect the most vulnerable groups in the country as the economy engages in an austerity plan to restore i t s fiscal balance, and w i l l be complemented with a proposed Fiscal Consolidation and Competitive Growth Adjustment Loan to address fiscal and structural issues in the economy. This f i rst phase of the HDRP would be the basis o f a first loan o f US$50.0 million, and i s part o f a comprehensive human development reform program that w i l l involve two subsequent programmatic loans o f US$lOO.O mill ion each, that w i l l set the stage for structural reforms in health, education, and social assistance.

2. w i l l require assistance to provide a cushion for the most vulnerable during this period o f adjustment. The recent signing o f an “austerity decree” and an agreement with the IMF to improve the fiscal and external balance has prompted the Government o f Ecuador to request assistance from the World Bank to:

This Memorandum describes the f i rst of a three phase Human Development Reform

A number o f recent economic and fiscal policies implemented by the new government

a. Help mitigate the adverse shock o f some o f those austerity measures by providing budget support; and

b. Help in the design and implementation o f a number o f structural reforms in the social sectors that w i l l occur concomitantly with structural changes in other areas l ike tax reform, custom reform, and c iv i l service reform.

3. The f i rst phase o f the program w i l l be built around the protection o f key social expenditures and the implementation o f initial changes in some key social assistance programs, as well as in the administration o f Ecuador’s health care system for rural workers, to increase the level o f protection o f vulnerable groups. I t w i l l also assist in the design o f structural reforms in selected programs in the social sectors. The second and third phases have a medium term horizon, and wi l l prepare the ground for the implementation o f further structural reforms that w i l l result in more efficient and equitable provision o f basic social services. In that sense, the f i rst phase o f the program stresses the need for immediate protection o f vulnerable groups and starts the slow introduction o f changes in the social sectors, f i rs t in the areas and programs where outcomes can be immediately influenced, and then setting the stage for changes in other areas and programs.

4. program. Many o f the issues to be addressed are complex and long term in nature, and as such, the three phases described in this document w i l l only provide medium term interventions that set the ground for longer-term changes that will occur in the future, with support from additional operations. The Program has three main objectives: (i) to protect public spending in the social sectors in general and in specific priority social programs; (ii) to improve the efficiency and efficacy o f basic social services, improving access and coverage and achieving a better targeting towards the poor; and (iii) to increase transparency, improve governance and accountability in the social sectors.

I t i s likely that the reform process will extend well beyond the life of the present

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11. THE POLITICAL AND ECONOMIC SETTING’

5. Ecuador i s recovering from the worst economic crisis in recent history. The economic crisis of the late 1990s was the worst in Ecuador’s recent history, and resulted in an increase in poverty levels, higher levels o f unemployment and inflation, and a drop in GDP that has been estimated at between 5 and 13 percent by different sources. The incidence o f poverty in only four years (1995 to 1999) increased from 34 to 56 percent o f the population. Both unemployment and inflation rates went up significantly during the crisis, and with it the number o f families requiring social assistance.

6. Benefiting from a positive external environment characterized by high petroleum prices, low international interest rates, and significant flows o f family remittances, GDP grew 5.1 percent in 2001 and an estimated 3.0 percent in 2002. Average annual inflation fell to 38 percent in 2001, and reached single digits by late 2002. The recovery i s explained by the increase in domestic demand (particularly private demand), stimulated in turn by high petroleum prices, growing remittances, the increase in nominal minimum and average salaries in dollars, which practically doubled between April 2000 and October 2000; and a gradual reactivation o f private credit, consistent with recovery o f the banking system. Construction o f the new pipeline for heavy crude o i l has also attracted significant inflows o f foreign investment. For i t s part, the init ial inflationary impulse, followed by a slow deceleration o f inflation, f i t s into the pattern observed in most dollarized economies: in the medium term, the domestic inflation rate tends to be determined by international inflation, but in the short-term, lags occur in relative price adjustment due to the control o f certain managed prices belonging to the basic basket, and to the post crisis reactivation o f domestic demand.

7. The main challenge for Ecuador in the short term is to implement a fiscal adjustment to generate fiscal surpluses and a sustainable external debt level, without neglecting the social sectors. At present the fiscal position in Ecuador i s frail, as the primary surplus has been decreasing since the year 2000, the public external debt i s the second highest in Latin America -about 60 percent o f GDP, and expenditures are extremely rigid. Much o f Ecuador’s revenue i s tied to the international price o f o i l and while this has risen dramatically, it has not produced sufficient revenue to cover domestic and international obligations, leaving relatively few resources for social programs needed to provide services to a growing number o f the poor. The primary surpluses o f the Non-Financial Public Sector (NFPS) have decreased from 7.7 percent o f GDP in 2000, to 4.5 percent o f GDP in 2002. Primary surpluses have been almost exclusively the result o f an increase in both petroleum and tax revenues, which have fluctuated irregularly between 2 and nearly 5 percent of GDP. Spending on salaries and on goods and services has almost doubled compared to pre-dollarization levels-from about US$ 1 bil l ion and US$0.5 billion, respectively, in 1999, to about US$2 bil l ion and US$0.9 billion, respectively, in 2002-and capital spending remained high at 6.4 percent o f GDP in 2002.

8. In 2003, Ecuador has total net financial requirements o f about US$2 billion, which after including already scheduled financing, leaves a gap in financing o f US$0.7. At the same time the social sectors need to be prioritized, as public spending i s s t i l l below Ecuador’s historical levels -particularly in education and health.

Th is section borrows heavily from the companion Fiscal Consolidation and Competitive Growth Adjustment Loan, being prepared simultaneously with this operation.

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Table 1. Ecuador: Non-Financial Public Sector Financing Requirements and Sources

2001 2002 2003 2004 Prelim Projection

Gross Financing Need NFPS deficit Deposit buildup Scheduled amortization External Domestic

Others Arrears clearance Accounts payable carried in Banking sector assistance Other*

Identified Financing NFPS surplus Domestic bond issues Loan disbursements Others

Arrears accumulation Accounts payable carried out Other

Gap Reschedulingldebt relief IDB W B CAF IMF Unidentified

1,885 0 33

1,117 73 1 386 735 304 79 330 22

1,547 0

333 5 84 63 1 563 68 0

338 94 61 71 173 0

-6 1

2,233 0

20 1,113 710 403 1100 832 68

200 0

1,983 245 138 412 1188 798 78 312

250 73 0 0 81 96 0

1,986 0 26

1,150 726 424 1882 606 78 69 29

1,316 508 398 339 72 4 68 0

67 1 150 100 130 100 160 31

1,566 0

283 1,174 776 398 95 12 68 0 15

953 544 0

338 71 0 71 0

613 100 100 100 150 40

123 * Includes debt reduction, and payment to the IESS. Sources: BCE, IMF, and World Bank estimates.

9. term measures. The government o f President GutiCrrez which took office on January 15 announced, after only three days, a plan o f “Economic Ordering and Human Development”. The goal o f that plan i s to reduce poverty, increase fiscal revenues, achieve a sustainable debt management system, and implement a number o f reforms in the social sectors as well as the tax and social security systems. Among the austerity measures announced were the following:

The new Government has an ambitious reform agenda that extends beyond short-

a. Freezing of wage rates for regular c iv i l servants for 2003;

b. Cutting o f overtime allowances;

c. Reducing the president’s salary by 20 percent;

d. Reducing by 10 percent the salaries o f government appointees with monthly earnings over US$l,OOO;

e. Reducing by 10 percent the number o f positions that can be fi l led by the new government;

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f.

g.

h. 1.

10.

Decreasing by 10 percent the salaries for all the politically appointed government officials;

Restraining spending on goods and services in the central government, including on official travel abroad, the use o f vehicles and cell phones, and a prohibiting the purchase o f new offices and furnishings;

Selling public sector assets not in use; and

Gradually reducing the number o f public sector officials, until reaching an optimal labor force size

The Government has also signed a Stand-By agreement with the IMF. In it, the Government agreed to adopt measures aimed at: (i) resolving immediate liquidity pressures and regularizing arrears left by the previous administration; (ii) tightening the fiscal stance to recover from the slippages o f 2001 and 2002; (iii) protecting the poor by stabilizing their income levels and strengthening social programs; and (iv) improving the flexibility o f fiscal policy and prioritizing expenditures. Some o f the measures contained in the Government’s IMF supported Program have already been implemented through the austerity decree described above. Other measures include: an increase in spending on social assistance, efforts to strengthen the social security system (actuarial studies), and an improvement in the targeting o f the gas subsidy.

1 1. At the same time, a number of structural reforms have been announced. The Government i s preparing to send to Congress a number o f draft laws covering a unification o f the c iv i l service salary scale, customs reform, tax reform, elimination o f the distribution o f utilities services from public sector companies to their workers and the introduction o f other measures tending to increase revenues; social security reform and health care reform.

12. in the short term. Early this year, the Government increased the price o f gasoline of between 3 percent and 24 percent, which resulted in a higher inflation rate and reduced the purchasing power o f the population, particularly the poor. The Government’s macroeconomic program supported by the IMF also contemplates to reducing the level and tightening the eligibility o f the gas subsidy, some o f which i s now targeted to the poor -in a very imperfect way.*

Some of these measures will impact on the most vulnerable groups in the population

111. SOCIAL SECTORS: REFORMS AND ISSUES

A. WHY I S A REFORM PROGRAM NEEDED?

13. Ecuador stil l show an unequal performance across regions and income groups. Lower investment rates in the social sectors and a number o f coping strategies on the part o f poor families after the late 1990s crisis have resulted in poor outcomes in health and education, as can be seen in Table 2.

In spite of the progress achieved during the last decades, social indicators in

’ Annex 9 describes in detail the incidence of the gas subsidy.

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Table 2. Selected Social Indicators, Ecuador, 2001.

INDICATOR VALUE

L i fe expectancy at birth (years) Pichincha province 14.5 Amazonia province 59.6 Infant mortality (per one thousand) Urban 22 Rural 40 Highest quintile 21.9

L ive births at home (percent) National 29 Amazonia 50

Lowest quintile 44.5

Guay aquil 4.5

Lowest quintile 4 Highest quintile 12

Years of schooling

Percent o f six year olds in primary school Highest quintile 98.8 Lowest quintile 65

Source: Ecuador Policy Notes (WB 2003)

14. Public spending in the social sectors has decreased sharply, especially in health and education. In 2001, spending in education was about 2.8 percent o f GDP, while public spending in health was below 2 percent. In spite o f a partial reversal in the year 2000 of a decreasing trend that started in the 1990s’ these levels are low, not only for international standards -Bolivia for example, spent 3.6 percent o f GDP in health and 7.1 percent in education in 2001- but are below Ecuador’s historical averages as well. Education expenditure has been continuously dropping since the 198Os, when i t stood at around 6 percent o f GDP.3

15. Besides the low levels of public spending, the main problems affecting the social sectors have to do with an inequitable distribution of resources, inefficient provision of basic services, and insufficient coverage:

a.

b.

Access to basic health care services i s limited for a significant percentage of the population. Only about 25 percent of the population i s covered by some kind o f public health insurance, and about 30 percent has no access to basic health care services;

Public spending in health i s the second lowest in Latin America, after Haiti. The system i s highly fragmented, with both the Ministry of Health and the Social Security Administration JESS administering public health care provision in their own facilities, leading to inequities in treatment and care;

A more detailed analysis of the trends in public spending in the social sectors can be found in Annexes 7 to 9, which summarize the recently written Policy Notes in Education, Health and Social Assistance.

C.

d.

e.

f.

g.

h.

i.

j.

Approximately 10.5 percent o f the population aged 15 o r older i s illiterate. Even though primary school enrolment i s close to 90 percent, net enrolment rates for secondary school, at 5 1 percent, are too low for Ecuador’s development level;

There are severe inequities in education spending b y income group. This i s mirrored in discrepancies between rural and urban areas, as well as between indigenous and non indigenous populations;

Governance problems in the educational system like the high turnover rates in authorities, the highly centralized administration systems, and the lack o f coordination among the different units within the Ministry o f Education al l contribute to low levels o f monitoring o f activities and poor incentive schemes for teachers;

The social assistance system suffers f rom high fragmentation. There are over 20 ‘priority programs’ in the system, and more often than not their objectives and target populations are not well defined, so that there i s high potential for duplication and overlap. Moreover, different programs are administered by separate units and even different Ministries, inflating the share of the budget that goes to pay for administrative costs;

The Bono Solidario program -which concentrates more than half the total social assistance budget- lacks clarity on i t s objective, on the way the benefit i s determined, and on how the target population i s chosen. I t has no mechanism to update the beneficiary pool over time and i t s impact has never been satisfactorily evaluated;

Most social assistance programs are ineffective due to bo th their internal designs and the lack o f appropriate targeting instruments. This in turn translates into poor coverage o f those most in need, and into important leakages o f resources to groups with higher income;

The formal social security sector has very low effective coverage. Wi th only 26 percent o f the Economic Active Population covered by formal social security, and with extremely low pensions paid to retirees, the effective coverage i s among the lowest in Latin America.

Even though the social security system i s currently experiencing a surplus -partly through the low benefits being paid and partly through yearly transfers from the Government- i t i s s t i l l in need o f reform, from a legal and accounting standpoint and more importantly, from the perspective o f i t s operational rationale; and

There is n o coordination among the income protection schemes f o r the elderly. This applies to the formal social security system, the social assistance provided through the Bono Solidario, and the non-contributory insurance scheme for independent rural workers, called Seguro Social Campesino.

B. LONG TERM VISION OF HUMAN DEVELOPMENT IN ECUADOR

16. Ecuador’s long-term vision fo r the social sectors i s that they provide adequate protection to vulnerable groups, operate efficiently to offer wide access to basic social services, and achieve spending levels necessary fo r quality provision, according to Ecuador’s income and development levels. Improving health and education outcomes w i l l crucially depend on the adoption o f a strategy that incorporates those objectives. Higher levels o f spending in health and education, changes to the financing structure o f health care and the

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allocation o f resources in education, and a radical reform in the provision of basic social services are necessary to reach a larger percentage of the population, especially the poor. These guiding principles also apply to the social safety net, indispensable as a means to protect the vulnerable groups, and to the economic protection for the elderly.

17. In the health sector, the Government’s long term goal i s to guarantee the population access to a basic package of essential services that i s financially sustainable, offered through networks of public and private providers. The “universal” coverage w i l l be achieved in stages, through the gradual transformation o f existing institutions that currently provide or finance basic health care to some segments o f the poor population. As a f i rs t step, formal agreements w i l l be signed between some health care providers that currently target the poor and the Ministry o f Health, so that the population with no current access to health care can receive services there - financed by the Ministry o f Health. Next, a comprehensive cost-effective basic health care package w i l l be defined that can be provided universally, and agreements w i l l be signed with the Ministry o f Health for the provision o f this basic package to those without protection. Over time, an increase in coverage o f the vulnerable population w i l l come from the contracting o f networks o f providers with access to this population. Eventually the financing o f health care w i l l be separated from the provision, first in the formal health insurance institution and later in the Ministry o f Health so that the purchaser can pay for the basic package to be provided by any health care facility. Increases in coverage w i l l depend upon availability o f fiscal resources and service capacity.

18. productive and adaptable labor force, Ecuador needs to invest heavily on i t s education system in order to improve access, coverage, and quality. These goals can only be achieved through a set o f institutional and functional reforms that address the problems and inequalities that exist today and propose solutions that are viable and compatible with the process o f decentralization. Ecuador needs to align the incentives o f those involved in the provision and acquisition o f education with the needs o f the country. Regularity in teachers pay and proper incentives to attract qualified teachers to rural areas are a priority, as i s better quality o f education for children and adults that makes school enrollment and attendance worthwhile. These changes w i l l require substantial work to strengthen the operational and institutional capacity of the Ministry o f Education and other education authorities, as well as increased investments in the hardware and software o f the system

19. The main challenge in social assistance is to provide protection to the most vulnerable without increasing the strain on fiscal resources. More than half the population o f Ecuador i s poor, and about half o f those live in extreme poverty. These figures pose tremendous challenges for a social assistance system that has limited resources and almost no capacity to respond to temporary increases in poverty and vulnerability due to economic crises or natural disasters. Ultimately, Ecuador aims at having a flexible social safety net system, able to provide assistance to the poor with minimum leakage, channeled through a few efficient and well organized programs with clear goals, and with rigorous impact evaluations being used to fine- tune the system.

20. design, their capacity to reach the needy, and, most importantly, their impact on poverty and other outcomes of interest. Reforms in the next few years should then be directed to rationalize the social protection system while minimizing the potential negative social impact o f the transition from one social assistance model to another. This w i l l entail good communication campaigns and social ownership o f the proposed reforms based on principles o f equity.

In a world where competitiveness and sustained growth depend more and more on a

The Government will have to establish priorities across programs according to their

7

21. for the aged in Ecuador should become, in the long term, an integrated system, with high coverage, efficient performance, and low fiscal cost. These goals should be achieved by designing a strategy that considers the different institutions that currently provide income security (IESS, ISSFA, ISSPOL, Bono Solidurio) as part o f a single system. Labor market reforms to promote formalization and compliance must be promoted, and an efficient, well-targeted non contributory system has to be designed and implemented for those who are structurally excluded from the formal labor market.

22. Institutional and parametric reforms should be implemented slowly to improve the long term sustainability of the pension system, easing the fiscal pressures and incorporating defined contribution components in the formal sector. A new legal framework that defines the long term structure o f the social security system in clear terms and generates the conditions for the development o f a financially sustainable system with high coverage should be approved. The next table summarizes the Government o f Ecuador’s goals for the period 2003-2007.

Among the vulnerable groups, the elderly are particularly at risk. Income protection

TABLE 3. GOVERNMENT GOALS IN THE SOCIAL SECTORS, 2003-2007

INDICATOR UNITS YEAR 2003 YEAR 2007 CHANGE (%)

Social spending % GDP 7.7 12.5 63

Poverty % population 51.0 38.0 -26

Extreme poverty % population 25 .O 10.3 -59

Illiteracy % 10.3 8.0 -23 Population without

access to health % 23.2 17.0 -26

Schooling Years 8.0 9.4 18

Infant mortality (per 1,000) 11.5 8.8 -24

General mortality (per 1,000) 4.3 3.6 -16 Note: The baseline figures on infant mortality may need to be revised. Source: GOE estimates

c. PRINCIPLES OF THE REFORM. OBJECTIVES, TRIGGERS, AND BENCHMARKS

23. The HDRP encompasses three objectives:

i.

11.

111.

Protecting public spending in the social sectors and priority programs;

Increasing effectiveness and efficiency o f basic social services and programs; and

Increasing transparency and accountability in the social sectors and priority programs

..

...

These are described below, along with the HDRL triggers and benchmarks for each o f the proposed first, second, and third programmatic loans.

8

OVERALL OBJECTIVE 1: PROTECTION OF PUBLIC SPENDING I N THE SOCIAL SECTORS AND I N PRIORITY PROGRAMS. The overall objective is to assure minimum levels of public spending in health, education, and social welfare and priority programs of special importance for vulnerable groups.

24. Increasing Investments in the Social Sectors. In order to reflect the priority i t attaches to Human Development, the Government o f Ecuador has committed to maintaining spending in this sector in the near term, and raising i t over time. The decreasing trend in public spending on the social sectors was stopped in the year 2000, and even though the fiscal situation in the country rules out any sharp increases in the social sectors budget this year, i t i s necessary to at least maintain the level o f spending as compared to last year. As the country engages in a path o f sustainable growth and implements the structural reforms described in section 2, additional space for further increases in the social sectors budget w i l l be created.

OBJECTIVE 1: TRIGGERS FOR INCREASING INVESTMENTS I N THE SOCIAL SECTORS

TRIGGER ACTIONS UNDE FIRST PROGRAMMATIC LOAN . The 2003 budget for the priority social sector functions - Education, Health, and Social Welfare - has been established at levels higher than or equal to the 2002 budget, as a percentage of GDP.

TRIGGER ACTIONS UNDER SECOND PROGRAMMATIC LOAN . The 2004 budget for the priority social sector functions - Education, Health, and Social Welfare - has been established at levels higher than or equal to the 2003 budget, as a percentage of GDP.

TRIGGER ACTIONS UNDER SECOND PROGRAMMATIC LOAN The 2005 budget for the priority social sector functions -Education and Social Welfare- has been established at levels higher than or equal to the 2004 budget, as a percentage of GDP, and the 2005 budget for the priority social sector function of Health at levels higher than or equal to 2.3 percent of GDP.

Note: actions in bold represent triggers. For an explanation of the difference between triggers and benchmarks, see page 33, paragraphs 83 and 84.

25. The government should not only protect the budget of the social sectors as a whole, but of some key priority programs as well. There are about 20 social programs in Ecuador considered to be “priorities”, but some are more relevant than others in the protection of the poor and other vulnerable groups -in spite of the lack o f serious impact evaluation for most o f them. The Government and the Bank have agreed on a subset o f these programs that should be protected, a decision that was based on the overall budgets for each program, the target population, and the general objectives. These programs are described in Table 4.

OBJECTIVE 1: TRIGGERS TO PROTECT THE LEVEL OF SPENDING I N SOCIAL PROGRAMS

TRIGGER ACTIONS UNDER FIRST PROGRAMMATIC LOAN . The 2003 budget for each of the social programs listed in Annex 3.A i s equal to or greater than their 2002 respective budget in real terms.

TRIGGER ACTIONS UNDER SECOND AND THIRD PROGRAMMATIC LOANS The 2004 and 2005 budgets for each of the social programs listed in Annex 3.A are equal to o r greater than their previous year’s budgets in real terms.

9

Table 4. Selected Characteristics of Protected Social Programs

PROGRAM BUDGET 1 TARGETING I (real 2002 values, us$ million) COVERAGE

Bono de Desarrollo Humano

1,251,000 (76 percent of the total children enrolled in elementary schools)

1.2 mil l ion households. 4.5 mil l ion individuals

N.A

I SELBEN I PRADEC

2002: 152.60 2003: 195.47

Old age nutrition program 2002: 10.00 2003: 12.52

PAE

P A " 2000

PA1

102,000 pregnant women 2002: 2.70 and 117,000 children 2003: 9.34

2002: 5.60 2003: 11.50

2002: 25.70 2003: 31.44

743,000 women receiving prenatal care. 93,000 normal childbirths.

Universal

Investment expenditure in Education

Ley de Maternidad Gratuita

2002: 64.50 2003: 86.94

2002: 17.28 2003: 19.26

26. whose success depends on receiving a continuous flow o f funds. For example the immunization program Programa Ampliado de Znmunizaciones (PAI) requires that vaccines reach the beneficiaries in a timely manner. The Government has not been able to guarantee this flow in the past. The Policy Matrix includes some actions to try to remedy this p r ~ b l e m . ~

The timely execution of some programs budget i s essential. There are some programs

1 OBJECTIVE 1: TRIGGERS TO PROTECT THE EXECUTION OF SOME PROGRAMS BUDGET

TRIGGER ACTIONS UNDER SECOND AND THIRD PROGRAMMATIC LOANS . In 2003 and 2004 the level of execution in at least three of the social programs listed in Annex 3.A was no less than 80 percent of the budget, and the level of global execution in the programs listed in Annex 3.A was no less than 80 percent of the budget. In 2003 and 2004 the quarterly execution level of the Ley de Maternidad Gratuita and the Programa Ampliado de Inmunizaciones was no less than 80 percent of quarterly agreed level (Annex 3.B).

OVERALL OBJECTIVE 2: INCREASE EFFECTIVENESS AND EFFICIENCY OF BASIC SOCIAL SERVICES AND PROGRAMS. The overall objective i s to assure that basic social services and social protection programs reach intended beneficiaries within acceptable budget envelopes through ( i) identifying intended

Programs funded with World Bank loans are not included in the l is t o f protected priority programs, as they are protected by the legal agreements of the respective loans.

10

beneficiaries with administratively clear criteria; ( i i ) improving targeting mechanisms of the delivery of basic services and raising consistency in their administration; and ( i i i ) directing social assistance spending towards the most demonstratively efficient programs.

27. significantly by sector. The institutional capacity at each of the line ministries and the potential for technical assistance was essential in fleshing out the strategy for each sector. For social assistance the counterpart from the Government i s very strong - as the Secretaria Tkcnica del Frente Social i s a technical group dedicated to providing support in this area. In health, the Bank has established a strong relationship with the Ministry o f Health through a number o f investment operations, and the scope for technical assistance through existing projects i s high. Education, on the other hand, has a weaker institutional capacity. This i s why the actions in education are more slowly paced than the ones in social assistance and health. While there i s some front- loading in the actions for social assistance, most of the significant actions for education will happen during the last phase of the HDFW, using the first two phases to build consensus and a relationship with the counterpart.

The Methodological Approach in devising the policy actions in the program differed

1. SOCIAL ASSISTANCE

28. shown that often the most effective social assistance programs are those which use conditional cash transfers to induce behavioral changes among the program beneficiaries. For instance, conditional cash transfer programs l ike PROGRESA, in Mexico, and Bolsa Escola, in Brazil, have been very successful at increasing school enrolment and attendance, as well as nutritional outcomes among infants. The largest social assistance program in Ecuador, the Bono Solidario, was instituted in 1998 as a cash subsidy to poor families affected by the elimination o f the energy subsidies (which were later re-instated). Its targeting criteria were not systematic, but rather ad- hoc: families were “certified” in local churches and other institutions. In 2002, more than 1.2 mil l ion beneficiaries received unconditional transfers from the program, amounting to US$152.6 million, or about 0.75 percent o f GDP. Litt le i s known, however, about the potential impact these transfers may have had on outcomes o f interest since payment did not depend on the beneficiaries taking any particular action. For this reason, and because unconditional transfers can often generate dependency among beneficiaries, the Government i s going to create a new program, the Bono de Desarrollo Humano, that w i l l replace the Bono Solidario and the Beca Escolar and w i l l condition payment o f benefits to changes in household behavior regarding education and health.5

Introducing Behavioral Change in the Social Safety Net. International experience has

The details conceming the Bono de Desarrollo Humano are described in Annex 4. A complete description of the Bono Solidario can be found in Annex 9.

13

OBJECTIVE 2: TRIGGERS TO INTRODUCE BEHAVIORAL CHANGES IN THE SOCIAL SAFETY NET TRIGGER ACTIONS UNDER FIRST PROGRAMMATIC LOAN

A conditional cash transfer program, the “Bono de Desarrollo Humano (BDH)” has been created. The program -having the characteristics described in Annex 4- has started to progressively replace the Bono Solidario (BS) and the Beca Escolar (BE).

TRIGGER ACTIONS UNDER SECOND LOAN * The transition process from the BS and B E to the B D H has progressed adequately according to the

implementation schedule agreed upon in May 2003.

TRIGGER ACTIONS UNDER THIRD LOAN * The transition process from the BS and B E to the B D H has finished.

29. social assistance system includes some highly regressive programs. For example, subsidies for electricity, gas, and gasoline amounted to US$541 mill ion in the year 2000, almost 4 percent o f the GDP, o f which households received 63.5 percent. These subsidies are highly regressive, as they are correlated to the consumption o f fuel, which increases with income. I t i s estimated that the total subsidy per capita - o n electricity, gas, and gasoline- i s f ive times greater among the wealthiest quintile than among the poorest. Nonetheless, the subsidy represents a fundamental source o f aid for the poorest o f the poor. I t has been reported that without the subsidies, the poorest sectors would see their income reduced by 7 percent annually. Some social assistance programs are progressive, but even in these programs a high percentage o f the benefit reaches the wealthiest population quintiles. For example, 45 percent o f the benefits of the Bono Solidario Cash Subsidy Program i s received by families in the three highest quintilesa6

30. instruments. To that end the HDRP wi l l support the use o f two targeting instruments, a proxy means test (SELBEN) and a geographic targeting instrument. Programs whose benefits are distributed to households directly w i l l be targeted with the SELBEN and programs whose benefits are distributed according to geographic criteria w i l l be targeted with the Poverty Map. In particular, special emphasis has been placed on the targeting o f the three largest social assistance programs in terms of budget, the new Bono de Desarrollo Humano (BDH), the School Feeding Program (PAE), and the largest early childhood development program, the ORI.

3 1. overlapping with other programs. I t had an approved budget for 2002 o f US$25.7 million, and provides nutritional supplements to school-age children. The program utilizes an approximate poverty map determined by the Social Vulnerability Index. Yet, this program i s clearly not only benefiting the poorest. Indeed, in 200 1, supplements were granted to approximately 1.4 mil l ion school-age children, yet in 1999 Ecuador had 1,629,065 children enrolled in elementary schools. Furthermore, like al l programs that grant in-kind transfers through schools, those who are the poorest do not receive the benefit, because they are outside the formal educational system. In that light, the poverty map should provide a more effective way to target the PAE.

Improve Targeting and Effectiveness of Social Assistance Programs. The current

The regressivity of some programs i s due in part to a lack o f consistent targeting

The School Feeding Program i s particularly important given i t s dimension and potential

Annex 9 on the Social Safety Net provides more detail information about the incidence of various social assistance programs.

12

OBJECTIVE 2: TRIGGERS AND BENCHMARKS TO IMPROVE TARGETING AND EFFECTIVENESS OF SOCIAL ASSISTANCE PROGRAMS

BENCHMARK ACTIONS UNDER FIRST PROGRAMMATIC LOAN . The firms in charge o f the expansion o f the SELBEN have been hired and an implementation schedule for expansion has been agreed upon.

TRIGGER ACTIONS UNDER SECOND PROGRAMMATIC LOAN . The poverty map has been adopted as the geographical targeting instrument for the PAE and evidence has

been presented that at least 40 percent of the PAE benefits in 2003 was directed to the Parroquias of the first quintile, and at least 30 percent was directed to Parroquias in the second quintile.

BENCHMARK ACTIONS UNDER SECOND PROGRAMMATIC LOAN . The process o f expansion o f the SELBEN and a technical evaluation have been completed.

BENCHMARK ACTIONS UNDER THIRD PROGRAMMATIC LOAN A financing plan and an implementation schedule for the revision and updating o f the SELBEN have been drafted, and the methodology for the updating has incorporated al l changes required according to the technical evaluation.

32. the two main programs (BDH and PAE), and changes in their design wil l be made to reflect findings. In this way, institutions will be provided with information o n the impact o f their social assistance programs to help in eliminating resistance to change.

Rigorous Impact Evaluation of Programs. Impact evaluations will be conducted for

BENCHMARK ACTIONS UNDER FIRST PROGRAMMATIC LOAN The Actions in the Policy Matr ix related to this reform principle are discussed under the Overall Objective o f Transparency and Governance.

33. Reduce Overlapping Among Programs. A reorganization o f programs wil l be implemented to eliminate the multiplicity o f programs that target a similar vulnerable group. The group o f children under the age o f six offers a clear example. There are at least f ive programs that have this group as a target population, and according to the National Children’s and Family Institute “Instituto Nacional de la Nifiezy la Familia” - INNFA (2000), the programs administered by the Ministry o f Education, o f Social Welfare, and the INNFA itself cover approximately 139,000 children, only 11 percent o f the age group in situations o f poverty. According to a 1999 report f rom INNFA, 40.3 percent o f the population was undernourished in Ecuador in 1999. In other words, out o f 1,304,920 children between zero and five years o f age, approximately 525,800 showed some sign o f malnutrition.

13

OBJECTIVE 2: BENCHMARKS TO REDUCE OVERLAPPING AMONG PROGRAMS

BENCHMARK ACTIONS UNDER FIRST PROGRAMMATIC LOAN The objectives and target population of the nutrition and feeding programs have been restated so that the current overlapping has been eliminated.

BENCHMARK ACTIONS UNDER SECOND PROGRAMMATIC LOANS The Fondo Nacional del Sistema Integrado de Alimentacidn (FNSIA) has been created and i s in operation within the PGE 2004 with the goal o f rationalizing the operation o f the various nutrition programs.

BENCHMARK ACTIONS UNDER THIRD PROGRAMMATIC LOANS The nutrition and feeding programs have been consolidated and their budgets adjusted according to efficiency and impact criteria.

2. EDUCATION

34. Establish a relationship with the Ministry of Education and Agree on a Strategy for Reform. As discussed in paragraph 26, the Ministry o f Education requires strengthening to carry out immediate changes in the area. Moreover, the political r isks are very high in the education sector, where the teachers union i s very combative. For that reason the actions in education are more slowly paced and involve significant exercises o f building consensus among different stakeholders. The end result i s to set the ground for important changes in the way resources are allocated and incentives are provided for teachers in rural areas, where significant gaps s t i l l remain. Some o f these changes w i l l begin during the last phase o f the HDRP.

35. Improve Access to and Coverage of Education in Rural Areas. In 1999, overall net enrolment at the primary level was 90 percent. However this figure hides significant differences between urban and rural areas and, since most o f the indigenous population lives in rural areas, between indigenous and non-indigenous children. Low enrolment rates, coupled with frequent drop-outs and delayed enrolments (at age 6, only 70 percent o f children in rural areas are enrolled in school compared to 90 percent in urban areas), make improving access to and coverage o f education in rural areas a priority.

36. Because about 15 percent o f the rural population speaks languages other than Spanish and schools with only one teacher are most often located in poor, rural areas, increasing enrolment rates among children in these areas w i l l necessarily require investments to improve bilingual education and the quality o f education at multilevel schools. A bilingual education system, Intercultural Bilingual Education system, exists in Ecuador since 1998, and enrolments in bilingual schools have increased by more than 100 percent in a decade. However, despite these improvements the system covered barely 4.4 percent o f al l children enrolled in 2000 - a very small percentage when one considers that between 12 and 25 percent o f the rural population i s indigenous. Similarly multilevel schools, covering approximately 9 percent o f al l children enrolled in elementary school, are most often located in the country’s poorest rural, isolated areas, and hence at a disadvantage with respect to the rest of the public schools in the rural areas.

37. If access to and the quality o f education in bilingual and multilevel schools i s to increase, teachers need to be trained to effectively operate in such environments. Proper training should go hand in hand with regular pay and improved incentives, monetary and non-monetary, to improve working conditions and ensure teacher attendance.

14

OBJECTIVE 2: BENCHMARKS TO IMPROVE ACCESS TO AND COVERAGE OF EDUCATION IN RURAL AREAS

BENCHMARK ACTIONS UNDER SECOND PROGRAMMATIC LOAN . Through a consultation process organized by the Secretaria del Didlogo, policy recommendations have been made to improve education coverage and quality in rural areas.

BENCHMARK ACTIONS UNDER THIRD PROGRAMMATIC LOAN . The implementation of the policy recommendations put forward by the consultation group has started and its financing i s ensured.

38. rural schools to attract and retain teachers should be increased by linking salary monies to positions rather than teachers -cur ren t ly referred to as “Partidus” system. The system for assigning teachers contributes to the difficult situation, principally in rural schools. When there i s a vacancy in a rural school, a teacher can be appointed to work in the school, but a few months later, he or she can obtain a position in an urban school or in a Provincial Directorate taking the appointment along with h idher , and leaving the school without an available position. Hence, the current teacher pay system needs to be reformed to fight fraud among teachers and to ensure that salary monies remain where they are most needed, that is, in rural areas. In addition, the teachers’ salary structure does not respond to the principles o f performance and equity. For example, the “frontier bonus” received by teachers in isolated rural areas, which represents an amount equivalent to up to 25 percent o f their salary, continues to be included in a teacher’s salary even when the teacher stops working in the rural area and i s transferred to an urban school. The f irst steps in these directions should contemplate a revision of the ‘partidus’ system, inc lud ing an update of the currently active teacher population. Recognizing that no significant reform w i l l be taken as long as teachers do not receive their salaries on time, the HDRP also calls for regularizing overtime the payment o f teachers salaries.

Improve Budgetary and Teacher Allocation Systems. Besides training, the capacity o f

OBJECTIVE 2: BENCHMARKS TO IMPROVE BUDGETARY AND TEACHER ALLOCATION SYSTEMS

BENCHMARK ACTIONS UNDER FIRST PROGRAMMATIC LOAN . A working group with representatives o f the Frente Social has been constituted to discuss proposals for reform to the education system. With technical assistance from the Secretaria Tkcnica del Frente Social, a preliminary diagnosis o f the current status o f human resources has been prepared using the Teacher Census 2000-2001. Teachers have been paid their March salary, and a system to measure delays in and increase the transparency o f teacher salary payments has been designed.

.

.

BENCHMARK ACTIONS UNDER SECOND PROGRAMMATIC LOAN . Guidelines and a methodology for the allocation o f financial resources based on territorial, cultural, ethnic and

gender equity criteria have been agreed upon and published. 60 percent o f all irregular teacher certificates (Partidas) have been rationalized and a plan for the implementation o f a human resource monitoring and management system has been elaborated. During the first quarter o f 2004 the system that measures delays in payment o f teacher salaries has been used to show that delays in payments have been reduced, giving priority to poor areas and provinces with lower performance in education.

.

.

BENCHMARK ACTIONS UNDER THIRD PROGRAMMATIC LOAN ’ As the restructuring o f the MEC has been completed, the MEF has transferred to the MEC the competence to

manage and allocate the education budget, within the scope o f the laws o f fiscal responsibility and the budget. The human resource monitoring and management system has been fully implemented and its financing i s ensured. During the last quarter o f 2004 and the first quarter o f 2005 the system that measures delays in payment of teacher salaries has been used to show that delays in payments have been reduced, giving priority to poor areas and provinces with lower performance in education.

15

39. among different units within the Ministry, and among the Ministry and the rest o f the education sector requires better information systems and a reorganization o f the institutional structure of the sector (starting with a reorganization o f the Ministry o f Education). These improvements should increase the sector’s capacity to attract the qualified personnel that i s needed to implement the proposed reforms, as well as the Ministry’s capacity to manage the sector’s budget.

Institutional Strengthening of Ministry of Education. An effective coordination

General Health Insurance (IESS)

OBJECTIVE 2: BENCHMARKS TO STRENGTHEN THE INSTITUTIONAL CAPACITY OF THE MINISTRY OF EDUCATION

BENCHMARK ACTIONS UNDER SECOND PROGRAMMATIC LOAN A reorganization and institutional strengthening plan for the financial planning and administration o f the Ministry o f Education has been completed, including the implementation o f a new information system at the central level.

Employees in formal sector plus retirees. Dependents not covered (10.7% population in 1999)

BENCHMARK ACTIONS UNDER THIRD PROGRAMMATIC LOAN * The restructuring and strengthening plan has been completed, and the information system i s working in the

totality o f the country.

Seguro social campesino (SSC)

3. HEALTH

Peasants and dependents (7.7% of population and about 25% of potential peasant population)

40. coverage provided by the Ministry o f Health and, to a more limited extent, by municipalities. I t i s expected that over time steps w i l l be taken to increase the coordination among schemes, which w i l l eventually lead to an integration o f the system. Under the first phase of the program activities w i l l be developed to contribute to such integration. The process w i l l continue further during the second and third phases, but full integration i s a long-term process that goes beyond the scope o f the three programmatic loans discussed here.

Integration. The health system has five insurance schemes, notwithstanding the service

Table 5. Ecuador, Selected characteristics of Health Insurance Schemes

SCHEME I COVERAGE FINANCING I FACILITIES

5.71% of ”average” salary (about 60% of total real avg wage)

18 hospitals and 70 primary care facilities

1% of payroll (0.3% government contribution, 0.35% employers, and 0.35% employees). Peasants pay 1% o f minimum wage (about 5% of total SSC revenue)

572 primary care facilities exclusive to ssc beneficiaries. Higher curative care referred to LESS hospitals at subsidized rates

BUDGET ISSUES

Per capita spending i s US$145 in 2000. About 53% of budget went to level 111 hospitals in 2000

Per capita expenditure US14.3

16

SCHEME

(SSFAP) covers staff and dependents of the armed forces and police

Private Pre-paid Insurance

COVERAGE FINANCING

4.5% contribution out o f payroll plus a monthly fix amount o f US$4.6 to cover families

~~

About 2 percent o f the N.A. N.A. 4% o f Total Health population Expenditures in the

2000

FACILITIES

facilities and 20 hospitals managed by the institution itself

BUDGET ISSUES

Ley de Matemidad Gratuita y Atenci6n a la infancia (LMG)

Guarantees universal coverage o f 33 interventions for al l mothers and children up to five years. Provided services to 1,222,000 mothers and 768,000 children in 2002. There are an additional 3.1 million people l iving in rural areas that could receive services

General budget in an amount of USS15,100,000 per year as established in special legislation, plus a tax o f 3 percent o f the total commercial transactions

41. a.

b.

C.

d.

The integration of the health system will proceed in stages:

Stage 1: Creating a working group to oversee the design of a universal basic health insurance model, and improving interaction among existing health care providers. The LMG and the SSC wi l l be the initial structures over which the universal system w i l l be constructed. The design wil l include: (i) an implementation strategy for a set of minimal and self targeted basic health services; (ii) a sustainable financing mechanism; (iii) a regulatory system. At the same time, agreements w i l l be signed between the LMG and the SSC so that the latter can provide maternal and child services to the non-affiliated population.

Stage 2: Standardizing basic health care provision among different providers. The services offered by the LMG and the SSC wi l l be matched to the one defined by the working group for universal coverage -Conjunto Garantizado de Prestaciones CGP, to facilitate agreements among providers for the exchange of services o f non-affiliated population.

Stage 3: Developing service networks of increasing complexity and separation of financing from provision at the IESS. Achieving a better coordination among providers w i l l be the goal o f this stage. Performance agreements among providers wil l be signed in order to buy and sell services related to the guaranteed basic health care package, CGP. At the same time, the IESS w i l l proceed with the full implementation o f a separation of financing and provision. This wil l set the stage for the IESS to be able to buy services from other providers.

Stage 4 (beyond the scope of the program): Separating of financing from provision, and eventually creation of a unique purchasing agent. In this stage the decentralization process w i l l continue further, and the separation of financing and provision w i l l be completed.

17

OBJECTIVE 2: BENCHMARKS TO INTEGRATE BASIC HEALTH CARE

BENCHMARK ACTIONS UNDER FIRST PROGRAMMATIC LOAN . The Government has created a working Group to oversee the design of a universal basic health insurance model (AUS), using the Ley de Matemidad Gratuita (LMG) and the Seguro Social Campesino (SSC) as stepping stones. The working group has produced TORS and/or studies to analyze the following aspects o f the AUS: (i) definition o f a set o f guaranteed and self targeted basic health services, the Conjunto Garantizado de Prestaciones CGP; (ii) identification o f beneficiaries excluded from CGP; (iii) gradual integration of existing systems in a single system to provide the services guaranteed by the CGP; (iv) the financial implications o f increasing coverage o f CGP; (v) establishing an institutional and judicial framework, as well as the regulatory scheme for the functioning and quality o f the CGP; (vi) establishing a base line for obstetric networks, and (vii) a study of legislation, registry, and utilization o f essential drugs. In order to implement the separation o f financing from provision in health care services within the IESS, as expressed in the Social Security Law LSS, the IESS has signed management agreements with 84 implementation units.

.

BENCHMARK ACTIONS UNDER SECOND PROGRAMMATIC LOAN . . The design o f the AUS has been completed and the CGP has been discussed at a national level gathering.

The group has presented the results o f the studies committed in 2003, an implementation plan, and TORS for a study on catastrophic insurance. The M O H has initiated two pilots for the implementation o f the AUS. At least one o f such pilots wil l be implemented in one or more districts o f the first quintile according to the poverty map. The IESS has evaluated the management agreements and effectively implemented the separation between financing and provision in at least 20 pilot units.

.

.

BENCHMARK ACTIONS UNDER THIRD PROGRAMMATIC LOAN . The pilots have been evaluated and evidence has been presented showing that the AUS has covered more than 60 percent of the population in the f i rs t and second quintile as defined by SELBEN. The AUS has been implemented at the national level having incorporated the changes in design resulting from the evaluation o f the pilots. The PGE 2005 has incorporated funding for the AUS. The experience of the 20 pilot units has been evaluated.

.

. *

42. breadth o f coverage, that i s the proportion o f the total population that has effective access and financial risk protection; and (ii) the depth o f coverage meaning the extent to which services are available to people without exposure to out-of-pocket payment. The breadth o f coverage i s very low in Ecuador, estimated at about 22 percent o f the total population (1 1 percent IESS, 8 percent SSC, 1 percent the SSFAP and 4 percent others). I t i s estimated that in 2002 another 31 percent o f the population received basic health services through the Ministry of Health’s facilities and that about 10 percent o f the population receive services from NGOs, religious institutions and other providers. This leaves about 37 percent o f the population without access to basic services. From the perspective o f the depth o f coverage, the situation i s even worse, especially for the poor population. The LMG i s limited to a very basic package o f services for maternal and child care only, and this system lacks adequate financial coverage and depends on a system o f referrals to other (equally problematic) public hospitals when severe health problems are detected.

43. Increased access and coverage will be accomplished through the creation of a basic package and the signing of contracting agreements among providers to take advantage of idle capacity. The LMG guarantees access to maternal child health care, but there i s a number o f potential beneficiaries l iving far from facilities that currently provide those services. The following actions w i l l be taken to increase access and coverage:

Increase Access and Coverage. Coverage o f health services has two dimensions: (i) the

a. Agreements w i l l be signed to contract SSC facilities by the LMG to give access to rural population and to delimit responsibilities with respect to service provision and financing;

18

b. Dependents o f IESS affiliates w i l l be incorporated to the health insurance scheme on the basis o f an approved and sustainable plan; and

c. The LMG health package w i l l be reviewed to increase some very basic mother and child services and ensure proper reference to public hospitals in case o f higher care need.

~ ~~~ ~

OBJECTIVE 2: TRIGGERS TO INCREASE ACCESS AND COVERAGE OF BASIC HEALTH CARE

TRIGGER ACTIONS UNDER FIRST PROGRAMMATIC LOAN .

. The IESS has concluded a study to evaluate the cost of covering the spouses and children under 6 o f current beneficiaries. A framework agreement has been signed to provide services included in the LMG in facilities that belong to the Seguro Social Campesino (SSC), for the population not covered by this insurance scheme, including a process to identify non- affiliated beneficiaries. The Executing Unit of the LMG has started the process o f designing a system o f monitoring and control o f payments, and a process to identify a set o f instruments to be used to overcome cultural barriers that prevent some groups o f the population f rom accessing health care.

.

TRIGGER ACTIONS UNDER SECOND PROGRAMMATIC LOAN . Relatives o f affiliates to the IESS health services receive benefits according to the implementation schedule and the financing constraints determined by the actuarial studies. The minimum package being offered i s the one defined by the LMG. The number of f irst time prenatal consultations and consultations for children less than 6 years o f age has increased in 10 percent. The Monitoring system and the mechanism to overcome cultural barriers that prevent some groups o f the population f rom accessing health care have been implemented.

. 1

TRIGGER ACTIONS UNDER THIRD PROGRAMMATIC LOAN . The necessary changes to the financing scheme and the package of services have been made to guarantee an increase in coverage o f IESS to relatives o f affiliates. The number o f f i r s t time prenatal consultations and consultations for children less than 6 years o f age has increased in 20 percent, and at least 20 percent of such consultations benefited the population not affiliated to the SSC. The Monitoring system and the mechanism to overcome cultural barriers that prevent some groups o f the population f rom accessing health care continue being used.

.

*

44. performance o f essential functions by the Ministry o f Health, based on guidelines prepared by the Pan American Health Organization, shows poor performance in leadership, surveillance, research, promotion, coordination, monitoring and other essential functions. The lack o f leadership i s compounded by recent legislation that gives the Ministry o f Health only a coordinating role in the health sector rather than a stewardship role which would allow it to set operational policies, and enforce standards. As a result, agencies l ike the IESS and SSFAP consider themselves autonomous institutions for the provision o f health care services, that have essentially no formal relationship with the Ministry o f Health, and operate essentially in an isolated manner.

45. put in place. The Government w i l l implement a major revision o f the existing regulatory framework, establishing a set of stewardship functions o f the Ministry o f Health that w i l l strengthen i t s role, and creating an organic structure necessary to fulfil those functions.

Improve the Stewardship Role of the Ministry of Health. A recent evaluation o f the

In order to strengthen the role of the Ministry o f Health, a new legal framework should be

19

BENCHMARK ACTIONS UNDER FIRST PROGRAMMATIC LOAN The Actions in the Policy Matrix related to this reform principle are listed under the overall objective o f Transparency and Accountability in the Social Sectors.

46. Elimination of Hidden Cross Subsidies. The lack o f transparency in the health sector has been a major factor in the presence o f hidden cross subsidies among providers and the high price o f pharmaceuticals. Thus, the real cost o f different services i s unknown, as, for example, the SSC uses I E S S facilities for second level or more complex health care procedures without receiving a compensation, as well as some services from MOH are provided to the general population, including I E S S affiliates. In order to eliminate the cross subsidies, the MOH and the IESS wi l l sign agreements to purchase services from one another, based on several studies being performed on the cost o f services and the extent of subsidization from one institution to the other.

47. Reduce Out of Pocket Expenses in Pharmaceuticals. The out o f pocket expenses in pharmaceuticals i s much higher in Ecuador than in other Latin American countries. This can in part be attributed to higher than average price o f pharmaceuticals. The process for approval o f drugs through the National Registry lacks transparency. As such, some cases are processed immediately, and others take an indefinite period o f time to go through. At the same time, suppliers o f drugs to the MOH and the LESS have to be included in a l i s t approved by the Consejo Nucionul de Sulud, CONASA, but the procedure to be incorporated into that l i s t i s not explicit. The country has passed a generic drugs law, but it has not been applied so far.

OBJECTIVE 2: BENCHMARKS TO ELIMINATE CROSS SUBSIDIES AND DECREASE OUT OF POCKET EXPENSES I N PHARMACEUTICALS

BENCHMARK ACTIONS UNDER SECOND PROGRAMMATIC LOAN . .

A new legal framework regulating the purchase, distribution, and use of essential and generic drugs has been presented. An agreement between the MOH and the IESS to purchase health services has been signed, based on the studies about cross subsidies in the health sector.

BENCHMARK ACTIONS UNDER THIRD PROGRAMMATIC LOAN . *

The cross subsidies in the health sector have been completely eliminated. The legal framework for essential and generic drugs has been approved.

4. PENSIONS

48. Liabilities: Access to pensions and income supplements among the elderly in Ecuador i s one o f the lowest in LAC, judged by traditional indicators, l ike the proportion o f the economically active population that pays into the contributive system, or the proportion o f persons age 60 or more with benefits. With only 15 percent o f older individuals receiving a contributory pension and another 15 percent receiving a non-contributory benefit, Ecuador i s the country with the second lowest percentage o f contributors to formal pension schemes, after Bolivia. As the elderly are a significant proportion o f the poor, coverage should be expanded in the formal sector as well as in the informal sector. This may be accomplished by improving labor market conditions, enforcing existing legislation, and designing and implementing well-targeted and fiscally sustainable non- contributory benefits.

Expand Effective Income Protection for the Elderly and Limit Contingent Fiscal

20

49. challenges with potential fiscal implications: first, the Government o f Ecuador has run in the past substantial arrears on i t s contributions to IESS as an employer, and on the 40 percent o f pension payments i t i s liable for, according to the law. The Constitution requires that the Government and the LESS reach an agreement on the value o f this debt, and that i t be paid by 2009. There i s an agreement in the value o f the debt in Sucres, but depending upon the exchange rate to be applied, the total liability fluctuates between US$0.4 and US$2 billion. Second, the 40 percent payment by the Government to IESS i s maintained by the new Social Security Law, with the added problem that i t also applies to increases in pension benefits, which are determined exclusively by the IESS.

50. In defining a strategy to increase coverage, the fiscal implications w i l l be taken into account. Negotiations are under way to determine the value o f the debt and the schedule o f payments, and a revision o f the current Social Security Law, which has been questioned on legal grounds in the superior courts o f Ecuador i s going to be revised. This operation does not support the implementation o f a pension reform as described in the 1991 Social Insurance Law, however, as this law has been questioned in legal courts.

5 1. Developing a Strategic Vision for the Sector. Unfortunately, at present the Government has not articulated an integrated pension policy, although many institutions have their own strategies and clienteles. This leads to a fragmented system with coverage gaps, lack o f mobility between employers and institutions, and inequities that can be counterproductive. The abovementioned working group would eventually become an established institution within the government structure. I t s main functions would be to:

At the same time, the formal contributory pension scheme faces a number o f financial

a.

b.

C.

d.

e.

f.

Develop and implement a long term strategy for the income protection policies for the elderly;

Assess and evaluate the performance o f social security institutions, respecting their autonomy;

Collect and analyze financial, actuarial and demographic information from the Social Security System, in order to assess the overall status o f the system, and regularly disseminate the information though Statistical Reports;

Prepare, publish and regularly update actuarial balances, medium and long term projections and performance evaluations o f the system and i t s institutions;

Prepare drafts o f laws and regulations, aimed at improving the efficiency o f the old age income protection system; and

Coordinate the activities o f al l institutions responsible o f managing cash transfer programs for the elderly.

However in order for that to happen, the IESS and the Government have to reach an agreement, the debt has to be regularized, and the legal aspects o f social security administration need to be clarified.

21

OBJECTIVE 2: BENCHMARKS TO EXPAND INCOME PROTECTION TO THE ELDERLYAND LIMIT CONTINGENT FISCAL LIABILITIES

BENCHMARK ACTIONS UNDER FIRST PROGRAMMATIC LOAN . A working group responsible for designing a strategy for economic protection of the elderly has been created.

BENCHMARK ACTIONS UNDER SECOND PROGRAMMATIC LOAN . The working group has prepared a strategy for fiscally sustainable coverage expansion in the long-run,

incorporating the agreements reached on the existing fiscal contingencies.

BENCHMARK ACTIONS UNDER THIRD PROGRAMMATIC LOAN I The strategy has been implemented.

OVERALL OBJECTIVE 3: TRANSPARENCY AND ACCOUNTABILITY IN THE SOCIAL SECTORS AND PRIORITY PROGRAMS. The overall objective is to improve access to social sector and program information and transparency in the administration of such resources by both public sector managers and planners and by userhenejiciaries.

52. ministries and agencies to track and monitor public spending has been gradually improving over the past several years, but i s s t i l l weak. The Sistema de Gestidn Financieru SIGEF -the Government financial management system- has been and i s being developed to facilitate collecting information periodically about the evolution o f the budget and i t s execution in all areas o f government. However there have been cases in which the processing o f information i s delayed or the data sent by local agencies i s not verified at the national level. As a number of actions in the HDRL Policy Matrix involve close monitoring o f expenses and timely execution, it w i l l be necessary to strengthen this ~ y s t e m . ~ The proposed Fiscal Consolidation and Competitive Growth Adjustment Loan also includes actions tending to improve data collection and monitoring o f Government spending.

Improve Monitoring of Social Spending. The institutional capacity o f Ecuadorian

OBJECTIVE 3: BENCHMARKS TO IMPROVE MONITORING OF SOCIAL SPENDING

BENCHMARK ACTIONS UNDER SECOND PROGRAMMATIC LOAN . Since June 2003 the government, through the MEF or the Frente Social has issued quarterly reports detailing the execution of social spending by program and source of funding.

BENCHMARK ACTIONS UNDER THIRD PROGRAMMATIC LOAN * For 2004 the MEF has presented monthly reports regarding the execution of social spending by program and

source of funding.

53. Rigorous Impact Evaluation of Social Programs. As described above in the context o f rationalizing the structure o f major social programs, at present the budget allocations for social assistance programs are not related to their effectiveness and impact. None o f the programs in the

Additional detail i s provided in Section IV.D, under the Financial Management Arrangements.

22

social safety net has implemented a serious impact evaluation in order to find out how they benefit the vulnerable groups being served. As the operation being proposed here introduces significant changes to the most important programs, impact evaluations w i l l be carried out to determine the programs effectiveness.

OBJECTIVE 3: TRIGGERS AND BENCHMARKS TO SUPPORT RIGOROUS IMPACT EVALUATION OF SOCIAL PROGRAMS

TRIGGER ACTIONS UNDER FIRST PROGRAMMATIC LOAN . The firm in charge of the baseline survey for the B D H impact evaluation has been selected, and a methodology and an implementation schedule for the evaluation have been presented.

BENCHMARK ACTIONS UNDER FIRST PROGRAMMATIC LOAN . The government has produced a methodology, and an implementation schedule for the impact evaluation o f the PAE.

TRIGGER ACTIONS UNDER SECOND PROGRAMMATIC LOAN * The impact evaluation of the B D H is progressing adequately according to the implementation schedule

agreed upon in M a y 2003.

BENCHMARK ACTIONS UNDER SECOND PROGRAMMATIC LOAN 1 The impact evaluation o f the PAE i s progressing adequately according to the implementation schedule agreed

upon in May 2003.

TRIGGER ACTIONS UNDER THIRD PROGRAMMATIC LOAN * Changes in the design, budget and implementation of the B D H have been made following the

recommendations from the impact evaluation, and improvements in schooling and health outcomes related to the BDH have been shown.

BENCHMARK ACTIONS UNDER THIRD PROGRAMMATIC LOAN . Changes in the design, budget and implementation o f the PAE have been made following the recommendations from the impact evaluation.

54. Society. Most social sector programs have built constituencies o f beneficiaries and o f important groups o f stakeholders. The management o f the evaluation and change process would require ongoing dialogue and negotiations with these stakeholders, as well as with the Ministry o f Economy and Finance and legislators in order to achieve sustainable results. Such consultations would form part o f the Government’s implementation strategy for the program. The HDRP w i l l introduce a mechanism for social control o f the performance o f specific social programs, either through satisfaction surveys or “score-cards”. The specific mechanism to be used w i l l be decided through consultations with c iv i l society.

Introduction of an Ongoing Consultative Process with Stakeholders and Civil

23

OBJECTIVE 3: BENCHMARKS TO INTRODUCE A CONSULTATIVE PROCESS WITH STAKEHOLDERS AND CIVIL SOCIETY

BENCHMARK ACTIONS UNDER FIRST PROGRAMMATIC LOAN . Initial consultations with key stakeholders covering program concept and f irst year steps has been concluded and

a roster o f interest groups has been established (determined as part o f consultations covering the CAS).

BENCHMARK ACTIONS UNDER SECOND PROGRAMMATIC LOAN . One key program in each o f the social sectors (education, health, and social assistance) has been evaluated by civi l society groups using a consultative process (scorecards or similar). Evaluation o f first and second phase program results and framework for third phase actions in each sector has been concluded with adequate stakeholder consultation and participation.

.

BENCHMARK ACTIONS UNDER THIRD PROGRAMMATIC LOAN . The results from the evaluation process have been incorporated into the respective programs, and the second phase o f the evaluation i s finalized. A framework for continuing sector reform has been concluded with adequate stakeholder consultation and participation, and the results o f the evaluation of one key program in each social sector have been incorporated into the design o f such programs.

55. Resolve Pending Legal Issues. There are unresolved legal issues that affect the transparency and governance o f some social programs. A new comprehensive law for the national health system, the Ley Orgdnica del Sistema Nacional de Salud, was passed by congress a few years back, but it was never regulated. Regulating the Organic Law on the National Health System creates an opportunity for the Ministry o f Public Health to perform i t s essential public health functions more efficiently, and issue already discussed in paragraph 44, page 19.

OBJECTIVE 3: BENCHMARKS TO RESOLVE PENDING LEGAL ISSUES

BENCHMARK ACTIONS UNDER FIRST PROGRAMMATIC LOAN . A legal framework for the “Ley Orgdnica del Sistema Nacional de Salud” has been completed, including at least

the following: (i) Stewardship functions o f the Ministry o f Health as expressed in the National Constitution; and (ii) an organic structure necessary to fulfill those functions.

BENCHMARK ACTIONS UNDER SECOND PROGRAMMATIC LOAN * The legal framework created in May 2003 i s operational.

56. Increase Transparency in the IESS. The administration o f IESS funds lacks transparency and allows for cross subsidies among programs. Ecuador i s one o f the few countries in Latin America where the health and pension funds have not been separated. This means that there i s no separate accounting or financial management o f the funds, which leaves the door open to possibly large cross subsidies from one fund to the other. Additionally there are no regulations at the IESS with respect to publication o f balances or to provide a transparent account of the use o f funds or i t s investment criteria. The HDFP wi l l seek a complete separation o f funds as well as increased accountability on the use o f funds.

24

OBJECTIVE 3: BENCHMARKS TO INCREASE TRANSPARENCY I N THE IESS

BENCHMARK ACTIONS UNDER FIRST PROGRAMMATIC LOAN . The separation o f funds has been completed and validated by the Executive Committee of the IESS.

BENCHMARK ACTIONS UNDER SECOND PROGRAMMATIC LOAN . Last year balances have been audited and published and the rules and procedures used have been verified independently.

BENCHMARK ACTIONS UNDER THIRD PROGRAMMATIC LOAN . Last year balances have been audited and published and the rules and procedures used have been verified independently.

D. FISCAL COST OF THE PROPOSED PROGRAM

57. The first phase of the HDRP i s basically budget neutral, as no significant new expenses w i l l be required to implement the actions included in the Policy Matrix. Table 6 summarizes the expected fiscal impact of the main actions in the Policy Matrix.

The fiscal impact of the proposed changes have been incorporated into the analysis.

25

Table 6. Expected Fiscal Impact of Social Reform Actions

Action Fiscal Impact Phase of Program

Creation o f Bono de Desarrollo Humano

' Budget neutral

Expanding and updating the SELBEN

Preparing the poverty map

Targeting o f nutrition programs

I Education

Regularity in payment o f teacher salaries

Significant savings wil l come from better targeting, the introduction o f differential payments by income, and the conditionality o f payments

The updating o f the SELBEN, scheduled for 2005, wi l l have to be financed by the government (unless alternative sources o f funding are found). The current version o f SELBEN cost $4-5 million and the update i s expected to cost about the same

The Bank i s preparing the poverty map at no cost for Ecuador

The definition o f mutually exclusive target populations and the adoption o f SELBEN as a targeting mechanism wil l eliminate overlap and hence reduce cost. Also, better targeting wil l help cut down on over-coverage, creating savings.

T h i s measure should not create any additional fiscal stress in terms o f levels. I t may, however, force the MEF to re- evaluate their cash-flow since teacher salaries are often used as a source o f liquidity

The consultations should not be expensive and constitute one-time experiences. Implementing the results o f the consultations may have a fiscal impact, but having the MEF participate in the consultations guarantees that the fiscal constraints wil l be taken into account

Information system and re- structuring o f Ministry o f Education

Revision o f the 'partidas' system

One-time changes that should not amount to a lot. The IDB offered to provide funds for the information system

T h i s should translate into big savings since a significant number o f 'ghost teachers' wi l l disappear from the payroll. I t is, however, unclear so far whether more teachers are needed, or whether the number i s enough and they just need to be relocated to rural areas where they are mostly needed.

I Health

First, second, and third

Third I First I Second and third -I Second and Third

Second and third

Second

Second

Increasing access through agreements between LMG and SSC

US$12 mill ion (already in the 2003 budget) 1 ~~

First, second, and third

Eliminate cross subsidies between M O H and IESS

Second

Increase coverage through the 1 AUS US$l20 million (lowest two quintiles and average cost o f CGP in other countries)

Third

I Pensions I Increase effective coverage o f economic protection for the e 1 der 1 y

Unknown at the moment. But the actions committed are based on financial sustainability principles

Third operation

26

58. Fiscal Impact of Social Assistance Reforms. The main fiscal impact of the f i rst phase comes from the creation o f the Bono de Desarrollo Humano (BDH). This has been budgeted at US$197 mill ion which has already been incorporated in the social welfare budget. However, the team working on the BDH estimates that significant savings w i l l come from better targeting, the introduction o f differential payments by income, and the conditionality o f payments. Moreover, since the targeting instrument used by the BDH (SELBEN) i s only to be updated every three years at the soonest, the number of beneficiaries i s not expected to increase in the medium run. Changing the targeting mechanisms (expansion o f SELBEN and producing the poverty map) i s being financed with non-reimbursable funds.

59. The second and third phases of the program wi l l consolidate the BDH, but the marginal cost should be close to zero and w i l l support a transformation o f the nutrition programs. The definition o f mutually exclusive target populations and the adoption o f SELBEN as a targeting mechanism are expected to eliminate overlap and hence reduce cost. Also, better targeting w i l l help cut down on over-coverage, especially in the case o f the PAE, creating savings. Part o f these savings; however, are likely to be devoted to the inclusion of milk in the ration handed out by the PAE, an issue that i s still under discussion by the Government.

60. should not create any additional fiscal stress in terms o f levels, but may force the MEF to re- evaluate their cash-flow control mechanisms since teacher salaries are often used as a source o f liquidity.

6 1. should translate into significant savings since an important number o f 'ghost teachers' w i l l disappear from the payroll. I t is, sti l l , unclear whether more teachers are needed, specially in rural areas, or whether the teachers currently on the payroll can be relocated to rural areas where they are mostly needed. A consultation process to determine actual teacher needs in the country, and to modify the resource allocation system wi l l involve the MEF, guaranteeing that any change w i l l factor in existing fiscal constraints.

62. any increases in expenditure beyond those established in the Pro forma Budget. The agreements between the LMG and the SSC w i l l imply that the total budget o f the LMG be used during the fiscal year, but this budget o f US$15 mill ion has already been incorporated in the current budgetary provisions. The HDRL I also calls for expansion o f coverage by IESS to dependents and relatives o f affiliates, but this expansion i s only going to take place in the second phase o f the program, according to a plan and financing capacity. This expansion o f coverage has already been approved by law, and the program i s assisting in making sure that such expansion does not create deficits in IESS and fiscal contingencies for the Government. This amount w i l l have to be budgeted in future years also.

63. The biggest fiscal impact on the health side w i l l be felt during the third phase of the program. I t has been estimated that the extension o f coverage to the lowest two quintiles could cost about US$120 mill ion (using the cost o f an average basic package in other countries as reference). Expansion beyond that point w i l l be based on prior analysis o f fiscal sustainability. A Public Expenditure Review currently underway and other specific studies w i l l determine a fiscally sustainable package and expansion plan o f health services.

64. additional strain on fiscal accounts in the pensions area, but acknowledges that there i s a potentially significant fiscal contingency in that autonomous decisions by IESS on pension benefit levels are mandated (by law) to be partially covered by the Treasury -about 40 percent

Fiscal Impact of Education Reforms. The Regularity in payment o f teacher salaries

The main fiscal impact i s expected from the revision o f the 'partidas' system. This

Fiscal Impact of Health Reforms. The f i rst phase o f the HRDP does not contemplate

Fiscal Impact of Pension Reforms. The f i rst phase o f the Program does not create an

27

o f the pension benefits paid by the IESS every year. The Program calls for the true and operational separation of funds (health, pensions, workman’s compensation, etc) in IESS, prior actuarial studies.

65. The increase in coverage to the elderly i s expected to start by the third phase o f the program, but w i l l be preceded by a fiscal sustainability study, to establish an estimate of the expected cost.

Iv. THE PROPOSED HUMAN DEVELOPMENT RF,FORM LOAN 1

A. LINKS TO COUNTRY ASSISTANCE STRATEGY AND OTHER BANK OPERATIONS

66. consideration together with the HDRP. The CAS has identified three pillars o f the Government’s agenda as priorities for Bank assistance over the next four years: (a) consolidating the macroeconomic framework to lay the foundation for diversified and sustainable growth and poverty reduction; (b) making needed structural reforms socially sustainable and mitigating their impacts on the poor and the vulnerable; and (c) strengthening governance and helping officials build an accountable and efficient Government, the services of which are accessible to all Ecuadorians. This program supports the second objective and i s complemented by the proposed Fiscal Consolidation and Competitive Growth Adjustment Loan that addresses the f i r s t objective. Both the HDRP and the proposed Fiscal Consolidation and Competitive Growth Adjustment Loan support Government efforts to strengthen governance and improve the equity and efficiency o f Government service delivery.

67. The proposed Fiscal Consolidation and Competitive Growth Loan complements this program by promoting structural reforms in the economy. The proposed HDRP supports the design and implementation o f structural changes in the social sectors; the proposed Fiscal Consolidation and Competitive Growth Loan w i l l support the design and implementation o f structural changes in the financial and fiscal sectors, including to:

a. Increase fiscal surpluses and improve tax collection b. Maintain austerity measures to control the expansion o f public spending in areas not

related to social sectors;

c. Uni fy the public sector salaries scales;

d. Reform the c iv i l service reform;

e. Improve public debt management;

f. Increase competitiveness; and

g. Simplify regulations in the energy sector

Coordination with other Bank activities in Ecuador, currently under preparation

The Country Assistance Strategy (CAS) for Ecuador i s being submitted for Board

68. and implementation, will be assured. The Health Services Modernization Project , (MODERSA-Ln. 4342-EC) i s providing technical assistance for the implementation o f some o f the activities necessary to carry out the reforms introduced in the Policy Matrix, such as changes in the regulatory framework o f the National Health Law, technical assistance to the working group in charge o f devising strategies to increase coverage o f health care, design o f the basic package o f health services, and assistance to design the model contract between the IESS and the LMG to provide services in the SSC facilities.

28

69. recommendation related to the design o f targeting instruments like the poverty map and impact evaluations for the main social assistance programs.

70. to provide support for introducing improved budget monitoring through the SIGEF-Institutional system in several key autonomous agencies, and integrating these more fully into the SIGEF- Global network.

7 1. Bank (IDB) i s considering a proposed loan to support changes in the social sectors, that w i l l focus on the social safety net and the labor market, included the protection o f public spending in the social sectors, and promote further policy reforms in the education sector. World Bank interactions with the IDB have been frequent to assure the maximum coordination between the two programs (including joint missions and meetings with Government officials to discuss complementarity o f the assistance).

A Poverty Assessment, currently under preparation, i s providing an analysis and

Finally, a recently approved Public Sector Financial Management TA Project i s expected

Coordination with other multilateral institutions. The Inter-American Development

B. RATIONALE FOR A PROGRAMMATIC APPROACH AND PROGRAM DESIGN

72. reinforce the role of human development as a basis for poverty reduction and long-term sustainable growth. Together with a set o f austerity measures in many other areas, the Government announced an increase in social assistance spending as well as the preparation o f a number o f new draft laws to enable extension o f coverage and to improve the cost effectiveness o f the provision o f basic social services. The Government has prepared a Letter of Development Policy to this effect (Annex 1). The new administration i s generally clear on the broad areas o f need and the general principles that could guide i t s reform process (see Section 1II.B on the long term vision), although at this early stage o f i t s tenure, it has not fully defined the operational targets that should ultimately be achieved and a timetable for reaching them. However, it envisages a period o f national dialogue on major social sector issues, making immediate reforms when these can establish a direction o f improvements and build constituencies and commitment for further activities. Key to this process w i l l be the newly-created Dialogue and Planning Secretariat -Secretaria de Didlogo y Planijkacio'n, whose mandate includes establishing a framework for and implementing consultative processes on issues o f national importance between the Government, civi l society and international partners. The Secretaria i s receiving assistance from UNDP and UNICEF to launch i t s activities, among which national roundtables on reforms in the health sector and decentralization are priorities.

73. Several alternative mechanisms o f World Bank Assistance for the program were considered and rejected. Support through investment lending was rejected in favor o f adjustment lending given to the Government's need for broad budgetary support in the present financial emergency, rather than for structured and positively-identified resources, for specific purposes (the Bank i s considering investment lending in specific sectors were relevant). A more traditional sector-based adjustment approach through a SECAL was also rejected, even considering the sectorial nature o f the issues to be addressed, since a SECAL was seen as requiring more specification o f conditions over a longer time period than would be consistent with the present context. In this context, a process that permitted a certain flexibility in defining the precise steps and content o f a medium term program, and allowed the Government to build commitment would be advantageous, and so a Programmatic Structural Adjustment Loan was considered the most appropriate instrument for the Government's needs.

One of the main priorities announced b y the Government upon taking office was to

29

74. The World Bank assistance will be provided in three phases, the first supported by a programmatic loan of US$50 million, and the second and the third by programmatic loans of US$lOO million each, with their own terms and conditionalities appraised and negotiated separately. The loans would be built around three main goals, emphasized differently by operation and by sector; as follows:

a. Protecting the most vulnerable groups in the population by protecting public spending on the social sectors in general and priority social programs in particular;

b. Increasing the efficiency and coverage o f basic social services through: (i) improving targeting tools for social assistance programs; (ii) using those instruments in a consistent way to determine who benefits from the program; (iii) prioritizing social assistance spending towards the most efficient programs, (iv) improving a number o f basic social services; and (v) eliminating some administrative barriers that prevent social services from reaching the poor; and

c. Improving access and generation o f information and to promote transparency in the distribution and administration o f public social sector resources.

The first phase of the HDRP would assist the Government in closing fiscal gaps 75. while protecting key social expenditures, and in redirecting expenditures towards the most vulnerable groups in the population. The HDRL I would improve Ecuador’s ability to finance social operations during the ongoing fiscal adjustment while protecting programs that affect the poor, and would also provide assistance in the adoption o f administrative and regulatory measures that w i l l improve the poverty targeting and focus o f basic social services, reduce leakages and improve the effectiveness of social expenditures that are being made in the period o f austerity. These adjustments would have dramatic medium term effects. In addition, work would be initiated to design alternative and improved programs that could institutionalize a more cost- effective set o f social services.

76. would set the stage for long-term structural reforms in the social sectors. While the f i rst phase protects social spending, begins the implementation o f changes in the social safety net, and assists in the design o f reforms in health and promotes dialogue in the education sector, the second and third operations w i l l also focus on guaranteeing that basic social spending i s protected and increases as fiscal pressures ease, and on preparing the ground for implementation of long term structural reforms. This w i l l be done through the execution o f pilot experiences, leading a national dialogue on the direction o f the social agenda, negotiating changes in regulatory frameworks, signing agreements among different actors in the social sector that are at the moment acting individually, and lifting a number o f constraints that prevent social programs from working efficiently. An overview o f the program sequencing i s provided in Table 7.

The second and third phases would begin to implement medium term actions that

30

TABLE 7. OVERVIEW OF THE MEDIUM TERM PROGRAM

FIRST PROGRAMMATIC SECOND PROGRAMMATIC THIRD PROGRAMMATIC LOAN LOAN LOAN

I. PROTECTION OF PUBLIC SPENDING IN THE SOCIAL SECTORS AND IN PRIORITY PROGRAMS

Establish a base-line level o f the Maintain base-line level o f social social sector budget in real terms e sectors budget e sectors budget to meet an accepted

Improve level o f level o f social

standard

Define and provide base-line levels o f spending on priority programs e programs and guarantee periodic e programs, accounting for increased

Maintain protection o f priority

execution o f their budgets

Maintain protection o f priority

coverage, and guarantee periodic execution o f their budgets

11. INCREASING THE COVERAGE AND EFFICIENCY OF BASIC SOCIAL SERVICES

Adopt improved targeting o f social assistance programs aimed at the e social assistance programs J assistance programs poor; and reforms in main social assistance program effects o f changes

Adopting a targeting scheme for

addressed to poor districts; evaluate

Reform of additional social

Show improved outcomes

e Begin o f implementation of strategy Reach agreement on framework for income protection for the elderly e protection for the elderly

Design of a strategy for income

Agree on strategic plan to reorganize management structure I Implementation o f reorganization within Ministry o f Education

Agree on plan to change the determination and administration o f e remuneration and evaluate first teacher remuneration year’s effectiveness

Reach agreement among stakeholders on broad framework e for education sector reform Implement plan for teacher

Agreement between health care providers to increase access to e Show improved access services for the poor

Design o f structural reforms in health to adapt existing institutions e Pilot implementation for an increase in coverage

Implementation at national level e Show improved outcomes

111. PROMOTING CONSULTATIONS, TRANSPARENCY AND ACCOUNTABILITY IN SOCIAL SECTORS AND PRIORITT PROGRAMS

Reach agreement on the Impact evaluation used to make methodology and administrative necessary changes in main social framework for evaluating efficiency e Evaluations implemented e assistance programs and efficacy o f critical social sector show positive results in main social

assistance programs programs

Reach agreement on principles for

Implement action plan for introducing open access to social sector program information, improving monitoring o f budget Show improved Monitoring system

providing transparency in and open execution access to information concerning the J Prepare modifications to legal and e Approve modifications to the legal rights, financing, and administration regulatory framework governing o f social sector programs transparency and accountabilities in

selected social sector programs for legislative consideration

frameworks and regulations as needed and implement newly defined accountabilities

Initiate consultative process in Complete stakeholder consultation Complete stakeholder consultations defining social sector priorities and e on status o f the program and e on status and results o f the program programs proposals for further actions and proposals for next steps.

31

77. The first phase would emphasize the first two objectives since they are considered priorities. I t would define an adequate level o f public spending on the social sectors to be maintained, and a number o f programs whose budget has to be protected. It would also seek to begin the implementation o f structural changes in the main social assistance program, in order to improve immediately the level and type o f assistance to the poor, for example by changing the way it i s targeted and benefits determined. Finally, i t would support the design o f structural reforms in health and pensions to improve efficiency and coverage. The phasing in the program recognizes that structural changes in social assistance can provide immediate protection and relatively quick results, while changes in education require a longer term to be effective.

78. The second phase would consolidate the first phase results by maintaining the level of protection in social spending and guaranteeing i ts execution, emphasizing efficiency gains and the accountability goal. This phase would call for maintaining the level of social spending in real terms and for showing that the execution o f some priority programs i s on target, as delays in execution could be damaging for the objectives o f those programs. During this phase the structural reform to the Bono Solidario would be finalized and additional reforms to the social safety net would be implemented, like the adoption o f the poverty map as a geographic targeting tool. The second loan would set the stage for longer-term structural reforms in health and education, including changes in existing structures and the administration o f health care services to allow for conversion and initiation o f structural reforms, and a consultative process in education to modify resource allocation systems and improve incentive schemes for teachers in rural areas.

79. The third phase would take the first steps in implementing changes that would have a long term impact in social sectors. While the level o f protection to social spending would be maintained and even increased, particularly in health, a third loan would concentrate on deepening the changes that started in the previous operations, and on achieving and measuring some results from the reforms implemented then. Under the third phase other programs in the social safety net besides the Bono Solidario would be reformed, and the long-term structural changes in health w i l l be mainstreamed. The long-term reforms in education would begin, and the implementation o f the pension strategy would start.

80. transparency.

Throughout the three phases there would be emphasis on accountability and

C. THELOANS

8 1. The programmatic loans w i l l consist o f one single tranche o f US$50 mil l ion and two single tranches of US$lOO mill ion each. In the case o f the f i rs t loan, the disbursement for the single tranche would be for US$49.5 mill ion as the front-end fee i s being capitalized and should be deducted from the US$50 million. This amount w i l l be disbursed upon effectiveness. The second and third loans o f US$lOO mil l ion each are expected to be negotiated and submitted for approval around May 2004 and 2005 respectively. The basis for the negotiation and approval o f these loans wi l l be the completion o f actions described in the Policy M a t r i f l l a n o f Actions.

82. Disbursement arrangements would follow the simplified procedures for SALS/ SECALs approved by the Board o f Directors on February 1, 1996. The Borrower w i l l open an account in Ecuador's Central Bank (Banco Central del Ecuador). Once the Bank formally notifies the borrower that a tranche i s available for withdrawal, the Borrower may submit a simplified withdrawal application so that the proceeds o f the tranche are deposited by the Bank in this account, for use in accordance with the Loan Agreement. Disbursements w i l l not be linked to

32

specific purchases, and supporting evidence for disbursements i s therefore not required. The proceeds o f the loan may not be used to finance expenditures typically excluded under the Loan Agreement.

83. Benchmarks and Triggers. In extensive discussions with MEF and other Government agencies, a number o f benchmarks have been agreed to measure progress in achieving the objectives o f the social reform program. The detailed set o f benchmarks for the f i rst HRDL I loan and an indicative detailed l i s t o f benchmarks for the second and third loans are specified in the Policy Matrix in Annex 2. This matrix also includes a minimum set o f expected outcomes at the end o f the program.

84. The indicative benchmarks for the second loan listed in Annex 2 w i l l not necessarily be a l l conditions for future lending. Many of them w i l l serve as guideposts to signal progress o f decisions/actions towards achieving the objectives o f the reform program. Among these benchmarks, some key actions w i l l serve as triggers or minimum conditions for the Bank to proceed with the processing o f the second loan. Following i s a l i s t o f Trigger Actions the Government has committed to implement as necessary condition to proceed with preparation o f successive phases o f the program.

33

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D. PROGRAM IMPLEMENTATION AND SUPERVISION

(1) Institutional arrangements

85. the Subsecretaria de Znversidn Pablica as the official counterpart. Responsibilities for supporting, monitoring, and coordinating the activities o f the agencies involved in meeting the benchmarks o f program progress, and completing the triggers for subsequent lending would be delegated to the Secretaria Tbcnica del Frente Social, a technical secretariat whose head w i l l act as Project Coordinator. The Secretario wi l l be assisted by specially delegated staff to manage daily operations related to program implementation. The MEF wi l l coordinate closely with other members o f the Frente Social to assure that program goals are met. Under its mandate, the Frente Social would serve as the forum to discuss and advise on the policies and their ramifications being advanced under the program, monitor progress in meeting program objectives, participate in national dialogue with non governmental stakeholders and c iv i l society, and arrange for the collaboration o f technical staff within their respective agencies with the Program Advisor to complete research, analyses and preparations necessary for program implementation.

The program would be implemented on behalf o f the Government by the MEF, through

(2) Stakeholder Consultations

86. developed at a political and strategic level. Shortly after its inauguration, the new Government established a Secretariat for Dialogue and Planning -Secretaria del Didlogo y Planinficacidn. This Secretariat has the mandate to facilitate consensus building on issues o f national importance, promoting the participation o f NGOs and c iv i l society organizations in a variety o f national and regional fora. The Secretariat would be engaged during the program to continue to facilitate dialogue. The Government would also follow a two-way communication and consultation process on the technical and programmatic aspects o f the sectors reform through the communications unit o f the Frente Social. These consultations w i l l focus on the definition o f operational objectives, timetables, details o f reform initiatives and measures to implement the program. One part o f this launching process was the presentation of the program in a dialogue that coincided with preparation o f the CAS. This also included consultations with representatives o f the indigenous community. As part o f the preparation o f the second and third phases, additional consultations would be organized to assess progress in meeting program objectives, evaluating additional needs and recommending additional measures that might be required. The Secretaria Tbcnica del Frente Social would be responsible for arranging such consultations and events. Having conducted such a consultative process would also be part o f the conditionality o f making the second and third loans.

Consultations among stakeholders in Ecuador’s social sectors are already well

(3) Safeguards Arrangements

87. institutional and regulatory changes which do not appear to have environmental consequences. I t i s therefore assigned a category “C” for screening purposes.

88. the major issues affecting beneficiaries and stakeholders (A summary o f which i s presented in annexes 7, 8, and 9). Therefore, with this background and consultative processes that are envisaged, a specific social assessment i s not being considered for the f i rst phase. Further consultations and preparation o f the details o f measures to be carried out under the second and

Environmental Category. The program i s an adjustment operation that i s confined to

Social Assessment. The program has been supported by sector notes that have illustrated

37

third phases would constitute social assessments for these phases. Actions that had specific implications for the indigenous community w i l l also be highlighted at that time.

89. controlling public expenditures during the recently completed (2001) State Modernization Project (MOSTA). The ICR for the project has reported that the development and application o f a new integrated financial management system (SIGEF) has brought a satisfactory level o f financial accountability to national institutions and provincial agencies covering about 85 percent o f the national budget and has allowed the MOF to consolidate and track such spending. The MOSTA also has provided the State Controller’s Office -Contraloria General del Estado- with a focused mandate and improved capacity to monitor and audit state spending ex post. As a follow up, the Government has prepared and the Bank i s supporting a Public Sector Financial Management TA Project (FMTAP), which would provide software, hardware and training for additional agencies, including autonomous agencies using government financing, to incorporate them into the SIGEF.

90. To mitigate r isks associated with financial management under the program, al l o f the major users o f public funds to support social sector agencies (ministries, ministry units managing specific programs; autonomous agencies) would be programmed to begin receiving technical support to implement SIGEF-Institutional provisions during the second and third phases o f the program. A condition for making the second programmatic loan would be that MEF has produced a consolidated report on the status o f spending in the social sector (as defined under this program), and while not specifically required, the use o f the improved SIGEF system would assist in this task.

9 1. During 2002, a Memorandum o f Understanding (MOU) was reformulated and approved by the Bank and the Controller General o f the State (CGE), which enhances oversight o f the independent audits o f projects and aims at improving the timeliness and quality o f audit reports. Also, a Pilot Capacity Assessment o f Private Audit Firms in Ecuador was conducted during FY03. The assessment revealed that there i s unevenness in the institutional capacity, audit methodology and engagement practices o f firms, when bench marked against international standards on auditing. As a result o f the assessment, recommendations have been made to the CGE on the acceptability o f firms to conduct audits o f World Bank-financed projects. It i s expected therefore, that the risks to Bank funds posed by uneven quality o f audits, w i l l be reduced.

92. Also, a Country Financial Accountability Assessment i s planned for FY04. The results o f this assessment are expected to contribute to Ecuador’s economic development by (i) identifying weaknesses in Public Financial Management Systems and Practices (ii) making recommendations for improving efficiency, transparency and accountability. Upon completion if the diagnostic work, specific actions items can be built into the Policy Matrix for the second and third tranches o f this program.

93. aware that the use o f public sector funds were at risk o f misuse, from a CPAR completed in April 2000 which rated Ecuador’s procurement risk as “high”, and through various project status reports. The Bank would address this issue on a global basis in part through a new CPAR, scheduled for 2005, and through country discussions. Measures that partially mitigate the risk o f misuse o f public funds under this program would be the tightening o f eligibility criteria and the improvement in administration of social programs (improved targeting); achieving improved budgetary control via the FMTAP (improved SIGEF), and the strengthened capacity o f the CGE under the MOSTA, to audit ministry and agency accounts, ex post.

Financial Management. GOE has made progress in addressing issues o f managing and

Transparency and accountability in the use of public funds. The Bank has been

38

(4) Monitoring and Evaluation

94. Progress in implementing the program would be monitored through the realization o f i t s legal and regulatory achievements and through the evolution o f public spending as consolidated by MEF from the SIGEF-Global system. The program would provide for participatory assessments of results through periodic consultations with stakeholders, with support from the Secretaria del Dia'logo. I t would also provide for third-party expert assessments o f cost- effectiveness in the third phase activities. The Technical Secretary o f the Frente Social would be responsible for providing periodic reports on the program's progress, and for informing the Government and the Bank on progress and other issues during implementation.

(5) Supervision and Consultations with the Bank

95. implementation. The Bank would participate in the consultations with stakeholders, with the staff o f the Resident Country Office.

GOE and the Bank would consult on progress at least twice per year during

(6) Preparation of Subsequent Phases and Loans

96. Immediately following disbursement o f the first loan, GOE would initiate work on the actions contained in the second and third phases. A detailed schedule o f these activities and budget would be prepared with the Bank at that time. The Bank w i l l assist the Government o f Ecuador to secure financing o f these activities to complement i t s own budget for the STFS.

(7) Audit Arrangements.

97. the right to request that an audit be conducted in accordance with International Standards on Auditing, by an independent firm acceptable to the Bank. If requested, the audit wil l be performed in accordance with terms o f reference (TORS) approved by the Bank.

Although a routine audit o f the deposit account would not be required, the Bank reserves

E. BENEFITS AND RISKS

98. This loan will contribute to guaranteeing the provision of social services to vulnerable groups of the population while assisting in improving coverage and performance of such services. First, the loan w i l l support the provision of basic social services to vulnerable groups during a period o f fiscal adjustment. Second, it w i l l assist in the design o f structural changes and their implementation to improve targeting and make social services more efficient. At the end o f the program i t i s expected that the poorest households in the population (f irst and second quintile) w i l l be receiving benefits from a well functioning social safety net, that the poor wil l have better access to basic health care -thus improving their health status- and that the education system wi l l have started to work on changes to guarantee teachers presence in rural areas.

99. Implementing the program faces three main risks;

a. Political: Key stakeholder groups have already shown their ability to influence the possible course o f dialogue on reform in the social sectors. Throughout, groups w i l l hold

39

positions, reflecting agendas that are not central to the protection o f vulnerable groups and social sector reform. While difficult to mitigate, the Government would engage each in transparent and open two-way communications, and in information-based processes o f negotiations o f interests. I t would also maintain an open information policy for the general public so as to isolate this source o f risk to the overall program.

b. Macroeconomic: Ecuador i s currently facing a period o f uncertain economic growth (with a positive outlook) that coincides with the fiscal problems facing the Government. Both the level o f fiscal revenues and to a considerable extent, general per capita incomes and employment levels are dependent on an uncertain international o i l market. The budget and revenue projections underlying the present program (as well as the fiscal program supported in the proposed Fiscal Consolidation and Competitive Growth Adjustment Loan) have been made on the basis o f low international o i l prices (about 50 percent o f the current spot market price per barrel) so that the fiscal risk o f the program should be manageable. However, fluctuations in incomes and employment w i l l affect the climate in which the reform process i s to take place and change the perception o f interests and the actual demands for social sector services that could negatively affect the program’s timing and content. Mitigation o f this risk beyond incorporating some flexibility in the planned timing o f phases 2 and 3 may be difficult.

c. Implementation: The program involves the efforts o f three key ministries and a number o f autonomous agencies, in areas that are technically (as well as politically) demanding. There is, therefore, a serious risk to successful implementation o f the entire program owing to i t s scope and depth. The program appears to have an adequate management structure, but several of the reforms still require adequate technical preparation to be sound. Apart from assistance that may be available through ongoing projects and from other agencies, the Government w i l l likely seek additional financing to allow it to conduct the necessary research and studies to reduce these difficulties, and the Bank i s prepared to consider these requests. I t i s also expected that significant technical assistance and close supervision w i l l be necessary, mostly in the education sector.

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ANNEX 1. LETTER OF DEVELOPMENT POLICY (Translated from the Spanish by the Government)

LETTER OF SOCIAL SECTOR DEVELOPMENT POLICY

Quito, April 14 2003

Mr. James D. Wolfensohn President The World Bank Washington, DC -USA

Dear Mr. Wolfensohn.

1. This letter addresses Ecuador's progress in the implementation o f policies aimed at promoting human development in Ecuador through the carrying out o f programs to address the main needs o f the poorer, including key developments in the health, education and social assistance sectors. The improved accountability, a more participatory and integrated approach, the development o f compensatory and equity enhanced policies, and the improvement in the quality and efficiency o f the social programs in Ecuador are basic requirements for providing better social services to the Ecuadorian population, in special the underserved communities, while improving the efficiency o f the social safety net for the event o f external shocks. We believe the policies outlined herein constitute key Ecuadorian government initiatives to be supported by the Bank under a programmatic adjustment loan.

Macroeconomic Outlook

2. BACKGROUND: In early 2000, after a severe economic and political crisis, Ecuador formally replaced the Sucre with the U.S. dollar. With this strong exchange rate anchor, the economy quickly stabilized and started to recover, led by domestic demand. The recovery was also helped by rising o i l prices and by debt relief through the restructuring o f Brady bonds and a rescheduling o f Paris Club obligations. However, after a promising start, fiscal policies in 2001-02 were not strengthened in step with the requirements o f dollarization, as public sector wages ballooned, imposing significant fiscal rigidities for the subsequent years, and the primary surplus declined. Moreover, while the banking system recovered rapidly after the economic crisis, there was little progress in cleaning up closed banks, and the privatization program o f public enterprises and other important structural reforms were halted. As a result o f these slippages, by end-2002, the central government was again facing domestic and external payments arrears, the treasury was running out o f cash with few options to obtain new financing, and economic activity was slowing.

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3. THE ECONOMIC PROGRAM FOR 2003: The government o f President Gutierrez took office on January 15, 2003, and since i t s start introduced specific policy actions as part of a comprehensive economic and social program aimed to correct the macroeconomic situation and introduce structural reforms. After a short process o f negotiation developed during the f i rst quarter o f 2003, the program o f the government o f Ecuador for the period March 2003- March 2004 received the support o f the International Monetary Fund by means o f a 13- month Stand-By Arrangement from the Fund in the amount o f SDR 151 mill ion (46 percent o f quota on an annual basis). The ultimate objective o f the Economic and Social Program o f the government i s to improve the living conditions o f al l Ecuadorians, particularly the poor, through sustained growth with low inflation, improvements in the social safety net, and the provision o f better public services, in special health and education. In order to reach these objectives Ecuador has defined dollarization as the monetary tool to reach those objectives, together with the achievement o f a strong fiscal position, the creation o f conditions for sustained growth as the restoring o f credit worthiness, and a set o f structural reforms in the social sector to improve competitiveness, fairness and governance.

4. THE MACROECONOMIC FRAMEWORK: The macroeconomic framework for 2003 projects moderate output growth, with continued progress in lowering inflation. Output growth in 2003 i s projected to be around 3% percent, led by an expansion o f o i l exports, although there w i l l be some slowing o f investment after the completion o f the new o i l pipeline (OCP). Consumption i s expected to expand at a more moderate pace from previous years following a period o f catch-up spending on consumer durables. The widening in the external current account deficit i s expected to moderate in 2003, while consumer price inflation i s projected to decline to around 6 percent by end-2003, notwithstanding an increase in some administered prices.

5. Sustained prudent fiscal policies and continued structural reforms are essential to achieving strong output growth and other medium-term-goals. The fiscal primary surplus wi l l need to be maintained at a high level in 2004 and beyond, while revenues from extra o i l exports w i l l be used in large part to reduce the public debt. The government i s confident that a diligent implementation o f this strategy w i l l boost confidence in fiscal and debt sustainability and bring down the current account deficit, consistent with dollarization, thus contributing to reduce significantly the very high interest rates and EMBI risk spread s t i l l faced by Ecuador. Bringing down risk spreads w i l l enhance private sector growth.

6. The government's fiscal policies are geared towards the following main objectives: (i) resolving immediate liquidity pressures and regularizing arrears left by the previous administration; (ii) tightening the fiscal stance to recover from the slippages o f 2001 and 2002; (iii) protecting the poor by stabilizing their income levels and strengthening social programs; and (iv) improving the flexibility o f fiscal policy and prioritizing expenditures.

7. The public sector needs a strong primary balance to bring down inflation, to narrow the large external current account deficit, and to meet debt servicing obligations. Within one week o f taking office, the government implemented a set o f corrective measures, described below, consistent with strengthening the primary balance o f the nonfinancial public sector (NFPS) from 4.5 percent o f GDP in 2002 to 5.2 percent in 2003. The overall NFPS balance in 2003 i s targeted to be US$509 million, or 1.9 percent o f GDP, resulting in a drop o f the public sector debt ratio from 59 percent o f GDP at end-2002 to 52 percent by end-2003. P

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8.

9.

Revenues o f the NFPS are programmed to increase by 0.9 percentage points to 26.9 percent o f GDP in 2003. As a cornerstone o f the adjustment effort, on January 19, the prices for fuels were increased by an average o f 25 percent, yielding close to US$400 mill ion (1.5 percent o f GDP) in 2003. This step was complemented by resolutions issued by COMEXI reversing selective and highly distortionary import tariff cuts (for US$30 million) that were implemented in the last few weeks o f the outgoing administration. The government i s also committed to reducing subsidies on government services, including in utility prices. B y August, the government i s also seeking approval o f legislation to unify the public sector wage structure, which i s projected to yield US$20 mill ion in 2003 in additional social security revenues.

Primary expenditures o f the NFPS are projected to stabilize at 21.7 percent o f GDP in 2003. This reflects mainly the austerity decree issued by President Gutierrez on January 22. In this decree, wage rates for regular c iv i l servants were frozen for 2003; overtime allowances were cut; the president's salary was reduced by 20 percent; and the salaries o f government appointees with monthly earnings over US$l,OOO were lowered by 10 percent. Moreover, the number o f positions that can be filled by the new government was also reduced by 10 percent. Notwithstanding these measures, in dollar terms, the NFPS wage bill w i l l s t i l l increase by US$260 mill ion to US$2,251 mill ion because o f the carryover from the large increases granted in 2002, an increase in the 14th salary imposed by congress in December 2002, and normal promotions.

10. The austerity decree also restrains spending on goods and services in the central government, including restrictions on official travel abroad, the use o f vehicles and cell phones, and a prohibition on the purchase o f new offices and furnishings.

11. The government has reduced by some US$lOO mill ion the budgetary expenditure allowance for Petroecuador. Spending on the social safety net w i l l increase in 2003. The cash transfer program to the poor (Bono Solidario) was increased from US$11.50 to US$15.00 per eligible person per month, to help them deal with the increase in fuels prices, and welfare assistance for the elderly poor was increased by US$5 per person a month, effective January 2003, at a combined cost o f some US$60 million. Pension benefits from the social security institute (IESS) were sharply eroded by the collapse o f the currency in the crisis o f 1999. As a result, they were increased substantially in 2001-02, were raised again by 25 percent in January 2003, but they w i l l not be increased further this year. To help cover the costs o f the large pension increases, the E S S w i l l suspend making loans to affiliates, thereby reducing lending operations from US$158 mil l ion in 2002 to repayments o f US$40 mil l ion in 2003.

12. The financing requirements o f the non-financial public sector in 2003 are projected to amount to nearly US$2.0 billion. The main component i s debt amortization, which i s projected to amount to US$1.2 bil l ion (including a US$29 mil l ion debt reduction in the last quarter o f the year from the new o i l stabilization fund (FEIREP)). Also included are nonreschedulable external arrears (amounting to some US$lOO million), which w i l l be cleared as a prior action under the program, and domestic arrears, estimated at US$0.4 bi l l ion that are also being cleared. The financing needs are programmed to be met from the fiscal surplus o f US$0.5 billion; roll ing over some US$0.4 bi l l ion o f domestic debt falling due in the year; US$0.3 bil l ion in project financing; and with exceptional program fhancing o f just over US$0.6 bil l ion (US$130 mill ion from the World Bank, US$lOO mill ion from the IDB and the CAF each, US$160 mill ion from the Fund, and the government i s seeking cooperation o f Paris Club and other official creditors to resolve intrayear cash flow pressures

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through US$l50 mill ion in external debt rescheduling). With these amounts, the 2003 program would be fully financed. Ecuador w i l l not seek an oil-backed loan.

13. The budget for 2003 approved in congress before end-February, i s consistent with the program. The budget includes a freeze on wages and i s based on an o i l price assumption o f US$18 per barrel for Ecuador mix. If realized petroleum revenues fal l below the programmed level, the government would fully compensate the shortfall with expenditure cuts. If petroleum revenues turn out higher than programmed, they w i l l be used in full to build up central government deposits in the central bank (in the Fondo de Estabilizacibn Petrolero por Liquidar) or to lower the public debt. Any higher than programmed revenues for the social security system w i l l also be saved, and used to increase i t s asset base. Finally, to protect budgetary revenue, the government has issued regulations to the new tourism law that prevent the opening o f new tax loopholes.

Structural Reforms

14. While macroeconomic policies described above address immediate fiscal needs, the government w i l l also send several bills to congress this year to bolster the fiscal and structural outlook for 2004 and the medium term.

15. Before end-February 2003 (a prior action under the program), the government w i l l submit to congress, as urgent legislation, a reform o f the customs administration. This reform aims to allow an overhaul o f the administrative and personnel structure o f the customs office, permit the SRI to upgrade the information systems in customs, and bring the customs tax administration under the internal tax administration (SRI). The government believes that this reform wi l l make a major contribution to reducing corruption m customs, and improve the collection o f revenues.

16. Before end-April 2003, the government w i l l submit to congress a bill for public sector wage unification and c iv i l service reform (including amendments to the Ley de Servicio C iv i l y Carrera Administrativa). Under the wage unification, the various components of remuneration w i l l be brought together in one salary statement, which w i l l then be the new basis for the assessment o f social security contributions. The higher social security contributions w i l l be withheld from the employees (phased m over four years) without increasing the public sector wage bill. The c iv i l service reform w i l l seek a reduction in the number o f public sector employees so that the central government nominal wage bill in the 2004 budget w i l l be lower than that in the 2003 budget. The government has requested technical assistance and financial support (for severance payments) from the World Bank and the IDB for this reform. The government seeks congressional approval o f this reform by end- August 2003.

17. Before end-August 2003, the government w i l l submit to congress a comprehensive tax reform bill intended to allow for a more efficient allocation o f public spending and to expand the tax base. The reform wi l l include: (i) the elimination o f revenue earmarking that i s not mandated in the constitution; (ii) the elimination o f tax exemptions; (iii) the removal o f small taxes with low yields and high administrative costs ("nuisance taxes"); (iv) an increase in vehicle tax revenues; (v) a reduction in the standard deduction (m'nimo imponible) for personal income taxes; and (vi) the closing o f some tax loopholes that allow enterprises to deduct artificially inflated costs. The government seeks congressional approval o f this reform by end-November 2003.

44 P

18. The reforms described above w i l l provide the basis to achieve an overall budget surplus on an enduring basis, with the objective o f reducing the public sector debt. The new private sector o i l pipeline (the OCP) has the capacity to more than double o i l exports, which significantly boosts the medium-term prospects for exports and growth. However, this increase could also intensify the dependence on o i l and Dutch disease problems in the economy, if the new o i l revenues are not managed prudently. Therefore, in January 2003, and as a prior action for the program, the government issued regulations to put in place the Fiscal Responsibility and Transparency Law that was adopted by congress in September 2002. A key aspect o f the legislation and i t s regulation i s that the bulk o f the public sector revenues accruing from the new pipeline wi l l not be used to augment current spending but rather be placed in an o i l stabilization fund (the FEIREP). Ten percent o f the resources in the FEIREP are dedicated to social spending; 20 percent w i l l be saved to help deal with contingencies, such as a natural disaster or a sharp decline in o i l prices; and 70 percent would be dedicated to debt buybacks (not for regularly scheduled budgetary amortizations). The new pipeline i s expected to come on stream in the last quarter o f 2003. The government's medium term policy o f fiscal surpluses, combined with the debt buyback capacity from the FEIREP, are projected to reduce the debt to GDP ratio from 59 percent at end 2002 to below 40 percent by end-2006, I as stipulated in the Fiscal Responsibility and Transparency Law.

19.

20.

21.

22.

Strengthening competitiveness i s essential for sustaining growth and preserving dollarization in Ecuador. Fiscal expenditures have driven up costs in the economy, and these outlays need to be controlled as described above. At the same time, productivity growth needs to be accelerated with structural reforms. In this area, the government i s implementing several measures in 2003.

The electricity distribution and telephone companies (Pacifictel and Andinatel) must be made more efficient. For this purpose, by end-June 2003 the companies w i l l be placed under private sector management o f reputable international firms. At the same time, the subsidies to these enterprises need to be gradually eliminated. In January 2003, the suspension o f the tariff increases was lifted by the regulatory agencies (Conelec and Conatel; see prior action item 3) and tariffs are now being adjusted on a monthly basis until these reach levels matching economic costs. The World Bank and the IDB are providing technical assistance to establish, by end-June 2003, the appropriate structure o f tariffs, taking account o f measures to strengthen collections.

Petroleum sector. Before end-June 2003, and with assistance from international experts, the government w i l l conduct an economic and environmental analysis and prepare an action plan and time table to improve the efficiency o f the production, distribution, and sale o f petroleum and i t s derivatives. Improvements in these areas could produce substantial savings for the economy.

To provide the citizens with better information on public sector operations, the government w i l l improve public sector disclosure and transparency. The monthly fiscal spreadsheets used to frame the program and follow i t s implementation w i l l be published on the web pages o f the ministry of economy (revenue and expenditure data) and the Central Bank o f Ecuador (debt and arrears data), PetroEcuador, TAME (the airline), and all enterprises in the Solidarity Fund, w i l l publish on the web their annual reports approved by the Boards o f Directors, beginning with the report for 2002, before April 2003; and their interim January- June reports before end-September 2003. These reports w i l l contain the companies' profit and loss and cash flow statements, and the balance sheet. Moreover, in April 2002, Ecuador

45

received a mission from the Fund to prepare a Report on the Observance o f Standards and Codes (ROSC) for statistical dissemination. The final report w i l l be published by the authorities and on the Fund's web site before approval o f the Stand-By Arrangement

SOCIAL SECTOR REFORMS

Social Investment :

23.

24.

25.

26.

27.

28.

29.

Efforts to strengthen the social security system wi l l continue. With technical assistance from international institutions, the government w i l l assess the operating procedures and actuarial balances o f the three social security funds (IESS, ISFA, ISPOL) by end-September 2003. This assessment i s intended to result in a reform strategy aimed at ensuring a reasonable and reliable income for retirees on a sustainable basis, including by eliminating the actuarial deficits and minimizing transfers from the central government.

The government wants to target the cooking gas subsidy more equitably. The current large subsidy i s an important distortion in the economy, gives rise to smuggling and corruption, and benefits disproportionately the higher income groups in society. In the f i rs t semester, the government w i l l undertake a project, with help from the IDB, to improve the database o f the Solidarity Bonus to focus better the cash assistance on the truly poor, and remove the subsidy in the cooking gas price. These steps are programmed to yield US$ 40 mill ion (net) in 2003.

Funding prospects to finance priority social programs have been conditioned by the behavior o f macroeconomic variables, in such a way that the greater or lesser availability o f funds has been basically linked to economic growth trends, which have influenced the expenditure capacity o f the Government and thus the coverage offered by these programs. This means that social investments are characterized by their procyclic nature.

In spite o f a significant increase in recent years, funds earmarked for the social sector -which grew from US$ 690 mill ion in 2000 to US$ 1.54 bil l ion in 2003, representing 4.3% and 7.4% o f the GDP respectively, are s t i l l far below the average for Latin America, which for 1998-1999 was 13.1%.

In addition, performance levels have been conditioned to the transfers o f funds from the Ministry o f Economy and Finance to social sector agencies, an issue that has hampered the advance towards the achievement o f expected goals and objectives.

In 2002, the performance levels o f the social budget was 91 % (Fiscal Funds) while.transfers .reached 86%; for this reason, payment obligations were generated for the 5% differential.

The current Administration proposes to isolate the funds destined for social investment from the fluctuations o f the general budget, in order to ensure an effective use thereof. To this end, the Administration i s committed to maintain or increase the amounts destined to education, health and social welfare sectors during the 2003-2006 period, which in 2002 represented 2.5%; 1.3%, and 1.4 % o f the GDP respectively. In 2003 the budget for social welfare, health and education, w i l l be equal or higher than 2002 as a GDP percentage.

/ 1 Includes preallocations for Universities and Social Security

46

30. Likewise, priority programs that w i l l be preserved have been redefined, placing emphasis on programs that provide subsidies both in cash or in kind, in addition to primary health care programs, which have a budget o f US$ 290 mill ion and a relative share o f 19% o f the total budget for the social sector. The priority programs are: "Bono de Desarrollo Humano", BDH; "Programa de Alimentacidn Escolar", PAE; "Programa de Atencidn y Nutricidn para Niiios", P A " ; "Programa de Alimentacidn para e l Desarrollo Comunitario", PRADEC; "Maternidad Gratuita", LMG; "Programa Ampliado de Inmunizaciones", PAI. Operacidn Rescate Infantil, ORI; "Programa Nuestros Nifios" (national funds); Programa de Educacidn Bilingiie; y Escuelas Unidocentes.

31. With the purpose o f guaranteeing transfers o f funds by the Ministry o f Economy and Finance, operating mechanisms are being developed with the cooperation o f the Undersecretary of Budget ("Subsecretaria de Presupuestos") and the State Treasury ("Tesoreria de la Nacidn"), which have agreed to transfer at least 90% o f the planned amount.

32. The 2003 budget for the following programs: "Bono de Desarrollo Humano"; BDH; "Programa Ampliado de Inmunizaciones", PAI; "Ley de Matemidad Gratuita", LMG; "Gasto de Inversidn en Educacidn"; Food and Nutrition Programs (PA"+PRADEC+PAE), w i l l be higher than, or equal to, 2002 budged, in real terms.

The Social Assistance Sector

33.

34.

35.

36.

The social safety net in Ecuador has evolved significantly over the past few years, shifting away from food handouts towards direct cash transfers. Until recently, social assistance was dominated by the delivery o f food baskets and supplemental feeding programs. Program evaluations and international experience showed that these programs are relatively costly and inefficient, with the logistics o f procuring, transporting, storing, managing, and delivering food al l adding significantly to their cost.

Ecuador has several social assistance programs, including the Solidarity Bonus ("Bono Solidario"), student scholarships ("Beca Escolar"), school lunch program ("Programa de Alimentacidn Escolar"), and day care centers for children. However, these programs do not constitute a true social safety system or net, due to lack o f coordination and overlapping o f both their objectives and the targeted population. Although these programs seek to provide assistance to the most vulnerable population, they fai l to respond to a comprehensive vision. Most programs lack adequate monitoring and follow-up and, especially, impact assessments. The most important programs as concerns coverage and budget are "Bono Solidario" and "Program a de Alimentacidn Escolar". Other programs have low coverage.

The "Bono Solidario" appeared in late 1998 as a conditioned monetary compensation mechanism for the poor population, as a result o f the elimination o f the subsidy on electrical power. With the financial crisis o f 1999 this program gradually became the axis o f social assistance in the country. The "Bono Solidario" i s a program that benefits the poor, but it has funding problems. Currently i t assists close to 1.3 mill ion people, most o f which are mothers o f minor children.

The social safety net has no homogeneous targeting criteria: for example, i t i s estimated that 18% o f the beneficiaries o f the "Bono Solidario" program are not poor (inclusion o f population not corresponding to the target group). At the same time, 21% o f the program's P

47

37.

target population has been excluded (exclusion o f population corresponding to the target group). This i s a widespread problem affecting social programs and i s caused by the lack o f a technical tool that would allow to target beneficiaries on an individual basis.

Given the successful experience o f conditioned monetary transfer programs such as "Oportunidades" in Mexico and "Bolsa Escola" in Brazil, the Ecuadorian Government w i l l unify the "Bono Solidario" and de "Beca Escolar" in one new program, called the Human Development Bonus ("Bono de Desarrollo Humano", BDH). This program wi l l consist in monetary allocations, conditioned to school attendance and to periodic health checkups o f children o f mothers who benefit from the "Bono Solidario", as well as o f those registered in the Project to Select Social Program Beneficiaries (SELBEN), that is, families included in the , two f irst quintiles according to the social assistance index developed by SELBEN. The BDH wi l l be create in the last days o f April 2003.

38. The refocusing o f the BDH wi l l be executed within one year, starting in June 2003, and wi l l include approximately 250,000 households.

39. An initiative to design an elderly adults protection strategy w i l l be undertake by the Government. A interinstitutional agreement w i l l create a work group responsible to define technical, financial, legal framework and time needs to achieve this goal, until April 25 2003. The main objective i s to achieve the implementation of a legal framework, until May 2005, to allow the expanding o f the coverage, achieve fiscal sustainability and efficient contingent response, in the long term.

40. The key challenges facing the social safety net include: expanding programs, improving monitoring and evaluation, both o f individual programs and o f the broader safety net, rationalizing and consolidating the safety net and improving equity through stronger targeting and an increased focus. The Ecuadorian Government i s committed to face these challenges, specially by expanding criteria to reach new target populations, bringing in those who were excluded.

Food and Nutrition

41. Although Ecuadorian social assistance policies have launched a process to strengthen mechanisms that w i l l a l low to increase their effectiveness, shifting from food handouts towards direct cash transfers, i t i s also necessary to implement adjustments to current programs o f transfers in kind in order to optimize their actual impact.

42. The school food program ("Programa de Alimentaci6n Escolar") hands out food supplements to boys and girls who attend public schools in the country. This i s also a program targeted for the poor but, similarly to the Solidarity Bonus, it has focalization problems. This program has significantly expanded in recent years and has faced problems related to the diversion of funds. Currently, most recipient children eat both breakfast and lunch at school.

43. An assessment o f the social safety net w i l l provide the information required to improve the rationalization and coordination o f this program. I t w i l l also help bridge the gaps and overlapping o f assistance provided to some beneficiaries, as i s currently the case in some programs. This w i l l allow to collect more consistent selection criteria, definitions o f target groups and a dimensioning o f funds transfers. A national inventory and georeferentiation o f social programs w i l l also be useful instruments to adapt social policies. a

48

44. The development o f Poverty Maps w i l l support the distribution and w i l l complement the individual and household selection criteria, increasing the impact on poverty. In addition, improving the targeting o f programs for small children and pregnant and breast-feeding women -key vulnerable groups, given their unique nutritional needs, also increases the impact on poverty. Clear criteria and strategies for the exclusion o f certain beneficiaries must be used in order to lower their dependence on transfers, as well as government strategies, to alleviate poverty and improve the l iving condition o f the families, achieve it 's goals.

45. Based on the experience gathered in the execution o f feeding and nutrition programs in Ecuador, the political decision set forth in the Basic Fight Against Poverty Agenda ("Agenda BAsica de Lucha contra la Pobreza") i s a combined strategy that includes the delivery o f economic subsidies and the targeted delivery o f food to the most vulnerable population included in the f i rst two poverty quintiles.

46. The National Food and Nutrition Program -PA"- w i l l continue delivering food specifically designed and formulated for pregnant women, breastfeeding mothers and children under 2, which i s the best way to ensure the adequate nutrition o f these vulnerable groups. Experiences in Mexico, Chile and studies made by the PAHO reveal that the delivery o f this type o f food, combined with a nutritional education process, can generate positive impacts.

47.

48.

49.

The care program for children between 2 and 5 years o f age and for elderly non- institutionalized adults w i l l operate via transfers o f cash to their families or via an increase in the BDH (Human Development Bonus), combined with a strong nutritional education program that w i l l involve the community.

The School Food Program -PAE- ("Programa de Al imentac ih Escolar") has had negative results for many years, due to the diversion o f funds both in the handling o f food and in the money given to schools and to groups o f parents. The Agenda has established that the first steps w i l l be to analyze and improve current rations -which include breakfast and lunch at school; and to improve both the procurement system (including local purchases) and the timely distribution o f food to schools. The transfer o f the education bonus encourages school attendance by children, while the food component reinforces their performance in school.

The school food program wi l l target parishes in the country included in the f i rs t two quintiles determined by the poverty map, on the basis of unmet basic needs criteria. Children attending schools located in the parishes o f the f i rst quintile w i l l eat both breakfast and lunch at school. Children attending schools in the parishes o f the second quintile wil l only get breakfast. At the same time, the program w i l l gradually reduce the coverage given to higher quintiles.

The Health Sector

50. The Ecuadorian health sector i s characterized by morbi-mortality rates which place traditional health care problems at the top o f the l ist. Also, chronic diseases and accident and violence related problems are in the increase. This corresponds to a profile that i s typical o f the modern dynamics o f developing economies.

51. The health system i s not fully organized, i s highly inequitable, fragmented and inefficient. For these reasons, i t i s considered that approximately 30% o f the Ecuadorian population has no access to health care coverage, while 77% o f al l Ecuadorians are not covered by any type

49

o f insurance whatsoever. At present, the public health system has deteriorated considerably, making the need to reform the sector even more urgent.

52. The process to reform the health sector began in the 90s. The basic principles o f the reform proposal include increasing health care coverage, improving the quality o f services, separating delivery, control and funding services, providing insurance coverage to the entire Ecuadorian population, shifting towards a model o f decentralized quality health care, raising the professional status o f health care practitioners and providing training to the human resources o f the sector.

53. The process to implement this reform in Ecuador has resulted in the development o f a dense and in many cases ambiguous legal framework, with loopholes that have hindered the achievement o f the objectives contained in the reform. This legal framework includes the law of decentralization and social participation -"Ley de descentralizacidn y participacidn social". (1997), the law to amend the previous law on free maternity and child care -" Ley reformatoria de maternidad gratuita y atencidn a la infancia"- (1998), the Political Constitution o f Ecuador (1998), the Social Security Law -"Ley de Seguridad Social"- (2001) and the National Health System Law -"Ley del Sistema Nacional de Sa1ud"- (2002), as well as the amendment o f the Health Code (a process currently underway in Congress). The new legal framework has not been sufficiently assimilated inside the sector, generating tension with both existing traditional programs and new proposals that are being developed. On the other hand, the new regulations are not ready and there are gaps that hamper the adequate coordination o f actions and the possibility o f developing a national health system.

54. The most important proposals in this area relate to decentralization and universal health insurance. Concerning decentralization, despite advances in legal procedures and some successful experiences at local level, i t i s experiencing substantial contradictions and currently it i s yet to be fully implemented. As for the establishment o f a universal insurance system, i t should be noted that this proposal has been around for many years. Currently i t i s the Central Government's most important proposal for the health care sector. This proposal provides for the implementation o f a national health system that would allow to extend health care and insurance coverage to the entire population, to rationalize resources and optimize their use, and in general, to have a positive impact on the health o f the Ecuadorian population.

55. With respect to Universal Insurance, an international work group w i l l be established, presided by the Vice-presidency of the Republic, to ensure the achievement o f the goals established on the basis o f agreements reached within the sector.

56. An initiative to extend insurance coverage consists in including spouses and children under 6 in the insurance coverage provided by the IESS. This process i s already under way inside the institution, and the studies required for the implementation o f this measure have been completed.

57. Advances have also been made in the coordination o f services provided under the Law o f Free Maternity Care ("Ley de Maternidad Gratuita", LMG) and the Rural Social Security System ("Seguro Social Campesino", SCC). In this way, an agreement w i l l be signed between IESS-SSC and Health Ministry-LMG to improve the extend o f insurace coverage, until April 25 2003. P

50

58. On the other hand, the need to include accountability process in procedures related to the Law o f Free Maternity Care and the Rural Social Security System has been identified. Work i s also being carried out to develop strategies aimed at a better handling o f intercultural aspects related to the services provided under the Law o f Free Maternity Care.

59. Work i s also being done in the definition of a Guaranteed Set o f Services, in the coordination and integration o f existing systems, and studies are being made to dimension the operational aspects o f the reform. The development o f crossed subsidy mechanisms has been proposed to optimize the selling and purchasing o f health services.

60. A proposal has been made to rationalize the legal framework for the acquisition and distribution o f essential and generic medicine.

61. Finally, a process has been launched to separate health service delivery from health service financing, through service delivery units.

The Education Sector

62. The Constitution o f the Republic o f Ecuador, passed in 1998, guarantees the universal right o f al l Ecuadorian citizens to literacy and basic education. The government, through the Ministry o f Education, i s interested in bringing this to fruition. To this end, the Ministry wil l foster two extensive initiatives. First, a National effort to encourage reading and writing in Ecuador ("Minga Nacional por un Ecuador que Lee y Escribe"), with the main objectives o f alphabetizing youngsters and adults, strengthening school literacy in the early years, promoting reading and writing among children, young people and adults, and fostering reading and writing among teachers. Second, the Social Education Contract ("Contrato Social por la Educacih"), with the ultimate goal o f ensuring 10 years of basic quality education for al l Ecuadorian men and women, and adopting quality standards in education, taking into account the ethnical and cultural diversity o f the country. I t also includes training in ethical, moral and civic values. The two initiatives, and especially the second one, were proposed by the population itself and have the support and participation o f broad sectors o f Ecuadorian society.

63. The Ministry o f Education and Culture o f Ecuador (MEC) has a dysfunctional, centralized and bureaucratic structure. Seeing this, the Ecuadorian Government has a clear political w i l l to advance in a process o f organic restructuring aimed at rationalizing strategic sector processes.

64. In addition, the system devised to allocate resources to elementary and high schools i s inequitable. In view o f this, the Government i s interested in reforming this system, taking into account positive discrimination criteria, including density o f school-aged population, rural population, intercultural aspects, vulnerability, and gender.

65. The government identify as a political objective to reduce the payment delay in teacher's salaries, staring from the poorest and less educational develop provinces. Currently, M E C and MEF are working to define a strategy to reduce the delay through reform process link to improve efficiency and transparency.

66. Another significant problem affecting the MEC i s the lack o f a reliable information system about the human resources working in the sector. Accordingly, the National Government i s P

51

keen in developing a reliable information system about the human resources o f the Ministry and in purging its teacher roster.

67. Finally, another current need o f the MEC i s to have an integrated and efficient information and communications system to facilitate management processes. There i s scattered and chaotic information that must be unified and centralized so that i t can be used to take timely decisions and to ensure an efficient administration. The M E C i s keen in redressing this situation through the implementation o f a system and a strategy o f information and communication that w i l l integrate the various existing systems, giving them coherence and making them useful for administrative purposes.

Transparency and Governance

68. Currently the Government i s developing the methodology and the timetable that will serve to define the baseline that win be used to assess the impacts o f the BDH. The selection o f the firm for undertake this baseline w i l l be done until April 25.

69. Based on the policies described above, and expose in detail on the attach document developed in cooperation with de World Bank Mission: "Matriz de Politicas Sociales", which have changed the face o f Social Policies in the country, I request the Bank the approval o f a programmatic social loan for Ecuador.

Mini

52

3

Ti 5

Y

-0 L W

ANNEX 3. LIST OF PROTECTED SOCIAL PROGRAMS

A. PRIORITY SOCIAL PROGRAMS P -

Sector Program Area Budget 2002 Budget 2003 (million US$) (million US$

2002) Social Welfare Bono de Desarrollo 152.6 195.47'"

Humano Social Welfare PAE Nutrition (*) 25.7 3 1.44

PRADEC Nutrition 10.0 12.52 Health PA" 2000 Nutrition 2.7 9.34

PA1 Immunization 5.6 11.50 Ley de Matemidad Maternal Child health 17.28 19.26 Gratuita

Education Investment expenditure 64.5 86.94 (1) The Bono de Desarrollo Humano i s a new program that will replace progressively the Bono Solidario ( U S 1 14.1 1 million in 2002) and the Beca Escolar (US6.63 million in 2002) (2) For the purpose of the conditionality, all nutrition programs will be treated as a single program in order to allow for transfers of resources across programs if so needed.

B. QUARTERLY SCHEDULE OF EXECUTION OF EXPENSES IN PRIORITY SOCIAL PROGRAMS

Quarter Program

First Second Third Fourth

PA1 50% 10% 3 0% 10%

Ley de Maternidad Gratuita 25% 25% 25% 25%

60

ANNEX 4. CHARACTERISTICS OF THE BONO DE DESAROLLO HUMANO

Activities Planning

Coordination with payment agency and implementation of new system

Transfer o f 479,000 beneficiaries to BDH

Incorporation o f 801,000 new beneficiaries to the BDH

Progressive elimination o f 697,000 recipients of Bono Solidario from the roster beneficiaries

Accumulated number of beneficiaries

Note: figures in thousand

This annex describes the objective, nature and main characteristics o f the program Bono de Desarrollo Humano as specified in the executive decree signed by the President of Ecuador on April 25, 2003.

Rationale: The program Bono de Desarrollo Humano (BDH) w i l l replace the programs Bono Solidario and Beca Escolar.

Nature: The BDH i s a conditional cash-transfer program that seeks changes in behavior related to education and health. The specific objectives, nature, implementation and monitoring mechanisms o f the conditionality are described in the regulatory framework o f the decree.

Implementation: The implementation o f the BDH wi l l follow the schedule agreed upon between the Government o f Ecuador and the World Bank team and included below. Beneficiaries: The BDH can benefit al l families in the first or second lowest quintiles defined by the SELBEN index (a welfare index based on the principle-components method) Payments: The program has a schedule o f payments that depend on household composition and welfare

i.

ii.

Families in the second quintile are initially entitled to US$15 provided they satisfy the relevant conditions Families in the f i rst quintile whose household head or household head spouse i s either disabled or over 65 years o f age are entitled to US$11.5, and this payment i s unconditioned Families in the f i r s t quintile not included under (ii) are entitled to US$11.5 provided they satisfy the relevant conditions

... 111.

- Juri -

479

224

-60

703

F bene ~

~

Jul ~

-60

:iaries

- 2%

55

-60

758

55

-60

813

Oct -

55

-60

868

- Nov -

55

-60

923

- Dee -

55

-60

978

- Jan -

55

-60

1,033

- Feb

55

-60

1,088

L, ~

MU ~

55

-60

1,143

4 A!?!-

55

-60

1,198

- May

55

-37

1,253

- Jun

~

27

1,280

rOTAL

479

801

-697

1,280

61

ANNEX 5. TARGETING INSTRUMENTS FOR SOCIAL ASSISTANCE PROGRAMS

A. Targeting mechanisms for selected Social Assistance Programs

Program SELBEN Poverty Map

Bono de Desarrollo Humano 71 Household level targeting Geographic level targeting

P A " 2000 71 OR1 71 PAE 71 PRADEC 71

B. Methodology for the use of the Poverty Map in the geographic targeting of social assistance programs

The updated poverty map -using data from the 2001 census and the 1999 Household Survey- i s being developed by the World Bank and w i l l be ready for use by the end o f May 2003. The Secretaria Tkcnica del Frente Social has committed to use the map to target social assistance programs using a geographic criterion (see part A o f this Annex). To that end i t was agreed that:

1) The totality o f the parroquias in the country w i l l be sorted by poverty level, using a severity index produced with the poverty map.

2) Quintiles w i l l be calculated according to the population l iving in each o f the parroquias and a threshold level w i l l be determined -in agreement with the government- that w i l l separate the parroquias that w i l l receive social assistance from those that w i l l not.

3) For each program funds will be allocated to the parroquias below the threshold level, using a formula based on the severity of the poverty indicator -the precise formula has to be agreed upon with the government.

In the case o f the PAE and the ORI, the government, through the Secretaria Tkcnica del Frente Social, will have to determine a targeting goal, like the percentage o f the total budget assigned to the parroquias in the f i r s t quintile, second quintile, and so on by year 2005, and an intermediate goal for 2004. These goals w i l l be determined before May 2003 once the baseline for the targeting o f these two programs i s established using the 2001 map o f unsatisfied basic needs.

62

ANNEX 6. STUDIES AND ACTIONS SUPPORTING THE PROGRAMMATIC HUMAN DEVELOPMENT REFORM OPERATION

The f i rs t operation, but most importantly the second and third phases o f the program, w i l l be supported by a series o f studies, some of which are already under preparation. Some o f these studies are included in the Policy Actions that the government has committed to implement as part o f the program. Others are pieces o f sector work being funded and implemented by the Bank, which w i l l provide useful information for the preparation o f successive phases o f this operation:

Study Expected Date

Poverty assessment

Poverty map

Impact evaluation BDH

Impact evaluation OR1 Impact evaluation PAE

Study on resource allocation in teachers salaries

Technical assistance for evaluation o f human resources needs in education sector

Actuarial studies for each fund o f IESS

Study on expanding coverage o f social security

Study on cross subsidies in health care provision between MOH, IESS, and SSC

Analysis o f cost of essential drugs

Design o f catastrophic health insurance

Study on cost-effectiveness of the LMG

Fraud control in LMG

Cultural barriers to access in health care services

Including relatives o f affiliates to health care provision by IESS Studies related to universal basic health insurance (listed in Policy Matrix)

Completed July 2003

Completed June 2003

Begin May 2003

Begin May 2003

Begin May 2003

Begin December 2003

Begin January 2004

2004

2004-2005

2003-2004

2003

2004-2005

2004

2003-2004

2003

2003

2003-2004

63

ANNEX 7. THE EDUCATIONAL SYSTEM IN ECUADOR, ISSUES AND OPTION FOR CHANGE.

Ecuador has a complex institutional system (see synopsis 1). several plans and initiatives have been developed during the 1990s and in the past few years (see synopsis 2). yet many challenges still face the educational sector in Ecuador. The principal challenges facing this sector are described below:

Limited Access to Education and Inequities.

Considerable discrepancies and inequities are seen in the provision o f services when comparing income quintiles or urban population as a whole to rural and indigenous populations. While the population o f the poorest quintile in rural areas has less than 4 years o f schooling, the population o f the wealthiest quintile in urban areas has more than 12 years o f schooling. The results o f the L iv ing Conditions Survey o f 1999 indicate that the indigenous population over the age o f 24 l iving in the rural highland areas has an average o f 2.4 years o f schooling, compared to 5 years o f schooling for the rural non-indigenous population in the same areas and 7.6 years o f schooling on a national level. In 1999 the net school enrollment rate for basic middle school education among the poorest quintile o f the population was 19 percent, while for specialized high school this figure was 11 percent. Among the wealthiest quintile o f the population, these rates were 80 percent and 62 percent, respectively. Inequities are also reflected in higher education, as only 2 percent o f the population among the poorest quintile has access to higher education, as compared to 38 percent among the wealthiest quintile. A summary i s presented below o f this situation as seen in early- childhood education, pre-school, elementary, secondary, and higher education.

Early-childhood education. The supply o f early-childhood education i s very limited. Only 7.3 percent o f children between 0 and 4 years o f age in the three poorest quintiles o f the population have access to these services. I t i s estimated that out o f a target population o f close to 1.2 mill ion children, only 97,000 are serviced by the two national programs. There i s no national policy or strategy that addresses this group o f children.

Pre-school education. This level, which i s considered to be the f i rst year o f the mandatory ten- year cycle (basic education), covers only half o f children who are age five. Only 42 percent o f children among the poorest quintile have access to pre-school education, as compared to 86 percent among the wealthiest quintile. Rural enrollments at this level account for only 22 percent o f the total, despite the fact that the number o f children in rural areas represents 44 percent o f al l children between four and five years o f age. Net enrollment at this level (33 percent) for children between 4 and 5 years o f age i s very s imi la r to that o f other countries o f the region with similar income.

Elementary school education. The majority o f children in urban and rural areas have access to elementary school education. In 1999, net enrollment was 90 percent and gross enrollment was 109 percent, demonstrating high coverage. Yet a significant number o f students were either younger, or, as happens more often, older than what was expected for this cycle. According to a study conducted by the World Bank (2000), at age 6, only 65 percent and 78.6 percent o f children from the two lowest income quintiles, respectively, were enrolled in school, while 98.8 percent o f children from the wealthiest quintile were enrolled. At age 7, children from the poorest quintile were the only ones with late-enrollment problems (82.9 percent are enrolled), and at age 8, the enrollment rate was 92.5 percent. Another part o f the same study indicated that delayed enrollment age was principally a problem in rural areas, where, at age 6, slightly more than 70 percent o f children were enrolled, while in urban areas this figure i s 90 percent. (See Figure 1).

64

At the elementary-school level, the enrollment rate nationwide grew by 7 percent between the 1994-95 school year and the 1999-2000 school year, with two mill ion students when the bilingual schools are included. Yet enrollments only grew by 3.9 percent during that same period in the rural areas. The annual enrollment growth rate was less than the estimated growth o f the population (2 percent). Over a five-year period, the number o f teachers grew by 25 percent in urban areas and 20 percent in rural areas, which reduced the studentkeacher ratio from 26 to 23 during this period.

Figure 1: N e t Enrollment Rates, by Consumption Quintiles and by Educational Levels

I I

. ........................................... I 1 8 ! )

91 9 2 Q3 614 9 5 Total men women rural U” ............................. ............. Elementary I Secondary .Z University *m Elementary Secondary g: University I (6-11) (1 2-1 7) (1 8-24)

,.... ........................................ i .............................................. Source: Living Standards Measurement Study (LSMS) 1999 in Social Indicators System of Ecuador -SI ISE (Sistema Integrado

de IndicadoreI Sotiah de Enradotj (2000) and the author’s calculations ( information based on consumpt ion quinules).

The Intercultural Bilingual Education subsystem, officially created in 1998, had slightly more than 85,000 students in the year 2000, which corresponds to 4.4 percent o f the total enrollments in that year. This percentage i s relatively small when one considers that between 12 and 25 percent o f the rural population i s indigenous. lo Enrollments in bilingual schools increased by more than 100 percent in a decade. I t i s worth noting that the enrollment of males grew twice as much as the enrollment of females.

Close to one third o f elementary schools (approximately 6,000) have only one teacher for the school. In the Amazon region the percentage o f schools of this type even i s higher (53.5 percent). I t i s estimated that these one-teacher schools cover 170,000 students or 9 percent o f total elementary school enrollments. Since these schools are principally found in the country’s poorest rural, isolated areas, they are at a disadvantage with respect to the rest o f the public schools in the rural areas.

Despite significant reductions in grade repetition rates, these rates are s t i l l alarming, particularly in rural areas. In rural areas, during the f i rst two grades, the grade repetition rate i s 13 percent, compared to 6 percent in urban areas. I t has been verified that the percentage o f students in bilingual schools who are not promoted to the next grade i s almost double the number o f students who are not promoted in what are known as “Spanish” schools.

Basic middle school and specialized high school education. The nationwide enrollment rate at this educational level grew by 19 percent between school years 1994-1995 and 1999-2000. During school year 1999-2000, the country had close to one mil l ion students enrolled in 3,473 schools. One out o f every four students were attending a private school, while educational institutions in rural areas accounted for only 14 percent of the students. This demonstrates that access to this level o f education i s limited for poor and indigenous peoples. Enrollment in intercultural, bilingual education establishments amounts for less than one percent o f total enrollments in middle school and high-school education. The net school enrollment rate i s

lo The percentage depends upon the source of information.

65

calculated at 50 percent. The studentkeacher ratio i s very low as compared to the average in Latin America.

Data from the Living Conditions Survey for the year 1995 indicate that the older the age-group, the less likely i t i s that youth w i l l be enrolled in school. For example, 9 1 percent o f youth who are 12 years o f age were attending school, while in the same year, only 76 percent o f 13 year-olds, 68 percent o f 14-year-olds, 62 percent o f 15-year-olds, 58 percent o f 16-year-olds, and 55 percent of 17-year-olds were attending school. The gap between rich and poor i s wider at this level than in the elementary grades. A study conducted by the World Bank using data from the L iv ing Conditions Survey o f 1998 found that the principal reason why 34 percent o f children between 11 and 15 years o f age were not attending an educational institution was the cost; 19 percent were not attending due to a lack o f interest, 16 percent because they had to work, 10 percent due to lack o f access, 4 percent due to sickness, and 3 percent because they had to do chores at home.

education. This figure represents 14 percent o f the population between 18 and 24 years of age. (The percentage i s very low when compared to Chile, which has a university enrollment o f 21 percent,

enrollment o f 27 percent). 80 percent of the students enrolled

or Argentina which has a university

During school year 1998-1999 almost 235,000 students were enrolled in institutions of higher

Figure 2: Public Spending on Education by Consumption Quintile

Elementary Secondary University All

eQuintile 1 b Quintile 2 8Quintile 3 JQuintila 4 r Quintila 5

attend public universities and the remaining 2o percent attend private universities. The Universidad

Source: National Educational Statistics System of Ecuador - SINEC (Sistema Nacional de Estadisticas Educativas del Ecuador), Living Conditions Survey, 1998. In World Bank, mnn I""".

Central del Ecuador and the Universidad de Quito account for almost 50 percent of university enrollments. Higher education i s not equitable: Net enrollments are 4 percent in the country's rural areas and 22 percent in urban areas. Less than 1 percent o f the population over 24 years of age has a university degree in the rural areas o f the Coastal Region, compared to 8 percent in the cities. In the highlands these percentages are 1.1 percent and 11.8 percent, respectively. B y income quintiles, the percentages are 2 percent and 5 percent for the poorest quintiles and 38 percent for the wealthiest quintile o f the population. In the highlands, significant differences between genders are found: 15.3 percent o f the population in institutions o f higher learning are male and only 8.7 percent i s female. Higher education i s inefficient as i t takes an average o f 13.4 years o f study for a person to graduate at a cost o f US$22,460. The rate o f graduation at public universities i s rarely more than 10 to 15 percent o f the original freshman class.

In summary, inequities are seen at al l levels o f the system. it i s clear that there are significant discrepancies between rural, indigenous, and urban populations and among income groups (See Figure 2). The school-age population o f the rural area that i s poor and indigenous i s at a great disadvantage as compared to urban school-age children who are not poor and are non-indigenous. Middle school, high school, and university education are principally aimed at the urban school population from the wealthiest quintiles, as the poor in rural areas have no possibility o f enrolling in middle school. It i s interesting to note that the analysis found no differences that could indicate problems o f inequity between men and women in basic education.

Efforts to expand coverage have had positive results. I t i s important to note that illiteracy rates in the country have been significantly reduced. Currently, i t i s estimated that 10.5 percent o f the

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population over the age o f 15 i s illiterate. This illiteracy rate i s only 3.2 percent among persons between 15 and 24 years o f age and 6.2 percent among 25- to 39-year-olds. As i s to be expected, the greatest percentage o f illiteracy i s found among persons over the age o f 65, among whom the illiteracy rate i s 34.5 percent. It can also be noted that illiteracy i s chiefly found in rural areas, and especially in the indigenous zones.

Within the Ministry o f Education, the National Directorate o f Continuing Popular Education DINEPP (Direccidn Nacional de Educacidn Popular Permanente) i s the entity in charge o f adult education. Currently i t coordinates a plan aimed at improving the supply o f formal and non- formal education for groups that for one reason or another have been excluded from the system. The progress report on that plan indicates that i t s main problems are fundamentally related to a lack o f political support to implement the plan and a lack o f economic resources.

systems o f the Americas. Researchers who conducted a survey o f employers in 200 1 for the World Economic Forum

International Development - CID) reached the same conclusion. As i s seen

and Harvard University (Center for

Low Quality of the Education Imparted

Results from academic achievement tests (APRENDO) indicate deficiencies in the quality of teaching at the basic level. I t i s clear that the low quality o f education i s related to factors involving school campuses, the teaching staff, the family, and, in general, with the socio- economic conditions surrounding the students.

In 1996 the Ministry o f Education and Culture implemented a system to measure the quality o f education and ascertain student achievement in the areas o f language and mathematics. This system was applied to students in second, sixth and ninth grades in public and private schools in the Coastal Region and the Highlands. To date, the system has been applied four times (1996, 1997, 1998 and 2000). In general, i t can be concluded that the results indicate deficiencies among the students in achievement and aptitude for language and mathematics, especially in the rural areas and among public-school students.

d = OECD = Digannation for Economic Cooperation L Dcvcloplrrnt i ’ 1‘’ Lbc - LabnAmerlMg

$ 0 , 1 2 3 4 5 6 7 QUALITY OF WBUC SCHOOLS

Source. Global Competitiveness Report 2001-2002, Harvard University (1 = Worse than most other countnes, 7 = Among the best in the world)

Similarly, the deficient quality o f education was noted in a survey conducted in Ecuador in 1998, known as ‘‘Barbmetro Latino” (“Latin Barometer”). The survey’s participants indicated that they considered the educational system in Ecuador to be one o f the most deficient educational

Figure 3: Quality of Schools, Based on the Opinion of the Business Sector

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there i s s t i l l a long way to go in terms o f teacher training for contexts of intercultural, bilingual education. Another problem i s that teachers are using obsolete methodologies that are not conducive to furthering a genuine teachindlearning process. Limited access to teaching materials for students and the teaching staff. Due to the economic crisis o f the past few years, investments in teaching materials for schools i s very limited or almost null. I t i s common in rural areas to find students who do not have access to the most minimal school supplies (notebooks, pencils). It i s also common, both in rural and urban areas, that school campuses are in physically deplorable conditions that are not conducive to learning. There are other factors that affect the quality o f education, related to child labor, absenteeism among children who work to help their parents, and other aspects that are socioeconomic in nature. I t i s important that future measurements under the APRENDO system include instruments to detect the influence o f associated factors (family, school, teachers) in the students’ academic achievement.

Serious Difficulties for Financing Education Serious financial difficulties played a major role in the funding cuts that impacted the educational sector. Teachers’ salaries have been impacted and i t i s estimated that families had to contribute in a greater proportion to educational expenses. Some indicators are presented below:

Since the late 198Os, investments in education have been cut sharply as a result o f the economic crisis. Available information suggests that spending on education dropped, on an average from 4.7 percent o f the GDP in the 1980s to 3.1 percent in 1998 and 2.7 percent in 2000. (See Figure 4).

As a result o f the above-mentioned spending cuts, the needed investments in education are not being made. Infrastructure maintenance i s minimal and teachers’ salaries have been reduced. This has contributed to a higher teacher turnover rate, teacher moonlighting, and teacher absenteeism. Similarly, these pay

Figure 4: Spending on Education as a Percentage of the GDP in Ecuador and in

Latin America and the Caribbean, 1980 to 2001 - 8 0 %

Soarcex Data on Ecuador from 1980 to 1995 based on Social Indicators System of Ecuador (SIISE), 2000, and from 1996 to 2001 from the Ministry o f Finance and the Banco Central de l Ecuador. Da ta on La t in America and the Caribbean (LAC) from U N E S C O database.

cuts have probably reduced the interest taken in the profession by young people who would have wanted to be teachers. This situation could have serious consequences for the availability o f well- trained teachers in the future.

Parents have had to increase their contribution to finance their children’s education. For example, they have had to hire teachers to replace those who have abandoned schools in isolated rural areas, or hire teachers o f certain subject matters in secondary schools. The home survey conducted in 1998 indicates that 40 percent o f parents from the poorest percentile contributed a monthly amount in fees and uniforms, both in elementary and secondary schools (excluding transportation, textbooks and school supplies), almost equal to the monthly payment made by parents o f private school students. Data from the most recent teacher census indicate that more than 1,000 public school teachers are paid with community funds.

During the years 2000 to 2001, higher education received 26 percent o f the funds allocated to the educational sector, compared to 22 percent in 1995. In 2001, the budget for elementary and

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secondary education was the same as the amount allocated for these levels o f education in 1995, while higher education received an increase in i t s budgetary allocation o f almost 33 percent over that same period. From the point o f view o f equity, these budgetary allocations would not be advisable. Aggregate spending in education at all levels indicates that the lowest-income population quintile i s allocated 12 percent of public spending on education, while the highest- income quintile i s allocated 25 percent o f public spending on education. The percentage o f public spending on education that reaches the poorest sectors o f the population i s less in Ecuador than in neighboring countries such as Peru, where 21 percent i s channeled to the poorest population quintile, Bolivia with 32 percent, or Chile with 34 percent.

Problems in the Governability of the Sector Despite the magnitude o f the educational sector’s financial problems, one o f the greatest challenges i s the sector’s governability. Greater public and private investment in education w i l l not have a significant impact unless measures are taken to address deficiencies in governability. The principal issues are mentioned below, with certain points that serve as indicators to illustrate the severity o f the problem:

The Ministry o f Education and Culture has an elevated turnover rate in i t s high-level authorities (ministers, assistant-ministers, provincial directors, and advisors). This situation impedes continuity in educational policies, makes i t difficult to apply a long-term outlook for resolving problems in the sector, and also creates obstacles for teamwork within the Ministry. In its 118 years of existence, the Ministry o f Education and Culture has had 113 ministers. In the last 10 years, 11 ministers have headed up this entity.

The Ministry o f Education and Culture has administrative units with parallel functions. There i s a duplicity o f functions and lack o f coordination among the various levels, and decision-making i s centralized. In a recent analysis o f the structure and functions of the Ministry o f Education and Culture i t was found that administration i s excessively centralized, that there are too many administrative units, that participation in decision-making at the local levels i s almost inexistent, and that service to clients i s deficient. Within the Ministry o f Education and Culture, intercultural, bilingual education has been incorporated through the creation o f a parallel system. This has resulted in a structure where the “Spanish” system and the Intercultural, Bilingual Education system are nearly independent o f one another.

There i s a lack o f coordination o f the sector inside and out. The Ministry o f Education and Culture and the Provincial Directorates have limited communication with the elementary and secondary schools. As a result, follow-up and control o f activities at the school level are not effective. In addition, there i s almost no follow-up or support from the Ministry o f Education and Culture for teachers, who are the most important resource in the educational process. Finally, early-childhood education i s beyond the control and coordination o f the Ministry o f Education and Culture, since it i s administered by the National Children’s and Family Institute and by the Ministry o f Social Welfare.

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SYNOPSIS. GOVERNMENT STRATEGIES AND INITIATIVES

Progress in the DeconcentratiodJlecentralization of the System. In Ecuador, the legal framework for decentralization and deconcentration i s found in the Constitution o f the Republic and in a series o f legal provisions. Despite the good intentions towards establishing a decentralized/deconcentred system, the efforts made in that direction are quite timid and incomplete. Current decentralization efforts are based in part on prior experiences, especially those o f the 1990s, which were partially successful. Examples o f these experiences are: the Program for Better Quality Basic Education, which created 120 Educational Matrix Centers - CEMs (Centros Educutivos Matrices), with each CEM constituted by approximately 20 schools comprising a network. Another example i s the Autonomous Rural School Networks Program, known as Redes Amigus, which has as its objectives: (i) to grant autonomy to approximately 20 percent o f the rural schools (close to 2,400 schools) for the management o f their resources, with greater participation from parents and members o f the community in school administration; and (ii) to improve teaching conditions in basic rural education (elementary school and middle school) in the beneficiary schools’ zones o f influence. A third example i s the decentralization o f approximately 1,800 secondary schools, which are managed as decentralized units and receive funds (cash transfers) directly from the Ministry o f Economy and Finance. With the funds received, the school pays i t s teachers directly and covers campus utility bills and maintenance expenses. In the municipality o f Quito, decentralized education currently covers 42 Municipal Educational Centers, more than 12,000 students, and 900 teachers. The Quito experience i s a further example o f actions that are conducive to providing autonomy and delegating functions to the various levels. Attachment 1 includes a summary o f the progress mentioned above, which plays a fundamental role in future educational policy decisions.

Progress in Planning. Various plans have been delineated by the past few administrations to continue the process o f extending coverage, improving the quality o f services and, in general, making services more efficient. In 2000, the Ministry o f Education and Culture prepared and published a ten-year plan covering the various levels o f the education sector. The plan sets forth policies to be followed, priorities for the sector, and strategies to be implemented. The fundamental objective o f this plan i s to ensure universal access to general education (including basic education, high school, and adult education), in accordance with the principle o f equity. T h i s plan contemplates a Ministry “converted into a organization that functions as a leader, that i s deconcentred, decentralized, efficient, and flexible, and whose management contributes to reducing inequities in access to educational services and in the distribution o f knowledge ...” (Ministry o f Education and Culture, 2000). The plan in question established the following policies and strategies to be implemented: (i) universalization o f access to early-childhood and basic education, while ensuring that students stay in school at those levels o f education; (ii) improved quality o f education, so as to ensure significant learning and the integral development o f the students; (iii) strengthening o f intercultural, bilingual education; and (iv) better conditions for teachers, along with regulation o f the teacher training system for intercultural, bilingual education. In order to implement these actions, the Ministry o f Education and Culture has considered the following measures: (i) decentralization and deconcentration, with specific strategies for each level o f administration: central, provincial, and Local; (ii) changes in financial and budgetary administration that strengthen and integrate the planning and financing functions; monitoring and evaluation o f the use o f financial resources, and a deconcentrated allocation o f budgetary funds in order to generate autonomous school networks and schools as implementation units.

The Social Contract for Education. More recently (September 2002), the agencies o f the United Nations system proposed what has been called the “Social Contract for Education,” which sets forth the following goals: ensure that Ecuadorian girls and boys have access to and remain in school for ten years o f quality basic education; adopt standards Jf quality in education, taking into consideration the ethnic and cultural diversity o f the country, which would include .raining in ethical, moral, and civic values, so that Ecuador wil l become one o f the countries with the best indicators in iasic education within the region.” The declaration also includes strategies that need to be followed to meet these goals, which can be summarized as follows: (i) training and continuing professional development for the teachers, and decent lay; (ii) an equitable distribution of human resources in accordance with the needs o f the schools; (iii) compliance with :urriculums; (iv) establishments with adequate infrastructure and equipment; (v) an incentive policy based on the mplementation of a national evaluation system; (vi) support to needy families (scholarships, school meals); and (vii) m u r e appropriate financial resources to meet the goals that have been established.

The administration of human resources, mainly teachers and principals, i s deficient and must be improved. The screening, appointment, and promotion of teachers within the institution i s a process that lacks transparency. Principals of elementary and secondary schools lack authority to

70

select their personnel, or to take corrective measures when teachers engage in serious misconduct. Frequently, appointments depend upon subjective criteria and not necessarily upon the experience and qualifications o f the teachers being considered for the position.

The system for assigning teachers contributes to the difficult situation, principally in rural schools. When there i s a vacancy in a rural school, a teacher can be appointed to work in the school, but a few months later, can obtain a position in an urban school or in a Provincial Directorate, taking the appointment along with himher, and leaving the school without an available position.

Teachers and principals o f elementary and secondary schools are appointed for an indefinite period. No mechanisms exist to ensure that they w i l l retire when they reach a certain age. Due to the fact that retirement income i s significantly less that the salaries, very few persons opt for a voluntary retirement.

The rate o f teacher absenteeism in schools i s high, due to the fact that teachers must visit the Provincial Directorates or the offices o f their supervisors frequently with regard to administrative matters. Moreover, i t i s estimated that during the past 15 years an average o f one month per year has been lost due to teacher strikes. At schools servicing the poorest populations, an average o f nine days o f work per month i s lost.

The distribution o f teachers i s not adequate. There i s an excess o f teachers in some areas and a deficit in others. During the 1990s the studendteacher ratio declined and the inadequate distribution worsened. The situation seems to be critical in some night schools where there are six students per teacher.

Finally, the salary structure o f the teachers has no correlation to the objective o f improving the quality and equity o f the system. For example, the “frontier bonus” received by teachers in isolated rural areas, which represents an amount equivalent to up to 25 percent o f their salary, continues to be included in a teacher’s salary even when the teacher stops working in the rural area and i s transferred to an urban school.

The management o f the budget as a tool to promote progress in the implementation o f educational policy i s inexistent. The budget of the Ministry o f Education and Culture i s administered by the Ministry o f Finance, with limited participation from the Ministry o f Education and Culture. The budget i s not being utilized as a tool to carry out educational policy. There are delays in the transfer o f funds and the educational authorities are not incorporating economic and financial variables into their policy decisions.

Recommendations

The new administration needs to find solutions to the problems detected in the areas o f coverage, quality, financing, and governability o f the sector. The principal challenge facing the new administration i s to attain the goal o f providing ten years o f basic quality schooling. This challenge i s encompassed within the framework o f the Millennium Development Goals. For said purposes, programs aimed at extending coverage must be clearly focused on groups that have not been attended to, such as low-income persons, rural areas, and particularly the indigenous areas. The Ministry o f Education and Culture has attained successes during recent years, whose coverage must be expanded. Particular attention must be paid to the schools known as one- teacher or multi-grade classroom schools, so that in places where there are only one or two teachers, at least all elementary school grades w i l l be offered.

Ecuador should consider other educational options such as the model o f “Telesecondary” education developed by Mexico, which i s being successfully implemented in countries o f the

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region such as Guatemala, Panama, Colombia, and Brazil, among others. Similarly, innovative strategies should be developed to offer the complete basic education cycle in areas that are far away from major population centers, where there are no schools offering secondary education.

Given that the economic situation o f families i s a factor that influences whether students enroll in school and stay in school, the Ministry o f Education and Culture should consider financing the most needy students through scholarships.

As for the issue o f quality education, Ecuador has already engaged in significant efforts to design and implement a quality measurement system, which can be improved and institutionalized. APRENDO as a measurement system can play a fundamental role as a tool that makes i t possible to: (i) identify schools with serious difficulties in attaining given standards; (ii) provide follow-up to policies focused on solving certain identified problems.

As for training (continual education) o f the teaching staff, various options or strategies should be evaluated. The Ministry o f Education, public and private universities, as well as normal schools should al l be involved in the training process. The most ideal institutions would be those that are devoted to teacher training. This process w i l l be highly effective if the instruction, as well as the teacher training, are closely correlated to teacher promotions and thus increase remuneration.

The financing of the sector i s an aspect that should be closely analyzed from the point of view o f efficiency (size of the system at the central, provincial, and local levels), as well as from the point o f view o f the resources needed to expand coverage and guarantee at least ten years o f basic education. Consideration should be given to financing demand for the service, through scholarships for students o f the poorest families. An investment in infrastructure, textbooks, libraries and teaching materials i s fundamental to ensure, at least in part, the quality o f the service being offered.

If the Ministry o f Education and Culture fails to improve the “governability” o f the sector, i t i s quite possible that the funds allocated w i l l not achieve the desired results. The structure o f the Ministry o f Education and Culture should be reviewed, carefully analyzing processes for screening, appointing, and promoting personnel both as teachers and in administration. It i s equally important to review experiences with decentralizatioddeconcentration, so as to give autonomy to individual schools and greater participation to parents.

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ANNEX 8. THE HEALTH SECTOR IN ECUADOR

Despite the diff icult economic and political conditions that Ecuador has confronted in recent years, the country's Human Development Index (HDI) has shown sustained improvement, increasing by 9 percent between the years 1980 and 2000. Nonetheless, even though new countries have been incorporated into the analysis, Ecuador's ranking has dropped, from 49" place in 1975 to 93rd place in the year 200011.

During this period, Ecuador's health indicators have improved significantly. L i fe Expectancy at Birth, (one o f three components of the HDI), increased from 58.8 years in 1975 to 70 years in 2000, (67.3 years in males and 73.5 in females). This represents an increase of 19 percent and an average o f 1 1.2 additional years o f l i fe for each member o f the population.

Infantile mortality was reduced by two thirds, from 87 per thousand in 1970 to 30 per thousand in the year 2000, and mortality in children under five years o f age was reduced by three fourths, from 140 per thousand to 39 per thousand over that same period. Nonetheless, the changes seen at an overall national level, were not homogeneous in the country's interior.

Figure 1: Relationship between Income and Life Expectancy, Year 2000

Tabin 0

0 USA

a . Dinamarca lrlanda

..........

Sud Africa

Botswana

I I I I I 490 5000 10000 20000 30000 35000

Gross Domestic Product per capita, 2000 (U$S) Source: Generated using the database o f the Human Development Report 2002, UNDP

1 1 UNDP, Human Development Index; Statistics, http://hdr.undp.org/statistics/default.cfm

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This trend towards better health was seen in the majority o f the countries in the region. Social, cultural, technological, economic, and environmental factors have al l contributed to these changes, along with increased accessibility to and improved quality o f health services. The relationship between a country’s per capita income and its l i fe expectancies follows a curve, with Ecuador located at the curve’s mid-point (Figure 1). Some countries with income similar to that o f Ecuador show greater l i fe expectancies, such as Armenia, Syria, Sri Lanka, Surinam, and Jamaica, among others. Certain countries, however, such as Egypt, the Ukraine, Honduras, and Guatemala, whose income i s also s imi la r to that o f Ecuador, have lower l i fe expectancies.

Figure 2: Correlation between Life Expectancy and Household Consumption, Ecuador, 1999

75 i 0 Carchi Pichinch%

os Rios

Guayas 0

65 Chimborazo 0

60 Amazonia I I I I I

I 50 250 350 450 550 Household Consumption per capita, U$S

Source: UNDP, Human Development Indicators, Ecuador, 1999.

Within Ecuador, demographic, cultural, and social heterogeneity has created fertile ground for the development o f economic inequities and for disparities in health conditions and conditions o f life.

In the province o f Amazonia, l i fe expectancy for 1995-2000 was 59.6 years,12 and it was estimated that 21 percent o f the population would not survive more than 40 years. At the other extreme, the population o f Pichincha Province had a l i fe expectancy that was 14.9 years longer, and only 6.8 percent were expected to die before age forty. When l i fe expectancies are compared with household consumption per capita, the relationship follows a s imi la r curve on a country-by- country basis. In this instance as well, the populations o f “poor” provinces have a lower l i fe expectancy than those o f provinces with greater resources. (Figure 2).

A. DIAGNOSTIC AND FEATURES OF THE HEALTH PROFILE

Ecuador exhibits a polarized pattern o f epidemiological transition, in which problems are seen that are typical o f developed populations, hand-in-hand with problems typically seen in populations that have not achieved such levels o f development (high rates o f mortality due to infectious disease or external causes, cervical cancer, infantile mortality, deaths o f children under five years o f age and deaths related to pregnancy, childbirth or puerperal deaths). This does not mean that one and the same population i s suffering f rom both types o f problems. Rather, i t suggests that there are certain population groups with better health indicators, longer l i fe expectancies, and an epidemiological pattern more typical o f a developed country, at the same time as other population groups, due to adverse conditions o f life, situations o f inequity, and lack o f access to basic health services, suffer f rom premature mortality whose causes are preventable.

12 UNDP, Human Development indicators, Ecuador, 1999

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PROBLEMS WITH RECORD KEEPING AND PREMATURE MORTALITY FROM PREVENTABLE CAUSES Vital statistics record keeping in Ecuador does not yet provide reliable information, and mortality rates vary depending upon the source o f one's data. In 1995 it was estimated that mortality was being underreported by 25 percent, while CELADE, the Centro Latinoamericano de Demografia (Latin American Demography Center) considered the underreporting to be even higher. Estimated mortality for 1999 was 5.9 per 1,000 inhabitants (6.8 in males and 4.9 in females). The deficit in medical certifications was 17 percent (1 1 percent in the coastal region and 37 percent in the Amazonian region). Furthermore, in 14 percent o f the deaths where medical certification was provided, the cause o f the death was incorrectly defined.I3

Deaths due to cardiovascular disease have increased by 3 1 percent as compared to 1995 and continue to be the leading cause of death, with an adjusted rate, to correct for underreporting, o f 155 per 100,000 inhabitants (166 in males, 143 in females) (Figure 3). The second, third, and fourth most frequent causes o f death, each with very similar rates, are cancer, external causes, and infectious disease. Finally, at a rate of 180 per 100,000, are all other causes. Among deaths caused by cancer, the most frequent cause o f death in both sexes i s stomach cancer, followed in males by lung cancer and prostate cancer, and in females by breast cancer, cancer o f the uterus, and lung cancer. The rate o f mortality for cancer o f the uterus (surpassing that o f lung cancer and almost equal to that o f breast cancer) i s very high. It causes the death o f approximately 700 women each year, which indicates the lack o f impact o f preventive efforts.

Deaths from accidents, suicide, and homicide are four times more frequent among males (132 per 100,000). One fourth o f these deaths are due to traffic accidents.

Diseases that are easily controllable through basic healthcare, such as respiratory infections and diarrhea, continue to cause the majority o f deaths from infectious disease, especially in the population groups with the least access to health services.

There was a decrease in cases o f cholera, but rates for typhoid fever and food poisoning increased. The incidence o f tuberculosis has gone down slightly, but rates for the provinces with the largest proportion o f indigenous and rural population are up to 10 times greater than those o f the coastal provinces. In addition, i t i s estimated that the diagnosis and treatment o f tuberculosis i s accomplished in less than 60 percent o f the actual cases.

Figure 3: Mortal i ty b y Types of Causes, Ecuador 1999

External Infectious AI1 causes Disease Other

Cancers vascular

Jourle: Pan-Amencan Health Organizanon, Health in the Americas, Edition 2002

Causes

13 Pan-American Health Organization, Health in the Americas, 2002 Edition

75

Figure 4: Incidence of AIDS by Sex, Ecuador 1990 to 2000 ............ ............................ ............................................................

i .... .... .... " ......................................... j$ ..............................

........................ ........................

--t Men - Women Source: Pan-Amencan Health Organizaaon,

Health m the Amencar, Edsnon 2002

Even though the actual incidence o f AIDS i s not accurately known, the greatest proportion o f AIDS cases and HIV carriers are also clustered in the province of Guayas (83 percent o f the country's total). The reporting o f cases continues to grow, especially in women. Heterosexuals account for 62 percent o f the cases, homosexuals account for 33 percent, and bisexuals account for 5 percent (Figure 4).

Slightly more than 50 percent o f the country's population lives in malaria risk zones, and since 1996the-reporting o f cases has increased annually, until reaching levels almost 10 times higher in the years 2000 and 2001. There has also been a notable increase in the incidence o f dengue fever. From less than 1,000 cases per year between 1992 and 1995, the rate has risen to more than 20,000 in the year 2000 (the majority centered in the province o f Guayas). The four serotypes o f the virus are now in circulation, and cases have been seen o f dengue hemorrhagic fever. All this leads to a prediction that dengue w i l l have a major short-term impact on the health o f the population and on health services.

HIGH INFANT MORTALITY RATES As in the case o f general mortality, the figures on Infantile Mortality obtained through vital statistics are lower than those obtained through surveys or estimates. For the period o f 1994 to 1999, the mortality rate according to the Survey on Demographics and Maternal and Infantile Health, [Encuesta Demogrdfica y de Sulud Materna e Znfuntil - ENDEMAIN 1111 was 30 per thousand. These values represent a decline o f 24 percent as compared to the period o f 1990 to 1994 (39.5 per thousand).

The rates estimated by the Pan-American Health Organization (PAHO) were even higher. Indeed, according to PAHO's estimates, the decline, over a longer period (1990 to 2000), was only 18 percent, that is, from 52.7 to 43.1 per tho~sand. '~

The national rates do not reveal the internal variations in this indicator. In the costal region, the rate for the period o f 1994 to 1999 was 25 per thousand, in the highlands it was 34 per thousand, and in the Amazonian region, it was 38 per thousand.

The differences are even more extreme if one takes into consideration:

Place o f residence: Urban zones (22 per thousand), rural zones (40 per thousand). Educational Levels: no schooling (51), elementary (35), secondary (25), higher education( 11). Income quintile: lowest (44.5), second (33.5), middle (23), fourth (15), highest (21.9).

14 Pan-American Health Organization, Special Program for Health Analysis. Based on liner interpolation of World Population Prospects.

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HIGH PREVALENCE OF RISK FACTORS FOR INFANT MORTALITY Fertility rates have decreased over recent decades for all age groups, except in adolescents. The fertility rate in the 14 to 19 year-old group for the period o f 1994-1999 was 58 per thousand in Quito, 76 per thousand in Guayaquil, and as high as 157 per thousand in the Amazonian provinces, exhibiting the gap in access to information and access to family-planning methods among those populations.

Close to 20 percent o f mothers deliver their children without any prenatal care, (10.8 percent in urban zones and 28 percent in rural zones), with disparities as wide as 7 percent in Guayaquil and 34 percent in the Amazonian provinces. On a national level, 29 percent o f childbirths are home deliveries, but in Guayaquil and Quito the rates are only 4.5 percent and 6.7 percent, respectively, as compared to 50 percent in the Amazonian region (60 percent in Chimborazo, in Bolivar, and Cotopaxi). Home deliveries are seen in only 2.3 percent o f mothers with a higher education, while for mothers with no schooling, the rate i s 73.6 percent.

There i s a high rate o f newborns with a birth weight o f less than 2500 grams (16.1 percent). Indeed, a reduction in this indicator could produce a significant decline in infantile mortality. More extensive provision o f basic health services would not necessarily have a radical impact on this factor. Specific measures are required, such as an increase in the interval between pregnancies, nutritional control, and other factors related to fetal malnutrition or to premature childbirths. Finally, despite the Free Healthcare Maternity Act, there are major inequities in access to health services for care during the first year o f life.

Mortality in children under five years o f age follows a pattern s imi la r to that o f infantile mortality. According to the results o f the ENDEMAIN-94 and ENDEMAIN-99 surveys, mortality rates for this group decreased from 55.7 per thousand to 37.1 per thousand (a 33.4 percent reduction). Nonetheless, estimates from the Pan-American Health Organization (PAHO) and the United Nations Population Division (UN) suggest higher rates and a decline between 1992 and 1999 o f only 11.5 percent, from 65.2 to 57.7 per tho~sand. '~

The distribution o f mortality rates in children under five years o f age follows a s imi la r pattern to that o f infantile mortality, with a predominant role played by malnutrition and infectious disease.

The second Survey on Health and Nutrition in children under five years o f age, in 1986, determined that 37.5 percent o f Ecuadorian children were underweight (below minus two Standard Deviations from median weight-for-age) and 49.4 percent had retarded growth (below minus two Standard Deviations from median height-for-age). Malnutrition was even more pronounced in the highland provinces (51.9 percent and 69.8 percent)16. Twelve years later, the 1998 L iv ing Conditions Survey estimated that the prevalence o f chronic malnutrition had declined to 26 percent. This means that sti l l , more than 350,000 children under five years o f age are suffering from malnutrition.

HIGH MATERNAL MORTALITY RATES The records on maternal mortality are even less precise. While the INEC, the National Statistics and Census Institute o f Ecuador (Znstituto Nacional de Estudistica y Censos) states that the rates for the years 1990, 1996, and 1998 were 117,63, and 55 per 100,000 births respectively, ENDEMAIN I1 has estimated that during the period o f 1981 to 1994, there were an average o f 220 maternal deaths for each 100,000 births, (302 per 100,000 for the period of 1981-1987 and 159 per 100,000 for 1988-1994).

15 United Nations, Population Division, Demographic Indicators 1950-2050, Dataset 1999. 16 Food and Agriculture Organization (FAO), Nutrition Country Profiles, Ecuador, 2001

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The significant rate increase reported for the year 2000 in the Yearbook o f Vital Statistics in comparison to 1998 could indicate improvements in the rate of ~nderreporting.’~

B. PROBLEMS IN THE HEALTH SERVICES SYSTEM

More than two thirds o f the population o f Ecuador have no formal health insurance, and the Ministry o f Public Health and other public institutions are incapable o f providing healthcare services to nearly half o f the uninsured. Those who are left without service are precisely the persons with the worst health indicators. While the financing i s insufficient to provide basic healthcare to this 30 percent, average spending per person i s US$70 on persons affiliated with the General Obligatory Insurance o f the Ecuadorian Social Security Institute (IESS) and almost five times less on the affiliates o f Rural Social Security. These disparities are even greater if instead o f considering national averages, certain values are analyzed at a provincial level.

BACKGROUND In 1992 a process was commenced for the modernization o f the national government. As part o f that effort, the Ministry of Health promoted decentralization o f services and community participation in the management model. In 1993 a project was launched that was known as FASBASE, “Strengthening and Expanding the Scope o f Basic Health Services in Ecuador” (Fortalecimiento y Ampliacio’n de 10s Servicios Bdsicos de Salud en el Ecuador). This project’s activities, focused on the country’s 7 1 poorest zones, was aimed at expanding the covered population and at increasing institutional capacity, so as to provide basic health, nutrition, and sanitation services and also improve the quality o f health services for the population at greatest risk. In 1997, the Special Law on Decentralization of the State and Social Participation defined the conditions for a transfer o f authority and resources to the municipalities and provincial councils. In 1998, the National Constitutional Assembly legally consecrated the right to health, with an integral conception involving both health promotion and healthcare. At the same time, i t reaffirmed the regulatory role o f the State, the need to organize the national health system, and to implement a strategy o f decentralizing governmental management. The reform also recognized the need to develop a new, competitive social security health care approach, based on universality, solidarity, and efficiency, while entrusting the Ecuadorian Social Security Institute (IESS) with the management o f that system.

As a complement to FASBASE, a project was launched known as MODERSA, “Modernization and Development o f Comprehensive Health Services Networks (Modernizacio’n y Desarrollo de Redes Integrales de Sewicios de Salud) with three strategic pillars: a) to strengthen the Ministry o f Health’s regulatory and supervisory role, b) to develop Decentralized Health Services that would function in networks, and c) to promote the Modernization o f semi-autonomous hospitals that could provide support to those networks.

In November 2001, the Social Security Act was passed. I t was then declared unconstitutional, however, in a legal process that has yet to be completely defined, and whose application i s partial. One year later, the Organic Law on the National Health System was enacted, which guarantees equitable, universal access to comprehensive healthcare services for the entire population.18 For this purpose, the law proposes to implement a Comprehensive Health Plan, which emphasizes primary care, basic services, and health promotion. The law guarantees the financing o f the Plan with government funds, and creates specific funds for protection against catastrophic diseases

17 INEC, Anuario de Estadi’sticas Vitales. Ecuador, 2000 18 Organic L a w of the National Health System, Official Gazette No. 670, September 2002

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among the uninsured low-income population. Currently, regulations for the Law are being elaborated.

FRAGMENTED ORGANIZATION AND UNDERUTILIZED RESOURCES

Ecuador’s health sector i s comprised by a number o f public and private institutions, with independent organizational structures and management mechanisms, and little or no interaction and/or coordination. Thirty percent o f the population lacks access to health service^.'^ Despite efforts to increase access to health services, these percentages have not significantly changed in recent years. Such deficiencies notwithstanding, Ecuador has ambulatory care and hospitals run by either the IESS (Ecuadorian Social Security Institute) or the private sector, although the geographic dispersion and distribution o f human resources i s not homogeneous (See Synopsis 1).

Synopsis. Organization of the Health Sector

The public subsector i s comprised by the Ministry o f Public Health; the Ecuadorian Social Security Institute (IESS) with General Obligatory Insurance and Rural Social Security, the Health Service o f the Armed Forces, and the Health Service o f the Police (each with i t s own institutions). One can also consider some o f the institutions o f the Ministry o f Social Welfare and certain municipal services as forming a part o f this sector, along with those o f some private, non- profit institutions, such as the Welfare Council o f Guayaquil, the Guayaquil Children’s Protection Society, the Red Cross, and the Society for the Fight Against Cancer.

The Ministry o f Public Health provides health services to approximately 31 percent o f the population, the IESS to 18.0 percent (10 percent through General Obligatory Insurance and 8 percent through Rural Social Security); the Armed Forces cover close to 1 percent, and the rest o f the institutions cover 10 percent. The private sector, with a number o f independent institutions, covers 10 percent, while as much as 31% o f the population (or more if one takes into consideration that part o f the population covered by the IESS also receives services from the Ministry o f Public Health), has no access to basic services. For the performance of i t s functions, in addition to service units, the Ministry o f Health has Health Directorates in each province and Health Areas for each municipality, which oversee municipal health posts, health centers, and hospitals.

The IESS i s Ecuador’s social security health system. I t also covers pension programs, workmen’s compensation, severance pay indemnifications, a funeral aid program, Illness and Maternity Care Insurance, and Rural Social Security. For their part, the non-profit institutions are establishments with a very long history in the sector, and they have a powerful influence.

In 1999 there were 3,518 service units, o f which 2,975 were ambulatory care units and 543 were hospital units.20 The Ministry o f Public Health accounted for 48 percent o f the total establishments (52.5 percent o f the ambulatory care units and 22.3 percent o f the hospital units), while the IESS, through i t s General Obligatory Insurance and Rural Social Security, accounted for almost 30 percent (33.6 percent of the ambulatory units and 3.3 percent of the hospital units). The three groups o f establishments function in parallel, and in many areas they provide an underutilized, inefficient installed capacity. T h i s i s particularly true among the establishments of the Ministry of Health and the General Obligatory Insurance. Utilization o f hospital-bed capacity during the period o f 1990 to 1999 fell by 25 percent, as a result o f the decrease in the average hospital stay and a stable rate o f 50 patient discharges for each :housand inhabitants. The private sector contributes 67.6 percent o f the hospitals (148 institutions) but only 23 percent 3 f the available beds (4,408 beds).

l%e availability of human resources, especially o f physicians and professional nurses, has grown over the last decade, kom 11.6 physicians and 3.7 nurses per 10,000 inhabitants in 1991 to 14.5 and 5 per 10,000, respectively, in the year 2000. In contrast, the number o f auxiliary nurses during that period went down by 12.3 per 10,000 inhabitants to 10.5, i s a consequence o f the professionalization programs and a reduced supply o f training programs for auxiliary nurses. f i e geographic distribution o f human resources i s not homogeneous. Urban centers and training centers have much iigher concentrations than the provinces o f Amazonia, Esmeraldas, and Bolivar.

19 Pan-American Health Organization, Basic Country Health Profiles, Summaries 1999, Ecuador 20 Pan-American Health Organization, Profile o f the Health Services System o f Ecuador, 1999

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INSUFFICIENT GOVERNMENT SPENDING AND INEQUITABLE PRIVATE SPENDING ON HEALTH According to recent estimates, after the dramatic 32 percent drop in overall spending on health in the year 1999, spending grew to US$1.500 bil l ion in 2001 (US$123 per year per inhabitant), recovering 1998 values.’l These values are greater than the ones estimated in the National Accounting Report22, which would indicate that private spending had been severely underestimated and that i t probably accounted for 80 percent of total health expenditures. Government expenditures amounted to 1.7 percent of the GDP, somewhat higher than the 1.5 percent figure for the year 2002, but failed to regain the 2.2 percent level o f 1997. As such, Ecuador i s one .of the countries o f Latin America with the lowest proportion o f i t s GDP earmarked for public health expenditures, (only Haiti spends less). Owing to the crisis, the Ministry o f Public Health cut i t s expenditures from US$197.6 mill ion in 1997 to US$89.6 in 1999. The recovery o f the GDP allowed health expenditures to grow to US$145 mill ion in 2001, however, o f which one-fourth was earmarked for administration o f the Ministry o f Public Health and the Area Directorates.

As for a breakdown o f expenditures by level o f care, the Ecuadorian health system allocates 34.2 percent to primary care, 29.7 percent to secondary care, and 36.0 percent to tertiary care. In terms o f structure, 34.4 percent of expenditures are earmarked for hospital services, 29.3 percent for medications, 23.6 percent for ambulatory care, 1 1.7 percent for public health services, and 0.9 percent for research.

The average expenditure of US$123 per inhabitant varies notably when viewed in terms o f each provider’s expenditure with respect to the population covered. The Ministry o f Public Health, which covers approximately 3 1 percent o f the population, spent approximately US$38.40 dollars per beneficiary in 2001, the IESS, through i t s General Obligatory Insurance, spent US$84.8 mil l ion (US$70.5 per insured party), and spent US$14 mill ion (US$14.8 per affiliate) through Rural Social Security. The disparity between the expenditures on General Obligatory Insurance and Rural Social Security was even greater this year, since the level o f spending for Rural Social Security remained unchanged, while i t i s estimated that spending on General Obligatory Insurance almost doubled.

Moreover, the most recent L iv ing Conditions Survey (1998) made it patently clear that the poorest o f the poor are the group impacted the most by out-of-pocket expenses. Among the decile with the least income, health expenses represent 40 percent o f income, while among the decile with the highest income, health expenses barely surpass 5 percent o f income. (Figure 5).

NON-TRANSPARENT FINANCING According to the National Accounting Report, approximately 5 1.3 percent o f national spending on health i s financed by public sources, that is, 23.7 percent from the general budget o f the nation, a similar percentage (23.9 percent) through the social security health system, and the remaining 3.7 percent from other public sources. For i t s part, the private sector reportedly contributes 46.2 percent, o f which 34.4 percent corresponds to the families’ out-of-pocket expenses and 2.5 percent comes from external sources. Yet according to the study that MODERSA conducted, private financing i s approximately 100 percent greater, which would reduce the percentages attributed to the national budget and the Social Security Health system by f i f ty percent.

~~

21 MODERSA, Gusto y Financiamiento del Sistema Nacional de Salud [“Expenditures and Financing for the National Health System”], Period of 1995 - 2001. 22 Cuentas Nacionales de Salud [“National Health Accounts”], Final Report, Ecuador 1997, Ministry o f Public Health - National Statistics and Census Institute of Ecuador (INEC) - Partners for Health Reform (PHR), March 2001.

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LIMITED HEALTH INSURANCE COVERAGE Ecuadorians, or a sector o f them (22 percent), have four types o f health insurance: General Obligatory Insurance, Rural Social Security, the Insurance o f the Armed Forces and the Police, and insurance through prepaid healthcare companies.

General Mandatory Insurance (Seguro General Obligatorio - SGO) i s managed through the Ecuadorian Social Security Institute (IESS). Persons with steady employment, as well as the majority o f self-employed workers, are entitled to this insurance. Though SGO Insurance i s now obligatory, a significant number o f workers are not affiliated with it. SGO i s an individual insurance that does not cover one’s immediate family. The only exception i s that for female affiliates, their children’s healthcare i s covered, but only during the f i rst year o f life. The Social Security Act, which extends coverage to one’s dependents, i s not, in fact, being applied. Nonetheless, the IESS has commenced a process to extend the scope o f coverage. Thus, children under the age o f six and the wives o f affiliates are expected to be included by the year 2003.

In 1999, 1,303,000 affiliates (10.7 percent o f the population) were covered by this insurance, o f which 1,092,000 were active affiliates and 21 1,000 were retired. In comparison to the number of active affiliates in 1990, the current figure represents a growth o f 33.8 percent. Yet considering the increase in the economically active population during this period, this actually represented a growth in coverage o f only 5 percent. With the incorporation o f family members projected for late 2003, the number o f affiliates would be two million, with 16.5 percent o f the population covered by this insurance.

The health services are preferably provided through the E S S ’ s own institutions, although expenses for services rendered at establishments with which agreements have been made are eventually compensated. The population generally considers this insurance to be o f poor quality. Many people consider the insurance to be useful to them for situations necessitating major expenses, but not for situations o f minor complexity. In fact, many people have additional private insurance.

The SGO insurance had a financial deficit o f close to 50 percent in 1997,24 percent in 1998, and 29 percent in 1999, which was covered using their returns on investments. Under the dollarization o f Ecuador’s currency, and calculating contributions on the basis o f the totality o f revenues from private workers, the financing o f the SGO insurance grew significantly, from US$59.8 mill ion in the year 2000 to US$88.1 mil l ion in 2001 and approximately US$187 mil l ion in 2002. I t i s projected that revenues in 2003 w i l l amount to US$237 million. The Social Security Act prohibits cross subsidies between the pension funds and the health funds o f the IESS.

Rural Social Security (Seguro Social Campesino - SSQ. T h i s insurance i s also managed by the IESS. I t i s a voluntary family insurance, which provides coverage to peasants who work for themselves or are organized into cooperatives, communes, or agrarian associations. The population covered in 1999 was 200,000 direct active affiliates, 13,000 passive affiliates, and 737,000 family members. As of 2002, these figures have remained unchanged, and it i s estimated that 75 percent o f the rural population (3 million persons) have not even applied for coverage. The insurance covers medical and pharmaceutical services, with no maximum limit, and includes prevention and health promotion activities. The services are provided through service centers in the rural zones, and when a greater complexity i s involved, through the ESS ’s General Obligatory Insurance establishments, as opposed to those o f the Ministry o f Public Health. The insurance i s paid for through a symbolic contribution from the peasants o f US$O.O4 per month and through 1 .O percent of the wages of all workers affiliated with the IESS, prorated as follows: 0.30 percent i s covered by the government; 0.35

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percent by employers, and 0.35 percent by workers affiliated with the General Obligatory Insurance, in addition to the contribution of 1.0 percent o f the minimum wage from heads of household^.^^ This insurance, which i s older than the Ministry o f Public Health itself, has a great deal of meaning for the peasant population, who consider it to be a victory. Unlike the General Obligatory Insurance, i t s affiliates consider i t to be “good insurance”. Nonetheless, Rural Social Security i s facing serious financing difficulties, along with problems in the provision of supplies and medications. Moreover, many o f i t s service units require maintenance. Their basic equipment, which i s now obsolete, also needs to be upgraded. The Social Security Act extended the application o f the insurance to the entire rural population either working in the fields or in fishing. Yet due to budgetary constraints, it has not been possible to actually extend the coverage. During the year 2003, an additional 100,000 affiliates are expected to be covered. (Only the 3.3 percent o f the population remaining to be incorporated into the insurance program).

Insurance of the Armed Forces and the Police, for the personnel o f the Armed Forces and the Police, and their direct relatives. This insurance covers approximately 1 percent o f the population. Private insurance, according to records that are not very up-to-date, covers approximately 3 percent o f the p ~ p u l a t i o n . ~ ~

T h e Free Healthcare Maternity Act. This i s not insurance per se. Nonetheless, it guarantees 33 services for expectant mothers and infants at no charge in 119 municipalities that have signed an agreement. The Law was passed in 1998, but i t s regulations were only recently adopted, in 2002. Users can receive care from several different services, particularly those o f the Ministry o f Public Health, and the system reimburses providers through a fee schedule. Expenditures for 2002 are estimated at 12 milli01-1,~~ and the budget for the coming year projects a financing o f 30 million. This financing i s not dependent upon demand, and many service providers complain that the fee schedule does not cover their costs. Furthermore, given the universal nature o f the coverage under the Law, double coverage i s being provided to persons who already have some type o f health insurance.

INADEQUATE PERFORMANCE OF THE ESSENTIAL FUNCTIONS OF THE MINISTRY OF PUBLIC HEALTH, SHORTFALLS OF THE I E S S AND DIFFICULTIES FOR ACHIEVING THE MILLENNIUM DEVELOPMENT GOALS. In October 2001, the Ministry o f Public Health evaluated i t s performance in relation to i t s Essential Public Health Functions,26 for which purpose it followed the protocol developed by the Pan-American Health Organization (PAHO). According to the evaluation’s results, the performance o f the Ministry o f Health is:

23 IESS, World Bank; Rural Social Security in Ecuador 24 Pan-American Health Organization, Profile of the Health Services System of Ecuador, 1999. 25 Inter-American Development Bank, Andlisis de la ejecucidn de 10s Programas Sociales Prioritarios y del Instrumento de Focalizacidn SELBEN, 200 1-2002 [“Analysis on the Implementation of Priority Social Programs and Targeting Instruments o f SELBEN, the Ecuadorian Beneficiary Identification and Selection System”]. 26 Ministry of Public Health, Pan-American Health Organization; Perjormance Measurement of Essential Public Health Functions. October 2001.

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InsuSficient or minimal in:

Low in:

Vely Good in:

These results illustrate the Ministry o f Health’s existing weaknesses in carrying out i t s planning, administration, monitoring, control, and evaluation functions. There i s no single health information system, and each o f the various subsystems, which in general are dependent upon vertical programs, have different percentages o f underreporting. Their efforts overlap and they fai l to coordinate with one another. Health promotion, which was recently prioritized by the Ministry o f Health, was qualified as being minimally developed. Participation o f the citizenry i s being encouraged through a general governmental initiative. The active community role in the Local Health Councils, in the context o f developing Decentralized Health Services, i s an important step in that direction. As for control activities, activities vary depending upon the zone. For example, in terms o f the surveillance system, research and control activities for outbreaks o f disease and epidemiological emergencies are very limited. On the other hand, even though one- fourth o f the municipalities have not attained the goal o f 95 percent coverage, the expanded immunizations program has succeeded in significantly lowering the number o f cases o f neonatal tetanus (24 in 1998, 14 in 1999 and only 6 in the year 2000), and no cases o f diphtheria or measles have been recorded since 1998. The Ministry’s capacity for reducing the impact o f emergencies and disasters was the only aspect evaluated as good. The government’s emphasis on control and assistance in emergency situations, derived from the El NiAo phenomenon, has probably been the determinant factor in said regard.

LIMITATIONS OF THE IESS HEALTH AREA Although the Ecuadorian Constitution considers the I E S S to be universally responsible for the administration o f insurance, the proportion o f the population that i s insured continues to be low. The IESS provides inadequate, inequitable services, and the population i s not satisfied with them, despite the fact that the IESS administers almost 50 percent o f the public sector funds. The IESS health area i s suffering from problems similar to those faced by the health system in general in Ecuador:

Lack of orientation and clear policies. Constant changes in laws and regulations, conflicts o f interest in i t s administrative functions (to direct, plan, and oversee the institution) and a long, unconcluded IESS restructuring process. Deficient allocation of resources. Mainly directed towards covering the expenses o f the provider network, but without paying attention to the use of resource allocation mechanisms to promote fairness and efficiency in their use. Healthcare and hospitalization model. Litt le content in terms o f preventive care and health promotion, with the bulk o f the resources concentrated on curative aspects. There i s no reference and referral network, and demand i s concentrated on Level I1 and I11 hospitals, which account for 65 percent o f expenditures. Deficient health services management model. Adequate incentives do not exist, and there i s no flexibility in resource management. No emphasis i s placed upon

Health surveillance, research, and control o f r i sks Research in public health Policy development and capacity for planning and management I t s regulation and auditing capacity Health promotion Development o f human resources Guarantying and improving the quality o f health services Monitoring, evaluating, and analyzing the health situation Promoting the participation o f the citizenry in health issues Evaluating and promoting equitable access to health services Reducing the impact o f emergencies and disasters

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patient satisfaction, and there are no systems that make it possible to monitor and evaluate the quality o f the care. Little coordination within the sector. An absence o f coordination with the Ministry o f Public Health, which results in poor investment policies, duplication o f supply, and low utilization o f resources. The Ministry o f Public Health fails to engage in a regulatory activity over the General Obligatory Insurance, which i s needed in order to provide an orientation for the Institute’s health policies.

for-age below Anus two Standard Deviations from median as a baseline, the goal to be achieied by 2015 would be a prevalence o f 20 percent. The latest survey, from 1998, estimated that the national average was 26 percent, which indicates that progress i s being made in attaining this goal. Nonetheless, the national average could be deceiving, as the decline may not have been similar in all population groups.

DIFFICULTIES FOR ACHIEVING MILLENNIUM DEVELOPMENT GOALS. For Ecuador, achieving the Millennium Development Goals i s a difficult challenge. Many o f the needed changes are beyond the scope o f the health sector, yet the cumulative impact o f the health sector’s own actions are indeed required, especially in terms o f narrowing gaps and reducing risk factors.27

20 percent

Reduce malnutrit ion between 1990 and 2015 by one-half I Considering a prevalence o f close to 40 percent o f children under five years of age with a weight- I Goal

Starting with an estimated rate for 1990 o f 160 per 100,000 births, the goal should be a rate o f 40 per 100,000. Many o f the risk factors for matemal mortality are linked to infantile mortality, especially institutionalized childbirth, prenatal care, and a lowering o f fertility rates in high-risk groups.

Goal 40 per 100,000

Reduce by two thirds the mortality rate among children underfive I Considering the data from the ENDEMAIN I1 survey as a starting point (55.7 per thousand), the

These diseases are st i l l not under control. In fact, their incidence i s growing, particularly over the last half o f the past decade. I t i s necessary to review the control programs, seeking intervention altematives consistent with local needs and involving the community so that the efforts wil l be more effective.

goal would be 18.6 per thousand. According to data from the ENDEMAIN IIIsurvey, this indicator has already gone down by one third. Nonetheless, for 1994-1999, no individual province, and not even the highest income quintile, has achieved the goal. Infantile mortality i s responsible for more than 75 percent o f mortality in children under 5 years o f age, and in order to achieve the goal, national infantile mortality risk-factor values must go down to less than the corresponding values for the province with the lowest infantile mortality rate (Guayas). Th is means that at a national level, the fertility rate in women between 15 and 19 years o f age should be lower than 75 per thousand, that more than 90 percent o f pregnancies should receive prenatal care, that more than 87 percent of childbirths should take place at institutions, and that the percentage o f underweight children should be close to 13 percent.

Goal Rates in decline

Goal 18.6 Per 1,000

27 World Bank, Measuring Progress Using the Poverty Reduction Strategy Framework. Final Report, 2002

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I Figure 6: Mortality in Children Under 5 Years of Age I Figure 7: Maternal Mortality I 10,000 live bikhs

Source: ENDEMAIN I1 Survey PAHO i ENDEMIN % m y

C. RECOMMENDATIONS Ecuador must overcome a difficult, complex epidemiological and social scenario, where inequities are clearly present. In particular, it must meet the following challenges: Attain the Millennium Development Goals regarding infantile malnutrition and infantile and maternal mortality, as well as mortality in the young population; expand basic care coverage and formal health insurance coverage; increase public investment in health, and seek formulas so that private spending w i l l be more equitable and efficient; as well as develop a sectorial coordination between the Ministry o f Public Health and the health area of the IESS. I t i s clear that public investment in health i s insufficient and that certain areas and services require an investment in upgrades and development. Yet for want o f coordination and complementation, there i s also a duplication o f underutilized resources, with results that are far from desirable. Moreover, in addition to inequities in spending and in access to services, there are inequities in the quality o f health services, and especially in their results. The universal programs approach (give everything to everyone) has limited the ability to set priorities, which has resulted in services of variable quality for a few, while many people receive no services at all.

Extension of Access to Basic Services

Universal coverage for all benefits and for the entire population i s for now an impossibility, and such an approach has been one o f the factors that has distorted an equitable distribution o f spending. The idea of a system that guarantees the provision o f a series o f basic services i s a rapid, efficient alternative, and has already been implemented, albeit with certain difficulties, by the Free Healthcare Maternity Act. In order to better develop this program, a targeting model should be utilized to avoid double coverage. In addition, actions should be taken to extend coverage, taking social and cultural aspects into consideration that limit the demand for basic services.

A package o f basic activities and services should be developed and gradually expanded to cover the majority o f the population, especially aimed at achieving the Millennium Development Goals (reduction o f infantile malnutrition, o f mortality in children under 5 years o f age, and o f maternal mortality). This should include promotion and prevention activities, especially the promotion o f prenatal care and institutionalized childbirth, the prevention o f low birth weight, teenage pregnancy, and short intervals between pregnancies, and the provision o f care to children under the age o f six (addressing growth, development, and common childhood diseases).

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Out o f approximately 300,000 births per year, some 250,000 take place with no type o f health insurance. The US$12 mill ion from the 2002 budget for the Free Healthcare Maternity Act are equivalent to US$48 per birth, which would increase to US$120 with the US$30 mill ion projected for 2003. This figure i s s t i l l insufficient when one takes into account that in addition to the 250,000 births (pregnancies, childbirths, post-partum, and care during the f i rs t year o f life), these funds must also finance healthcare activities for approximately one mill ion children between one and five years o f age that have no health insurance coverage, along with a series o f programs to stimulate the demand for health services among this population and promote reproductive health.

If the Free Maternity Healthcare funds were exclusively earmarked for the uninsured population, estimating an average expenditure o f US$90 per birth, (including prenatal care, childbirth, and post-partum, along with care during the f i rst year of life), plus US$30 for each child between one and five years o f age and for promotional programs, an additional US$22.5 mill ion would be required in 2003.

The information system for the management o f the Free Healthcare Maternity Act must also monitor indicators for Millennium Development Goals and for their respective risk factors.

The possibility of progressively including children o f up to 13 years of age in the program should be evaluated. Health expenses for the population between 6 and 13 years o f age i s much less than for children under the age o f six. Moreover, this group has no health coverage through other mechanisms.

In order to reach the population most in need, it i s also essential that efforts to implement the Free Healthcare Maternity Act be integrated with Rural Social Security. Rural Social Security has financial limitations in the short term that prevent i t from extending i t s coverage to the remaining three mil l ion targeted beneficiaries. Thus, the uninsured maternal and infantile population depends upon the Free Healthcare Matemity Act for i t s care. For this reason, a closer collaboration should be sought between Rural Social Security services and Free Healthcare Maternity activities, by creating mechanisms that allow Free Healthcare Maternity beneficiaries to be serviced at Rural Social Security establishments.

In order to extend access to basic services so as to include retired persons and the disabled, access to these services should be made available through the Bono Solidurio Cash Subsidy Program earmarked for this population. Such a mechanism could take advantage o f part o f that subsidy program’s operating and targeting structure. In this way, coverage could be offered to approximately 230,000 retirees and 8,000 disabled persons who have no other healthcare resource. These services should include preventive and promotional activities, ambulatory care, and hospitalization for common acute diseases, as well as a basic package for chronic diseases and surgery. Estimating a cost per person o f US$SO, the additional cost o f these services would be US$19 million. Nonetheless, an actuarial calculation would have to be made, based on a profile o f the population and a definition o f the services, so as to attain a more accurate estimate.

a mid- and long-term action, an attempt should be made to expand the population coverage o f Rural Social Security and o f the General Obligatory Insurance, while creating an insurance for the low-income population to gradually replace the benefits o f the Free Healthcare Maternity Act and the services o f the Bono Solidurio Cash Subsidy Program.

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Decentralization for a Better Supply of Health Services

The use o f local managers and planners, closer to the communities they serve, would increase the possibilities for community involvement in decision-making regarding the design and operation o f the services. Such community involvement i s a factor that promotes demand.

Nonetheless, health services are s t i l l very much dependent upon a Ministry provider. An accelerated decentralization would contribute to a deterioration in the supply o f health services, and prior training efforts are needed. Decentralization o f health services should be considered a first step in a long-term decentralization, and the Ministry o f Health should continue moving this process along. In doing so, i t should build on the experiences o f MODERSA (“Modernization and Development o f Comprehensive Health Services Networks” - Mudernizacio’n y DesarrulZu de Redes Integrales de Sewicios de Salud) and utilize the decentralization to strengthen i t s administrative role. An evaluation should be made in each particular case o f the operative conditions for the decentralization. In addition, encouragement should be given for health centers and hospitals to develop capabilities so that they can define their own baselines, priorities, objectives, and management commitment goals, formulate plans o f action and budgets, and develop periodic, systematic evaluation mechanisms o f their results.

Sectorial Coordination and the Future for the Ministry of Public Health and the IESS Bearing in mind the opportunity for change that a new administration o f government creates, consideration should be given in the short term to preparatory changes aimed at improved coordination o f the health sector, so that the Ministry o f Public Health can properly perform i t s essential public health functions, and so that the health area o f the IESS can, in the long-term, manage a national health coverage system.

The regulations for the Organic Law on the National Health System create an opportunity for this process. Given the lack o f a clear regulatory framework for the Social Security health system, those regulations need to be rapidly defined and applied to the Organic Law on the National Health System.

The regulatory framework needs to be developed, and the groundwork needs to be laid for a system o f regional health service networks structured into tiered levels of complexity, with participation from establishments affiliated with the Ministry o f Public Health and decentralized establishments, as well as those affiliated with General Obligatory Insurance and Rural Social Security. The local levels should focus their efforts on primary care and basic services programs, while specialized institutions and network hubs should focus on technical and logistic support to resolve more complex situations. The networks should operate with referral systems and a training program for human resources in primary care, promoting the concept o f working as a network. The signing o f management commitments should be encouraged. These management commitments should stimulate the demand for basic health services among the population and award the attainment o f indicators that exhibit an increase in the quantity and quality o f coverage.

While the process of decentralization i s underway, the Ministry o f Public Health should consider developing a comprehensive program for executing i t s functions as a regulating body, taking the following aspects into consideration: implementation o f an accreditation mechanism for establishments, bearing in mind their levels o f complexity and the services they offer, along with systems for monitoring their production quality and results; a review and modernization o f the activities of the National Hygiene Institute, (its procedures for record-keeping, quality control, and approval o f medications and medical supplies; as well as for the production o f biologics and

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as a public health laboratory); strengthening o f control strategies for enforcement o f regulations on the treatment o f solid waste generated by hospitals, as well as food safety, air quality, and potable water; improvement of the vital statistics system to reduce underreporting and raise the quality o f death certifications; strengthening o f the health surveillance system and capacity- building for intervention in situations o f epidemiological risk and disease outbreaks; and the training o f Human Resources.

Parallel thereto, a modernization program for the health area o f the IESS should be developed, involving both promotional and preventive activities; which would develop forms o f service provisioning, contracting systems, and risk-management systems; along with mechanisms that allow the insured party to freely choose his or her provider; the design o f systems to prevent increased costs; the development o f mechanisms for coordination with the rest o f the health system, especially the Ministry o f mtblic Health; the development o f changes in financial transactions, with a migration from historically budgeted funding to payment for services rendered, depending upon the capacity for local management; the development o f a human resources training program; the improvement of mechanisms for the contracting o f services in order to promote competence, including capitation systems with management commitments; and the implementation o f a system to monitor and evaluate quality and results.

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ANNEX 9.

A.

MAIN ISSUES ON SOCIAL ASSISTANCE IN ECUADOR

PRINCIPAL FEATURES dF THE SOCIAL ASSISTANCE SYSTEM

A social assistance system can be defined as a set of programs designed to protect vulnerable population groups (chronic or temporary) against specific risks that threaten their well-being. Such a system should be comprised o f structural elements as well as anticyclic elements. Programs of the structural type attempt to raise the standard o f l iving and well-being o f persons in situations o f chronic poverty, that is, persons who face a prolonged impossibility o f subsisting or generating an adequate level o f income on their own. Anticyclic programs aim to protect individuals against temporary reductions in their income or well-being, and are fundamental in times o f crisis, when the number o f poor increases as a consequence o f temporary impacts on major sectors o f the population. A typical example o f a classically anticyclic program -although it i s actually insurance- i s unemployment insurance. In times o f crisis, when the number o f unemployed increases, the base o f the insurance also expands; once the crisis i s over, the base o f the insurance contracts.

A system can be comprised by a great variety o f programs. There are programs for the supply o f goods and services, such as in-kind transfers and subsidies on the consumption o f certain goods; demand-based programs, such as money transfers; and programs that help generate income in families by providing temporary employment. Many o f these programs are represented in the social assistance system of Ecuador. In fact, there are 22 social assistance programs in Ecuador designated as Priority Programs by the Frente Social, an entity that attempts to coordinate the social assistance activities o f the ministries of Education, Health, Social Welfare, and Urban Development and Housing, which are the entities that administer these programs.28 The Priority Programs came into being in the year 2000 with the design o f the Emergency Social Plan in an attempt to confront the crisis.

Table 1 summarizes the principal features o f the Priority Programs. In 2001, Ecuador spent close to US$264 mil l ion on i t s Priority Programs, or approximately 1.5 percent o f i t s GDP. Out o f that sum, approximately 60 percent i s represented by two money-transfer programs, the Bono Solidario Cash Subsidy Program and the Scholarship Program (Beca Escolar), the latter o f which has a minimal budget as i s at an experimental stage. The rest involve food and nutrition, education, childcare for children between zero and six years o f age, healthcare, and construction o f housing. This l i s t does not include subsidies on gas and gasoline consumption, which, represented approximately US$350 mill ion in transfers to households in the year 2000, and almost US$500 mill ion in total.

** The 22 programs designated as Priority Programs are not an exhaustive list o f social assistance programs. In addition, there are the programs administered by the National Children and Family Institute (INNFA, Instituto Nacional del Nifio y la Familia), an autonomous entity historically directed by the First Lady. Several NGO’s also provide decentralized social assistance.

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Table 1: Selected Features of the Social Assistance System’s Priority Programsa for 2000- 2001

Number of programs 22 Approved budget 2001 US$295.7 million

Implemented budget 2001 US$263.8 million

Money transfer programs 2

Programs that provide food 5

Percentage of the budget for money transfers 58%

Percentage of the budget 20.9%

Energy subsidy for households, year 2000 US$ 341 million

Source: Frente Social 2002

a Social Assistance Programs created in April 2000 as a part of the Emergency Social Plan. These include “Redes Amigas” [Girls’ Networks of Friends”]; Mochila Escolar [“Backpack for School”]; Improvement of Intercultural Bilingual Schools; School Meals; Nuestros Niiios [“Our Children”]; Operacidn Rescate lnfantil [“Children’s Rescue Operation”]; “Beca Escolar” r‘The Scholarship Program”]; Crkdito Productivo [“Productive Credit”]; the Bono Solidario Cash Subsidy Program; Community Kitchens; Generic Medications; Mobile Health Units; Free Maternity Healthcare; National Food and Nutrition Program “ P A ” ’ 2000; Extended Immunizations Plan; Epidemiological Control: Tuberculosis; Epidemiological Control: Malaria and Dengue; Peasant Housing; Urban Low-Income Housing; Housing for Beneficiaries o f the Bono Solidario Cash Subsidy Program; and Potable Water and Environmental Sanitation.

Table 2 summarizes the outstanding features o f the most significant social assistance programs. In terms o f coverage and budget, the two foremost programs are the School Breakfast and Lunch program, with an implemented budget o f US$24 mill ion in 2001, and the Bono Solidario Cash Subsidy Program, with a budget o f US$154.5 mil l ion in 2001. In general, i t i s noted that the system i s comprised by a great number of programs that, in their majority, are not inter- coordinated, and some of which overlap one another in terms o f their objectives and the population they cover. In addition, the programs are administered by many different players. Some recent programs, such as the Scholarship Program, represent a fundamental change. Indeed, this program pioneered in the use o f a clear targeting tool, a system known as SELBEN, the Ecuadorian Beneficiary Identification and Selection System (Sistemu de Zdentificucidn y Seleccidn de Beneficiurios), and it also provides money transfers in an attempt to influence the behavior o f the beneficiaries.

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d 3

8

.9 .9

3 e 4

t m N

9 r- e

B. SUPPLY AND DEMAND FOR SOCIAL ASSISTANCE

VULNERABLE GROUPS One methodological framework for evaluating social protection programs i s known as the Social Risk Management Framework*’. The concept o f Social Risk Management i s based on the idea that individuals are subject to unexpected shocks that affect their capacity to generate income. In some cases, the shock i s permanent in nature, while in other cases it i s purely temporary. Optimal risk management consists o f a series o f mechanisms to prevent and mitigate the risk in question, and, as a last resort, activities to aid those affected, so that they can withstand the negative effects of the shocks in minimize their adverse effect. The mechanisms so utilized include social security health systems and social assistance systems.

This framework for evaluating the social assistance system involves the following steps: First, a determination i s made o f the potential demand for social assistance, as a function o f the r isks associated with the various population groups. Second, an evaluation i s made o f the mechanisms that these groups employ in order to cope with those risks, and how such mechanisms could affect the well-being o f the respective groups. Third, a survey i s conducted among the groups that face a high-risk o f temporary impacts as a consequence o f a crisis, or o f permanent impacts due to a chronic impossibility o f generating income. Fourth, an evaluation i s made o f the features o f the current social assistance programs in light o f the needs o f the population, especially the needs o f vulnerable groups as determined above. Finally, a decision i s taken regarding measures to be implemented, aimed at improving the contribution o f programs in effect to the well-being of groups who are in need o f social assistance.

A study o f poverty in Ecuador (Le6n (2002)) maintains that “recent” poverty in Ecuador doubled between 1998 and 1999. “Recent” poverty refers to households that are below the poverty line, but whose basic needs are satisfied. This means that the households in question are confronting a situation o f temporary poverty, where their standard o f l iv ing has been reduced, but not for so long that their basic needs are affected. When households have lived in poverty over a long period o f time, their basic needs go unsatisfied. That population, which lives in conditions o f poverty qualified as “chronic,” increased from 28 to 36 percent between 1995 and 1999. I t i s interesting to observe that the increase in temporary or recent poverty was principally seen in urban zones, while the increase in chronic poverty i s both an urban and a rural phenomenon.

The unemployment rate also increased notably during the period o f crisis. While for the 15 to 28 year-old age group, unemployment rose from 15.3 to 27.8 percent between 1998 to 1999, unemployment for the 29 to 44 year-old age group rose from 5.4 to 11 percent. In total, the unemployment rate doubled, from 8.5 percent in May 1998 to 16.9 percent in August 1999. Underemployment also increased significantly.

The increase in the inflation rate, the depreciation o f the Sucre, and the subsequent dollarization o f the economy may have increased the number o f recent poor. The inflation rate was 52 percent in 1999 and 96.1 percent in the year 2000. Many families who were not poor at the beginning o f the period may have been affected by the depreciation o f the Sucre if they had debts in dollars. At the same time, those with savings in Sucres suffered from the freeze on deposits ordered by the government in March 1999 and the high inflation and depreciation rates that eroded the value o f their savings. According to the survey o f households o f 1998, approximately 25 percent o f the families in the third quintile o f consumption had savings accounts.

The most vulnerable age groups in Ecuadorian society are poor children and pre-teens, pregnant women in conditions o f poverty, and elderly persons with no formal income. In fact, families with

29 Social Risk Management Framework, in World Bank (2001).

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children under two years o f age, and to a lesser extent families that include older children or elderly persons, have a higher probability o f being poor. Indigent families include, on an average, a higher number o f elderly persons and children between zero and two years o f age.

According to the L iv ing Conditions Survey o f 1998, the percentage o f chronic malnutrition among children between zero and two years o f age in the f i rst income quintile was 32.5 percent, while the percentage o f low weight-for-age was 24.3 percent. Both these figures are far above average for that age group. This situation was also seen, to an even worse extent, in the group o f children between three and five years of age, where the percentage o f chronic malnutrition was 44 percent in the lowest quintile, as compared to an average o f 29 percent in the general population. Among this group, the percentage of low weight-for-age was 23.3 percent as compared to 14 percent overall. The National Children's and Family Institute (INNFA) [Znstituto Nacional de la NiAez y la Familia] reports that approximately 660,000 children between zero and five years o f age show signs o f acute, chronic malnutrition.

The group o f school-age children in the poorest quintile i s also subject to numerous risks, especially malnutrition and limited formation o f human capital. Pre-school education for this group i s very low, with levels o f attendance at 10 percent (as compared to 30 percent for the highest quintile). The disparity between levels o f income i s particularly notable for secondary schools, with net attendance rates o f 44 percent for the country as a whole, but only 19 percent for the lowest quintile. A parallel phenomenon to low school attendance i s that o f children who work, with 21 percent o f children between 10 and 15 years o f age working and not attending school in 1998. According to data from the Integrated Social Indicators System o f Ecuador (SIISE) [Sistema Zntegrado de Indicadores Sociales de Ecuador], in Ecuador there are 1,050,802 children who work, 32.5 percent o f whom are between five and nine years o f age, and the rest o f whom are between 10 and 17 years o f age.

According to the Demographic Survey and the Survey on Maternal and Infantile Health, there were no significant changes in the percentage o f children who received healthcare and follow-up during the f i rst f ive years o f l i fe between 1994 and 1999. Though the prevalence o f diseases such as diarrhea and acute respiratory infections went down for the country as a whole, an a increase was seen in the incidence o f both these ailments for the group o f mothers without schooling, which i s an approximate indicator of low-levels o f income. A similar trend was seen for vaccination rates. When observing the percentages o f children under one year o f age who received complete vaccinations, a significant deterioration was seen between 1994 and 1999, especially in rural zones and in families where the mother has no schooling. In these families, the percentage who received complete vaccinations declined from 26 to 16 percent. This might reflect a deterioration o f healthcare conditions as a consequence o f the crisis.

The elderly without coverage are an especially vulnerable group. Poverty statistics indicate that families with elderly persons in their nuclear family unit have a 13 percent greater probability than the average population o f being poor. From 1990 to 2001, the proportion o f persons more than 60 years o f age rose from 6 to 9 percent, and in 1999, illiteracy was seen in 34 percent o f the elderly. Five out o f every 100 poor were elderly3'. The coverage o f the social security health system i s minimal, as only 23 percent o f Ecuadorians over the age o f 60 i s affiliated with the IESS. In this context, many elderly persons belong to multigenerational households (54 percent o f the elderly live in this type o f household). A social assistance program does target this population group, as according to the L iv ing Conditions Survey o f 1999,30 percent o f Ecuadorians over the age o f 65 were receiving the Bono Solidario Cash Subsidy. Currently, the subsidy i s

30 Sistema Integrado de Indicadores Sociales de Ecuador - SIISE (2002) [Integrated Social Indicators System of Ecuador]

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approximately US$7 per month, representing between 15 and 30 percent of the value o f the average pension.

SOCIAL RISK MANAGEMENT STRATEGIES

The L iv ing Conditions Survey and information from a qualitative study aimed at determining the effects o f the crisis in Ecuador, reveal a series o f behaviors that could be considered to constitute social risk management. Many o f the behaviors that households are employing could have a negative impact on the future well-being of their members, and the social assistance system aims in part to prevent these behaviors from being maintained for prolonged periods o f time: * Child labor: According to a 2001 UNICEF study -based on the Living Conditions

Survey o f 1999, there were 136,700 children in Ecuador between five and nine years o f age and 914,000 between 10 and 17 years o f age who were ~ o r k i n g . ~ ’ This i s not necessarily due to the crisis, and may have already existed, but some households have indeed coped with the crisis by incorporating more members o f the family into the labor market in order to generate income. The percentage o f children between 10 and 15 years o f age who were working and not studying remained more or less constant between 1998 and 1999, and the same constancy was seen in the gross attendance rate. Nonetheless, the number of days absent from school almost doubled, from 5.4 to 10.5 days per month. This may reflect a deterioration in the supply o f education or problems with transportation and other social services, on account o f which it has become more difficult to attend school, but i t may also be due to the alternative use o f time by children on temporary jobs. In many cases, even where no drop has been seen in school attendance, the quality o f the education received, which i s much more difficult to measure, could have been affected as a result o f the crisis.

+ Reduction in consumption: A recent IDB study (2002) cites data from 1999, which indicates that 95 percent o f the beneficiary households o f the Bono Solidurio Cash Subsidy Program have reduced their consumption o f food, and 58 percent have reduced their number o f meals per day. Information i s also found in interviews with focus groups conducted in July 1999 (World Bank, 2000), which reported a drop in consumption o f proteins and minerals, and an increase in the consumption o f carbohydrates and cheaper foods o f poorer quality. In small local markets, a decline was reported in the sale o f f ru i ts and vegetables, cheese, eggs, and meat.

* Debt: this strategy i s more common -but not exclusive- in households that face a situation o f temporary poverty. One out o f every two beneficiaries o f the Bono Solidurio Cash Subsidy Program applied for a loan in 1998; one o f every four beneficiaries fel l behind in their rent payments, and one out o f every five had to buy on credit in neighborhood stores or sell their belongings.

. Differed healthcare: According to a World Bank Report (2000), the percentage o f households that report that they differed healthcare for some member o f the family because they could not afford i t rose from 51.5 to 72 percent.

Migration: several newspaper articles have reported an increase in the number o f persons who have left the country and not returned. While in 1997 the total number of migrants was 18,000, in 2001 160,000 persons left the country without returning.

31 Instituto Nacional de la Nifiez y la Familia - INNFA [“National Children’s and Family Institute”] reports significantly higher numbers, based on information from the SIISE.

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Moreover, during the past five years 45 1,143 Ecuadorians have migrated. Money sent from abroad i s becoming an important source o f funds for many Ecuadorians.

c. PROBLEMS OF THE SOCIAL ASSISTANCE SYSTEM

Lack of Flexibility. With a budget o f between 1 and 1.5 percent o f the GDP earmarked for social assistance, spending on social assistance in Ecuador i s average for the region32. Nonetheless, the system does not seem to have the capacity to adapt to the needs o f the population, that i s to say, to expand in times o f crisis and contract under normal circumstances. The system’s lack o f flexibility i s a result o f the nature of i t s budget, problems o f coverage, and the design o f programs.

Flexibility in the Budget. A recent analysis o f trends in social spending between 1970 and 2002, Vos et al., (2002) argues that social spending as a whole has been procyclic, although volatility varies according to the category o f the expenditure -education, health, social security healthcare, and social assistance. In the case o f social assistance, the trend i s principally non-cyclical, as i t i s characterized by a relatively inflexible budget that i s not correlated to the needs o f social protection o f vulnerable groups during times o f crisis. Over the past two years, social assistance spending has increased, to the detriment o f spending on health and education. This i s primarily a consequence o f the creation o f money transfer programs such as the Bono Solidario Cash Subsidy Program. Nonetheless, the trend over the past two decades has been a decline in social spending as a whole.

The social assistance budget not only needs to be flexible -and wherever possible anticyclic, i t i s also necessary to protect the budgets o f certain priority programs in order to guarantee their long- term sustainability. If minimum floors were established -in terms of absolute value - for the budgets o f some programs, this in fact would add an anticyclic component to the social assistance system. Currently there are no guarantees regarding the continuity o f several social programs, as the budgets are not protected in the future. Although the World Bank Structural Adjustment Loan for the year 2000 included a commitment from the government to maintain minimum floors for social programs in terms o f absolute value for 2000 and 2001, there are no s i m i l a r figures for 2002 and the following years.

Flexibility in Coverage. The programs do not have an automatic mechanism that allows them to be rapidly updated. This i s especially necessary for anticyclic programs aimed at providing temporary social assistance in times o f crisis. In these cases, i t i s necessary to be able to enroll beneficiaries at various times during the l i fe o f the program, and, in the same manner, remove beneficiaries from the system when they no longer require assistance. For example, the Bono Solidurio Cash Subsidy Program enrolled beneficiaries when it was launched in 1998 only. In successive years the beneficiary base was screened and non-eligible households were eliminated, yet no mechanism was ever designed to enroll new beneficiaries. Some supply-based programs are updated, which allows for the enrollment o f new beneficiaries, but no systematic mechanism exists. Rather, the review o f the beneficiary base i s made on an ad hoc basis.

Flexibility in Design. A t this time there i s no program that i s classically anticyclic. Anticyclic programs contain automatic adjustment mechanisms that allow the beneficiary base to be increased in times o f crisis. For example, programs that provide temporary employment with a

32 For example, in 1999 Argentina spent approximately 0.9 percent, Mexico 1.1 percent, Nicaragua 1.1 percent, Peru 1.4 percent, and Venezuela 1 percent (Dulitzky, Gragnolati, Lindert (2001)).

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self-targeting criterion and sufficiently low wages are clearly anticyclic, as only during a crisis i s the opportunity cost o f taking such employment sufficiently low, and therefore the beneficiary base increases.

Absence of Consistent Targeting Criteria and Regressivity in the System’s Programs. The social assistance system in Ecuador includes both universal and targeted programs. In general, i t i s observed that many o f the universal programs tend to be regressive, as a high percentage o f the expenditure on those programs ends up benefiting the higher level income quintiles. The targeted programs vary in their effective outreach to the lower quintiles, and furthermore, do not utilize consistent targeting criteria. This generates duplications and dilutes their effectiveness even further. Several programs also have insufficient coverage, and in many cases fail to address important r isks for certain vulnerable groups. Such i s the case o f programs to protect children from zero to two years o f age against the risk of malnutrition.

Targeting and Regressivity. The social assistance system includes certain highly regressive programs. For example, subsidies for electricity, gas, and gasoline amounted to US$541 mil l ion in the year 2000, almost 4 percent o f the GDP, o f which households received 63.5 percent. These subsidies are highly regressive, as they are correlated to the consumption o f fuel, which increases with income. I t i s estimated that the total subsidy per capita -on electricity, gas, and gasoline- i s five times greater among the wealthiest quintile than among the poorest. Nonetheless, the subsidy represents a fundamental source o f aid for the poorest o f the poor. The study in question argues that without the subsidies, the poorest sectors would see their income reduced by 7 percent annually.

Vos, Ponce, Ledn, et al., (2002) estimates the percentage o f benefit o f various social assistance programs in terms o f the population quintiles benefited. This can be represented graphically through concentration curves, such those on Figure 1. A progressive program would have a concentration curve higher than the 45 degree curve, indicating that the poorest quintiles receive a more than proportional benefit. Figure 1 illustrates that some social assistance programs are progressive, but even in these programs, a high percentage o f the benefit reaches the wealthiest population quintiles. For example, 45 percent o f the benefits o f the Bono Solidario Cash Subsidy Program i s received by families in the three highest quintiles (Attachment 1 contains the exact percentages o f benefits reaching the various population quintiles).

Insufficient Coverage. The coverage o f the social assistance system i s inadequate. This i s not necessarily due to a lack o f budget, for, as was mentioned above, Ecuador’s spending on social assistance i s average among the countries o f Latin America for which said information i s available. Yet due to the lack o f a consistent targeting criterion and the overlapping o f programs, in many cases funds are diverted towards groups that do not need them. The group o f children under the age of six offers a clear example. There are at least f ive programs that have this group as a target population, and according to the National Children’s and Family Institute [Instituto Nacional de la Niiiez y la Familia] - INNFA (2000), the programs administered by the Ministry o f Education, of Social Welfare, and the INNFA itself cover approximately 139,000 children, that is, approximately 7 percent o f al l children in that age group and 11 percent o f the age group in situations o f poverty. According to INNFA 1999,40.3 percent o f the population was undernourished in Ecuador in 1999 -comprehensively and chronically. In other words, out o f 1,304,920 children between zero and five years of age, approximately 525,800 showed some sign o f malnutrition. This illustrates that the programs for this age group and risk are far from ideal. Other vulnerable groups, such as the elderly, are covered by social assistance programs, but the benefit received i s insufficient to meet their needs.

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Figure 1. Concentration Curves for some Social Assistance Programs

1

0.9

0.8

0.7

0.6

0.5 a g 0.4

% ,0.3

0

.e

2 8 0.2

(0.1

0 0 0.2 0.4 0.6 0.8 1

Accrued Proportion o f Households

School feeding - - CI Childcare

- -+ - Bono solidario

-Gasoline subsidy - - ' ' . . ' ' Gas subsidy

Equidistribudon

Source: Vos, Ponce, L e h , et al., (2002).

The near universality o f certain programs l i m i t s the field o f action o f the social assistance system. The Free Maternity Healthcare program provides free medical assistance to pregnant women through childbirth, even for women covered by IESS health insurance. It i s imperative to review the targeting criteria, coverage, and benefits o f the system's most significant programs.

Shortcomings of the Bono Solidario Cash Subsidy Program. The Bono Solidario Cash Subsidy Program i s the most significant program in the social assistance system. If Ecuador could only administer a single assistance program, this would be a natural candidate, given i t s broad beneficiary base, i t s high budget within the system, i t s scope, and the possibilities i t offers. Nonetheless, the program has numerous organizational and implementation problems that must be addressed.

a. o f new beneficiaries. The beneficiary base i s being screened, and the number o f beneficiaries has been reduced from approximately 1.7 to 1.2 mill ion through this mechanism. Yet new beneficiaries have not been allowed to enroll since the commencement o f the program. This i s particularly serious if one bears in mind that the program's init ial targeting did not utilize any consistent instrument beyond an enrollment form verified by local churches and parishes.

b. screened, using a series o f criteria. For example, the elimination f rom the beneficiary base of a l l individuals affiliated with Social Security Insurance creates disincentives to affiliating with this program. Although the idea o f approximating beneficiaries' income levels through closely- correlated indicators i s adequate, such indicators must be selected with care in order to minimize disincentives.

C.

targeted program, given that, as mentioned above, enrollments were made through an enrollment slip validated by local parishes and churches. A World Bank 2000 analysis demonstrated that the coverage rate of the Bono Solidario Cash Subsidy Program was 88 percent o f the poor. Yet

Enrollment o f Beneficiaries. To date there i s no mechanism that allows for the enrollment

Questionable Validation Criteria. The original beneficiary base has been gradually

Inadequate Targeting. A t present, the Bono Solidario Cash Subsidy Program i s a self-

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according to that same study, many individuals who met the requirements for the subsidy were not actually receiving it, while many who were receiving it failed to meet all the requirements. Table 3 indicates the number o f mothers and the elderly who were receiving the Bono Solidurio Cash Subsidy in 1999 according to the Living Conditions Survey, as compared to the potential number of beneficiaries. I t i s seen that the number o f persons who are not receiving the subsidy despite meeting all i t s requirements i s high -59 percent o f those eligible- while the number o f ineligible persons who nonetheless receive the subsidy represents 54 percent o f the total beneficiaries.

Table 3: Targeting of the Bono Solidario Cash Subsidy Program (Individual Beneficiaries)

Eligible Ineligible Total

Receive the subsidy 590,955 692,985 1,283,940 Do not receive the subsidy 856,442 1,417,795 2,274,237 Total 1,447,397 2,110,780 3,558,177

Source: World Bank 2000.

d. US$11.5 per month, the elderly US$7.0 and the disabled US$7.0. These levels of benefits were determined in keeping with the init ial purpose o f the Bono Solidurio Cash Subsidy Program: to aid families with the costs o f gas and electricity, given the elimination o f energy subsidies. Nonetheless, the energy subsidies were later reinstated, and the Bono Solidurio Cash Subsidy Program, which was supposedly a replacement for them, was never eliminated. The calculation of the benefit i s based on a historical criterion, and does not accurately correlate to the way beneficiaries use it. Factors such as the poverty line, the opportunity cost of accumulating human capital, the cost o f basic healthcare, or the effects o f dollarization and inflation on the income o f the beneficiaries were not borne in mind for the calculation.

e. Institutional Problems. Currently, the Bono Solidurio Cash Subsidy Program i s an entity with financial autonomy, associated with the Ministry o f Social Welfare. Nonetheless, the payments are made by the Ministry o f Economy and Finance. This means that there i s no single responsible entity. Rather, different administrative aspects o f the Bono Solidurio Cash Subsidy Program are under the dominion o f different administrative bodies. Such a state o f affairs creates confusion and problems o f coordination. Other institutional aspects should also be reviewed. For example, the system uses the private banking system, intensely clustered in urban zones, to effect payment of the benefit. The banks verify the identity of the payment recipients, but are not obligated to convey that information to the government. There are also problems with the manner in which payments are made (times o f service and long waits at private banks).

f. Bono Solidurio Cash Subsidy Program in terms o f i t s effectiveness. The closest approximation to such an evaluation was a baseline survey of the program, conducted in August 2002, which attempted to determine how the beneficiaries were using the money. Yet, just as occurs with the rest o f the programs in the social assistance system, no serious evaluation i s being made of the subsidy’s effects.

g. Lack o f Clear Objectives. As was mentioned above, the historical reason for which the Bono Solidurio Cash Subsidy Program was created -that subsidies on energy consumption were being eliminated- i s no longer valid, as the energy subsidies have since been reinstated. The Bono Solidurio i s currently a money transfer program with no stated purpose. This compromises other dimensions o f the program, such as targeting and determination of the level o f benefits.

Inadequate Benefit Levels. Currently mothers with children under 18 years of age receive

Failure to Evaluate the Program’s Impact. N o evaluation i s made of the impact o f the

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h. social assistance programs are those which attempt to influence changes in the behavior o f their beneficiaries. A good example would be the education o f mothers on aspects o f nutrition, which i s considered more effective and lasting than food distribution programs. The Bono Solidurio Cash Subsidy Program i s nothing more than a money transfer. I t does not seek to influence behavior, and thus entails a risk o f generating dependency amongst i t s beneficiaries.

The Subsidy does not Aim to Influence Behavior. In many cases, the most effective

D. RECOMMENDATIONS

Ecuador’s social assistance system i s plagued with numerous faults that the new administration needs to address. The principal problem i s not a lack o f funds for social assistance. Rather, the problem i s that social assistance i s not well targeted, and that several programs are regressive, and therefore do not reach the population most in need.

The recommendations o f this Policy Note can be grouped into three categories. In the f i rst place, the flexibility o f the social assistance system needs to be increased, using some mechanism to ensure that the system can adapt in times of crisis, when the number o f persons demanding social assistance grows. In second place, a series of distortions in the current social assistance system must be corrected. This w i l l require a review of the benefits, targeting criteria, objectives, and administration o f certain programs. Changes such as these demand a major political commitment and are not easy to implement. An evaluation o f the impact o f the measures adopted i s therefore imperative. The third recommendation involves Ecuador’s largest assistance program, the Bono Solidario Cash Subsidy Program. The new administration should focus i t s efforts on ways to take advantage o f the program’s structure, which has a broad outreach and could serve as the backbone o f the social assistance system. In this sense, numerous changes are needed, which are described below.

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INCREASE THE FLEXIBILITY OF THE SOCIAL ASSISTANCE SYSTEM

As was stated above, creating flexibility in the social assistance system entails the creation of mechanisms so that i t can expand in times o f crisis and contract under normal circumstances, when the demand for social assistance goes down. For said purpose, the following i s recommended:

a. minimum statutory budgets be created for certain social assistance programs. The social assistance system should have a basic budget that i s protected, at least in the case of certain programs. In this sense, the inclusion o f clauses in the agreements made with multilateral entities to guarantee the protection o f these funds i s an option that has been utilized in the past, which has allowed certain priority programs to stay in operation.

b. most significant targeted programs are not allowing new beneficiaries to enroll. This means that during a crisis, those who require temporary social assistance have no access to it. A mechanism must be conceived that w i l l allow new beneficiaries to enroll at various times o f the year. One way to accomplish this i s to periodically verify the eligibility o f potential beneficiaries, particularly during a crisis. Another possibility i s to consider a functional decentralization o f certain programs. If their administration were in the hands o f provinces or municipalities, who would be closer to the potential beneficiaries, i t would be easier to evaluate the needs of the population.

C.

works programs provide income to unemployed persons who are unable to obtain work during a crisis, while simultaneously contributing to the creation o f infrastructure. The advantage offered by these programs i s that they are purely anticyclic and temporary. Indeed, i t i s only during a crisis that a major group o f individuals w i l l exist who w i l l be looking for work and unable to find it. In general, these programs are self-targeted, as they offer sufficiently low wages that only attract very poor persons who are truly in need. Furthermore, the benefit granted i s usually short in duration. These programs tend to be expensive, but part o f the financing for a program o f this type could be made available through rationalizing or adapting many other existing programs, such as the energy subsidies.

Protect the budget of priority social assistance programs. I t i s recommended that

Design a system that allows for an updating of program beneficiaries. To date, the

Consider the creation of a public works program or other anticyclic program. Public

IMPROVE COORDINATION AND TARGETING IN EXISTING PROGRAMS

Ideally, a social assistance system should focus on a few programs with specific objectives and consistent targeting instruments. In the case o f Ecuador, the system could cover vulnerable groups and the most immediate r isks to which these groups are subjected through the Bono Solidario Cash Subsidy Program, the Scholarship Program, and an anticyclic program such as public works employment. This would entail a reform o f the Bono Solidario Cash Subsidy Program (the recommendations for which are included in the next point). The Bono Solidurio Cash Subsidy Program should be reoriented towards protecting very young children and pregnant women against the r i sks o f malnutrition. At the same time, the influence o f other programs that offer in-kind transfers should be reduced. Given that the elimination o f programs can be very costly from a political point o f view, an attempt should at least be made to improve coordination among the programs already in existence, so as to avoid the temptation o f creating more programs than are recommended. It i s recommended that the following measures be studied:

a. Adopt consistent targeting criteria. As was explained in the preceding section, there i s evidence that the present social assistance programs do not always reach those most in need. I t i s

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suggested that a single criterion be adopted for targeting the most significant social assistance programs. There are at least two possibilities. On the one hand, surveys o f households can be used to determine which households are the most needy, in order to entitle those households to a series o f benefits. That system would be periodically reviewed to allow the enrollment o f new households and to validate the information obtained on households that are already receiving benefits, thus minimizing errors o f inclusion or exclusion. There are numerous examples o f this type o f targeting criterion, such as SISBEN, Colombia’s Beneficiary Selection System (Sistema de Seleccidn de Beneficiarios), and SELBEN, the Ecuadorian Beneficiary Identification and Selection System (Sistema de Identijkacidn y Seleccidn de Beneficiarios), which i s now being developed. This system tends to be very onerous and difficult to administer. Thus, in several cases, it has been decided to utilize poverty maps to grant benefits. The benefits are granted to al l the inhabitants o f a given community considered to be very poor. Such a system i s easier to administer, but in principle can generate errors o f exclusion if the mapping i s not sufficiently precise, that i s to say, considering the lowest geopolitical division o f the population (in the case o f Ecuador, that would be the sub-township level).

b. Improve the Coordination of Existing Programs. The objective o f the programs on which the most emphasis i s placed must be clearly defined. This means that their targeted population must be identified, as well as the eligibility criteria and the r isks against which the beneficiaries would be protected, in order to prevent an overlapping o f programs that benefit one and the same household and address one and the same problem. In this sense, i t w i l l be necessary, for example, to reconsider the role o f the School Meals Program, as this program addresses risks that are s imi la r to those covered by other programs. The School Meals Program has an approved budget for 2002 o f US$46 million, and provides nutritional supplements to school-age children, both elementary and secondary. The program utilizes an approximate poverty map determined by the Social Vulnerability Index. Yet this program i s clearly not only benefiting those who are the poorest. Indeed, in the year 2001 supplements were granted to approximately 1.4 mil l ion school- age children, yet in 1999 Ecuador had 1,629,065 children enrolled in elementary schools. Furthermore, like al l programs that grant in-kind transfers through schools, those who are the poorest do not receive the benefit, because they are outside the formal educational system. As for the objective o f programs such as these, it i s clear that they do not solve the problems o f infantile malnutrition, as such a goal would require interventions at a very early age. Although the School Meals Program does act as an incentive to school attendance, i t also competes with the Bono Solidario Cash Subsidy Program. In fact, recent surveys have determined that 60 percent o f the beneficiaries o f the Bono Solidario Cash Subsidy use a l l or a significant portion o f that money to buy food. The School Meals Program also competes with the Scholarship Program, whose objective i s to promote school attendance through a cash subsidy to families who send their children to school.

C. Consider the elimination of subsidies on energy consumption. I t has been demonstrated that this program i s highly regressive and costly for the government.

d. Evaluate the impact of the most significant programs. All decisions to make changes in current programs should be founded on a costhenefit study and on a measure o f their impact.

e. Prioritize demand-based programs such as conditioned subsidies. This w i l l also require the improvement o f the supply o f related health and education services to make i t easier for beneficiaries to meet the requirements.

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REORIENT THE BONO SOLIDARIO CASH SUBSIDY PROGRAM TOWARDS BECOMING A PROGRAM OF CONDITIONED SUBSIDIES.

The Bono Solidurio Cash Subsidy Program, which represents approximately half o f the government’s social assistance budget, has the tools i t needs to become the central program o f the social assistance system. Nonetheless, a series o f changes need to be made to the program, including a review o f i t s objectives, a recalculation of benefits based on clear criteria, and an improvement in i t s targeting. Specifically, the following i s recommended: a. program, oriented towards protecting the health of children and pregnant women who live in poverty. Children’s nutrition programs have a very limited coverage. I t i s estimated that there are 1.3 mill ion boys and girls in Ecuador between zero and five years o f age. Programs targeting this vulnerable group only provide services to approximately 200,000 children, even though, according to data from the SIISE,33 approximately 600,000 children are suffering from chronic malnutrition. Clearly the coverage o f the programs aiming to alleviate this problem i s insufficient and inadequate. The Bono Solidurio Cash Subsidy Program i s a good potential channel for promoting control o f children’s nutrition and health in exchange for a transfer in money. This approach i s already functioning in other countries, such as Colombia and Mexico. The conversion o f the Bono Solidurio Cash Subsidy Program would entail an analysis, among other things, o f the possibility o f including pregnant women in the system; the type o f control that would be required o f mothers; and the exclusion o f persons who are receiving benefits from other programs such as the ORI, PDI, or the over the age of five, for whom the type o f control and the objective o f the program would be different.

b. Maintain benefits for the elderly, or progressively replace them with a non- contributive pension for the elderly poor. As explained in Section C, the elderly are a vulnerable group, especially those elderly persons who do not receive pensions from the social security system (the majority). The Bono Solidario Cash Subsidy Program i s thus the only program that mitigates the lack o f income in this demographic group. Nonetheless, there needs to be coordination with the social security system, so that this program w i l l not compete with a possible non-contributive pension under the IESS reform plans (See Policy Note on the Social Security System). Also, elderly persons who live with beneficiary families o f the Bono Solidurio Cash Subsidy Program should not receive a separate benefit under that same subsidy amounting to a double benefit for those families. One possibility in such a case i s to consider a reduction in the benefit, rather than i t s complete elimination.

C. Improve targeting criteria. In the first place, the beneficiary base should be screened, using a criterion consistent with those o f the other most significant social assistance programs. In the second place, new beneficiaries should eventually be allowed to enroll, provided that they meet the respective eligibility criteria. In the third place, clear targeting criteria should be chosen. For said purpose, the advantages and disadvantages o f systems such as surveys or poverty maps should be studied. A possible combination of these methods with self-targeting criteria should also be considered.

d. dependent upon the program’s objective and beneficiary population. For example, the benefit amount to protect children against problems o f malnutrition would be very different from the

Transform the Bono Solidario Cash Subsidy Program into a conditioned subsidy

An approach must also be developed for mothers with children

Review the amount of benefit granted. In good measure, the amount would be

33 Integrated Social Indicators System of Ecuador [“Sistema Integrado de Indicadores Sociales de Ecuador”]. 34 Children’s Rescue Operation [ “Operacidn Rescate Infantil”], Children’s Development Program [“Program de Desarrollo InfantiP’], and National Food and Nutrition Program [ “P rog ram Nacional de Alimentacidn y Nutricidn ”1, respectively.

103

amount granted to protect families from temporary reductions in their levels o f income or to protect children from possible losses in the development o f their human capital. Benefits must be based on clear criteria and must respect budgetary limitations. For example, increasing the benefit to mothers so that their income would reach 50 percent o f the poverty line would require a doubling o f the budget. Considering the budgetary limitations, these funds could be made available through a reorganization o f existing programs or an elimination o f certain beneficiaries based on such targeting criteria as may be adopted. Rofman (2002) estimates the additional costs o f increasing benefits and enrolling additional beneficiaries under various scenarios.

e. with private banks for handling benefit payments, confirmation o f the beneficiaries’ identity, and possible delays in project budget implementation.

f. the design o f the new program.

Review administrative aspects of the program. This includes reevaluating the contracts

Evaluate the impact of the program. An impact evaluation plan should be included in

E. CONCLUSIONS The political changes on the horizon in Ecuador create an opportunity to lay the groundwork for a more efficient and equitable social assistance system. The economy has been recuperating in recent years, but the effects o f dollarization and a possible repeat o f the El NiZo phenomenon necessitate a profound analysis o f the social assistance programs. I t has been emphasized in this Policy Note that many of the changes do not require budget increases, but simply a firm political commitment to improve the well-being o f Ecuador’s vulnerable population groups.

ATTACHMENT 1. INCIDENCE OF SOCIAL ASSISTANCE SELECTED PROGRAMS

Gas Bono Solidario

Program

Consumption School Free Food Childcare Cash Subsidy Gasoline Subsidy Subsidies Quintiles per capita Breakfast Programs Programs

Poorest 5 38 17 16 27 0 8

Second 9 15 18 37 28 1 14

Third 13 12 46 20 25 4 20

Fourth 20 33 19 19 16 10 24

Wealthiest 53 2 0 7 4 85 33

Source: Vos, Ponce, Le6n, et al., 2002.

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ANNEX 10. ECUADOR AT A GLANCE

Ecuador at a glance

-2.0 0.1 48.0 60.3

Latin Lower- POVERTY and SOCIAL America middle-

-Expolts +Imp

Ecuador 2001 Population, mid-year (millions) 12.9 GNI per capita (Atlas method, US$) 1,460 GNI (Atlas method, US$ billions) 18.7

Average annual growth, 1995-01

Population (%) Labor force (%)

1.9 3.0

Most recent estimate (latest year available, 1995-01) Povew (% of population below national poverty line) Urban population (% of fofalpopulatton) Life expectancy at birth (years) Infant mortalitv (per 1,000 live births) Child malnutrition (% of children under 5) Access to an improved water source (% of population) Illiteracy (?A of population age 154 Gross primary enrollment (% of school-age population)

Male Female

63 70 28 14 71 6

113 113 113

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1981 1991

GDP (US$ billions) 13.9 11.8 Gross domestic investment/GDP 23.2 22.2 Exports of qoods and services/GDP 21.8 31.4 Gross domestic savings/GDP 24.2 23.8 Gross national savinqs/GDP 20 1 15.2

Current account balance/GDP -6.1 -6.0 Interest paymentsiGDP 3.9 3.9 Total debt/GDP 55.0 106 0 Total debt service/exports 53.7 32.2 Present value of debt/GDP Present value of debtlexports

1981-91 1991-01 2000

GDP 2.2 1.5 2.3 (average annual growth)

GDP per capita -0.3 -0.6 0 4 Exports of qoods and services 6.1 3.1 -0.2

& Carib. income

524 2,164 3,560 1,240 1,862 2,677

1.5 1 .o 2.2 1.2

76 46 70 69 29 33 9 11

85 80 11 15

130 107 131 107 128 107

Development diamond'

Life expectancy

T GNI

capita en per

Access to improved water sou

Ecuador - Lower-middle-hcome groi

2000 2001

13.6 18.0 i Economic ratios.

16.8 25.0 42.4 31.2 28.4 22.0 28.0 23.5

Trade

T 6.7 -3.9 Domestir 4.0 4.2 1.. __. Inv

savings 97.6 .. I :: 1 17.3

96.5 178.2

2001 2001-05 Indebtedness

5.6 5.9 3.7 3.9 5.0 13.7

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Private consumption General government consumption Imports of goods and services

Manufacturing

1981 1991

11.9 14.3 39.3 36.3 17.2 20.8 48.8 49.4

61.6 68.6 14.3 7.6 20.8 29.7

2000

10.0 40.2 16.9 49.8

62.1 9.5

30.8

2001

10.6 32.9 18.4 56.3

Growth of investment and GDP (%) 100

M

0

-50

1981-91 1991-01 2000 2001 (average annual growth) Aqriculture 4 9 1 3 -5 3 Industry 0 8 2 4 4 9

Manufacturinq -03 1 9 5 2 Services 2 3 0 9 3 4

Private consumption 1 9 1 0 2 2 General qovernment consumption -1 4 -2 1 -1 3 Gross domestic investment Imports of goods and services

Note: 2001 data are preliminary estimates

* The diamonds show four key indicators in the countw (in bold) compared with its income-group average. If data are missing, the dia be incomplete.

105

Ecuador

PRICES and GOVERNMENT FINANCE

Domestic prices (“A change) Consumer prices Implicit GDP deflator

Government finance Is‘, of GDP, includes current grants) Current revenue Current budget balance Overall surpius/deficit

TRADE

(US$ millions) Total exports (fob)

Oil Ban an as Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (1995=100) Import price index (1995=100) Terms of trade (1995=100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DfC, locai/US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

iBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows interest payments Net transfers

1981

16.4 14.4

1981

2,143 1,323

183

1,996

84 719

167 108 154

1981

2,542 2,830 -288

-589 21

-856

608 249

650

1991

48.7 4.7

15.5 3.2 1.4

1991

2,851 1,059

720 352

2,399

92 888

109 96

114

1991

3,407 3,108

299

-1,117 110

-708

865 -157

1.090 1.00E-3 4.19E-2

1981 1991

7,666 12,459 151 816 37 31

1,397 1,106 23 150

1 1

8 46 404 102 871 -78 60 160 0 0

0 247 55 60 13 79

11 72 42 -19

31 -91

2000

96.1 -2.9

23.9 5.0 0.1

2000

4,927 2,144

821 1,229 3,721

298 942

131 83

159

2000

5,986 5,012

974

-1,410 1,352

916

-6,623 5,707

1,179 1 .o

2000

13,281 840 21

1,276 164

1

68 200 194 720

0

162 69 91

-22 74

-96

2001

37.7 25.1

21.5 6.9 0.4

2001

4,678 1,722

865 1,247 5,363

297 1,661

114 81

140

2001

5,773 6,755 -982

-1,268 1,545

-705

475 230

1,074 1 .o

2001

48

Inflation (%)

’50 T I 100

50

0

-50

I Export and import levels (US$ mill.)

I 95 96 97 98 99 00 01

Exports Imports

Current account balance to GDP (%) T

:omposition of 2000 debt (US$ mill.)

, - IBRD E -Bilateral , . IDA D - Other multilateral F - Private ; - IMF G -Short-term

Development Economics 9/20/02

106

ANNEX 11. STATEMENT OF WC’S PORTFOLIO FOR ECUADOR

Ecuador Statement of IFC’s

Held and Disbursed Portfolio As of 6/30/2002

(In U S Dollars Millions)

Held Disbursed

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1993 REYBANPAC 3.06 0 0 0 3.06 0 0 0

1969/73/77/8 1/82/87 COFIEC 0 0 0 0 0 0 0 0 1998 Concessionaria 11.5 1.3 0 15 2.93 0.33 0 3.82 1999 Ev Ecuacobre 4.38 0 4 0 4.38 0 4 0 1998 Favorita Fruit 8.33 5 0 0 8.33 5 0 0 1999 L a Universal 8.2 0 5 0 8.2 0 5 0

1997 Agrocapital 3.5 0 0 0 3.5 0 0 0

Total Portfolio: 38.97 6.3 9 15 30.4 5.33 9 3.82

Approvals Pending Commitment Loan Equity Quasi Partic

1999 L a Universal Swa 400 0 0 0

Total Pending Commitment: 400 0 0 0

107

co 0 3

MAP SECTION