ecuador: country strategy with the idb (2004-2006)

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

ECUADOR

THE BANK'S STRATEGY WITH THE COUNTRY

NOVEMBER 2004

This document was prepared by the project team consisting of: Jean Marc Aboussouan (PRI); Raimundo Arroio (RE3/SC3); Mauricio Bertrand (SDS/SDP); Adriana Cardozo (RE3/OD5); Dora Currea (COF/CEC); Jesús Duarte (RE1/SO1); Carlos Elías (RE3/OD6); Alejandro Izquierdo (RES); Luiz Villela (INT); Gabriel Montes (RE1/EN1); Franklin Nieder (RE3/FI3); Manuel Rocha-Fontes (MIF); David Rogers (RE3/OD5); Alfonso Tique (COF/CEC); Maria Carina Ugarte (RE3/OD5), and Francesca Castellani (RE3/OD5) and Javier León (RE3/RE3), who headed the team.

CONTENTS

EXECUTIVE SUMMARY AND STRATEGY MATRIX INTRODUCTION ............................................................................................................................ 1 I.

KEY DEVELOPMENT CHALLENGES...................................................................................... 3 A. Key development challenges...................................................................................... 4 B. Government program................................................................................................ 13

II. ASSESSMENT OF PAST STRATEGY AND PORTFOLIO ISSUES .............................................. 14 A. B. C. D. E.

Context of the strategy with Ecuador....................................................................... 14 Evaluation of the 2000-2002 strategy ...................................................................... 14 Changes in the portfolio............................................................................................ 19 Lessons learned ......................................................................................................... 20 Main recommendations of the Country Program Evaluation (CPE) Ecuador: 1990-2002.................................................................................................. 21

III. THE BANK’S STRATEGY WITH THE COUNTRY................................................................... 22 A. B. C. D. E. F. G. H.

Challenges facing the country .................................................................................. 22 Structure of the strategy ............................................................................................ 22 Characteristics of the strategy................................................................................... 23 Size of the operations program................................................................................. 25 Priority areas.............................................................................................................. 26 Strategy implementation........................................................................................... 31 Strategy implementation risks .................................................................................. 34 Agenda for country dialogue .................................................................................... 35

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ANNEXES

Annex I Annex II Annex III Annex IV Annex V Annex VI Annex VII Annex VIII Annex IX Annex X Annex XI Annex XII Annex XIII Annex XIV Annex XV Annex XVI Annex XVII

Bank instruments that support the Bank’s Strategy with Ecuador Classification of the operations program by strategic area 2004-2006 lending program 2004-2006 technical cooperation program 2004-2005 MIF, PRI, IIC, and SEP program Implementation of the Bank’s Strategy with Ecuador and outstanding portfolio BSE monitoring indicators External debt figures 2004-2006 2003-2006 resource flow scenarios Progress towards Millennium Development Goals Operations related to gender and indigenous group issues Operations in support of microenterprises and small and medium-sized businesses Outstanding portfolio indicators Process of consultation with civil society Coordination mechanisms between the Bank and other donors Consideration of the recommendations in the Country Program Evaluation Bibliography

ACRONYMS

AEC AGD ALADI APL ATPA ATPDA BCE BDH BSE CAF CAN CFAA CIER CORPEI CPAR CPE ECHO ECLAC EMBI FAD FAO FECD FISE FODI FRL FSO FTA FTAA GDP GEF GTZ HCP IESS IFAD IFS

Agenda Ecuador Compite [National Competitiveness Agenda] Agencia de Garantía de Depósitos [Deposits Guarantee Agency] Asociación Latinoamericana de Integración [Latin American Integration Association] Adaptable program loan (World Bank) Andean Trade Preference Act Andean Trade Promotion and Drug Eradication Act Central Bank of Ecuador Bono de Desarrollo Humano [Human Development Bond cash benefits program] the Bank’s strategy with Ecuador Corporación Andina de Fomento [Andean Development Corporation] Comunidad Andina de Naciones [Andean Community of Nations] Country Financial Accountability Assessment Comisión de Integración Energética Regional [Regional Energy Integration Commission] Corporación de Promoción de Exportaciones e Inversiones [Export and Investment Promotion Company] Country Procurement Assessment Report Country Program Evaluation Humanitarian Aid Office of the European Commission Economic Commission for Latin America and the Caribbean Emerging Market Business Indicator Fish aggregating devices Food and Agriculture Organization Fondo Ecuatoriano Canadiense para el Desarrollo [Ecuador Canada Development Fund] Fondo de Inversión Social del Ecuador [Social Investment Fund of Ecuador] Fondo de Desarrollo Infantil [Child Development Fund] Ley Orgánica de Responsabilidad, Estabilización y Transparencia [Fiscal Responsibility, Stabilization, and Transparency Law] Fund for Special Operations Free trade agreement Free Trade Area of the Americas Gross domestic product Global Environment Facility Deutsche Gesellschaft für Technische Zusammenarbeit Heavy crude pipeline Instituto Ecuatoriano de Seguridad Social [Ecuadorian Social Security Institute] International Fund for Agricultural Development International Financial Statistics

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IIRSA IMF INEC INECI INNFA JBIC JICA MBS MDGS MEC MEF MEM MERCOSUR MICIP MIDUVI MOP ORI OVE PANN PBL PDI PER PIRT PREDH PRI PROEESA SDC SECAP SELBEN SEP SIAN SIISE SMEs UDENOR

Iniciativa para la Integración de la Infraestructura Regional Sudamericana [Initiative for the Integration of South American Regional Infrastructure] International Monetary Fund Instituto Nacional de Estadística y Censos [National Statistics and Census Institute] Instituto Ecuatoriano de Cooperación Internacional [Ecuadorian International Cooperation Agency] Instituto Nacional de la Niñez y la Familia [National Institute for Children and Families] Japan Bank for International Cooperation Japan International Cooperation Agency Ministry of Social Welfare Millennium Development Goals Ministry of Education and Culture Ministry of Economic Affairs and Finance Ministry of Energy and Mines Southern Common Market Ministry of Industry, Trade, Integration, and Fisheries Ministry of Urban Development and Housing Ministry of Public Works Operación Rescate Infantil [Operation Child Rescue] Office of Evaluation and Oversight (IDB) Programa Nacional de Alimentación y Nutrición [National Food and Nutrition Program] Policy-based loan Programa de Desarrollo Infantil [Child Development Program] Public Expenditure Review Programa de Infraestructura Rural de Transporte [Rural transportation infrastructure program] Programa de Reestructuración Económica y Desarrollo Humano [Economic Restructuring and Human Development Program] Private Sector Department Programa Ecuatoriano Europeo de Seguridad Alimentaria [EcuadorianEuropean Food Safety Program] Swiss Agency for Development and Cooperation Servicio Ecuatoriano de Capacitación Profesional [Ecuadorian Vocational Training Service] Sistema de Selección de Beneficiarios de Programas Sociales [Social Program Beneficiary Selection System] Social Entrepreneurship Program (IDB) Sistema Integrado de Alimentación y Nutrición [Integrated Food and Nutrition System] Sistema Integrado de Indicadores Sociales del Ecuador [Integrated Social Indicators System of Ecuador] Small and medium-sized enterprises Unidad de Desarrollo Norte [Development Unit-North]

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UN UNCTAD UNDP UNFPA USAID WB WEF

United Nations United Nations Conference on Trade and Development United Nations Development Programme United Nations Population Fund United States Agency for International Development World Bank World Economic Forum

EXECUTIVE SUMMARY AND STRATEGY MATRIX

Ecuador has a small economy that is barely diversified and very vulnerable to external and internal shocks. In January 2000, following the most serious financial crisis of the last 20 years, the country adopted the dollar as its national currency and, although it has been able to cut inflation and country risk, its fiscal adjustment is not yet complete. Since January 2003, despite the political fragility that characterizes the country, President Gutiérrez’s administration has made the commitment to put its public finances in order, initiate structural reforms, and adopt redistributional policies that will help resolve the problems of low productivity and poverty and reduce high debt levels.

In a context of political fragmentation and the difficulty of achieving consensus, the greatest development challenge facing the county is reducing its vulnerability to internal and external shocks. To this end, simultaneous actions in four areas are required: macroeconomic (promoting the sustainability and flexibility of fiscal policy); structural (increasing the resilience of the productive sector); social (protecting the most vulnerable and promoting social development), and institutional (improving the effectiveness of public administration).

The IDB Country Strategy, which will apply to the 2004-2006 period, with 2003 as the transition year, will focus on two priority areas: (i) help lay the foundations for energizing the productive structure (structural dimension) and (ii) promote social development and the protection of the most vulnerable groups (social dimension). These two priority areas are supported by a cross-cutting element: improving the effectiveness of public administration (institutional dimension).

With the objective of helping to lay the foundations for energizing the productive structure, the Bank will: (i) support the introduction of policies, an institutional framework that will boost productivity and competitiveness, and business development programs; (ii) improve the productive infrastructure, (iii) nurture market efficiency; and (iv) promote economic diversification. The Bank’s efforts to promote social development and the protection of the most vulnerable will focus on: (i) strengthening the social safety net; and (ii) making social expenditure more efficient and improving the coverage and quality of government services. As a cross-cutting element, the Bank will support institutional strengthening with specific actions under each project to improve the workings of government in the priority areas of the country strategy.

Context of the strategy. The sustainability and flexibility of fiscal management is a prerequisite for implementing the IDB country strategy, while its viability faces one constraint: political fragmentation and the difficulty in achieving consensus. These two elements determine the size of the operations program and the combination of financial and nonfinancial instruments to execute the strategy.

Sizing of the operations program for the 2004-2006 period. Given the importance of macroeconomic stability and the debt ceilings established under the Fiscal Responsibility, Stabilization, and Transparency Law (FRL), the IDB’s strategy with Ecuador presents

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two scenarios: (i) high (US$483.4 million); and (ii) low (US$185.4 million). The trigger for the high scenario is defined by the maintenance of a sustainable fiscal situation consistent with the FRL. In the specific case of the electricity sector, the Bank’s intervention will depend on the progress achieved in the institutional and regulatory framework.

Lending program. Four operations totaling US$30.4 million have been identified for 2004. Under the high scenario, there is a pipeline of 10 operations totaling US$453 million for the 2005-2006 period.

Sequence of the strategy. The first stage would place emphasis on: (i) policy reforms; (ii) operations whose timing is critical to the country, such as those involving trade negotiations; and (iii) operations in advanced stages of preparation begun under the previous strategy and in 2003. The second stage would pursue interventions in the social area and actions to promote higher productivity: (i) improved efficiency and quality of social expenditure with interventions in education, slum improvement, sanitation, and natural resource management; and (ii) support for microenterprise, financial markets, transportation, power, and export diversification.

Coordination with multilaterals. The IDB’s strategy with Ecuador has been prepared and will be implemented in constant coordination with the International Monetary Fund (IMF), the World Bank, the Andean Development Corporation (CAF), and a number of bilateral agencies. This coordination is effected at four levels: (i) collaboration on policy and reform proposals; (ii) cofinancing; (iii) coordination in the identification and processing of technical cooperation operations; and (iv) organization of donor coordination round tables.

The risks that implementation of the strategy will face are related to political instability, external shocks (i.e., changes in the price of oil), changing demands by the government with respect to the content of the operations program, the significant turnover of government employees, which affects project preparation and execution, and the uncertain demand for Bank instruments that support the private sector.

STRATEGY MATRIX Sub-areas of priority to the Bank

Bank actions Country goals

Government’s strategy

Actions by other multilaterals

Current operations

2003-2006 work areas

Indicators

1. Help lay the foundations for energizing the productive structure Support the introduction of policies, business development programs, and an institutional framework that boosts productivity and competitiveness

Support an environment of legal safeguards based on stable and clear ground rules in all fields Reduce bureaucratic red tape

Strengthening of the National Competitiveness Council and establishment of the Ecuador Compite Agenda Promotion of modernization of the judicial system Modernization and simplification of the legislation to guarantee the institutional framework and legal safeguards for a business climate favorable to competition

World Bank: Programmatic fiscal and competitiveness loans I, II and III Fiscal decentralization and debt management (study) Competitiveness loan IMF: Stand-by agreement USAID: Support for macroeconomic reforms to strengthen the dollarization process Support for the Superintendency of Banks

Loan: Program in support of decentralization TC loan: Modernization of tax system

2003 FSO: Preparation of a policy-based loan (PBL) to boost competitiveness 2004-2006

Increase in competitive climate index (290 in 2003) Improvement of macroeconomic environment index (104 in 2003)

FSO: Support for decentralization

Loan: Program to boost competitiveness - PBL

TC: Strengthening of justice sector

Loan: Strengthening the justice sector

MIF: Microenterprise and small business competitiveness

Loan: Science and technology

Improvement of business cost index (180 in 2003)

FSO: Quality of spending—modernization of the public investment information system

Increase in the number of regional competitiveness councils (2 in 2003)

FSO: Strengthening debt management

Improvement in power sector efficiency index (drop in % of losses) (23% in 2002)

FSO: Support for Internal Revenue Service FSO: Design of program to strengthen the justice sector MIF: Support for supply chain in textile and garment-making sector MIF: Administrative simplification

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Sub-areas of priority to the Bank Improve productive infrastructure

Bank actions Country goals Improvement in the quality of transportation system, telecommunications, electric power, gas, and port facilities

Government’s strategy Road plan Manta-Manaos multimodal project Airport concession Strategies for power connection with Colombia and Peru Agenda: Ecuador Compite: infrastructure and logistics section

Actions by other multilaterals World Bank: Local roads CAF: Sector: rehabilitation, expansion, and maintenance of main highway network (IIRSA) JBIC/JICA: Highway infrastructure development

Incentives for direct foreign investment in tele-communications, electricity, and oil Foster market efficiency Labor market

Comprehensiv ely improve and modernize the labor system, by arranging the wage structure and hiring processes Enhance labor market efficiency Wage policy consistent with dollarization

Wage unification act: change labor laws to reduce the costs of layoffs and wage adjustments Ecuador Compite Agenda—human capital. Boost competitiveness and productivity in businesses starting with human capital; strengthen job training systems; improve quality of and access to secondary and higher education

World Bank: Institutional reform Labor markets study USAID: Promote economic development and job opportunities in the northern and southern border areas SDC: Development of required technical skills by branch of activity

Current operations TC loan: Support for private investment in infrastructure Loan: Rural transportation infrastructure (PIRT) FSO: Campo Sacha gas processing plant TC: Support for PIRT TC: Feasibility of power transmission grid MIF: Support for cleaner production IIC: Aquamar

MIF: Youth training program

2003-2006 work areas 2003 Loan: Local roads program 2004-2006 Loan: Support for electricity sector FSO: Development of program to support electricity sector PRI: Interagua infrastructure PRI: Quito international airport PRI: Guayaquil international airport IIC: Abanico 2003 FSO: Consultation on modernization of institutional framework for labor in the private sector 2004-2006 TC: Census and sociocultural analysis of informal tradespeople MIF: Job skills certification system in Ecuador’s tourism sector

Indicators

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Sub-areas of priority to the Bank Foster market efficiency Financial market

Bank actions Country goals Solve remaining problems from the banking crisis Set up a liquidity mechanism and a deposit insurance system Improve bank oversight Strengthen competition in the financial market Improve access to financing

Government’s strategy Audit and close AGD, and dispose of its assets with professional international assistance.

Reorganize public banks in order to direct their resources to the productive and handicraft sector Creation of the Financial Security Network Ecuador Compite Agenda: Provide the financial system with an institutional mechanism that performs as a lender of last resort Strengthen the rights of creditors and reduce legal risks

Actions by other multilaterals World Bank: Financial services for the poor Financial sector TA loan Financial sector assessment program (FSAP) with IMF Financial sector review CAF: Financial sector assistance to Banking Superintendency Small and microfinance lines of credit USAID: Corporate debt restructuring GTZ/USAID/Belgium: Microfinance SDC: Project to support the rural savings and loan system in Ecuador Business development to improve productivity and business operations in general

Current operations FSO: Support for Fundación Espoir FSO: Mechanism to support group enterprise FSO: Advanced financial training for judiciary MIF: Development of a health services subsidy MIF: Support for microentrepreneurs and emigrants MIF: Expansion of new microfinance institution

2003-2006 work areas 2003 MIF: Strengthening of Finca Ecuador IIC: Banco de la Producción (Produbanco) IIC: Banco Bolivariano IIC: Agrícola Ganadera Reysahiwal 2004-2006 TC: Increased access to mortgage financing in Ecuador MIF: Remittances and mortgages

MIF: Intellectual property rights

MIF: Development through remittances and mortgages and other loans

MIF: Institutional strengthening Jardín Azuayo Cooperative

MIF: Increase impact of remittances on development

IIC: Torry & Rodríguez

IIC: IMI Sociedad Financiera PRI: Banco Pichincha financial facility

Indicators Increase in credit to the private sector (18% of GDP in 2003) Drop in financial spread (7% in 2003)

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Sub-areas of priority to the Bank Foster market efficiency Rural market

Bank actions Country goals Sustainable development of a highly competitive agricultural and agroindustrial sector

Government’s strategy Develop an agricultural census and information system (SICA) Support agriculture technology generation and transfer, especially to small and mediumsized producers Improve marketing of agricultural products

Actions by other multilaterals World Bank: Rural productivity and sustainable development Agricultural research (loan) Agricultural census (loan) CAF: Natural irrigation channels Border development USAID: Bilateral assistance for micro and rural production

Protect and improve agricultural production (plant and animal health) Design microloans for farmers Develop a landed property market— titling

Promote economic development and job opportunities in northern and southern border areas EU: Cofinancing with IFAD of the PROLOCAL and PRODEPINE program (rural development) Rural and sanitation development in Esmeraldas and Cotopaxi SDC: Nabón agricultural development project

Current operations Loan: Regulation and management of rural lands

2003-2006 work areas 2004-2006 Loan: Rural business support services

FSO: Local roads training and advisory services

FSO: Design of support services program for rural business development

MIF: Economic development of Cuenca and Ambato

TC: Increase indigenous business capacity TC: Propicia local development plan MIF: Supply chain in cocoa sector MIF: Support for Codesarrollo MIF: Deepening of rural services MIF: Network of small rural microfinance institutions

Indicators

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Sub-areas of priority to the Bank Promote economic diversification Diversification of goods and services

Bank actions Country goals

Government’s strategy

Maintain international position in traditional products (bananas, shrimp, and flowers)

Ecuador Compite Agenda—open trade practices

Promote and diversify exports

Promote maquila activities

Reduce dependence on oil in current account Foster international trade relations and strengthen negotiation capacity

Implement export credit insurance Define a foreign trade policy

Exploit ATPDA preferential system Promote business training in export area Promote exports of indigenous products with value added Promote tourism Participate in trade agreements: Andean group, FTA negotiations, MERCOSUR, ALADI

Actions by other multilaterals World Bank: Fiscal consolidation and competitive growth loan I, II and III Growth in equality and competitiveness CAF: Multisector transportation and competitiveness program Credit lines for investment in the private sector: loans for working capital and trade Bilateral: Assistance for rural production

Current operations FSO: E-commerce FSO: Support for MICIP and CORPEI in the area of trade negotiations TC: Promotion of nontraditional exports

2003-2006 work areas 2003 Loan: Foreign trade support program MIF: Program to mitigate market access barriers under ATPA 2004-2006

MIF: Divestment of tourism assets

Loan: Quito historical center II

MIF: Local participation in Galapagos tourism

Loan: Tourism development program

MIF: Pilot program handicrafts and ecommerce

FSO: Initiation of strategic plan for tourism in Ecuador FSO: Support to UDENOR for consultative group TC: Support for rehabilitation of Quito historical center MIF: Introduction of international accounting and auditing standards IIC: Ecuaplantación

Indicators Increase the quotient: imports + (nonoil) exports of goods and services / GDP (39% average 2001-2003) Maintain the annual rate of growth in nonoil exports (4.9% average 2001-2003)

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Sub-areas of priority to the Bank Promote economic diversification Natural resources and natural risk management

Bank actions Country goals Promote conservation and sustainable development of the country’s natural resources

Government’s strategy Promote sustainable development of Amazon region

Actions by other multilaterals USAID:

Promote tourism in Amazon region Policies on biodiversity, forests, bioaquatic resources, soil, coastal, inland, and continental water resources, beaches and bays, nature tourism, and energy

Current operations

Sustainable management of natural resources in border areas

Loan: Environmental sanitation program for the Quito Metropolitan District

Conservation of biodiversity in Awa territory

Loan: Galapagos Islands environmental management program

Galapagos Marine Reserve

Loan: Sustainable development of northern Amazon region

Protection of watersheds for Quito Environmental education SDC:

Control and improvement of environmental quality in urban centers and rural areas

Native Andean Forests regional program)

Environmental strategy for sustainable development

Improvement in industrial emissions, waste, and contaminants and hospital waste

Motor vehicle pollution control in Quito (air quality)

EU: Cofinancing NGOs for environmental protection and tropical forests Disaster prevention and humanitarian assistance (ECHO)

FSO: Environmental monitoring and supervision program FSO: Support for Galapagos marine investment fund FSO: Support for strengthening the atmospheric monitoring network FSO: Preliminary studies on sustainable development of southern border region FSO: Development of a decentralized environmental management system TC: Feasibility–coastal resource management

2003-2006 work areas 2004-2006 Loan: Coastal resource management II Loan: Natural risk management FSO: Strategic Environmental Evaluation FSO: Startup of strategic tourism plan in Ecuador TC: Feasibility study in Galapagos TC: Strategic Environmental Evaluation TC: Support for reforestation plans

Indicators Maintain the country vulnerability index (18.3% average 1980-2000) Maintain natural resource management index (average of 1.2% per year 19902000)

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Sub-areas of priority to the Bank

Bank actions Country goals

Government’s strategy

Actions by other multilaterals

Current operations

2003-2006 work areas

Indicators

2. Promote social development and the protection of the most vulnerable Strengthen the social safety net

Reduce poverty from 51% in 2001 to 38% in 2007 Target subsidies to poorest and most vulnerable

Improve targeting of Solidarity Bond

World Bank: Programmatic social loans I, II, and III.

Strengthen Frente Social Technical Secretariat Guarantee continuity of SIISE (information) and SELBEN (targeting) Send laws to the Congress to reform social security and create systems for delivery of education, health, and other basic social services

Poverty assessment Disaster management Italy: Coverage for victims of natural disasters Social programmatic structural adjustment loan (PSAL) WFP/FAO: Food security USAID: Improve access to social services, with emphasis on health, water, and sanitation in the southern border region EU: Food safety program (PROEESA)

Loan: Support for the census and strengthening of statistical system Loan: Program of comprehensive services for children under six Loan: Social investment fund (FISE III) FSO: Development of indigenous communities in Cayambe FSO: Preparation of community development plan FSO: Social indicator system FSO: Strengthening indigenous nationalities FSO: Monitoring consultative group peace program

2003 Loan: Social sector program FSO: Evaluation of the human development bond (BDH) process FSO: Implementation of the National Child Development Fund (FODI) 2004-2006 Loan: Strengthening of rural social insurance FSO: Impact of dislocations related to armed conflict in Colombia FSO: Strengthening AfroEcuadorian organizations TC: Support for citizens’ watch mechanism TC: Demographic and mother-child health survey TC: Strengthening AfroEcuadorian organizations

Increase in the number of families qualified by SELBEN that receive the BDH increases (450,000 in 2003) Increase in the number of families registered in SELBEN (1,600,000 in 2004) Increase central government spending on social welfare/GDP (4.8% on average 20012003)

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Sub-areas of priority to the Bank Make social expenditure more efficient and improve coverage and quality of government services

Bank actions Country goals Reduce illiteracy from 10% to 8% in 2007

Potable water and sanitation

Promote comprehensive reform of education system, ensuring quality and access Increase and restructure education budget

Education

Make social expenditure more efficient and improve coverage and quality of government services

Government’s strategy

Strengthen basic water and sanitation infrastructure

Expand coverage: investment in rehabilitation and expansion of services for unserved population

Actions by other multilaterals

Current operations

World Bank: Education loan Health and social security loan Programmatic social loans I, II, and III. Education sector review CAF: Education assistance Belgium/UNFPA: Sexual education FECD/USAID/GTZ: Local education initiatives UNDP: Strengthening Ministry of Education

Loan: Improving the quality of education

World Bank:

FSO: Potable water for intermediate cities

Rural water supply and sanitation APL II GTZ: Water and sanitation for small-medium municipalities

2003-2006 work areas 2003 FSO: Support for education system and job skills training reforms 2004-2006 Loan: Education program TC: Domestic violence prevention TC: National Council for Higher Education Evaluation and Accreditation

Indicators Increase in basic education coverage (90.1% in 2001) Increase in the number of school networks (186 in 2004) Increase in the number of schools belonging to school networks (2,200 in 2004)

TC: Support for education sector

TC: Waste collection microenterprises TC: Design of potable water and sewerage.

Cuenca

2003 FSO: Solid waste management in intermediate cities 2004-2006 Loan: Solid waste management in intermediate cities Loan: Water in intermediate cities FSO: Design of water program for intermediate cities TC: Support for potable water program in intermediate cities TC: Feasibility study for solid waste program

Increase percentage of the population with access to potable water services (85% in 2000)

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Sub-areas of priority to the Bank Make social expenditure more efficient and improve coverage and quality of government services Low-cost housing

Bank actions Country goals Improve access to housing and promote for-al housing market for low-income families Promote active participation of private sector in financing low-cost housing

Government’s strategy

Actions by other multilaterals

Strengthening the Ministry of Urban Development and Housing - MIDUVI Strengthening of incentive system for housing Bond for development of new housing, improved housing, rural housing, and periurban housing

Improve quality and equity of public investment in housing sector

FSO: Technical cooperation financed through the Fund for Special Operations TC:

Technical cooperation financed through trust funds

MIF: Multilateral Investment Fund operations IIC:

Inter-American Corporation operations

PRI: Private Sector Department operations

Current operations Loan: Housing sector support program II

2003-2006 work areas 2003 FSO: Low-income housing information system 2004-2006 Loan: Neighborhood improvement

Indicators Reduce basic residential services deficit (65% in 2002)

INTRODUCTION The objective of this document is to identify the challenges for development in Ecuador and on that basis define the areas of action in which the Bank can support the government over the 2004-2006∗ period. President Gutiérrez’s term is four years long (January 2003January 2007). This strategy fits into that period, as established in the country strategy guidelines.

The following inputs were taken into account to identify the basic areas that comprise the Bank’s strategy with Ecuador (BSE) and its monitoring indicators and results: the Bank’s institutional strategy, the evaluation of the previous country strategy, the CPE’s recommendations, the note on the strategy’s evaluability prepared by OVE, the Economic Restructuring and Human Development Program (PREDH) presented by the government, and the Millennium Development Goals (MDGs). The definition of the operations program takes into account the debt limits set out in the Fiscal Responsibility, Stabilization, and Transparency Law (FRL), the Bank’s comparative advantages, the complementarity with other multilateral and bilateral organizations and the lessons drawn from the performance of the outstanding portfolio over the last few years.

The Bank organized a series of activities with the objective of preparing the BSE. The following stand out: (i) the conference on key topics for the development of Ecuador, held in October 2002; (ii) the Country Focus meeting where Ecuador’s sector challenges were presented, in November 2002; (iii) the preliminary consultation on the findings of the Country Focus with civil society in a number of cities in Ecuador, in December 2002 (see Annex XII); (iv) the “encerrona” with the government in March 2003; (v) the consultation on the main thrusts of the BSE with civil society in Quito, with representatives from Guayaquil, Loja, Cuenca, and Esmeraldas, in June 2003, (vi) the review of the priority areas identified in the BSE with the government in June 2004; (vii) dialogue missions on key areas of the BSE such as education, energy, water, and sanitation in 2004; and (viii) the preparation of sector notes, diagnostic studies, and analysis on topics related to the economic development of Ecuador (see Annex XV).

The Bank has also maintained an ongoing dialogue with the Andean Development Corporation (CAF), the World Bank, and the International Monetary Fund (IMF), for the purpose of sharing assessments, identifying the priorities of each entity based on its mandate and experience, and coordinating joint actions to avoid duplications and ensure

* According to document RE-271-1, the Bank’s strategy with the country is to be presented to the Programming Committee of the Board one month after consideration of the Country Program Evaluation (CPE) prepared by the Office of Evaluation and Oversight (OVE) (input for preparation of the strategy with the country). Because of OVE’s delay in preparing the CPE, Region III asked the Programming Committee for a waiver to this rule, which was not granted. The deadline established for presentation of the Bank’s strategy with Ecuador to the Bank’s Board of Executive Directors was therefore not met. In view of this circumstance, the 2003 operations program was agreed upon with the government during programming missions in March and October 2003. For this reason, 2003 is considered a transition year within the new strategy, the term of which is 2004-2006.

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complementarity. For this reason, the World Bank’s Country Assistance Strategy, the CAF’s Country Strategy, and the IDB’s new strategy share the diagnostic assessment and identify similar development challenges.

This document is divided into three parts. The first identifies the main challenges facing Ecuador and presents the government’s strategy. The second section contains an evaluation of the Bank’s current strategy with the country, discusses the main problems related to execution of the portfolio, and presents lessons learned for the design of the new strategy and execution of the operations program. The third section presents the proposed strategy, its priority areas and implementation sequence, the results indicators and monitoring and oversight system, the associated risks, and the respective operations program.

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I.

KEY DEVELOPMENT CHALLENGES

1.1

The heavy dependence on commodity exports (oil, banana, cocoa, coffee, and shrimp), the high level of public debt, and the difficult governability conditions are elements that determine Ecuador’s vulnerability to internal and external shocks.1 These factors, combined with the occurrence of natural disasters and an inadequate management of the economy, explain the country’s limited macroeconomic performance and the deterioration of social indicators experienced in Ecuador over the last two decades.

1.2

In the late 1990s, the combination of natural disasters, the cost of which were estimated at 15% of GDP in 1997,2 low oil prices, and the drop in external financing flows (sudden stop) had a negative impact on an economy characterized by high debt levels3 and a fragile financial sector with high exchange exposure. The 1999 exchange and banking crisis triggered a partial collapse of the financial system,4 the public debt default, and economic stagnation (negative growth of 6%).

As a result, poverty increased (from 34% to 56% between 1995 and 1999), as did inequality (the Gini coefficient went from 0.54 to 0.56), and the unemployment rate (from 10% to 14%). To contain the economic and social crisis and control hyperinflation (103% in 1999), on 9 January 2000 the Ecuadorian authorities adopted the United States dollar as legal tender.

1.3

The backdrop to economic and social trends in the last few decades has been a context of difficult governability conditions, an inherent characteristic of Ecuadorian politics.5 Geographic fragmentation and the fragility of political coalitions have acted as significant obstacles to the continuity and consistency of economic policies. The difficulty of achieving consensus on structural reforms— essential to the long-term development objectives of such a vulnerable economy— and the lack of programmatic consistency among the parties have affected economic policy by making it very sensitive to political shocks. These conflicts are

1

In 2003, traditional exports comprised about 70% of total exports. The oil sector accounted for 10% of GDP, 43% of total exports, and 30% of the nonfinancial public sector’s revenues.

2

ECLAC and IDB (2000).

3

In May 2004, the public debt/GDP and external debt/GDP ratios projected levels below 50% and 40%, respectively. The Bank is the country’s largest creditor (18% of total foreign debt), followed by the CAF (10%), the World Bank (8%), and the IMF (2.3%).

4

20 banks went under, representing over 50% of bank deposits.

5

The traditional parties in Ecuador tend to associate along regional lines. Guayaquil and the coastal region “belong” to the Partido Social Cristiano (PSC) and the Partido Rodoldista Ecuatoriano (PRE), while Quito and the highlands “belong” to Democracia Popular (DP), Izquierda Democrática (ID) and Pachakutik (indigenous party). Politicians and voters display little loyalty: between 1979 and 2002, on average, 10% of the members of the Congress (each year) and 44% of the voters (each presidential election) changed parties.

-4-

reflected in the tensions between the Legislative and Executive Branches, leading to frequent vetoes of presidential initiatives and challenges to ministers. Since the return of democracy in 1979, only half the elected presidents have completed their terms during the established periods and finance ministers (29 in all) have served 10 months on average (Beckerman and Solimano, 2002).

1.4

In the last two years, effective macroeconomic policies and favorable external conditions (high oil prices, low international interest rates, and the weak U.S. dollar) have hastened economic recovery. In 2003, growth reached 2.6%, inflation fell to 7.9%, the public debt/GDP ratio came to 54%, and country risk (EMBI+ spread) went from 2600 bps in 1999 to 762 bps at the end of 2003. Family remittances (5.7% of GDP) played a significant role in controlling the current account deficit, which reached 1.7% of GDP.6 However, the sustainability of fiscal performance is uncertain given that, despite the primary surplus (4.7% of GDP in 2003), increases in current spending and drops in capital expenditures have been recorded.

A.

Key development challenges

1.5

While the decision to dollarize the economy has helped the country achieve macroeconomic stability, the elimination of monetary policy has emphasized the importance of fiscal policy and structural reforms as the instruments necessary to breathe new life into the productive structure and reduce the volatility that characterizes the country.

1.6

In this context, the main challenge facing Ecuador is to reduce its vulnerability to internal and external shocks. This implies enhancing its capacity to address macroeconomic imbalances, structural rigidities, social instability, and institutional weakness. There are four dimensions to the challenge: (i) macroeconomic, to achieve a sustainable and flexible (i.e., countercyclical) fiscal policy; (ii) structural, to boost productivity and growth; (iii) social, to reduce poverty and promote social development; and (iv) institutional, to improve the workings of government.

1. The macroeconomic dimension: fiscal flexibility and sustainability

1.7

6

The challenge of reducing vulnerability requires a combination of policies that will stimulate the improved operation of product, labor, and capital markets, to minimize distortions that affect the performance of economic agents and to make faster productivity growth possible. The implementation of these structural reforms generates significant trade-offs in fiscal policy, due to the fact that the need to

In per capita terms, Ecuador holds third place for remittances in Latin America. The recent weakness of the dollar has benefited the country given that half of the remittances come primarily from Europe.

-5-

provide temporary relief to affected groups could be incompatible with prudent budget management that avoids real exchange rate deviations in the short term and guarantees sustainability in the long term.

1.8

This incompatibility of objectives could be mitigated through greater fiscal policy credibility. In this regard, the favorable external climate that Ecuador will enjoy in the next few months presents a unique and temporary opportunity to strengthen the credibility of fiscal management and start a virtuous circle of reforms that will generate growth in productivity. a. Sustainability

1.9

Fiscal sustainability is essential to consolidate macroeconomic performance and dollarization. The FRL approved in 2002, which establishes limits on growth in real primary spending (3.5%), defines the frame of reference for ensuring this sustainability. In 2003, the primary surplus of the nonfinancial public sector came to 4.7% of GDP—higher than the 2002 figure of 4.5%—but below the 5.2% target established in the economic program. The composition of this surplus shows an increase in revenues attributable to high oil prices, lower capital expenditures (from 6.7% in 2001 to 5.4% in 2003), and an increase in the wage bill (from 5.5% to 8.5%). The nonoil deficit increased from 1.3% to 1.4% of GDP. Income volatility and downward wage rigidity jeopardize the sustainability of fiscal results.

1.10

In the short term, fiscal sustainability depends on oil price levels and on the capacity to limit pressures on spending generated in particular by demands for wage and pension increases. In the medium term, strengthening fiscal discipline will require tax reform, the elimination of earmarking, lower pension subsidies, better targeting of subsidies to the most vulnerable groups, and better public spending management.7 b. Fiscal flexibility

1.11

In an economy characterized by high volatility, the absence of monetary policy as a macroeconomic stabilization instrument creates the need for a flexible fiscal policy, with instruments designed to minimize business cycle fluctuations. The countercyclical role of fiscal policy gains importance with the degree of vulnerability to external shocks (variation in terms of trade, drop in capital flows, natural disasters, etc.).

1.12

A study prepared by the IMF (2003) reflects the procyclical nature of public spending in Ecuador. The difficulty of guaranteeing stable revenues, with its correlation with oil price fluctuations and precarious access to external financing,

7

A number of studies share this conclusion: Report on the Observance of Standards and Codes (ROSC), Public Expenditure Review (PER), and the Country Financial Accountability Assessment (CFAA).

-6-

has been critical factors in this regard. In addition, weak budget institutions have put a damper on the generation of fiscal surpluses (Talvi and Vegh, 2000). c. Risk factors for fiscal policy sustainability and flexibility 1.13

Revenue volatility and spending rigidity limit the government’s capacity to implement sustainable and flexible fiscal policies.

1.14

Revenue volatility. Fiscal revenues are greatly dependent on oil revenues (30% of total). Artana (2002) estimates the correlation between oil prices and fiscal revenues at 0.7. Although there have been significant improvements in tax collection since the establishment of the Internal Revenue Service in 1997, greater fiscal revenue stability requires eliminating precommitment (estimated at around 13% of total revenues in 2003) and reducing generalized exemptions and tax evasion.

1.15

Spending rigidity. Aside from revenue earmarking, regulated in 50 statutory provisions, and the size of the debt service, the main source of public spending rigidity is wage bill inertia. The wage indexation mechanism adopted after dollarization and the benefits associated with increasing the public sector base salary produce this lack of flexibility. As a result, in 2004, the flexible component of budget execution is estimated at 4% of the total, equivalent to 0.9% of GDP.8

1.16

In view of the aforementioned factors, reducing pressure on fiscal policy as a stabilization tool requires combining sound fiscal management with reforms that contribute to energizing the productive structure. d. Public debt sustainability

1.17

The 2003 public debt/GDP ratio reached 54%, with 43% representing external debt and 11%, domestic debt. As a consequence of the lack of access to external financing since the 1999 default, most of the external debt (60%) is official (37% multilateral and 23% bilateral). In addition, 75% of the external debt is subject to fixed rates. In 2003 external debt service represented 24% of the value of exports of goods and services and 5.5% of GDP.

1.18

External debt restructuring in 2000 has helped to reduce the public debt/GDP ratio from 90% to 53% between 1999 and 2003. Yet the size of the debt and respective debt service still create liquidity problems, keep default risk alive, and crowd out productive spending.9 Consequently, effective public debt management is a requirement for any successful economic policy. Debt sustainability analyses indicate the need for a nonfinancial public sector primary surplus of about 5% of

8

Public Expenditure Review (2004).

9

In 2003, debt service reached 30% of budget execution.

-7-

GDP and compliance with the FRL which provides, inter alia, for allocating a portion of the revenues from the new heavy crude pipeline to debt buyback (70%).

1.19

The Bank is the country’s largest creditor, with a debt stock accounting for 17.8% of total external debt. It is followed by CAF (9.6%) and the World Bank (7.7%). To facilitate burden sharing with other international agencies and comply with the government’s debt reduction program, the Bank has gradually reduced its exposure in the country (see Annex VIII).

2. Structural dimension: productivity

1.20

Productivity, as an important factor for competing in the international arena, becomes critically important in a dollarized economy, where the impossibility of managing the nominal exchange rate makes it possible to boost competitiveness in the short term. The continued strength of the dollar in the exchange markets until mid-2003 and its recent weakness demonstrate that Ecuador’s economic competitiveness is strongly dependent on external shocks. To weaken this link, reforms will be necessary to stimulate and diversify the productive structure to improve the economy’s growth potential. These reforms are crucial, especially in the context of the trade negotiations under way.

1.21

In addition to the appropriate use of fiscal instruments (taxes, transfers, subsidies),10 increases in productivity require effective policies for investment in human and physical capital, labor and financial market reforms, the introduction of a consistent institutional framework, and efforts to improve trade integration. These elements are critical to improving business development and promoting private sector initiatives.11

1.22

Infrastructure. The surveys conducted among potential foreign investors (UNCTAD, 2001) reflect a negative perception of basic infrastructure: transportation, telecommunications, power, and water. Lack of efficiency, low quality of services, insufficient cost recovery, and an inadequate institutional framework for investment planning discourage the private sector from participating in the delivery of services through management contracts. In the electricity sector, while the 1999 reform was well designed, its implementation has been problematic.

In particular, the following challenges were identified: (i) modernize the rules on incentives to attract private investors to electricity generation; (ii) strengthen the

10

These are “structural” fiscal measures because the design of the tax system, the subsidy policies, social security, and other transfers affect the incentives for enterprises to invest and generate jobs, for consumers to save or spend, and for workers to enter the formal labor force or set up small businesses.

11

The measures to improve the investment climate can be grouped as follows: (i) implement policies aimed at increasing the country’s integration into the global economy; (ii) improve governability; (iii) modernize power and communications infrastructure; (iv) strengthen the banking system; and (v) promote the adoption of modern production technologies and improve quality of labor force.

-8-

Ministry of Energy and Mines in planning and formulating policies; (iii) increase the regulatory agency’s independence; (iv) improve the performance of electricity distribution companies; and (v) cover electricity generation needs. In the transportation sector, it is necessary to: (i) develop an explicit, consensus-based sector policy and planning; (ii) improve the institutional framework to overcome duplications among sector agencies; (iii) strengthen management capacity; (iv) assign sufficient investment and maintenance resources; and (v) promote private sector participation.

1.23

Education and vocational training. Growth in productivity is affected by the low coverage and quality of secondary and higher education as well as by the lack of incentives for job training. Companies prefer to hire temporary workers, which limits professional development opportunities. The Ecuadorian Vocational Training Service does not have efficient mechanisms for harmonizing the supply of competencies offered by training institutions with businesses’ demand. In this context, efforts to improve the quality of secondary education, access to higher education, and vocational training will help improve productivity and, by being conducive to greater labor mobility, will reduce the cost of adjusting to external shocks.

1.24

Labor market. Labor market rigidity engenders high production costs, reduces competitiveness, and creates incentives to work outside the formal sector. Wages, established on the basis of a minimum wage set by the government and indexed to projected inflation, do not reflect increases in productivity. In addition, the requirement that legally registered businesses distribute 15% of their profits to their workers acts as an additional tax and encourages outsourcing. Ecuador’s layoff costs are among the highest in Latin America12 and the restrictions on hiring and firing are inappropriate in such a volatile economic environment. In a dollarized economy with labor market inflexibility, external shocks could lead to a drop in production and in the demand for labor.

1.25

Financial markets. Given the financial sector’s role in the 1999 crisis, its consolidation is critical to reducing economic vulnerability. An efficient financial system that includes appropriate oversight standards is essential to improve access to credit and avoid a credit crunch following adverse chocks. Because of the lack of a lender of last resort and the limited access to external financing, the Ecuadorian banking system is characterized by high liquidity levels that cut into operating margins and credit operations.13 Although there are a growing number of loans to

12

In 1999, fired workers were paid 13 times their monthly salary, compared with an average of six times for Latin America (Heckman and Pagés, 2004).

13

The lack of a lender of last resort as a result of dollarization requires the adoption of appropriate liquidity requirements or the establishment of insurance with external financial institutions to allow the financial system to run smoothly.

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small and medium-sized enterprises, access to credit and to extended lending terms is limited. In 2003, credit to the private sector represented only 15% of GDP. The political and economic volatility and the legislative insecurity apparent in the weak enforcement of the rights of creditors discourage lending to local businesses.

1.26

Rural markets. The socioeconomic relevance of the agriculture sector identifies it as a strategic linchpin for economic diversification, generation of opportunities, and poverty reduction.14 Among the main elements that limit sector development, the following stand out: (i) lack of access to factors of production (land, capital, and technology); (ii) weak public institutions responsible for plant and animal health control; (iii) lack of organization by producers with respect to public institutions; and (iv) marketing system inefficiencies.

1.27

Diversification. Ecuador’s export structure is heavily concentrated by product and market. The size of the domestic market constitutes a significant constraint on economic growth, to such an extent that improving access to international markets is crucial for export diversification. The inefficiencies of regional infrastructure and customs management, combined with fluctuations in the real exchange rate, make it difficult to diversify the economy.15 In its search for new trade opportunities, Ecuador faces a complex agenda of negotiations: the bilateral agreement with the United States, the common external market of the Andean Community, FTAA and MERCOSUR negotiations, and new multilateral negotiations.

1.28

Natural resource management. Although protected areas cover 43% of the territory, the country has not been able to set up an efficient natural resource management system. The deforestation rate is close to 1.2% per year, far above the average for the region. Ecuador has substantial water resources facing pollution problems. In addition, urbanization has generated pollution and contamination problems stemming from inadequate solid waste management. Despite significant progress in the management of the Galapagos National Park, the islands continue to be threatened by the rise in population and the increase in pollution from sewage and solid waste. The solution to these problems requires ongoing support for the development of environmental policy tools that combine direct regulation, economic incentives, land use planning, environmental analysis, and community participation.

14

The agriculture sector accounts for 17% of GDP (30% of GDP with agroindustry and services directly linked to agriculture) and 50% of total exports. In addition, about 30% of the economically active population works in agriculture and 40% of the Ecuadorian population lives in rural areas and depends directly or indirectly on the rural economy.

15

The downward trend of the relative price of tradable/nontradable goods is one characteristic of economies that are dependent on the export of commodities (Dutch Disease). The impact on competitiveness is greater in the case of a dollarized economy, where managing the nominal exchange rate is not an option for improving it in the short term.

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3. The social dimension: poverty reduction and social development 1.29

In order to reduce vulnerability vis-Ă -vis external and internal shocks, it is necessary to implement efficient redistribution policies, improve the quality of social expenditure, and create more job opportunities. In the context of economic volatility and fragile governability, Ecuador faces the challenge of reducing social exclusion. The recent political and economic crises, combined with natural disasters and external shocks, have had a significant impact on the most vulnerable population groups. The percentage of the population living in poverty increased from 34% in 1995 to 56% in 1999. The incidence of poverty is highest in rural areas (77%) and among indigenous (78%) and Afro-Ecuadorian (over 70%) groups.16 As poverty indicators have worsened, inequality has increased. The Gini coefficient rose from 0.54 to 0.56 from 1995 to 1999.

1.30

The country has achieved significant progress in the area of education coverage: 90.1% in primary school and 45% in secondary school. In the case of primary education, the challenge is to improve service quality and access to the poorest, particularly in rural areas. Educational attainment for the rural population is only 4.8 years, compared with a national average of 7.5 years. This average is lower among indigenous groups (3.7 years). Although primary education coverage in urban areas is virtually universal, in rural areas 20% of school-age children do not attend. In the health sector, no more than 20% of the population has insurance.

Infant and maternal mortality rates remain high, although there has been continued improvement since the 1950s.

1.31

Indigenous peoples, Afro-Ecuadorian communities, and women are most affected by the lack of opportunities. Only 53% of the indigenous population has access to primary education, 15% to secondary education, and less than 1% to higher education. While 9.5% of men are illiterate, 13.8% of women over the age of 15 are. Moreover, 9.9% of girls do not enroll in secondary school to do housework.

In urban areas, 82.1% of women do not receive university training, compared with 76.8% of the men. In rural areas, this proportion is 96.7% for women and 95.3% for men.

1.32

Social expenditure. The diagnostic assessment of social expenditure17 in Ecuador reveals four characteristics: (i) there is little of it; (ii) it is not progressive; (iii) it is inefficient; and (iv) the institutions are weak.

16

Ecuador is a multiethnic and multicultural country. Of the 12 million inhabitants, close to 78% are mestizos, 7% are indigenous, and 5% are Afro-Ecuadorian (2001 Census).

17

Social expenditure refers to central government spending on education, health, and social welfare.

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a. Insufficiency.18 Between 1980 and 2000, the central government’s social expenditure dropped significantly from 5.3% of GDP in 1980 to 4% in 2000.

This trend reflects a drop in spending on education (from 4.3% to 1.9%) and health (from 0.9% to 0.8%). Since 2001, efforts have been redoubled to improve the level of social expenditure, but volatile economic performance makes it procyclical. In 2003, social expenditure came to 5% of GDP, with education and health at 2.6% and 1.3%, respectively. b. Lack of progressiveness. Of the universal programs, the only clearly progressive ones are primary education, rural social insurance, and school meals.

In the case of rural social insurance, 67% of spending benefits the poorest half of the population (Vos et al., 2003). In programs with some type of beneficiary selection, the clearly progressive ones are the Human Development Bond (BDH—previously known as the Solidarity Bond—now targeted using SELBEN, the Social Program Beneficiary Selection System), the school breakfast, and some childcare programs.19 c. Inefficiency. Social expenditure is dispersed and poorly targeted. The number of programs, projects, and activities is very large and there is no monitoring or evaluation and much duplication and overlapping.20 Few of the social programs are using objective targeting criteria to allocate resources. Efforts to provide the country with targeting tools have focused on the use of the Integrated Social Indicators System of Ecuador (SIISE), which has been improving georeferenced social statistics, and the SELBEN, the use of which is still limited, to facilitate beneficiary selection. d. Institutional weakness. Despite the number and size of the ministries and government agencies involved in the social area, the sector is characterized by its institutional weakness and, in particular, by: (i) a lack of integration and coordination; (ii) limited targeting capacity; (iii) rigid allocation of resources; (iv) high level of centralization; and (v) high execution costs.

1.33

Social safety net. Ecuador is still mid way towards consolidating a national social safety net. Several recent programs seek to alleviate the situation of the population affected by the various crises, primarily through cash transfers, programs for the

18

Spending indicators as a proportion of GDP are based on time series at constant prices in dollars (base year: 2000) (Vos et al., 2004a).

19

The SELBEN is a welfare index based on the concept of unmet basic needs (including environmental variables), income, and other socioeconomic variables (for example, language), which attributes points to each individual household and its members that indicate their level of poverty.

20

For example, in the area of childcare, there are five different national programs—Child Development Program (PDI), Operation Child Rescue (ORI), National Institute for Children and Families (INNFA), the National Food and Nutrition Program (PANN), Our Children—which are assigned to different institutions, have different unit costs, and provide similar services to similar populations.

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elderly and for children under six years of age, and food and nutrition programs.

The Solidarity Bond, which until 2003 was the most important cash transfer program, covering close to 1.2 million households on a budget of US$153 million per year, is being converted into the BDH, a conditional transfer targeting the poorest families, with resources of close to US$200 million per year. The Solidarity Bond targeting problems are being resolved in the BDH by using the SELBEN and, in the case of programs for children, food, and nutrition, through the creation of the Child Development Fund (FODI) and the National Nutrition System Fund (SIAN Fund).

1.34

Millennium Development Goals (MDGs). As a result of the crisis at the end of the 1990s, the country has strayed from meeting the 2015 poverty reduction goals.

ECLAC estimates that, to achieve this goal, Ecuador would need to grow at an average rate of 3.5%. The growth rates recorded in the 1990s averaged 2.2% per year. Yet the average improved to 3.5% in the 2000-2003 period. Progress towards the goals related to infant mortality, primary education, and access to potable water is positive (see Annex X). According to the latest report from the United Nations Development Programme (UNDP), between 1990 and 2001 official development assistance dropped from 0.33% to 0.22% of donor countries’ gross national income.

Since the adoption of the Millennium Declaration in 2000, this trend has reversed; between 2001 and 2002, official development assistance has expanded thanks to the Monterrey Conference’s commitment to increase it annually through 2006.

4. The institutional dimension: efficiency in the workings of government

1.35

The governability crisis is reflected in how difficult it is to implement the decisions made by the authorities. The lack of human resources and adequate financial, administrative, and organizational conditions prevents government agencies and other branches of government from performing their functions. In this regard, because of the bureaucratic cost, increased public spending, and inefficient workings of government, the State is unable to properly address the needs of the population (in terms of efficiency and quality). This crisis is evident at two levels: (i) public administration management; and (ii) trust in the administration of justice.

1.36

The public administration modernization process continues to be a key item on the agenda of reforms necessary to ensure efficient, effective, and transparent administration. The public administration is characterized by high staff and manager turnover, bad pay, a negative work climate that is not conducive to compromise, lack of incentives to improve performance in public agencies, management styles focused on procedures and not results, lack of mechanisms to evaluate results, and little accountability. There are no lead agencies to perform some crosscutting management functions, such as information technology, procurement, and public goods, making it difficult to coordinate and integrate the actions of the ministries in those sectors. Other crosscutting areas of reform include:

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financial administration, debt management, programming of public investment, and fiscal control.

1.37

Despite having gone through several stages of reform and made some significant progress, the Ecuadorian justice sector continues to present significant deficiencies in need of attention. This situation is in part reflected in the low levels of trust and participation by society in administration of justice services, which runs counter to the need for the country to maintain a competitive environment for local business development and foreign investment. Thus, supplementing the reform efforts already under way continues to be a national priority, considering that the quality of the services, the transparency of the processes, and the timely decision-making by justice sector agencies bear a close relationship not only to governability but to the investment climate and competitiveness.

B.

Government program

1.38

The objective of the government’s program for 2003-2007 (Economic Management and Human Development Program) is to consolidate fiscal discipline, strengthen the productive structure, and reduce the incidence of poverty. The fiscal adjustment measures include restrictions on public spending to solve liquidity problems and reduce the debt. The structural policies are aimed at consolidating the financial system, making the labor market more flexible, establishing incentives to foreign investment, and developing the productive infrastructure. The redistribution policy seeks to strengthen the social safety net. Institutional reforms include anti-corruption programs, modernization of the State, and increased transparency in government.

1.39

Competitiveness represents another linchpin of the government program. The National Competitiveness Agenda (Agenda Ecuador Compite–AEC) identifies two objectives: (i) to increase economic productivity by cutting costs and making more efficient use of the factors of production and by reducing risks and cutting transaction costs; and (ii) to promote diversification to lower dependence on primary products and move towards the production of goods and services with higher value added. Based on these objectives, the AEC promotes implementation of the following actions: human capital accumulation, greater efficiency in government, infrastructure, integration, financial system consolidation, innovation strategy, suitable institutional framework, and proper natural resource management.

The institutional framework for executing the AEC is centered on the National Competitiveness Council, which contributes to communication between the public and private sectors and identifies the measures needed to improve competitiveness.

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II. ASSESSMENT OF PAST STRATEGY AND PORTFOLIO ISSUES A.

Context of the strategy with Ecuador

2.1

The political and economic volatility that characterized Ecuador between 1990 and 2002 made the Bank’s programming process difficult. During the period under consideration, Ecuador was affected by significant events, including the departure of six presidents, constitutional reform, conflict with Peru, indigenous uprising, hyperinflation, foreign debt default, financial crisis, and dollarization. Nevertheless, the Bank maintained an ongoing and significant presence in the country throughout the entire period and the results achieved were positive. To this end, it maintained a constant dialogue with the government, based on annual programming exercises that made it possible to define a flexible operations program and keep a suitable balance between short-term monitoring to resolve the crisis and addressing longterm challenges.

2.2

When the implementation of the Bank’s strategy with Ecuador (BSE) is evaluated, the following aspects stand out: (i) the presence of the Bank, in times of boom and bust, through dialogue, technical assistance, and financing of loans; (ii) financial and technical support to consolidate important structural reforms, in particular approval of the FRL; (iii) the uninterrupted support for sectors in which the Bank has been working with the country, particularly infrastructure, the social sectors, and the environment; (iv) the Bank’s participation in the reconstruction of the coastal region affected by the El Niño phenomenon in 1997; (v) the contribution to the peace process after the conflict with Peru; and (vi) close coordination with other multilateral and bilateral agencies.

B.

Evaluation of the 2000-2002 strategy

2.3

The prospects for economic and political stability, stemming from the dollarization of the economy and the 2000 change in government, led the Bank to prepare a strategy for the 2000-2002 period (country paper) in line with the dollarizationrelated reform program. The targeting effort, fruit of the experience of the 1990s, resulted in the identification of four work areas: (i) stabilization of the economy and recovery of growth capacity; (ii) poverty reduction, human capital formation, and social inclusion; (iii) efficient infrastructure management with private capital participation; and (iv) modernization and decentralization of the State and promotion of sustainable regional development. Given these priority areas, the country paper contained a list of strategy results indicators. This section presents a review of the progress towards these targets, summarized in Table II-1.

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Table II-1. Progress in performance benchmarks: 2000-2002 strategy The Bank’s Strategy

The Bank’s Instruments

Performance Benchmarks

Progress

A. Stabilization of the economy and recovery of growth capacity Support for the resolution of governmentintervened banks

Investment sector loan

Eliminate earmarking, establish an oil revenue stabilization fund, and improve transparency expenditure Support increase in municipal collections Support Ministry of Economic Affairs and Finance (MIF) in macroeconomic programming, external debt and investment management Improve land market and better access to credit Restructure Internal Revenue Service

Decentralization support program

Improve the economy’s competitiveness

At least one third of the assets of the government-intervened financial institutions in private sector hands by the end of 2002.

Fiscal Responsibility, Stabilization and Transparency Act passed.

Decentralization support program Program to strengthen the MEF (cancelled)

Law on municipal taxation passed.

Preinvestment, project monitoring, and economic programming activities implemented in the MEF.

Rural land titling and administration

Improved access of small farmers to financial services.

10% real increase in tax collection through VAT, ICE, and income tax in 2001 and 2002.

Tax modernization program Science and technology program

Advanced training for 30 professionals connected to businesses.

-

+ -

+ + +

B. Poverty reduction, human capital formation, and social inclusion Maintain the level of social expenditure and prioritize investments Improve targeting of social expenditure

Provide social infrastructure to poorest communities, including indigenous and Afro-Ecuadorian populations Support social inclusion Explicit effort in Bank-financed programs to benefit ethnic groups Support asset accumulation of the poor, demand-targeted housing subsidies, and private sector participation in construction and financing.

Strengthen rural social insurance

Support rural preschool and basic education: implement reforms to make it possible to speed up program execution

Investment sector program System to identify beneficiaries of social programs Strengthening of national statistics system FISE I, II, and III

TC Support for indigenous nationalities and peoples TC Institutional strengthening of Afro-Ecuadorian organizations Housing sector support program

Public sector social expenditure reaches 5.5% of GDP in 2002.

At least 50% of the social safety net subsidies are targeted using the new system in 2003.

Population and housing census conducted.

+ +

At least 20% of FISE disbursements benefit indigenous or Afro-Ecuadorian municipios.

+

Access to social services and market opportunities improved for traditionally excluded groups.

+

+

48,000 families benefited by end of 2002 +

Rural social insurance program (not approved) Services to children under five

Rural social insurance system coverage increased by at least 20% between 2001 and 2004.

Recovery of and increase in net enrollment ratios for rural primary school to at least 87% by end of 2003.

-

+

C. Efficient infrastructure management with private capital participation Support for regulation and privatization in electricity and telecommunications sectors.

Sector investment program

Support investment in road infrastructure, privatization of road maintenance.

Develop infrastructure in poor rural areas.

Primary road network program Rural transportation infrastructure program II

Support concessions of State-owned enterprises to private operators

Guayaquil water and sewerage service

Regulations for private investment in electricity and telecommunications sectors 25% of electricity distribution assets managed by the private sector.

Modernization of the MOP and at least 20% of the country’s road system maintenance outsourced by end of 2003.

Road concessions process under way by end of 2002.

Guayaquil water and sanitation awarded to private operator by end of 2001.

+ -

-

+

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The Bank’s Strategy

The Bank’s Instruments

Performance Benchmarks

Progress

D. Modernization and decentralization of the State and promotion of sustainable regional development Strengthen finances and process for transferring resources and responsibilities to local governments.

Develop municipal infrastructure and implement sustainable financial policies for Banco del Estado (BEDE) and for the municipios.

Decentralization support program

Support natural resource management and sustainable development in Galapagos Islands, Pacific Coast, and northern Amazon region.

Sustainable development of northern Amazon border region Environmental management of Galapagos Islands Quito environmental sanitation program

Support financial sustainability and gradual reform of public enterprises of large municipalities.

Note:

Municipal development program II

15% of central government budget is transferred to local governments, with transfer of respective functions.

Locally raised revenues represent 30% of municipal budgets, and 15% of local governments are eligible for credit in 2004.

BEDE has <10% of loans in arrears by end of 2004.

Local capacity for environmental management and sustainable development with community participation in the Galapagos Islands, the Pacific Coast, and the northern Amazon region.

Progress is made on concession and/or outsourcing of water, sewerage, and sanitation services in Quito

(+): Progress was made or proposed achievement was reached (-): No progress was made towards the proposed achievement.

2.4

Two elements that affected implementation of the 2000-2002 strategy, and therefore accomplishment of its goals, are worth noting. First, because the period for the strategy was short, execution of many of the operations approved has just started. As a result, by the end of the strategy period, only the initial effects of the expected impact were achieved. Second, because of the lack of an agreement with the IMF and noncompliance with other conditions that were triggers for the lending scenarios, the decision was made to work with the low scenario, which affected the approval of important loans in each of the strategy areas.

2.5

One of the greatest accomplishments in the area of stabilization of the economy and recovery of growth capacity was approval of the Fiscal Responsibility, Stabilization, and Transparency Law (FRL), the Bank having supported the preliminary dialogue on the matter. This activity was complemented with the preparation of regulations to rationalize the municipal tax system and the ongoing support for improving tax administration performance. The effect of this last action was a significant increase in collections. Despite these advances, actions are still pending to make fiscal spending more flexible and to promote the necessary budget discipline to prioritize public investment and make social expenditure more efficient.

2.6

With regard to consolidation of the post-crisis financial sector, the objective of returning at least one third of the assets of the government-intervened private-sector financial institutions by the end of 2002 was not achieved. However, some progress was made—albeit with delays—in the resolution of government-intervened banks and recovery of the portfolio of closed banks, making it possible to achieve a more stable financial system. All these actions to support intervened bank resolution were

-

+

+

+

- 17 -

part of the investment sector program (which was part of a joint effort with the World Bank, the IMF, and the CAF).

2.7

In the area of poverty reduction, human capital formation, and social inclusion, indicator trends reveal significant progress towards most of the targets established.

Part of the success in implementing the strategy is due to the fact that, for most social sectors (housing, education, water and sanitation, and services for vulnerable groups), the Bank has provided medium-term support, in an attempt to maintain a strategic direction in its actions. Despite significant progress in terms of coverage and quality, the institutional base still needs to be improved.

2.8

The increase in social expenditure as a percentage of GDP is worth highlighting as one of the most important accomplishments. Such spending reached 6.4% in 2002, exceeding the target of 5.5% set in the strategy. In terms of services for the most vulnerable groups, the Bank provided direct support to strengthen the SELBEN, which was needed to improve targeting of public spending. Of the three Social Investment Fund (FISE) operations financed by the Bank, the first two were relatively successful in generating projects for poor communities, particularly minority groups. The third FISE is in the initial stages of execution and targets the poorest communities.

2.9

Bank support in the housing sector made it possible to move from supply-driven subsidies to demand-driven subsidies and to improve the targeting and management of public resources for this sector. In addition, the process of formulating policies for the housing subsidy was revised, strengthening the Ministry of Urban Development and Housing (MIDUVI), as the sectorâ&#x20AC;&#x2122;s apex agency. As a result of these actions, a low-income housing market was created and formalized. Despite these significant accomplishments, still to be achieved is the more active participation of the private sector in providing housing for middle- and lowerincome groups.

2.10

In the education sector, the Redes Amigas basic education project developed a methodology for allocating resources based on the number of students and implemented a management modality (school autonomy) that broke with the centralism of the sector ministry. The Nuestros NiĂąos childrenâ&#x20AC;&#x2122;s services program was instrumental in the establishment of a Child and Adolescent Code and had a significant influence on the national policy covering children from 0 to 5 years of age. These advances, adopted as policy in the social policy-based loan (PBL), are being implemented. However, the process has been slow and, because of governability problems, the permanence of these transformations is uncertain.

2.11

In areas related to the social inclusion of indigenous groups, the Bank contributed to an inclusive institutional arrangement that would cover all indigenous associations.

In May 2000, the Bank organized a workshop with indigenous leaders from the highlands, the Amazon region, and the coast, at which topics of concern were

- 18 -

discussed, such as modernization, external indebtedness, and the Bankâ&#x20AC;&#x2122;s support for the country. The Bank also undertook dialogues with the national authorities and indigenous groups regarding the possible ways of fighting poverty through productive investments. Through technical cooperation operations, the Bank supported initiatives to bring the indigenous population into the formal economy, specifically in the gas and oil sector in the countryâ&#x20AC;&#x2122;s Amazon region.

2.12

In the area of efficient infrastructure management with private capital participation, some progress was made in regulating the electricity, airport, and water and sanitation sectors, with regulations regarding control of monopolistic positions and quality of service. Support for the concession of State-owned water and sewerage enterprises to private operators, specifically in the case of Guayaquil, was important. Less progress was made in terms of incorporating the private sector into the management of and investment in electricity infrastructure. The privatization of 25% of electricity distribution was not achieved, despite floating tranche support from the investment sector loan and the private investment support program. The reason was lack of consensus on the role of the private sector in the delivery of services.

2.13

With regard to investment in road infrastructure, the Ministry of Public Works was not restructured because the project was suspended for lack of an agreement on the staff reduction plan. Significant progress was made, however, in the rehabilitation and construction of local roads (rural transportation infrastructure program), both in terms of improving the infrastructure and establishing the basic institutional arrangements for the sector. There was increased private sector participation in tourism, due in part to the establishment of a tourism promotion fund. Lastly, in the face of the destruction and damage on the coast caused by the El NiĂąo phenomenon, the Bank responded immediately by supporting rehabilitation of roads, bridges, schools, and public infrastructure works.

2.14

In the area of modernization and decentralization of the State and promotion of sustainable regional development, it has not been possible to make significant progress because of the difficulty of working on institutional matters that require political consensuses, such as reform of the State and support for decentralization.

The most progress was achieved in the consolidation of transfers to local governments of 15% of tax revenues. Delegation of functions is still pending, however.

2.15

The Bank participated actively in the dialogue on decentralization through two technical cooperation operations, but was unable to make significant progress towards startup of the support for decentralization loan, due to the lack of institutional definition within the government. As to sustainable development, the Galapagos Islands environmental management program is strengthening the local entities for conservation and sustainable use of the marine-coastal ecosystem. In addition, the Bank provided technical cooperation support for sustainable use and

- 19 -

outsourcing of forest control as a mechanism to halt the high deforestation rate.

This operation made it possible to deepen the Bank’s action in environmental conservation.

C.

Changes in the portfolio

2.16

The outstanding portfolio of loans to Ecuador dropped between 2000 and 2002 and, at the end of that period, represented 64% of the amount recorded at the start of 2000; the number of projects dropped from 26 to 19. In part, this reduction reflects the joint action of the government and the Bank to improve the performance of the portfolio by reformulating and/or canceling loan proceeds for problem operations.

2.17

In comparison with 2000, in 2002: (i) the level and rate of disbursements was higher; and (ii) the average age of the loans and loans with extensions dropped.

Qualitative indicators improved: in 2002, 94% of loans in execution were rated “likely” to achieve their development objectives, compared with 86% in 2000.21 See Annex XI.

2.18

At 31 December 2003, the Bank’s total portfolio with Ecuador was comprised of 73 operations for US$536.3 million. These resources are distributed among 16 projects with a value of US$515.8 million, 18 MIF operations for US$9 million, 37 technical cooperation operations for US$10.1 million and two social entrepreneurship operations for US$1.5 million. The portfolio of the InterAmerican Investment Corporation is comprised of five outstanding loans for a total of US$25.3 million, in the following sectors: agriculture and agroindustry; aquaculture and fisheries; financial services; and livestock and poultry farming.

Table II-2. Composition of the total portfolio at 31 December 2003 (US$ millions)

21

Type of instrument

Number of operations

Amount approved

% of total approved

Amount disbursed

% disbursed

Loans Investment Sector MIF TCs Trust Funds FSO Entrepreneurship Total

16 15 1 18 37 9 28 2 73

515.8 315.8 200.0 9.0 10.1 5.0 5.1 1.5 536.3

96.4% 59.0% 37.4% 1.7% 1.9% 1% 1% 0.3% 100%

223.7 123.7 100 3.1 4.4 1.9 2.5 1.0 232.3

43% 39% 50% 35% 44% 19% 25% 69% 43%

Balance to be disbursed 292.1 192.1 100.0 5.8 5.7 3.1 2.6 0.5 304.1

In 2003 the following projects performed poorly: Likely to achieve development objectives: Not likely, EC0180 TC loan—support for private investment in infrastructure. Progress in execution: unsatisfactory, EC0180 TC loan—support for private investment in infrastructure and EC0203 Social Investment Fund (FISE III). Fulfillment of basic assumptions: Low, EC-0180 TC loan—support for private investment in infrastructure.

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D.

Lessons learned

2.19

Flexibility in programming is necessary to respond to changing circumstances and crisis situations, provided a long-term strategic vision is maintained.

Targeting the Bank’s work on a few strategic areas has provided continuity while making it possible to react to crisis situations within a defined frame of reference.

In this regard, the strategy should offer a long-term view, even in times of crisis, to serve as an effective criterion in the selection of operations.

2.20

For programming to be more effective, the programming process should take into account the country’s institutional and fiscal constraints. The programming process needs to be very thorough in its evaluation of the government’s institutional execution capacity and fiscal absorption capacity, for project preparation resources to be used more efficiently. It is advisable to agree with the government, within the established indebtedness margins, on those operations that generate significant impacts.

2.21

Since institutional weakness continues to be a critical factor in the effectiveness of the Bank’s work in the country, the basic criterion for project design needs to be a simple institutional structure. Given the institutional instability, the Bank needs to continue its support for executing agencies and its internal incentives structure, within existing rules, to promote less staff turnover. In this context, the Bank is already supporting the country to ensure that the executing units are an integral part of the institutional structure.

2.22

Implementation of the strategy of communicating and consulting with project beneficiaries, civil society organizations, and the private sector on the identification, development, and execution of operations paved the way for building consensus on the Bank’s action, particularly with excluded groups such as the indigenous and Afro-Ecuadorian peoples. In addition to providing broader dissemination to the public on the projects, it is necessary to involve civil society at the different stages of the project cycle to generate an accountability formula that will facilitate its sustainability.

2.23

The synergies with multilateral organizations and bilateral cooperation are important for optimizing the impact of the Bank’s operations. Coordination implies not only promoting complementarity but also making efficient use of the institutional capacity of the country.

2.24

Preference ought to be given to approving a smaller number of larger operations to maintain priorities and generate significant impact. It has been noted that, unless very small operations are very innovative, they tend to lose priority.

- 21 -

2.25

Nonfinancial instruments are essential to the work of the Bank, especially in times of crisis. In the particular case of Ecuador, the Bank conducted technical dialogue missions, developed a program of economic and sector studies, and supported consultative groups, among other efforts to support implementation of its strategy with the country.

E.

Main recommendations of the Country Program Evaluation (CPE) Ecuador: 1990-2002

2.26

The CPE’s recommendations suggest that the Bank’s new strategy with Ecuador: (i) present a mutually agreed program of economic studies and specific activities to support the government in the process of identifying, selecting, and analyzing priority development issues, with particular attention to transforming the real sector, developing agreements on governability, and strengthening social investment instruments; (ii) adjust the Bank-Ecuador relationship to pursue long-term objectives, with emphasis on the planning horizons, the scaling of the operations program, and the definition of alternative scenarios; and (iii) consider issues related to the growth potential of the main sectors of the real economy, dollarization, the factors determining public spending amount and quality, the role of the private sector, debt sustainability, the added value brought by the Bank’s action and the integration of instruments and interagency coordination. These recommendations have been incorporated into this document.

2.27

In addition, the OVE report makes a series of recommendations that will be addressed as follows: (i) at the project level: the fiscal return ascribed to the operations selected and analysis of the operations’ risks; (ii) in all countries in which the Bank works: improvement of strategy evaluability and monitoring; and (iii) portfolio review report: contingency plans and alternative means of execution more suited to the development of the country’s institutional framework.

- 22 -

III. THE BANK’S STRATEGY WITH THE COUNTRY A.

Challenges facing the country

3.1

In a context of political fragmentation and difficulty with reaching consensuses, the greatest challenge to the country’s development is to make it less vulnerable to external and internal shocks. The country needs to take simultaneous actions in four areas in order to reduce vulnerability: macroeconomic, related to the sustainability and flexibility of fiscal policy; structural, focused on increasing the resilience of the productive structure; social, aimed at protecting the most vulnerable groups and promoting social development; and institutional, related to efficiency in the workings of government.

B.

Structure of the strategy

3.2

Given the lesson learned with regard to targeting the work of the Bank on a small number of strategic areas, the Bank’s strategy with Ecuador (BSE): a. Seeks to make the country less vulnerable to external and internal shocks by concentrating on two priority areas related to the most important medium-term challenges: (i) help lay the foundations for energizing the productive structure (structural dimension); and (ii) promote social development and the protection of the most vulnerable groups (social dimension). b. The institutional dimension will be treated as a cross-cutting component in the two areas identified as having priority. Rather than generic institutional support actions, the Bank will seek to have a direct impact on improving public spending and debt management and to take specific actions in support of institutions involved in Bank-financed operations. c. The political instability and the difficulty of reaching consensuses are an obstacle to achieving the objectives of the BSE because they affect the government’s capacity to: (i) implement reforms; (ii) identify, prepare, and execute projects; and (iii) manage demands under a consistent medium-term strategic line. Given the inadequate efforts to address this challenge, the Bank’s mitigating actions will rest on the government’s willingness and capacity and will be limited to encouraging an informed dialogue to generate consensus on economic and social policy. d. In order to work in the aforementioned areas, the framework of the BSE is the sustainability and flexibility of fiscal management. The existence of a framework of stable macroeconomic policy is a prerequisite for being able to implement actions to achieve the strategy’s objectives.

- 23 -

3.3

Table III-1 outlines the structure of the strategy as well as the sub-areas and respective components.

Table III-1. Structure of the Bankâ&#x20AC;&#x2122;s Strategy with Ecuador Priority areas of the strategy

Priority sub-areas

Components

Cross-cutting element

Support implementation of policies, an institutional framework that boosts productivity and competitiveness, and enterprise development programs

Help lay the foundations for energizing the productive structure

Improve productive infrastructure

Promote market efficiency

Promote economic diversification

Promote social development and the protection of the most vulnerable groups

Labor Financial Rural Trade agreements and nontraditional exports of goods and services Natural resource and natural risk management

Improve the effectiveness of public administration

Strengthen the social safety net

Increase the efficiency of social expenditure and improve coverage and quality of government services

C.

Characteristics of the strategy

3.4

The Bankâ&#x20AC;&#x2122;s strategy with Ecuador:

Education Water and sanitation Neighborhood improvement

a. applies to the 2004-2006 period, 2003 having been a year of transition. The new administration took office in January 2003 and preparation of the strategy began in late 2002. However, delays with the CPE prepared by OVE (which serves as input for defining the strategy) led the Programming Committee of the Board to recommend that presentation of the strategy be postponed. This meant that, for 2003, the operations program was designed by means of programming missions, with emphasis placed on actions to support increased efficiency in social policy. Such actions were to be consistent with the 2000-2002 strategy and in full agreement with the objectives of the 2004-2006 strategy (see Annex VI);

- 24 -

b. is consistent with prudential public debt management, since it is in line with the central government debt limits imposed by the Fiscal Responsibility, Stabilization, and Transparency Law (FRL), which establishes a ceiling on primary public spending growth of 3.5% and a target of 40% of GDP for the public debt; c. emphasizes the definition of policy reforms and the commitment to implement them. The BSE supports establishing regulations to protect social expenditure and make it more efficient and defining the legal framework to boost competitiveness and improve the investment climate; d. favors structural reform operations involving large amounts in the priority areas of the strategy, followed by complementary investment operations.

Taking into account the institutional execution capacity and the government’s fiscal absorption ceilings, the strategy includes operations that tackles the most important problems within each priority area; e. promotes coordination of the various Bank instruments within each priority area. The BSE benefits from the synergy among the various financial and nonfinancial instruments, especially in view of the fiscal constraints on the lending program; f. considers alternative financing mechanisms to support public investment by local governments or decentralized enterprises, in particular: (i) direct borrowing by local entities with the Nation’s guarantee; (ii) greater coparticipation of these entities in the financing; and (iii) use of specialized agencies to channel financial resources to the local entities; g. Given the fiscal constraints, the limits of Bank financing, and the experience of each entity, fosters balanced support in multilateral agency financing, through “burden sharing;” h. promotes private sector participation through: (i) programs that define the legal framework and regulations needed to boost competitiveness and increase private sector participation in productive infrastructure projects at the national and local levels; (ii) the use of Bank instruments for private sector development (PRI, MIF, IIC),22 subject to the demand generated; and (iii) adjustment of the size of the operations program within the government’s fiscal limitations, which fosters the establishment of an enabling macroeconomic environment for private initiative;

22

PRI participation through contract-based regulation may be an acceptable interim solution in the case of projects that lack a suitable regulatory framework. Financing of such projects would be subject to the existence of an acceptable level of credit and appropriate allocation of risks among the Bank, the investors, and the government authorities.

- 25 -

i. fosters the Bank’s coordination with multilateral and bilateral agencies as a key to strategy implementation. Table III-2 is a summary in graph form of the multilateral agencies’ main work areas (in gray) and the areas where they place the most emphasis (in black).

Democracy

Judicial reform

Environmental protection

Housing

Rural development/farm production

Water and sanitation

Health and population

Education

Social safety net

Modernization of the State

Workings of government

Poverty Reduction Private production / tourism

Energy and hydrocarbons

Business climate/ competitiveness

Trade and integration

Transportation and infrastructure

Economic Development and Competitiveness

Financial markets

Macroeconomic/fiscal stability

Area

Table III-2. International Cooperation in Ecuador

IDB World Bank IMF CAF United Nations system Bilaterals

Areas in which the agencies participate/work to some degree

Areas of more emphasis

Source: Donor Coordination Meeting—Quito, March 2003 and 2003-2007 strategies

D.

Size of the operations program

3.5

Given the borrowing limits established in the FRL, the BSE proposes two scenarios: (i) high, totaling US$483.4 million; and (ii) low, totaling US$185.4 million. The trigger for the high scenario is defined by the maintenance of fiscal discipline, determined by compliance with the FRL. In the case of the electricity sector, Bank support will depend on progress made with the sector’s institutional and regulatory framework.

- 26 -

Table III-3. Scenarios: size of the operations program (US$ millions) 2004 Total PBL Investment

30.4

Total PBL Investment

30.4 30.4

*

**

30.4

2005

2006

High Scenario* 368.0 200.0** 168.0 Low Scenario 85 85

Total

85 85

483.4 200.0 283.4

70

185.4 185.4

70

Trigger: maintenance of a sustainable fiscal position consistent with the FRL, which provides for monitoring primary spending, the nonoil deficit, and the public debt. In the case of the electricity sector, Bank support will depend on progress made with the sector’s institutional and regulatory framework.

The government has requested that the competitiveness PBL be in the amount of US$200 million, subject to overall availability of PBL resources for 2005.

3.6

Although both scenarios include operations in the priority areas of the strategy, the low scenario excludes projects that: (i) involve implementation of reforms to boost competitiveness; and (ii) require changes in the regulatory framework prior to execution, as is the case for the electricity sector. It is estimated that, under the high scenario de IDB debt/multilateral debt ratio would go from 47% in 2003 to 44% in 2006. Under the low scenario, the ratio would drop to 41%. Annex III lists the loan operations included under both scenarios and Annex IX presents the respective net flows.

E.

Priority areas

3.7

Taking into account the priority areas of the BSE identified in paragraph 3.2, and following the outline appearing in Table III-1, this section presents the Bank’s support activities in each sub-area and respective component, including the other multilateral agencies’ complementary activities.

3.8

In the case of the cross-cutting element, the Bank will support institutional strengthening of the MEF in the areas of debt management, financial programming, and setting of public investment priorities. In addition, under each project, activities will be included to consolidate the public institutions directly involved in execution.

The Bank will also provide support for building consensus on economic and social policy and technical assistance in the areas of decentralization and improvement of public revenue sources.

- 27 -

1. Priority area: Help lay the foundations for energizing the productive structure 3.9

Reducing the country’s vulnerability to shocks will require energizing the productive structure, which is closely linked to: (i) the development of a legal and regulatory climate conducive to investment and competitiveness; (ii) the improvement of productive infrastructure; (iii) the promotion of productivity through better performance of the markets; and (iv) the design and implementation of diversification policies, in order to improve access to international markets. All the actions in this priority area are included in the initiative to improve the business climate and are consistent with the government’s strategy contained in the AEC.23 a. Support the introduction of policies, an institutional framework that boosts productivity and competitiveness, and business development programs

3.10

With the public-private relationship as the linchpin, the Bank’s action falls within the framework of a competitiveness PBL that will support institutional strengthening and changes in the regulations for the implementation of the AEC. The Bank will work with the country on: (i) changes in the institutional framework that will make it possible to implement the AEC; (ii) changes in the institutional framework to enhance legal safeguards; and (iii) changes to regulations that reduce the risks of financial intermediation and the time needed to complete formalities and procedures. In addition, the Bank will continue to support: (i) the dialogue between the government, business owners, and workers to define the labor legislation that governs the private sector, a key issue for the FTA;24 and (ii) regulation of the transportation sector. The World Bank supports institutional strengthening through a programmatic loan to improve the legal and regulatory framework. b. Improve productive infrastructure

3.11

The Bank’s action in infrastructure will focus on supporting the policy dialogue for the transportation and electricity sectors, the generation of electricity (subject to a viable regulatory framework), and private sector participation. Given the priority that the government attaches to the sustainable development of the electricity sector and its relevance to the country’s competitiveness, potential areas of Bank support include: (i) reform of the institutional and regulatory framework; and

23

The Government of Ecuador signed the memorandum for this initiative in February 2004. A plan of action is expected to be prepared in 2005 and suitable financing mechanisms will be identified.

24

The most important areas that the Bank would support are: (i) resolution of incentives to informality inherent in current legislation on the distribution of profits and employer pension liabilities; (ii) new regulations for outsourcing; and (iii) changes to the collective bargaining system, limiting government participation and encouraging conflict resolution among the parties to simplify minimum wage.

- 28 -

(ii) investment in generation. In the transportation sector, in addition to continuing to support decentralized management of the secondary and tertiary road networks and rehabilitation of local roads, the Bank’s action will focus on: (i) the design of a plan to reform the sector; (ii) strengthening of regulation, oversight, and control of the automotive sector; and (iii) decentralization of urban public transportation regulation. In view of fiscal constraints and the opportunities to bring the private sector into infrastructure financing, the Bank will evaluate the feasibility of establishing an investment fund among private agents to finance private infrastructure that could be cofinanced through the Bank’s public and private windows. In addition, PRI will evaluate the possibility of providing financing for the construction of the new airport in Quito and the modernization of the airport in Guayaquil. The CAF will support reconditioning, expansion, and maintenance of the main road network.

3.12

Labor market. With regard to labor market modernization, in addition to promoting a mechanism for dialogue among the public and private sectors and the workers’ representatives, the Bank will help strengthen the Ecuadorian Vocational Training Service (SECAP) and improve the quality and coverage of job training programs. Given its importance to the country’s competitiveness and trade negotiations, the Bank will support the country in the area of labor code reform.

The World Bank is participating in this sub-area through studies on institutional reform of the labor market.

3.13

Financial market. The Bank’s support will focus on: (i) developing more effective ways to improve access to credit for the private sector and the most vulnerable economic groups; and (ii) developing medium- and long-term financial instruments.

In this area, the Bank, through technical cooperation, MIF, PRI, and IIC operations and in coordination with the World Bank, will seek to strengthen some of the financial institutions in the development of a capital market and in the mortgage loan area.25 With regard to remittances, which represent almost 5% of GDP, the MIF will support various financial intermediaries in mobilizing these resources to develop the mortgage market.

3.14

Rural markets. Promoting small and medium-sized enterprises (SMEs) will primarily contribute to social development in rural areas and job creation by: (i) consolidating the plant protection and animal health system, in order to make agriculture more competitive by improving the quality and safety of production; (ii) developing the public sector’s capacity in the agriculture sector to formulate, coordinate, analyze, monitor, and evaluate policies and projects; (iii) improving access to financial and productive resources (land and technology); and (iv) developing services to promote rural businesses. The World Bank participates

25

Given the demand of local institutional investors, PRI will support the development of long-term debt instruments by introducing credit improvements in such debt instruments.

- 29 -

through a rural productivity and sustainable development loan. The CAF focuses on irrigation canals and border development. c. Promote economic diversification 3.15

Trade agreements and nontraditional exports of goods and services. The Bank will support the government in its efforts to diversify by market and product through: (i) the development of a set of policies to maintain Ecuador’s positioning in international banana, shrimp, and flower markets, primarily through product differentiation; and (ii) the promotion of sustainable tourism development. In order to improve the country’s international positioning, the Bank’s support will focus on: (i) improving institutions involved in trade policy; (ii) strengthening negotiation capacity and implementation of international trade agreements, (iii) implementing information and communication systems for the trade sector; and (iv) encouraging the adjustment of the productive structure to new market conditions.26 Strengthening these areas is particularly important in the context of the bilateral trade negotiations with the United States, the Andean Community of Nations (CAN),27 and the Free Trade Area of the Americas (FTAA).

3.16

Natural resource and natural risk management. The Bank’s action focuses on: (i) natural resource conservation and improvement of the living conditions of the population in the southern border area; (ii) support for community reforestation and protection of critical watersheds; and (iii) support for comprehensive management of risks related to natural threats, working on prevention, mitigation, early warning, and construction of an institutional framework for risk management. The Bank will continue to consolidate sustainable environmental management of the Galapagos Islands, with particular attention to socioeconomic considerations. The participation of other entities in the environment area is channeled through environmental regulations and pursuant to the commitments set out in the Montreal Protocol.

Moreover, the World Bank participates with a natural resource management loan.

2. Priority area: Promote social development and the protection of the most vulnerable groups a. Strengthen the social safety net

3.17

The Bank’s action, in the context of a social PBL approved in 2003, will support the establishment of an efficient social safety net through: (i) improved targeting in the programs that involve transfers, subsidies, or delivery of goods to families or individuals; (ii) reforms of the social safety net programs that are not benefiting the

26

Because of the potential demand for long-term credit for export activities with long production cycles, PRI hopes to participate actively in the financing of investment operations for operational and efficiency improvements.

27

Andean Community of Nations: Bolivia, Ecuador, Colombia, Peru, and Venezuela.

- 30 -

poor or vulnerable; and (iii) the strengthening of social expenditure in well-targeted programs. Given that poverty is geographically concentrated in rural areas and intermediate cities, emphasis will be placed on actions to reduce rural poverty, in particular by: (i) designing projects that improve production indicators and increase demand for rural labor; (ii) strengthening rural social insurance; and (iii) boosting the competitiveness of rural microentrepreneurs and small and medium-sized producers. Together with the World Bank, the Bank will support the streamlining of social assistance programs and the strengthening of the SELBEN database to include a larger number of beneficiaries.

3.18

The Bank will continue to support social inclusion processes for Ecuador’s ethnic groups through investment loans for programs such as FISE III and sustainable management of the northern border region. In addition, technical cooperation operations have been developed in critical areas such as: gathering of statistical data (i.e., census of indigenous street vendors in Quito); promotion of entrepreneurs, in partnership with the private sector; and organizational strengthening (i.e., creation of the Afro-Ecuadorian civil society council, training activities for Afro-Ecuadorian organizations).

3.19

Social inclusion. The indigenous and Afro-Ecuadorian communities are the beneficiaries of a number of Bank programs. The indigenous groups are the main beneficiaries of the program to strengthen the rural social insurance and the AfroEcuadorians benefit in particular from programs targeting the Pacific coast, such as phase II of the coastal resource program. Both population groups are explicitly included as the beneficiaries of projects with a high community development content and will be consulted about them. b. Make social expenditure more efficient and improve coverage and quality of public services

3.20

Education. The Bank’s action will promote: (i) the efficient redistribution of spending towards basic and secondary education programs; (ii) the allocation of resources based on the number of children and the school modality; (iii) improved quality of basic education; and (iv) greater autonomy for schools in the management of human and financial resources, using the Redes Amigas program as a model. The work of other agencies includes a CAF education assistance program and the respective components of the World Bank’s programmatic loan for the social sector.

3.21

Water and environmental sanitation. The Bank will support the government to improve the performance of companies that provide water and sanitation services in the country’s intermediate cities. The specific objectives are to: (i) achieve better governability and autonomy in the companies’ management; (ii) adjust rates to levels that will make it possible to cover operation and maintenance costs and depreciation; (iii) improve operating, commercial, and financial efficiency;

- 31 -

(iv) increase private sector participation in public utilities; and (v) increase servicesâ&#x20AC;&#x2122; coverage areas. In terms of solid waste management, the Bank will support intermediate cities as they: (i) improve the quality and coverage of services; (ii) increase system sustainability through efficient system management; (iii) increase technical, administrative, and regulatory capacity at the national and local levels to improve management of the sector and operations; (iv) improve the legal and regulatory framework and mechanisms for cost recovery to promote greater private sector participation; and (v) correct environmental problems and reduce health risks caused by inadequate collection and disposal systems. The World Bank will participate in this area with a loan aimed at increasing water service coverage in rural areas and strengthening the current regulatory framework.

3.22

Neighborhood improvement. The Bank will continue to support the slum and neighborhood improvement policy with a second stage of the multiphase investment program approved in July 2002. The activities will benefit families that live in illegal areas and in ramshackle housing by: (i) issuing land titles; (ii) providing infrastructure to deliver municipal and social services; and (iii) improving environmental conditions. In addition, the Bank will strengthen participating municipios so that they can use the resources from the central governmentâ&#x20AC;&#x2122;s earmarking more efficiently in the immediate future.

F.

Strategy implementation 1. Sequence28

3.23

The first stage would place emphasis on: a. policy reforms that help lay the foundations for energizing the productive structure and simultaneously support and complement the macroeconomic program; and b. operations for which preparation is well under way, initiated under the previous strategy and considered consistent with the current one.

3.24

The second stage would consolidate investment and technical cooperation interventions in the social area and actions that promote increased productivity: a. improved efficiency and quality of social expenditure with interventions in the following sectors: education, water and sanitation, neighborhood improvement and natural resource management; and

28

During the 2003 transition, the following were approved: policy reforms in the area of promoting social development and the protection of the most vulnerable, and operations with critical timing for the country, such as trade negotiations.

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b. support for the following sectors: microenterprise, financial markets, infrastructure, and export diversification.

2. Instruments 3.25

The countryâ&#x20AC;&#x2122;s borrowing limits require efficient use of all the Bankâ&#x20AC;&#x2122;s instruments to address the priority areas identified. In view of the borrowing constraints facing the country, special attention will be paid, during strategy implementation, to properly prioritizing areas and activities to be supported through nonreimbursable technical cooperation funding, the various instruments supporting the private sector, and nonfinancial products (see Annexes I and II).

3.26

Loans a. PBL in key areas aimed at supporting reforms that pursue increased competitiveness. b. investment in priority areas that have a catalytic effect to encourage private investment. c. explore sector wide approaches (SWAPs) in social programs subject to restrictions imposed by liquidity problems.

3.27

Technical cooperation operations (see Annex IV) a. nonreimbursable funding to support institutional consolidation, technical strengthening, and project preparation; and b. resources from the Fund for Special Operations (FSO) will be used for: (i) the preparation of loans in the operations program; and (ii) activities proposed by the government in areas that are key to the strategy but that are not necessarily linked to investment projects.

3.28

Private sector (see Annex V) a. PRI operations focused on developing productive infrastructure and strengthening the financial system; b. MIF operations focused on competitiveness promotion, new businesses development, strengthening of the business climate, integration, and financial institutions; c. IIC operations that promote the infrastructure sector, financial services, and agroindustrial exports; and

- 33 -

d. Social Entrepreneurship Program opportunities for the most vulnerable.

3.29

(SEP) projects

that

create

business

Nonfinancial products a. technical dialogues and targeted studies in support of designing socioeconomic policies; b. organization of consultative groups to support government initiatives for the Binational Ecuador-Peru Plan and the northern border area; and c. preparation of the Country Financial Accountability Assessment (CFAA), the Public Expenditure Review (PER), the Country Procurement Assessment Report (CPAR), and the harmonization exercises.

3. The Bankâ&#x20AC;&#x2122;s coordination with multilateral and bilateral agencies

3.30

The Bankâ&#x20AC;&#x2122;s close relationship with the World Bank, the CAF, the IMF, and other donors has made it possible for the multilateral agencies to present a coordinated position to the government. Such coordination happens at four levels: a. Collaboration on policy and reform proposals. The IMF, the World Bank, and the IDB have made an effort to coordinate on sector policies and macroeconomic reforms. In addition, the Bank will maintain close coordination with the Global Environment Fund to take advantage of opportunities in environmental areas. b. Cofinancing. In the case of investment loans, the IDB and the World Bank are cofinancing the local roads program. In addition, the second tranche of a programmatic loan in the amount of US$100 million is planned, to support fiscal consolidation and competitive growth, areas that complement those in the PBL on competitiveness. c. Implementation of a proposal to coordinate technical cooperation activities.

In an effort to achieve greater coordination among donors and the government with regard to identifying and executing technical cooperation operations, actions are being undertaken to strengthen the Ecuadorian International Cooperation Agency (INECI), the National Planning and Development Department (SENPLADES), and the MEF. d. Organization of coordination round tables among donors. The Bank has created mechanisms for coordination on topics related to risk management, environment, and forestation (see Annex XIII).

- 34 -

3.31

These four levels of coordination are complemented by means of an exercise to harmonize and align strategies, policies, and procedures, which is currently being prepared by the Bank in cooperation with other multilateral and bilateral agencies.

4. Monitoring of indicators for strategy implementation

3.32

This section describes the methodology for monitoring the indicators presented in the last column of the Bank’s strategy matrix with the country.29 The details on the baseline indicators and the expected trends appear in Annex VII. a. Baseline. The baseline year used as a reference depends on the availability of data. In some specific cases, data from previous years or averages are used. b. Trends through 2006. Evaluation of the expected trend for each indicator through 2006—with respect to the baseline—is planned, with no specific targets established for the Bank’s action. The use of trends takes into account that: (i) the definition of specific achievements is related to each project; and (ii) in a three-year strategy, only partial progress will be made towards the targets, with ongoing support required over the coming years. c. Timing of the information. The strategy indicators will be evaluated annually. d. Sources. The indicators used come from international and local sources. At the international level, indicators prepared annually by the World Economic Forum and Transparency International are used, together with statistical data from the IMF. At the local level, official data prepared by the National Statistics Institute and the Central Bank of Ecuador are used. e. Monitoring. The strategy will be monitored in close coordination with the Under Secretary for Economic Policy of the MEF. This unit will receive technical assistance from the Bank to strengthen its monitoring and tracking systems, both at the BSE level and for individual projects. Indicator progress will be evaluated periodically through: (i) annual portfolio review missions; (ii) sector missions; (iii) annual operations program updates; and (iv) as a dialogue topic during the programming mission.

G.

Strategy implementation risks

3.33

Political risk. In view of the political and institutional instability that characterizes Ecuador, there is a risk that the priorities of the country and the operations program will be affected. Mitigation: to reduce this risk, the ongoing dialogue and generation of opportunities to build consensus will be complemented by Bank operations

29

To select these indicators, the document Evaluability of country strategies (RE-253), prepared by OVE, was taken into account.

- 35 -

aimed at consolidating the relationship between the government and the legislative branch. If there were to be a change in administration, the Bank would immediately establish a dialogue to review the operations program in the context of the strategy.

3.34

Macroeconomic risk. This stems from a potential lack of consistency between fiscal policy and the restrictions imposed by the FRL or from a sudden stop related, for example, to a temporary drop in oil prices and/or loss of access to external financing. Because the economy is dollarized, any adjustment to the real exchange rate necessary to correct the balance of payments on current account imbalance would have to involve deflation of nontradable sector prices, which would have recessionary effects and probably result in increased poverty. Mitigation: to mitigate this risk, the Bank will support the government in maintaining a countercyclical fiscal policy, strengthening the implementation of the FRL and acting in coordination with the IMF.

3.35

The government’s changing demand. Political fragmentation in Ecuador is reflected in constant changes in alliances that support different topics of national interest. In the meantime, the Bank’s supply of financial products addresses medium-term challenges and the Bank’s product preparation period is long. This leads to frustration on the part of the government over the Bank’s “slow” response, and on the part of the Bank over the constant changes in the government’s demand for products. Mitigation: this risk is mitigated by strengthening the programming and project identification process, in coordination with the MEF and the Bank’s counterpart in Ecuador.

3.36

High turnover rate among public employees. This affects the preparation and execution of the Bank’s operations and is in part responsible for delays in their execution. Mitigation: when there are vacancies for key staff in the executing units, these positions will be filled through a competitive selection process in compliance with the Bank’s and the program’s policies and requirements.

3.37

Private sector participation. Implementation of the BSE, especially in the priority area related to energizing the productive structure, rests on the use of instruments that depend on private sector demand. For this reason, there is a risk that the instruments may not be requested. Mitigation: establish and maintain an effective working relationship among the Bank’s units in charge of business development and the private sector.

H.

Agenda for country dialogue

3.38

A series of topics are listed below that are related to the new strategy and the operations program that supports it. These topics comprise the agenda for the ongoing dialogue between the government and the Bank:

- 36 -

1. General issues a. Progress with reforms to enable fiscal management sustainability and flexibility, including increases in current revenues, rationalization of government spending, and the budget preparation and approval process. b. Debt sustainability: profile, vulnerability, reduction, and diversification. c. Progress in the implementation of the government’s financial plan, with emphasis on the government’s capacity to raise funds on the international market. d. Technical discussion on the sustainability of dollarization. e. Bank support for the government’s actions to control traffic in persons. f. Greater clarity on the legal interpretations of the restrictions imposed by the FRL. g. Monitoring of MDGs and actions undertaken in the country to reach them. h. Setting of an agenda for the dialogue between the government and the Bank on policies to reduce inequality. i. Continued consultation with civil society regarding the BSE and the specific projects in their preparation and execution stages. j. Identification of bottlenecks that affect execution of operations, in order to improve the processes of the Bank and the executing units. k. Availability of resources to prepare projects. l. Dialogue on implementation of the PER, CFAA, and CPAR recommendations. m. Continuation of the dialogue on issues related to decentralization.

2. Coordination issues a. Monitoring of coordination among multilateral and bilateral agencies regarding operational programs as well as specific projects. b. Close monitoring with the government and the donor countries as to the organization, financing commitments, and execution of projects that end up with financing at the donors’ round tables.

Annex I Page 1 of 1

Bank Instruments that Support the Bankâ&#x20AC;&#x2122;s Strategy with Ecuador BSE priority areas

Help lay the foundations for increasing the resilience of the productive structure

Promote social development and the protection of the most vulnerable groups

Technicalcooperation Trust FSO funds

Priority sub-areas

Loans

Support the introduction of policies, business development programs, and an institutional framework that will boost productivity and competitiveness

9

9

9

Improve the productive infrastructure

9

9

9

Nurture market efficiency

9

9

9

9

Promote economic diversification

9

9

9

9

Strengthen the social safety net

9

Make social expenditure more efficient and improve the coverage and quality of government services

9

* Nonfinancial products

9

MIF

IIC

PRI

9

NFP*

9

9

9

9

9

9

9 9

9

9

9

9

Annex II Page 1 of 2

Classification of the Operational Program by Strategic Area BSE priority areas

Help lay the foundations for increasing the resilience of the productive structure

Priority sub-areas

2003

2004

Support the introduction of policies, an institutional framework that will boost productivity and competitiveness, and business development programs

FSO: Preparation of PBL to boost competitiveness MIF: Job skills certification system in Ecuador’s tourism sector NFP: Organization of industry: the oligopolistic structure of private enterprise NFP: Study on private sector development strategy NFP: Study on the competitiveness agenda

Loan: Strengthening the justice sector FSO: Design of program to strengthen the justice sector FSO: Quality of spending—modernization of public investment information system FSO: Strengthening debt management MIF: Support for supply chain in textile and garment-making sector MIF: Administrative simplification

Improve the productive infrastructure

Loan: Local roads program NFP: Study on transportation sector strategy

PRI: Quito international airport PRI: Interagua infrastructure IIC: Abanico

FSO: Consultation on modernization of the institutional framework for labor in the private sector MIF: Strengthening of Finca Ecuador IIC: Banco Bolivariano C.A. IIC: Agrícola Ganadera Reysahiwal S.A. IIC: Banco de la Producción (Produbanco) NFP: Study on the reform of the Banca de Desarrollo

TC: Increase indigenous business capacity TC: Increase access to mortgage financing TC: Propicia local development plan TC: Census and sociocultural analysis of informal tradespeople MIF: Support for supply chain in textile and garment-making sector MIF: Remittances and mortgages MIF: Institutional strengthening of Sociedad Financiera Interamericana MIF: Support for Codesarrollo MIF: Deepening of rural services MIF: Network of small rural microfinance institutions MIF: Development through remittances, mortgages, and other loans IIC: IMI – Sociedad Financiera SEP: Microenterprise, textiles, and local development in Otavalo SEP: Strengthening the cocoa sector supply chain in Afro-Ecuadorian communities

Nurture market efficiency

2005-2006

Loan: Program to boost competitiveness—PBL Loan: Science and technology FSO: Support for Internal Revenue Service

Loan: Support for electricity sector FSO: Development of program to support electricity sector

Loan: Rural business support services FSO: Design of support services program for rural business development PRI: Banco Pichincha financial facility MIF: Increasing the impact of remittances on development

Annex II Page 1 of 2 BSE priority areas

Priority sub-areas

Promote economic diversification

Strengthen the social safety net

2003 Loan: Foreign trade support program MIF: Program to mitigate market access barriers under ATPA NFP: Study on updating the environmental strategy NFP: Tourism sector study NFP: Study on the business vision of the Andean axis

Loan: Social sector program FSO: Evaluation of the human development bond process FSO: Implementation of the National Child Development Fund (FODI) NFP: Study on changing socioeconomic conditions and their impact on populations NFP: Study on gender and development

Promote social development and the protection of the most vulnerable groups

Make social expenditure more efficient and improve the coverage and quality of government services

NFP: Nonfinancial products

FSO: Solid waste management in intermediate cities FSO: Low-income housing information system FSO: Support for education system reforms and job skills training NFP: Study on solid waste management in intermediate cities NFP: Study to support and identify strategies for improving education system

2004 Loan: Quito historical center II TC: Support for rehabilitation of Quito historical center TC: Feasibility study of Fish Aggregating Devices (FAD) in Galapagos TC: Support for reforestation plans MIF: Introduction of international accounting and auditing standards MIF: Cocoa sector supply chain IIC: Ecuaplantation

2005-2006 Loan: Natural risk management Loan: Tourism development program TC: Strategic Environmental Assessment FSO: Strategic Environmental Assessment FSO: Support to UDENOR for consultative group FSO: Startup of strategic tourism plan in Ecuador

Loan: Strengthening rural social insurance TC: Strengthening Afro-Ecuadorian organizations TC: Demographic and mother-child health survey FSO: Strengthening of Afro-Ecuadorian organizations FSO: Impact of dislocations related to armed conflict in Colombia NFP: Workshop on status of and progress towards Millennium Goals NFP: Technical note on impact of current operations on Millennium Development Goals

Loan: Coastal resource management II TC: Support for potable water program in intermediate cities TC: Feasibility studies for solid waste program TC: Domestic violence prevention NFP: Complementary studies to Public Expenditure Review (PER) â&#x20AC;&#x201C; education, health, and social welfare sections

Loan: Water in intermediate cities Loan: Education program Loan: Neighborhood improvement Loan: Solid waste management in intermediate cities FSO: Design of water program in intermediate cities TC: National Council for Higher Education Evaluation and Accreditation TC: Support for education sector TC: Support for citizensâ&#x20AC;&#x2122; watch mechanism

Annex III Page 1 of 1 2004-2006 Lending Program YEAR

2004

NUMBER

NAME

EC-0193

Coastal resource management II (a)

EC-L1011

Strengthening the justice sector (a) (c)

5

EC-L0101

Strengthening rural social insurance (a)

5

EC-L1006

Quito historical center II (a)

8

2004 TOTAL

2005

30.4

Program to boost competitivenessâ&#x20AC;&#x201D;PBL (b)

EC-L1003

Natural risk management (a)

5

EC-L1008

Water in intermediate cities (a) (d)

30

N/N

Education program (a)

40

N/N

Science and technology (a)

10

N/N

Support for electricity sector

80

EC-L1009

203

368.0

Solid waste management in intermediate cities (a) (d)

25

N/N

Neighborhood improvement (a) (d)

30

EC-L1007

Rural business support services (a)

15

Tourism development program

15

N/N

2006 TOTAL (a) (b) (c) (d)

12.4

EC-L1004

2005 TOTAL

2006

AMOUNT (US$ million)

Priority operations under the lending programâ&#x20AC;&#x2122;s low scenario.

The amount includes complementary technical-cooperation funding for US$3 million.

This is stage one of a US$10 million multiphase program.

Operation subject to finding mechanisms for supporting public investment by the municipios.

85.0

Annex IV Page 1 of 2

2004-2006 Technical-Cooperation Program YEAR

NUMBER

NAME

AMOUNT (US$000)

Fund for Special Operations (FSO) EC-T1020 EC-T1007 EC-T1002 N/N EC-T1013

Strengthening Afro-Ecuadorian organizations (a) Quality of spendingâ&#x20AC;&#x201D;modernization of public investment information system Impact of dislocations related to armed conflict in Colombia

300 149.5

Strengthening debt management

150

Design of program to modernize the justice sector

200 869.5

2004 FSO Total

2004

70

EC-T1009

Trust Funds Demographic and mother-child health survey (a)

EC-T1010

Census and sociocultural analysis of informal tradespeople (a)

50

EC-T1019

270

FAD feasibility study in Galapagos (a)

50

TC0108020

Strengthening Afro-Ecuadorian organizations (a)

80

TC0301023

Support for rehabilitation of Quito historical center (a)

146

TC0302025

Increase indigenous business capacity (a)

120

TC0304018

Propicia local development plan - Esmeraldas (a)

119

EC-T1004

Feasibility studies for solid waste management

651

EC-T1005

Potable water program for intermediate cities

565

TC-0206010

Increased access to mortgage financing in Ecuador

196

TC-0301028

Domestic violence prevention in Quito

150

Support for proenvironment national reforestation plans

110

EC-T1018

2004 Trust Funds Total 2004 TOTAL

2,507 US$3,376.5

Fund for Special Operations (FSO) EC-T1014

Design of water program for intermediate cities

310

Development of program to support electricity sector

200

Startup of strategic tourism plan in Ecuador

150

Support for Internal Revenue Service

150

EC-T1012

Design of support services program for rural business development

150

EC-T1011

Support to UDENOR for consultative group Ecuadorian congress on national institutional, political, and economic reform Strategic Environmental Assessment â&#x20AC;&#x201C; Oil sector

N/N TC-0302026 N/N Pipeline

N/N N/N

2005-2006 FSO Pipeline Total Trust Funds N/N

50 120 300 US$1,430 120

N/N

Ecuadorian congress on national institutional, political, and economic reform National Council for Higher Education Evaluation and Accreditation

N/N

Social capital, ethics, and development

100

200

Annex IV Page 2 of 2 YEAR

NUMBER

NAME

N/N

Strategic Environmental Assessment–Oil sector

N/N

Support for education sector

N/N

Support for citizens’ watch mechanisms in social programs 2005-2006 Trust Fund Pipeline Total 2005-2006 Total

(a) Operations already approved.

AMOUNT (US$000) 200 To be determined To be determined 500 1,930

Annex V Page 1 of 1

2004-2005 MIF, PRI, IIC, and SEP Program YEAR

NUMBER

EC-M1003 EC-M1004 N/N N/N EC-M1001 EC-1006 EC-1009 EC-M1008 N/N N/N

EC-L1005 EC-0208 EC-L1002

EC-2071 EC-1007 EC-3099

EC-S1001 EC-S1002 EC-S10030

PROJECT NAME

MIF Introduction of international accounting and auditing standards Support for supply chain in textile and garment-making sector Administrative simplification Cocoa sector supply chain Remittances and mortgages Support for Codesarrollo Deepening of rural services Network of small rural microfinance institutions Development through remittances and mortgages and other loans Increasing the impact of remittances on development MIF Total PRI Quito international airport Interagua â&#x20AC;&#x201C; Guayaquil water and sanitation project Banco Pichincha financial facility PRI Total IIC Abanico Ecuaplantation IMI â&#x20AC;&#x201C; Sociedad Financiera IIC Total SEP Microenterprise, textiles, and local development in Otavalo Strengthening the cocoa sector supply chain in Afro-Ecuadorian communities Consolidation of diocesan microcredit programs SEP Total 2004 Total

AMOUNT (US$ million)

0.7 1.6 To be determined To be determined 5.0 1.5 2.0 0.5 To be determined 5.0 16.3 75.0 28.0 20.0 123.0 5.5 2.0 1.5 9.0 0.3 0.3 0.8 1.4 US$124.7

Annex VI Page 1 of 2

Implementation of the Bank’s Strategy with Ecuador and Outstanding Portfolio BSE Priority Areas

Loans

ATN# / Technical-cooperation

IIC / PRI

JC-7150-EC

Help lay the foundations for increasing the resilience of the productive structure

EC-0211 Local roads program EC-1001 Foreign trade support program EC-0180 TC loan: Support for private investment in infrastructure EC-0196 Rural transportation infrastructure (PIRT) EC-0175 TC loan: Modernization of tax system EC-0204 Program in support of decentralization EC-0191 Rural land regularization and administration EC-0134 Galapagos Islands environmental management program EC-0201 Sustainable development of northern Amazon region

Feasibility of power transmission grid JF-4374-EC Promotion of nontraditional exports JF-7342-EC Rural transportation infrastructure program SF-7453-EC Support for Fundación Espoir SF-8070-EC Campo Sacha gas processing plant SF-8101-EC Mechanism to support group enterprise SF-8110-EC E-commerce SF-8247-EC Advanced financial training for judiciary SF-8324-EC Support for MICIP and CORPEI in the area of trade negotiations FG-8137-EC Strengthening of justice sector SF-7743-EC Support for decentralization SF-8182-EC Development of a decentralized environmental management system SF-5549-EC Action plan for C and D group countries SF-8514-EC Local roads training and advisory services SF-8170-EC Preliminary studies on sustainable development SF-8312-EC Support for operation of atmospheric monitoring network SF-7756-EC Environmental monitoring and oversight program SF-8502-EC Consultation on modernization of institutional framework for labor in the private sector SF-8593-EC Preparation of PBL to boost competitiveness

ATN # / MIF

ME-6459-EC Economic development of Cuenca and Ambato MH-6460-EC Economic development of Cuenca and Ambato MT-6461-EC Economic development of Cuenca and Ambato MH-7083-EC Development of a health franchises program MT-7084-EC Development of a health franchises program ME-7300-EC Pilot program—handicrafts and ecommerce MH-7404-EC Youth training program MT-7511-EC Divestment of tourism assets MH-7524-EC Local participation in Galapagos tourism ME-7599-EC Support for microentrepreneurs and emigrants ME-7705-EC Microenterprise and small business competitiveness ME-7716-EC Expansion of new microfinance institution MT-7750-EC Intellectual property rights ME-7833-EC Support for cleaner production ME-8078-EC Institutional strengthening of Jardín Azuayo Cooperative ME-8539-EC Strengthening of Finca Ecuador MH-8542-EC Job skills certification system in Ecuador’s tourism sector ME-8530-EC Program to mitigate market access barriers under ATPA

IIC: Aquamar IIC: Torry & Rodríguez IIC: Banco Bolivariano C.A. IIC: Agrícola Ganadera Reysahiwal S.A. IIC: Banco de la Producción (Produbanco)

Annex VI Page 2 of 2 BSE Priority Areas

Loans

ATN# / Technical-cooperation

EP-6570-EC JF-6682-EC

Promote social development and the protection of the most vulnerable groups

EC-0216 Social sector program EC-0157 Program of comprehensive services for children under six EC-0125 Improving the quality of education EC-0203 Social investment fund (FISE III) EC-0207 Housing sector support program II EC-0200 Environmental sanitation program for the Quito Metropolitan District EC-0197 Support for the census and strengthening of the statistical system

Waste collection microenteprises Design of potable water and sewerage. Cuenca JF-7706-EC Feasibility of coastal resource management SF-7445-EC Development of indigenous communities in Cayambe SF-7540-EC Support for Galapagos marine investment fund SF-7759-EC Preparation of community development plan SF-7970-EC Strengthening indigenous nationalities SF-8187-EC Potable water program for intermediate cities SF-6848-EC Monitoring consultative group peace program SF-8095-EC Social indicator system SF-8435-EC Low-income housing information system SF-8593-EC Solid waste management in intermediate cities SF-8487-EC Support for education system and job skills training reforms SF-8484-EC Evaluation of the human development bond (BDH) process SF-8485-EC Implementation of the National Child Development Fund (FODI)

ATN # / MIF

IIC / PRI

Annex VII Page 1 of 1

BSE Monitoring Indicators Strategy Progress Indicators Priority area

Help lay the foundations for increasing the resilience of the productive structure

Promote social development and the protection of the most vulnerable groups

* **

Strategy indicators

Frequency

Present value (Year) 39% (2001-2003 average)

Trend (2006)

Source

Upward

IFS/BCE

Upward

CNC

Holding levels stable

IFS/BCE

Improving Improving Improving Upward (reduction of losses) Downward Upward

BCE BCE BCE

(Imports+exports* of goods and services)/GDP*

Annual

Increase in the number of regional competitiveness councils

Annual

Annual growth rate in the volume of nonoil exports

Annual

Competitive environment index Macroeconomic environment index Business cost index

Annual Annual Annual

4.9% (2001-2003 average) 290 (2003**) 104 (2003**) 180 (2003**)

Power sector efficiency index (% of losses)

Annual

23% (2002)

Financial spread Credit to the private sector (% GDP) Maintenance of the countryâ&#x20AC;&#x2122;s vulnerability index (number of deceased for every million exposed) Maintenance of natural resource management index (annual deforestation rate) Number of families qualified by SELBEN who receive BDH Number of families registered in SELBEN Percentage of coverage in basic primary education Percentage of the population with access to potable water (urban)

Annual Annual

7 (2003) 18 (2003) 18.3% (1980-2000 average) 1.2% (1990-2000 average)

Holding levels stable

UN

Holding levels stable

WB

Annual

450,000 (2003)

Upward

SIISE

Annual

1,600,000 (2004) 90.1% (2001)

Upward

SIISE SIISE

Annual

85% (2000)

Upward

UNDP

Central government spending on social welfare/GDP

Annual

Upward

BCE

Increase in the number of school networks Increase in the number of schools that belong to school networks Deficit in basic residential services

Annual

4.8% (2001-2003 average) 186 (2004)

Upward

MEC

Annual

2,200 (2004)

Upward

MEC

Annual

65% (2002)

Downward

INEC

Nonoil exports Data from the final quarter of 2003

Annual Annual

2 (2003)

CIER BCE BCE

Annex VIII Page 1 of 1

External Debt as of 30 June 2004 (US$ million) EXTERNAL DEBT

TOTAL

% of total

TOTAL INTERNATIONAL ORG. IBRD IDB CAF IMF OTHERS

11,336

100.0

4,449

39.2

881 2,018 1,090 266 194

7.7 17.8 9.6 2.3 1.7

GOVERNMENTS

2,480

21.9

BANKS

4,304

38.0

103

0.9

OTHERS

Source: MEF

2004-2006 Programming of External Debt Service 2004

2005

2006

2004

US$ thousands TOTAL

2005

2006

% GDP

1,554

1,622

1,648

5.34

5.28

5.09

INTERNATIONAL ORG. IBRD IDB CAF IMF OTHERS

668 117 248 260 40 3

753 115 231 310 94 3

728 112 222 292 99 3

2.30 0.40 0.85 0.89 0.14 0.01

2.45 0.37 0.75 1.01 0.30 0.01

2.25 0.34 0.69 0.90 0.30 0.01

GOVERNMENTS

386

378

323

1.33

1.23

1.00

BANKS

417

443

586

1.43

1.44

1.81

OTHERS

83

48

11

0.28

0.16

0.03

GDP*

* IMF estimates Sources: MEF, IMF

29,085

30,691

32,394

Annex IX Page 1 of 1

2003-2006 Resource Flow Scenarios High Scenario (US$ million)

2003

2004

2005*

2006*

2,084.41

1,987.72

2,098.72

2,142.97

232.90

30.40

368.00

85.00

Investment

32.90

30.40

168.00

85.00

PBL

200.00

Debt stock with the IDB Approvals

a. Disbursements Portfolio Investment

157.20

200.00** 63.30

261.00

188.95

57.20

60.30

137.57

38.47

57.20

60.30

37.57

38.48

100.00

3.00

123.43

150.48

3.00

23.43

50.48

100.00

PBL New operations Investment

100.00**

100.00**

b. Amortization

139.20

160.00

150.00

144.70

c. Net flow of loans (a-b)

18.00

-96.70

111.00

44.25

d. Subscriptions and contributions

4.30

e. Net flow of capital (c-d)

13.70

-96.70

111.00

44.25

PBL

100.00

f. Interest and fees

87.70

87.80

82.00

77.30

Net cash flow

-74.00

-184.50

29.00

-33.05

** This assumes the approval of the PBL to boost competitiveness for US$200 million and a first disbursement during the first half of 2005.

Low Scenario (US$ million) Debt stock with the IDB Approvals

2003

2004*

2005*

2006*

2,084.41

1,987.72

1,990.72

1,917.47

232.90

30.40

85.00

70.00

85.00

70.00

Investment

200.00

PBL

32.90

30.40

157.20

63.30

153.00

71.46

57.20

60.30

137.57

38.48

57.20

60.30

37.57

38.48

a. Disbursements Portfolio Investment PBL New operations

100.00 100.00

Investment PBL

*

3.00

15.43

32.98

3.00

15.43

32.98

-

-

100.00

b. Amortization

139.20

160.00

150.00

144.70

c. Net flow of loans (a-b)

18.00

-96.70

3.00

-73.24

d. Subscriptions and contributions

4.30

e. Net flow of capital (c-d)

13.70

-96.70

3.00

-73.24

f. Interest and fees

87.70

87.80

82.00

77.30

Net cash flow

-74.00

-184.50

-79.00

-150.54

This assumes that during the year the operations are approved, 10% of their value will be disbursed; then 20% during year two, and 30% during year three.

Annex X Page 1 of 2

Progress Towards Millennium Development Goals Goals for 2015 and progress indicators* 1

a)

2 3

Achieve universal primary education % net primary enrollment rate Promote gender equality and empower women Ratio of women/men in primary and secondary education Ratio of young literate women/men (% 15-24 years of age)

4

5 6

2002

12

21

88.9

90.1

97.3

100

98.8

100

57 43

29 b) 25

TCs: Domestic violence prevention in Quito SEP: Strengthening of cocoa sector supply chain in Afro-Ecuadorian communities; Textile microenterprises and local development in Otavalo; Consolidation of diocesan microcredit programs Loans: Social PBL; Comprehensive services for children under six; Improvement in the quality of education

150

130

Loans: Social PBL; Strengthening rural social insurance

52.9 c) 1

65.8 32.5

Reduce extreme poverty by half

% of population living in extreme poverty (consumption)

Reduce by two thirds the mortality rate among children under five Under-five mortality rate (per 1,000) Rate of child mortality (per 1,000 live births) Reduce by three quarters the maternal mortality ratio (per 100,000 live births) Maternal mortality rate (per 100,000 live births) Combat HIV/AIDS, malaria, and other diseases % of women 15-49 years of age who use contraceptives Percentage of tuberculosis cases detected using DOTS

Operations in the outstanding portfolio and in the operations program related to the MDGs Loans: social PBL, Housing II TCs: Strengthening of Afro-Ecuadorian organizations; Census and sociocultural analysis of informal tradespeople; Impact of dislocations related to armed conflict in Colombia; Increase in indigenous business capacity; Promotion of nontraditional exports; Strengthening of indigenous nationalities; Low-income housing information system; Implementation of the National Child Development Fund (FODI); Development of indigenous communities in Cayambe SEP: Strengthening of cocoa sector supply chain in Afro-Ecuadorian communities; Textile microenterprises and local development in Otavalo; Consolidation of diocesan microcredit programs Loans: Education program; social PBL; Improvement in the quality of education

1990

b)

Annex X Page 2 of 2

7

8 *

Ensure environmental sustainability % of population with access to potable water

71

85

% of population with access to sanitation

70

86

0.33

0.23

Develop a global partnership for development and market access Net ODA as percentage of OECD/DAC donor countriesâ&#x20AC;&#x2122; gross national income (OECD) The goals have been defined based on 1990 statistics.

Source: World Development Indicators, April 2004 a) Living conditions surveys. Preparation: SIISE. b) Data from 2000 c) Data from 1995

Loans: Potable water for intermediate cities; Coastal resource management II; Solid waste management in intermediate cities; Environmental management of Galapagos Islands TCs: : Support for reforestation plans; Environmental monitoring and supervision; Support for Galapagos marine investment fund

Annex XI Page 1 of 1

OPERATIONS RELATED TO GENDER AND INDIGENOUS GROUP ISSUES Portfolio

Operations program

Social Investment Fund (FISE III)

LOAN

-.-

Social sector program

LOAN

-.-

Education program

LOAN

Rural business support services

LOAN

Coastal resources management programs

LOAN

Strengthening of rural social insurance

LOAN

Promotion of nontraditional exports

MIF

-.-

Network of small rural microfinance institutions

MIF

-.-

Pilot program handicrafts and e-commerce

MIF

-.-

Youth training program

MIF

-.-

Support for microentrepreneurs and emigrants

MIF

-.-

Microenterprise and small business competitiveness

MIF

-.-

Job skills certification system in Ecuadorâ&#x20AC;&#x2122;s tourism sector

MIF

-.-

Support for supply chain in textile and garment-making sector

MIF

Mechanism to support group enterprise

FF

-.-

Strengthening of indigenous nationalities

FF

-.-

Strengthening of Afro-Ecuadorian organizations Impact of dislocations related to armed conflict in Colombia

FSO/FF FSO

Demographic and mother-child health survey

FF

Demographic and mother-child health survey

FF

Increase indigenous business capacity

FF

Domestic violence prevention in Quito

FF

Support for education sector

FF

Textile microenterprises and local development in Otavalo

SEP

Cocoa production chain strengthening in Afro-Ecuadorian communities

SEP

Consolidation of diocesan microcredit programs

SEP

FSO: FF:

TC financed from the Fund for Special Operations TC financed from Trust Funds

Annex XII Page 1 of 2

OPERATIONS IN SUPPORT OF MICROENTERPRISES AND SMES* Outstanding portfolio

2004-2006 operations program MIF

Economic development in Cuenca and Ambato

Introduction of international accounting and auditing standards

Economic development in Cuenca and Ambato

Support for supply chain in textile and garmentmaking sector

Economic development in Cuenca and Ambato Development of a health services subsidy

Administrative simplification

Development of a health services subsidy

Cocoa sector supply chain

Pilot program handicrafts and e-commerce

Remittances and mortgages

Youth training program

Support for Codesarrollo

Divestment of tourism assets

Deepening of rural services

Local participation in Galapagos tourism

Network of small rural microfinance institutions

Support for microentrepreneurs and emigrants Microenterprise and small business competitiveness

Development through remittances and mortgages and other loans Enhancing the impact of remittances on development

Expansion of new microfinance institution Intellectual property rights Support for cleaner production Institutional strengthening of Cooperativa Jardín Azuayo Strengthening of Finca Ecuador Job skills certification system in Ecuador’s tourism sector Program to mitigate market access barriers under ATPA

IIC Aquamar

Abanico

Torry & Rodríguez

Ecuaplantation

Banco Bolivariano C.A.

IMI – Sociedad Financiera

Agrícola Ganadera Reysahiwal S.A. Banco de la Producción (Produbanco)

SEP

Annex XII Page 2 of 2 Textile microenterprises and local development in Otavalo Strengthening of the cacao production chain in Afro-Ecuadorian Communities Consolidation of diocesan microcredit programs

* These operations support the achievement of the targets of the Americas Summits that provide for: (i) the Bank to triple the amount of its operations for microenterprises and SMEs by 2007; and (ii) reducing by at least half the average regional cost of transferring remittances by 2008. (Summit of the Americas, Nuevo Le贸n Declaration, January 2004).

Annex XIII Page 1 of 1

Portfolio Time-related Indicators Aging of the portfolio (months)

Average disbursement extension (months)

Average rate of disbursements

1999

46.58

27.81

13.44

2002

44.20

16.36

18.35

2003

35.32

6.61

16.50

Year

Portfolio Performance Indicators Year Projects with indicators/projects in portfolio

2000

2001

2002

2003

22 /26

26/28

19/19

15 /16

Likelihood of achieving development objectives Likely or very likely

18

24

18

14

Not likely

4

2

1

1

Progress in execution Satisfactory or very satisfactory

18

23

16

13

Unsatisfactory

4

3

3

2

Fulfillment of basic assumptions High

18

24

16

14

Low

4

2

3

1

Annex XIV Page 1 of 2

Process of Consultation with Civil Society Background During preparation of the new IDB Country Strategy (BSE), the Bank organized a series of activities aimed at defining those areas, based on the government’s priorities, where the most impact might be made on development in Ecuador.

The Ecuador Country Office has played a key role in identifying and designing mechanisms for liaison and consultation with civil society, by preparing a national “assessment and mapping” of this sector, in which the criteria used to create five “Regional Work Groups” (RWGs) were defined and applied. These RWGs are comprised of 10 representatives of civil society organizations, including trade unions, NGOs, civil associations, universities, research centers, chambers of commerce, industry, and craft, forums, indigenous and Afro-Ecuadorian associations, business development agencies, and foundations.

Once consolidated in 2001, the RWGs were included in the consultations on the country paper prepared by the Bank for 2000-2002. During this consultation process, there was widespread demand for specific information about Bank activities at the local, provincial, and national levels, and for earlier participation by civil society in the formulation of the Bank’s strategy to support Ecuador. These demands defined the consultation process for the new strategy.

Consultation process for the 2004 – 2006 BSE In December 2002, a document entitled “Retos para el desarrollo, Perspectiva del Banco Interamericano de Desarrollo—Consulta a la sociedad civil en el diseño de la Estrategia con el País 2004-2006” [Development Challenges, Perspective of the Inter-American Development Bank—Consultation with Civil Society on the Design of the 2004-2006 Country Strategy] was submitted for consideration to the five RWGs, which are located in Cuenca, Esmeraldas, Guayaquil, Loja, and Quito. Once this process concluded, agreements were made with each of the RWGs to hold working meetings during which they could share their opinions and comments with the Bank; these opinions and comments would then become the basis of a nationwide meeting.

This meeting was convened in mid-June 2003 and held in Quito with representatives of all of the RWGs. By that time, the Bank had already made progress in developing the issues paper, thereby giving the national meeting two main objectives: 1. To study the documents prepared by the RWGs regarding Development Challenges in Ecuador.

2. To report on the content of the issues paper prepared by the Bank and hear the RWGs’ comments and suggestions.

Annex XIV Page 2 of 2

During this dialogue, the Bank found broad consensus on the main challenges to sustained growth in Ecuador and on the objectives of its strategy. The following are the main suggestions made by the participants: General issues • • • • • • •

A pact on governability is needed for achieving consensus and commitment; Small cities feel vulnerable; Regional realities should be taken into account, including regional investment plans in the context of regional development strategies; Greater participation by local governments in the executing units of Bank projects was suggested; Decentralization is very important, but it is new and it is important to avoid the duplication of efforts; much needs to be done in defining roles and responsibilities; Improving information systems is essential for achieving greater transparency; Transparency applies to the government, the Bank, and all of civil society.

Specific issues • • • • •

Give priority to and consolidate education and health programs; Target health and education services in rural areas; to accomplish this, poverty mapping is necessary; The development of rural roads constitutes one priority area for support; The SECAP should be reorganized based on demand, develop technical assistance services for entrepreneurs, and support the development of business clusters; There is a need to develop the legal framework and an information system for SMEs.

Several complementary meetings were held with traditionally excluded groups such as Afro-Ecuadorian and indigenous groups. Additionally, in order to meet information demands, the “IDB Action in Ecuador” Information System program was designed.

Annex XV Page 1 of 1

Coordination Mechanisms between the Bank and other Donors Name

Purpose

Members

Value added

Multilateral Risk Management Group

To coordinate the actions of multilateral organizations in disaster prevention

IDB, World Bank, CAF, and United Nations

Broader presence in the sector; more effective Bank programs; greater momentum in the legal and institutional reform process.

Environmental Committee

To coordinate environmental actions and programs

IDB, GTZ, United Nations, World Bank, USAID, Embassy of Great Britain, Embassy of Germany, Embassy of the Netherlands, Spanish International Cooperation Agency

Activities that better complement one another and less duplication of efforts, both thematically and geographicallyspeaking; mechanism for dialogue with the government on issues and policies that affect the sector.

Galapagos Committee

To coordinate actions and funding programs in the Galapagos

IDB, United Nations/GEF, Spanish International Cooperation Agency, USAID, Embassy of Great Britain, Embassy of Germany, UNESCO

Synchronization and harmonization of activities and programs in the Galapagos; pooling of and complementarity in resources invested; mechanism for dialogue with the government on issues and policies that affect the sector; support for technical management of the Islandsâ&#x20AC;&#x2122; policies and regulations.

Forestry Committee

To coordinate forestry activities and programs with other cooperating agencies

IDB, GTZ, USAID, Embassy of the Netherlands, World Bank

Better coordination in programs supporting the sector; more effective Bank-financed programs; mechanism for consultation and dialogue with the government, particularly as regards outsourcing forest management, the national reforestation plan, and the sustainable use of biodiversity.

Annex XVI Page 1 of 2

CONSIDERATION OF THE RECOMMENDATIONS IN THE COUNTRY PROGRAM EVALUATION

CPE RECOMMENDATIONS

Consideration of these matters in the BSE

Define the potential of the principal sectors of the economy for generating real growth.

The BSE undertakes an assessment of the constraints on growth and how the Bank will support to country in laying the foundations to increase the resilience of the productive sector (priority area). Specific sectors: transportation, energy, rural development, and tourism.

Indicate the implications of the challenges presented by dollarization.

The document presents as the principal challenge the need to reduce vulnerability to external and internal shocks, which requires: (i) prudent management of fiscal policy; (ii) appropriate use of structural policies to increase the resilience of the productive sector; (iii) programs to protect the most vulnerable groups and promote social development; and (iv) improved effectiveness of public administration.

Analyze the factors that determine public spending size and quality.

Chapter I analyzes trends in public spending and its composition and attributes an increase in revenues to high oil prices, lower capital expenditures, and an increase in the wage bill.

Indicate the specific role the private sector is expected to play and its macroeconomic effects.

The BSE recognizes the importance of promoting private sector participation through: (i) a PBL to define the legal framework and regulations necessary to promote competitiveness and private sector participation in productive infrastructure projects at the national and local levels; (ii) operations financed with Bank instruments aimed at private sector development (PRI, MIF, IIC); and (iii) the adjustment of the operational program’s size to the government’s fiscal constraints, which promotes the establishment of an enabling macroeconomic environment for private initiative.

Analyze the conditions that determine the sustainability of the country’s external borrowing.

Chapter I develops a diagnostic assessment as one the essential conditions for fiscal policy to be consistent with dollarization. Fiscal management sustainability represents the framework for implementing the strategy. This analysis is supported by a series of studies on debt, public expenditure quality (Public Expenditure Review), and management of public finances (Country Financial Accountability Assessment).

Define the relationship between the scenarios planned by the Bank and the fiscal return imputed to the operations included.

The Bank’s operational program includes operations that will have a significant impact on development. In particular, the activity scenarios prioritize investment in human capital, focusing on social programs and support for vulnerable groups.

Describe the value added and comparative advantages of the Bank as perceived by the country.

Chapter III of the BSE presents the comparative advantages of the multilateral agencies. In the specific case of the Bank, the following areas are identified: education, water and sanitation, and housing.

There is also the added value of combining financial and nonfinancial instruments to implement the strategy.

Annex XVI Page 2 of 2 CPE RECOMMENDATIONS

Consideration of these matters in the BSE

Identify the mechanisms proposed for ensuring integration of instruments and interagency coordination.

Under the macroeconomic framework agreed upon with the IMF, the strategy seeks balanced financing support from the multilateral agencies. The Bankâ&#x20AC;&#x2122;s coordination with multilateral and bilateral agencies is a key component of strategy implementation. Given fiscal constraints, the Bankâ&#x20AC;&#x2122;s financing limits, and each agencyâ&#x20AC;&#x2122;s experience, this coordination will make it possible to: (i) establish a joint position regarding the need to operate within a stable macroeconomic framework; (ii) generate synergies; and (iii) ensure complementarity in the core areas of the strategy.

Indicate the procedures and instruments that will be put in place to improve the evaluability and monitoring of the strategy.

The document indicates that the strategy will be monitored in close coordination with the Under Secretary for Economic Policy of the Ministry of Economic Affairs and Finance. Indicator progress will be evaluated periodically through: (i) annual portfolio review missions; (ii) sector missions; (iii) annual operational program updates; and (iv) as a dialogue topic during the programming mission. All of these monitoring components have been agreed upon with the government.

Annex XVII Page 1 of 4

BIBLIOGRAPHY

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Sector

dialogue

notes:

“Rural

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Annex XVII Page 2 of 4

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Annex XVII Page 3 of 4

Lerrick, A. and A. Meltzer (2002) “Grants: A Better Way to Deliver Aid,” Carnegie Mellon, Gaillot Center for Public Policy.

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Rigobon, Roberto (2002), “Stabilization Funds in a Dollarized Economy,” mimeo Inter-American Development Bank, Washington, D.C. Solimano, A. (2003a), “Ecuador: Assessing the Country Programs for 1990-2002,” mimeo, Inter-American Development Bank, Washington, D.C. Solimano, A. and R. Soto (2003b), “Latin American Economic Growth in the late Twentieth Century: Evidence and Interpretation,” mimeo, ECLAC, Santiago, Chile.

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Annex XVII Page 4 of 4

Vos, Rob, J. Cuesta, M. León, R. Lucio and José Rosero (2004b), “Ecuador: Nota Técnica sobre Salud en Ecuador” [Ecuador: Technical Note on Health in Ecuador], Public Expenditure Review, World Bank and Inter-American Development Bank, Washington DC.