Report No. 10785-NI
Nicaragua
Public Sector Expenditure Review
(In Three Volumes) Volume l: Main Findings and 2%ecommendations
September 11, 1992
Country Operationis Division 2                 1    1
Country Department II                                              .                       z
Latin America and the Caribbean Region         '
FOR OFFICIAL USE ONLY
Document of the World Bank
This document has a restricted distribution and may be used by recipients
only in the performance of their official duties. Its contents may not otherwise
be disclosed without World Bank authorization.



CURRENCY
One Cordoba (CO) = One
Hundred Centesimos (¢)
5 CO = US$1.00 (1992)
FISCAL YEAR
JANUARY 1 TO DECEMBER 3



FOR OFFICIAL USE ONLY
NICARAGUA
PUBLIC SECTOR EXPENDITURE
REVIEW
JUNE 12, 1992
MAIN FINDINGS AND RECOMMENDATIONS
This report was drafted by Claudio Sapelli (LA2C2), based on the findings of two PSER missions which visited Nicaragua
during June 24 - July 6, 1991 and September 29 - October 16, 1991. The first mission was comprised of Messrs. Claudio
Sapelli (LA2C2, mission leader); Norman Hicks (LACCE, public investment program); Gustavo Axteta (consultant,
statistics); lerri Romm (consultant, health); Stephen Klees (consultant, education); Pablo lhnen (consultant, public
expenditure analysis); and Ercis Kurtulus (consultant, management of public expenditure). The second mission was headed
by Claudio Sapelli (LA2C2) and included Messrs. Ivan Rivera (LA2C2, macroeconomic framework); Gustavo Arteta
(consultant, statistics); Gaston Labadie (consultant, education); Robin Carruthers (consultant, transportation); Enrique
Crousillat (IBNED, energy); Jerri Romm (consultant, water and sanitation); Martin Raiae (RUTA, agriculture); Pr-'lo linen
(consultant, public expenditure analysis); and Ercis Kurtulus (consultant, management of publc expenditure).
|This document has a restricted distribution and may be used by recipients only in the performnance
|of *heir official duties. Its contents may not otherwise be disclosed w4ithout World Bank authorization.



EXECUTIVE SUMMARY OF POLICY ECOMMENDATIONS
I.   BACKGROUND
1.        The main purpose of the Public Expenditure Review is to assist the
Government of Nicaragua (GON) in improving the allc"ation of public resources,
and strengthening the institutions involved in financial management and
project implementation. This summary will focuts on the agenda for cction that
results from the analysis presented in the mail report.
2.        Although the government has taken steps to improve the fiscal
balance, larger efforts are required on the current expenditure side. The
overall level of public expenditures remaiss too high tit is projected to be
24W of GDP in 1992, only for the Central Government). Per capita expenditures
in real terms are at the same level as 1970, while GDP per capita decreased to
a third of the 1970 level. The fact that there are severe institutional and
management problems magnifies the difficulties resulting from the large size
of the public sector.
3.        The sectoral analysis (education, health, agriculture, transport,
energy, and water and sanitation) shows that the lack of planning of
expenditures, the inadequate allocation of current expenditures, the influence
of foreign aid on project se'.ection, the weakness of management and of
institutional structure are problems shared by most institutions in the public
sector. Some specific problems were also detected such as the divergence
between stated sectoral priorities and the actual allocation of resources (in
particular within the education and health sectors). The quality and quantity
of public services has deteriorated, mostly due to inappropriate policies and
misallocation of resources.  Consequently, services could be improved by
modifying policies and reallocating expenditures.
4.        The institutional analysis showed many areas where a sustained
effort is needed to strengthen and/or restructure institutions. The
importance of this aspect should not be underestimated. The passage from a
centrally controlled economy to a market economy implies an ambitious reform
of the economic structure and institutional organization. Among the
prerequisites for successful conclusion of these reforms are efficiency in
public expenditures and avoidance of the misuse of public funds. These are
not assured in the existing institutional setup. As outlined in the main
report, the operation of the public expenditure management system needs to be
restructured and strengthened.
5.        In sum, the diagnosis of publ.ic sector expenditures contained in
the main report brought out six pressing issues: (a) there are serious
institutional, procedural and processing problems of budgeting, investment
planning and aid coordination; (b) the accounting function is very weak,
leading to poor ex-post control and non-existing auditing; (c) recurrent
expenditures continue to be too high; (d) expenditure patterns (in particular
in the social sectors) do not reflect government priorities; (e) institutional
and administrative capacity is weak, both in the line ministries and the
public enterprises; and (f) the PIP is too large for the Government's
implementation capacity.



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XI. STPATEGY OF REFORM
6.        All of the problems identified above have to be addressed if public
expenditures in Nicaragua are to make a significant contribution to the
economic and social development of the country. However, clearly the
government cannot tackle all the problems at once, and expect to make good
progress on all fronts. We would, therefore, propose a phased approach.
Thesa phases could overlap in time, but each would tackle a subset of the
identified problems. The first phase should address the issue of the high
level of recurrent expendituras, to reduce the various risks of
destabilization presented by the large overall budget deficit and the
uncertainty offered by the importance of foreign funding. This phase would
also try to achieve a quick redressing of the low level of funding for primary
education and primary health care. Moreover, several steps would be taken
concurrently to address the institutional weaknesses in the areas of
budgeting, expenditure control, aid coordination, accounrting and auditing.
7.        A second, overlapping, phase would:  (a) include a comprehensive
reform of the civil service; (b) continue with the process of rationalizing
budget preparation; (c) initiate an effort to rationalize project preparation;
(d) improve coordination among the institutions involved; and e) continue with
the process of streamlining public sector employment and pay. A final phase
would continue with the efforts mentioned above, and introduce important
institutional reforms in the education, transport, energy and water sectors.
8.        The latter phases are called second or third only in the sense that
the actions have beer prioritized according to urgency, but there is no reason
why some of the actions under them cannot begin at the same time as those
under the first phase. In particular, preparatory work for many of these
reforms need to start immediately.
A.   Issues that Need to Be addressed Most Urgently:
(a) Reduce and restructure the Central Government current expenditures:
(i) reduce the size of the wage bill while increasing wages for professionals;
(ii) reduce expenditures in Goods and Services, while increasing allocations
for O&M; and (iii) reduce expenditures for defense.
(b)  Strengthen and restructure budgetary management:  The borderlines
among the core units which deal with budgetary practices and expenditure
control need to be carefully defined. In order to allow for the orderly and
comprehensive handling of budgeting and accounting, it is recommended that an
accounting system (based on Budgeting and Accounting units -BAUs- placed in
each ministry) be established.
(c) Establish a new expenditure control mechanism: Most importantly,
(i) revitalize expenditure control by the Auditor General; and (ii) extend
overall budgetary practices and expenditure control to the Ministries of
Defense &nd Police and the item "Unforseen Expenditures".
(d) Improve the mechanism for coordination and control of external aid:
The establishment of an External Aid Coordination Committee is recommended.



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Th.e primary function of this Committee would be to regulate the aid flows, but
not the assessment of needs or daily bureaucratic details of aid use.
Auditing principles and procedures for external aid would be the same as the
system in force for normal budget revenues and expenditures.  If an
institution acts in non-conformance to the norms, administrative sanctions
would be taken.
(e) Establish a government-wide accounting system: The proposed
Budgeting and Accounting Units in each institution, would be headed by a MIFIN
appointed Accountant, and would bear key responsibility for bookkeeping and
preparing year-end final accounts of the institutions. Each institution must
submit its year-end final accounts to the Auditor General via MIFIN for
legality and veracity clearance.
(f) Prepare and implement a Technical Assistance program: In order to
expedite the above restructuring efforts, short- term three-pronged technical
assistance needs to be provided to MIFIN consisting of: (i) training seminars
for MIFIN staff on improved budget preparation, implementation and control
issues, and some academic training abroad for Budget Directorate staff;
(ii) technical assistance for the formulation of an overall government
accounting system; and (iii) several short-term consultants in ex-post
expenditure control, revision of the auditing mechanism by the Auditor
General, and mid-term expenditure planning.
(g)  Reallocate funds toward primary health care:  Reallocate funds from
curative care to preventive care; introduce a targeted fee system for both
consultations and drugs, to improve efficiency and signal to users the cost of
the different kinds of treatment.  The funds generated in this way should be
allocated to primary health care.
(h) Reallocate funds towards primary education: i) reduce subsidies to
higher education; ii) develop cost-recovery options (in particular in higher
education); iii) charge Universities for the use of public utilities; and
iv) reform the retirement provisions of the Ley de Carrera Docente in line
with INSSBI's national rules. The funds generated in this way should be
allocated to primary education.
(i) Produce a sectoral strategy in the agricultural sector: Define the
short and medium-term sectoral objectives, and the roles of the different
institutions in meeting those objectives. The possible areas of concentration
would be extension, research, irrigation, institutional development,
coordination of technical assistance and training. Once this is done, a
Committee should be set up to assist in the coordination of the overall sector
policy.
B.   Issues to Be Addressed Subsequently:
9.        The issues mentioned below are a continuation of the efforts to
streamline the public sector, and increase its accountability and
transparency, and the onset of an effort to improve public investment planning
and implementation, and to address the structural issues in public sector pay
and employment.



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(a) Establish the accountability of government institutions: The
Auditor General of the Republic should audit all government expenditures and
institutions on behalf of the National Assembly as a superior organization and
officially ir. vrm that body of it-s findings. A reorganization and
redis; ',-ibution of tasks should clear the limited and unclear control conducted
by several organizations.
(b) Improve the mechanism for elaboration of the Public Investment
Program:  MEDE needs a clear mandate to coordinate the elaboration of national
and sectoral strategies. The PIP should then translate these global and
sectoral strategies into specific invest:ment projects. MEDE also needs a
clear mandate to enforce agreed upon priorities and allocate domestic and
external resources to the priority projects, to prevent the PIP to be driven
by donor interests.
(c) Strengthen institutional capacity for PIP elaboration: Efficient
PIP elaboration requires technical assistance to the core ministries, the line
ministries, and the public utilities.
(d) Restructure the civil service system: The civil service system
needs to be restructured and a sound salary scale established. This is a
prerequis4te for an effective control mechanism for personnel emoluments. To
achieve this, the GON needs to: (i) establish a separate Civil Service
organization; (ii) set up a system of establishments and payroll lists;
(iii) prepare position tables for each institution; and (iv) forbid
institutions to appoint staff without having a position authorized by MIFIN.
(d) Reduce personnel in public enterprises: INE, INAA and TELCOR
should devise programs to reduce staffing levels and adapt staffing patterns
to their revised functions.
(e) Monetize fringe benefits: The worker's benefits, now in the form
of fringe benefits, should be monetized and a percentage added to the salary.
This is particularly relevant in Health. Savings should be assigned to
improve patient services and increase expenditures on patient nutrition,
sheets, etc.
(f) Privatize or close all firms producing goods, that are now
operating under the Ministries.
C.   Final Phase
10.       The final phase of the reforms includes an emphasis in reforming
sectoral policies and strengthening sectoral institutions.
(a) Reduce expenditures on the Item UGeneral Services: (i) reduce the
number of independent institutes; (ii) restructure the urban transport
subsidy; and (iii) reform the Law earmarking funds for the University.
(b) Reduce the size of central administration: A study should be
performed to assess where and by how much the ratio of service to
administrative personnel should be increased. As a result of this study, the



v 
Government should restructure staffing patterns in the ptiblic sector as a
whole (possibly through the restructured Civil Service).
(c) Set up a preliminary model for mid-term expenditure planning: It
is necessary to start with preliminary mid-term expenditure planning to
establish consistency between revenues and expenditures as well as with
expenditure prioritization.
(d) Change teacher training, accreditation and reward alternatives: In
the long run, htprofessionalization" (i.e. in-house full-time training for
untitled teachers), should be abolished. The organizational structure should
recognize different career paths for accredited and non-accredited teachers
and the salary structure should recognize larger differences between them, as
established in the Career Law. MED should consider establishing an
examination for teachers, and give high points according to performance in
this test and not to previously acquired degrees.
(e) Promote private sector investment in the energy sector: The
existing institutional setup imposes serious constrPtints on sector performance
and should be reformed. This reform should consider: (i) the creation of an
autonomous regulatory entity designed to promote an efficient development and
use of energy resources; and (ii) promoting private sector participation,
particulanly in power generation and distribution and commercialization. This
policy implies a modification of INE's organic law which guarantees a public
monopoly in power.
(f) Improve operational and financial performance of INE:
(i) undertake further reductions of personnel; (ii) undertake an effective
power losses reduction program; and (iii) undertake a short term institutional
strengthening program focussing in improved budgeting, a managerial
information system, auditing and control systems. This program should include
the strengthening of INE's planning capability (demand and expansion
optimization), power systems maintenance and loss control.
(g) Develop institutions for the rural water sector: Plans should be
elaborated in coordination with donors (that provide most of the services in
rural areas), to determine how their technical and financial assistance will
be phased out and operations and maintenance handed over to municipal water
companies, communities or private water companies, regulated by an autonomous
regulatory entity.
(h) Improve INAA's (and other sectoral institutions') management
capacity to execute and supervise more projects: A key problem to address in
tee medium to long run is the low coverage, in particular in rural areas.  The
objectives of an increased investment program should be to: (i) repair the
existing network to prevent filtration; (ii) provide hygiene education;
(iii) implement low cost sanitation and improve waste disposal; and
(iv) install latrines in rural communities with existing or proposed water
systems.



NICARAGUA
PUBLIC SECTOR EXPENDITURE REVIEW
MAIN FINDINGS AND RECOMMENDATIONS
I.   OVERVIEW OF THE ECONOMY AND GuVERNMENT FINANCES
1.        Nicaragua is among the poorest countries in Latin America, with a
per capita GDP of around US$400 in 1991. Population growth is the fastest in
Latin America (3.4% per annum), and is expected to create severe pressures on
the Govemment's ability to provide the growing population with basic
services, including water and sanitation, primary education and primary health
care.
2.        During the 1980s, the Frente Sandinista de Liberacion Nacional
(FSLN) tried to establish a centrally controlled economy.  The combined impact
of these institutional changes, inappropriate economic policies, the Contra
war and the US trade embargo, led productive capacity into a downward spiral.
By the end of the decade, total production was well below the 1970 level,
exports were running at about half of the pre-1980 level, hyperinflation had
reached 33,700 percent in 1988, international reserves were depleted and there
was an extremely high debt accumulation.
3.        In less than two years, the Chamorro Administration, which took
office in April 1990, has been able to reverse most of these macroeconomic
trends. The key to stabilization has been an impressive adjustment in fiscal
policy, together with the support from the donor community. Looking into the
future, one of the most important challenges the Government faces is to
restructure the public sector, focusing its efforts on efficiently delivering
a reduced number of services; and strengthening the public sector management
capacity.
4.        The main purpose of this review is to help the authorities to
improve the allocation and management of public sector resources. At present,
the system leading to expenditure decisions is inadequate and has important
deficiencies. Most ministries are institutionally very weak, with poor
methods of planning and control. Budgetary processes and procedures need a
great deal of improvement. Moreover, the entire system of expenditure
management and control needs to be strengthened. Institutional weakness is
particularly worrisome in the management of external aid, as the Government
is, and will be for some time, dependent on external resources.
5.        The quality of services provided by the Government needs to be
improved. The deterioration is mostly due to inappropriate policies and poor
management. The situation has worsened in recent years, as public employees'
wages and fringe benefits remained at a relatively high level, while
expenditures in goods and services, vital to providing the much needed
services, declined. Services of the public sector can be improved in a major
way by modifying government policies and restructuring expenditures.



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II.  TE STRUCTURE OF CENTRAL GOVERNMENT EXPENDITURES
6.        Over the last twenty years, with each change of Government, the
size and structure of public expenditurea have changed substantially. From
the early seventies to the eighties. under the Sandinista Government,
expenditures in percentage of GDP more than triplad. Since 1990, total
Central Government expenditures declined to about half in real terms.
Nevertheless, in 1991 and 1992, Nicaragua's total Central Goverriment
expenditures as a percentage of GDP has remained significantly above the Latin
American historical average (28* vs. 18% of GDP, respectively). Moreover, per
capita expenditures are at the same level as 1970, while GDP per capita has
decreased to a third of the 1970 level.
7.        Central Government's capital expenditures increased from 4.3%
(average of 1970-79) to 9.7% (average of 1980-86) of GDP. However, in the
late eighties and early nineties it fell drastically, reaching 1.9W of GDP in
1991. In 1992, this trend is expected to change. Programmed investments of
the Central Government amount to 7.1* of GDP.
8.        The strategy followed by the Government of Nicaragua to reduce
current expenditures has been to lay off employees under the Plan de
Conversion Ocupacional --financed by USAID grants-- and reduction in military
personnel which are also financed by foreign grants. Although there is some
room to continue this program, the necessary adjustment in current
expenditures will require an additional effort in other areas. Hence, there
is an urgent need to determine global and sectoral strategies in order to
determine priorities that could be used to cut entire programs, which is the
only way to decrease and restructure expenditures substantially.
9.        Reductions in current expenditures have been a key ingredient in
the success of the stabilization program. Central Government current
expenditures decreased from 44% in 19901' to 25.7% in 1991*. Most of the
adjustment fell on the Ministry of Defense and the Ministry of Police and
Internal Affairs (Ministerio de Gobernacion).
10.       Larger efforts are required on the current expenditure side to,
among other things, accommodate the required investment program without
generating macroeconomic problems. The following risks will be faced if no
further adjustment occurs: i) deterioration in the mid-term financial
position of the Central Government; ii) crc-.Iing out of private sector
activities; and iii) downward pressure on tsae real exchange rate which would
hinder Nicaragua's export-led growth.
1/ Including extra-budgetary military expenses.
2/ Including cash payment of interest obligations to the multilateral lending
organizations.



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11.       Furthermore, there are several risks ox. both the financing and
expenditure side: i) external aid (in particular grants) will diminish over
time; ii) debt service will increase gradually in the following years;
iii) the large investnment effort will require a substantial increase in
operations and maintenance expenditures; and iv) expenditures irn social
security should be expected to rise in the future.
12.       With respect to structure, sectoral distribution has traditionally
been biased toward defense and general govermnent services. These
expenditures make up about half of the 1992 total current expenditures. On
the other hand, the social sectors (predominantly education and health) will
account for 30 percent of 1992 total current expenditures. This level is
slightly above the region's and the country's historical average. Meanwhile,
expenditures in ministries involved in production and infrastructure havc
significantly declined in relative terms.
13.       The average wage in the public sector, including all non-wage
fringe benefits, appears to be high. The ratio of average public sector wage
to ,DP per capita is approximately 5, while in other Latin American countries
the level is, on average, 3. Although Nicaragua is paying high public sector
wages on average, with respect to the country's resources, it is not paying
enough to attract and retain the most able personnel.
14.       Expenditures in social sectors should receive special attention
frcom the Gover.nment.  The main problem with social sector expenditures is the
allocation, rather than the lack, of resources, even excludinc the substantial
amounts of morney that donors are contributing to the social sectors.
Resources in education are not adequately distributed. Too much funding is
allocated to higher education, adult education and central administration,
rather than to primary education. Moreover, there is a non-discriminatory
transport subsidy to students and teachers.   With respect to the health
sector, expenditure per capita ic at a similar level to that of the seventies.
However, strong emphasis on higher cost programs causes rescurces to appear
scarce (see Chapter V).
15.       With respect to intrasectoral distribution of expenditures, the
size of the Central Administration in several ministries is too big. Some of
them, consequently, do not have enough money to actually perform their job.
Other items in which nearly all ministries show excessive expenditures are
water and vehicles. In sum, there are several areas in which a reduction in
expenditures can be achieved withouit Affecting the quality of services. An
improved management of existing re carces would go a long way toward achieving
the Government's objectives, in particular in the social sectors.
III. SECTORAL ISSUES
16.       Sector ministries and other public sector institutions are
inflicted by similar problems, such as the lack of planning of expenditures,
the inadequate funding fo- recurrent expendicures, the influence of foreign
aid on project selection, and the weakness of management and institutional



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structure. Also of concern, is the divergence between stated sectoral
priorities and the actual allocation of resources, in particular within the
education and health sectors.
A. AGRICULTURE
17.       There are three institutions responsible for carrying out the
agriculture sector policies: tl.e Ministry of Agriculture and Livestock (MAG),
the Natural Resources Institute (IRENA) and the Agrarian Reform Instit-ute
(INRA). Each institution defines its own strategy and action plan without
coordinacing with the others. From the information that is available on these
preliminary strategies, there are large areas of overlap, conflicting
objectives and priorities, and a -ast number of small investment and technical
assistance projects whose impact and effectiveness is unclear.
18.       As a result of the lack of a coordinated strategy, the investment
program for 1992 nas only a few projects which address the main sectoral
problems, such as the uncoordinated efforts in: i) research and extension, ii)
technical assistance and training; iii) irrigation; and iv) measures to
overcome institutional w-iakness. Instead, most projects address the problems
on a piecemeal basis, and generally in a non cost-effective manner.
19.       The dispersion of efforts is an importani. source of inefficiency
and ineffectiveness.  Only a minimum number of new projects aim to organize
dispersed efforts into nation-wide programs.  IRENA is the only institution to
have attempted consolidation (e.g. creating national forestry service rather
than implementing a number of small forestry projects)3/. MAG is unaware of
all of the pr.Djects that are executed regionally, even though preliminary
figures show that the external cooperation budget is over two times MAG's
total 1992 budget. Consequently, it lacks control over the sectoral
investment program.
B. HEALTII
20.       Throughout the 1980s, Nicaragua experienced declin4ng infant
mortality rates and increased life expectancy. Gains were achieved through
the expansion of free health care coverage. In recent years, however, the
gains are being reversed. Nicaragua's 1991 infant mortality rate of 72 per
thousand compares noorly with itber countries in the region. The major cause
of death is acute diarrheal disease.
21.       The model used by MINSA to expand health services has been strongly
biased toward costly curative interventions, neglecting preventive care,
sanitation and maintenance of facilities and equipment. As resources have
become increasingly limited, problems associated with this unbalanced strategy
are now apparent: i) hospitals are overwhelmed by the number of patients and
3/ The Bank is at present performing an environmental assessment to assist
Nicaragua in designing a National Environment Strategy.



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are deteriorating due to excesa demand from cases with preventable diseases
and from inadequate maintenance; and ii) the failure to change health,
nutrition and sanitation habits leaves the population unable to protect itself
from preventable diseaees, while the quality of government-financed care
declines.
22.       Priorities for spending have been :-appropriate, emphasizing:
(a)   operational expenditures over maintenance;
(b)   curative over preventive and hospital over primary care;
(c)   administration over medical care (administration costs, mostly at
the ^egional level, comprise 17W of total current expenditures, and
approximately 30% of doctors in the Ministry of Health (MINSA) hold
administrative positions that remove them from service);
(d)   full-time specialists rather than generalists, doctors rather than
nurses;
(e)   expenditures for medicine and drugs (for example, MINSA has
estimated that US$42 million, or US$10.75/person, is necessary for
the public sector alone, which is mo:e than four times what would
usually be considered necessary to meet basic needs); and
(f)   sector personnel over patients (under conditions of budgetary
constraint, expenditures for workers' goods and services have taken
precedence over those of patients; thus, about two thirds of the
budget goes to employees).
23.       Sector financing is characterized by the divergence between
financial allocations and sector priorities. The policy of free service has
resulted in excess demand on and premature deterioration of facilities and
equipment. Not enough revenues are being allocated to maintain facilities nor
to primary health care (PHC). In addition, the failure to charge for curative
care limits the incentive to use less expensive preventive measures and
results in the appearance of unmet demand at the hospital level, while at the
same time the PHC (primary health care) system is underused. The sector could
recover several million dollars with minimal fees for certain services without
discriminating against the poor. An appropriate fees structure would
encourage the use of less expensive methods of treatment, and free up
resources to improve PHC.
24.       Recurrent Costs.  Estimates indicate recurrent maintenance costs in
the amount of US$1.37 million each year are needed for the maintenance of
health care equipment and facilities. In 1991, however, only US$418,000 was
budgeted for maintaining equipment and vehicles, and much of this was diverted
to other uses.
25.       Pharmaceuticals.  The need for more medicine has been stressed by
the authorities, although it is known that a large amount of donor financing



is being channeled to provide medicines for public health facilities. The
problem is not a lack of resources, but inappropriate policies and inadequate
management. Drugs are being over-prescribed and are overused by the
lopulation. Moreover, there is waste and misuse of medicines because of the
looseness of controls in the system of drugs selection, procurement and
distribution.
C. EDUCATION
26.       The Nicaraguan education sector has traditionally been inefficient.
Net enrollment rates are low, while dropout and repetition rates remain
exceptionally high. Thus, retention and completion rates continue to be
extremely low. Factors that cause this are: i) low teacher quality because
of a lack of appropriate training; and ii) an inadequate school environment,
in particular lack of books and adequate equipment (desks, toilets, etc.).
27.     - Teacher training, has been an ongoing concern of the Ministry of
Education (MED). The Ministry is now spending a substantial percentage of its
budget in what appears to be an ineffective teaching program. The new
Teacher's Career Law (Ley de Carrera Docente), approved in 1990, provides an
incentive for training that could be very costly and ineffective in increasing
quality, if applied under the present structure. The Law emphasizes
credentials rather than performance. This is so because the system lacks
methods for measuring performance. The "Ley de Carrera Docente" also
establishes a retirement system whose effects on MED's finances and human
resources have not been thoroughly evaluated.
28.       The education budget is distributed approximately one third to
primary education and one third to higher education (Universities), with the
rest distributed mostly between secondary and General Administration. This
structure is inadequate to address the problems referred to above, most
importantly, the low retention rates at the primary level. Also, it does not
allocate resources to where social returns are highest and more equitably
distributed, i.e., primary education. Public education is practically free at
all levels, replicating the financial problems addressed above in the case of
the Health sector. Universities, moreover, benefit from a system of urban
transport subsidies and do not pay for public utilities.
29.       Central Administration is oversized and ineffective.  MED has
started to address this issue by reorganizing the ministry and reducing
personnel and costs at the central and regional levels.
30.       Private schools are currently being subsidized. Subsidies are given
as a proportion of the wage bill. In turn, MED regulates and controls the
private sector. In particular, it decides on the curricula and texts that
will be used.
31.       Technical education has been assigned to a newly created institute,
the Instituto Nicaragriense de Tecnologia (INATEC), which has also taken over
the Vocational Training function from the Ministry of Labor. This institution



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is receiving much mire foreign assistance in relation to its budget than MED.
It also receives earmarked payroll tax revenues, collected by the Social
Security Institute (INSSBI), which are credited directly to INATEC without
going through the Budget.  The internal efficiency of the system appears to be
low and the number of administrative personnel in INATEC appears too high. No
information is available with respect to the external efficiency of the system
or the linkages with the private sector.
D. TRANSPORTATION
32.       The Ministry of Construction and Transport (MCT) is responsible for
providing and maintaining most of the transport infrastructure and for
regulating transport operations. It has a highly bureaucratic structure and a
duplication of activities between its central and regional offices. Its
present organic structure appears costly and inefficient.
33.       Current expenditure of MCT is dominated by staff costs, both
because it has an inefficient structure and because it is not spending
sufficient amounts on maintenance activities. Capital expenditure over the
last ten years has been a fraction of what was needed to maintain the existing
infrastructure.
34.       Much of the transport infrastructure --roads, bridges, ports, and
airports-- is now in urgent need of rehabilitation or reconstrucsion. In
addition to the needs of restoring existing infrastructure, there are pressing
demands for new facilities and improvements to existing ones. These demands
are mostly to provide improved infrastructure to stimulate increased
agricultural production and foreign trade.
35.       Faced with these demands, it is not surprising that MCT's
investment plan looks overly ambitious. Howeve , it is unlikely that there
will be sufficient domestic or foreign funding for all of the projects.
Moreover, in the short term it is improbable that MCT could improve its
administrative capacity or that the national construction industry can raise
its productive capacity. Possibly only half of the total investment planned
can be managed.
E. ENERGY
36.       Nicaragua's energy sector faces a serious crisis.  The power
service has deteriorated severely in recent years, with frequent service
supply interruptions and low reliability. Currently, power rationing in the
National Interconnected System (NIS) reaches an average of 10% daily while
energy deficit amounts from 10% to 15% of consumption. Another problem that
depicts the current crisis is the increasing level of energy losses, which are
currently 24*. This amounts to an increment of more than 5% during the last
three years.
37.       A significant portion of the power sub-sector problems stem from
its legal and institutional framework. The existing public organization
imposes serious constraints for better sector performance. It is necessary,



- 8 -
therefore, to study the best arrangements for legal and institutional reform
in Nicaragua's energy sector.
38.       Generally speaking, the Energy Institute's (INE's) investment
program is well designed. Its components are all necessary, and many of them
are urgent. Most of the projects are emergency and/or rehabilitation
projects, aimed at improving power service quality in the short term. Only
three of the 13 projects imply an expansion of the system. Nevertheless, this
limited focus is prudent in the short term, as INE's technical and managerial
capability for undertaking large expansion projects is weak.
F. WATER AND SANITATION
39.       The highest cause of death in Nicaragua is associated with
water-borne diseases. This is due to the fact that existing water and
sanitation facilities reach a low percentage of the population. Even where
these facilities do reach, service quality is poor due to a long period of
neglect to facilities maintenance. These two problems will be difficult to
address. On the one hand, even though the sector's public investment program
(PIP) is ambitious, if fully implemented it would rehabilitate only the
existing systems but would not expand service. On the other hand, even where
piped water and sewer systems exist, contaminated supplies and poor waste
disposal controls contribute to disease transmission. Therefore, investments
in urban water, sewer or treatment facilities, without first removing the
sources of existing contamination and altering the conditions that create it,
will not provide the expected health benefits.
40.       The rural areas and the needs of the poor have been given very low
priority. Most of the population presently neglected resides in small rural
villages of dispersed houses. Although the quality of implementation and
maintenance is improving, investment and the rate of implementation are so low
that new coverage is hardly keeping pace with population growth. Virtually
all assistance to the rural areas is financed by external sources. The level
of dependence on donors --implementing programs and providing finances-- is
very high, and the domestic institutions, such as Direcci6n de Agua Rural, are
being replaced instead of developed. There is an urgent need to increase
investment in the sector, in particular in hygiene education, quality control
of water supply and low cost sanitation.
IV. THE PUBLIC INVESTMENT PROGRAM
A. INSTITUTIONAL FRAMEWORK FOR PUBLIC INVESTMENT
41.       During 1991, the Ministry of the Economy and Development (MEDE)
initiated a formal process for the definition of the PIP for 1992. The
elaboration of the 1992 PIP was conducted in an ad-hoc manner, however. The
task of following the formal process was hampered due to: i) the existence of
direct links between donors/creditors and executing agencies and consequently
the availability of finance without the need for clearance by MEDE; ii) the



-9-
need to subject the executing agencies to a prioritization process which they
had not been accustomed to; and iii) the lack of definition of the roles of
the Ministry of Finance (MIFIN), the Ministry of External Cooperation (MCE)
and the Central Bank (BCN) in the process of elaborating and supervising the
execution of the PIP.
42.       The coordination effort is particularly difficult.  MCE is a new
institution with no clearly established role in the area. Most importantly,
MEDE (also a new institution) had to assume a leading role in the process
without being able to affect the funding of projects directly, as it does not
control either domestic or external financing of the investment projects
(domestic financing is controlled by MIFIN; while BCN and MCE jointly
administer external financing). This circumstance deprives MEDE the power to
enforce its decisions for the PIP without the collaboration of MIFIN, MCE and
BCN. Furthermore, MEDE's role would be curtailed until it can provide a
framework for the prioritization of projects on which to base its decisions.
MEDE has been slow, mainly due to institutional weaknesses, to produce a
national development strategy and sectoral strategies which should serve as
guidelines for PIP prioritization.
43.       MEDE, in joint meetings with sectoral agencies, selected the
projects that: i) were for rehabilitation of infrastructure (social and
physical); ii) have secured external financing or are in the final stage of
securing it; and iii) were carry-on projects from previous years. The
Economic Cabinet, based on optimistic projections of the availability of
foreign funds and of the 1991 budget surplus of the Central Government, agreed
on a PIP of about US$240 million.
44.       The procedures for supervising the implementation and evaluation of
the PIP are being developed. The unit of physical and financial control of
projects operates under the General Directorate of the Budget in MIFIN. MCE
is planning to develop a similar unit, to monitor progress under external
cooperation agreements, which would need to coordinate its work program with
MIFIN. MIFIN's units are poorly endowed, able to capture only a fraction of
the projects in the PIP, and perform only a superficial follow-up of project
implementation.
45.       Funding for just above half of the PIP will be available from
external aid. Based on the experience of 1991, the Government will have
difficulties using all the available financing. MCE estimated that out of a
total of US$355 million in programmed funding for 1991 for all purposes
(balance of payments support, investments, technical assistance and general
aid), roughly US$226 million (640 of programmed assistance funding) remained
undisbursed as of November 1991.
46.       With respect to Technical Assistance (TA), about US$34 million (or
2W of GDP) of external funding was available in 1991. TA in terms of number
of projects was concentrated in the agricultural sector and related areas
(natural resources).  Assistance -n the form of cash support went
predominantly to the social sectors. The lack of coordination of these
projects with sectoral strategies is severely reducing their effectiveness.



- 10 -
B. THE PUBLIC INVESTMENT PROGRAM
47.       The main issues are the size and distribution of the 1992 PIP.  The
Government selected energy, agriculture, transport, water, and
telecommunications (in that order) as the main areas for investment. Despite
the ad-hoc manner of defining the PIP described in paras. 41 and 42, the
Nicaraguan Government put together a reasonably solid investment program, with
an appropriate sectoral distribution. The judgement is based on the urgency
of investments and the government's objectives.
48.       Faced with the enormous needs of the country, it is not surprising
that the initial exercise resulted in a very ambitious program. The US$242
million 1992 PIP (including the Social Investment Fund, FISE) appears to be on
the high side, at 13% of the estimated 1992 GDP. Historically, only two years
(1983 and 1984) had a higher investment program as a share of GDP.
Furthermore, financing problems may be encountered when implementing such a
sizeable program, as projections about the available resources seem overly
optimistic.
49.       Another important issue is the implementation capacity of the
different institutions. Most probably the proposed size of the PIP will
spread scarce resources --management capacity, skilled manpower, and
counterpart funds-- too thinly over many projects. Given the many urgent
needs faced by the Government of Nicaragua (GON), it seems advisable to
encourage the private sector to take over some of the proposed project areas.
Some prioritization is required to assure that key projects are implemented in
a timely fashion. Moreover, it is possible that the overall investment
program is in fact even bigger than mentioned above, as the PIP exercise may
not have captured all of the public sector investment projects in execution or
to be executed in 1992. In particular, this is the case for donor-financed
projects which do not require counterpart funds.
50.       With respect to sectoral distribution, the 1992 PIP focuses on
energy (28%), transport (25%), agriculture (14%), telecommunications (11),
and water (9*). This is an appropriate distribution which will restore the
seventy's structure, with three quarters of the program going to
infrastructure and power. However, over one-half of the program depends on
the implementing capacity of INE and MCT, and this capacity is untried, as
both institutions have managed very small investment programs in the last five
years.
51.       The Nicaragua Public Sector Expenditure Review examines in detail
the energy, transport, agriculture, water, education and health seetors, or
over four-fifths of the Investment Program. The overall distribution of
resources appears adequate, especially given the critical situation inherited
in the energy, roads, water, and communications sectors. As mentioned
previously, however, resources earmarked to the agricultural sector appear to
be excessive.
52.       The 1992 program is reasonably solid in the selection of projects
by the sectoral institutions, telecommunications (TELCOR), energy (INE), and



water and sewage (INAA). However, several of the big projects have an overly
optimistic time schedule (for example, the gas turbines project of INE). The
Central Government's selection of projects is not as solid, however, and some
projects should be postponed, such as MCT's biggest projected investments in
highways.
53.       With regard to financing, 55* of the investment program will be
financed by donors, 5 by institutional resources (principally from TELCOR and
INAA) and for the remaining 40%, no financing has been identified. Of the
sectors with large investment programs, transport stands out with 61% of its
program lacking financing. MCT has a large number of projects (18) with no
financing at all. Agriculture, INE and INAA have projects with high
percentages of foreign financing (74%, 64% and 75W, respectively).
V.   STRENGTHENING AMD RESTRUCTURING THE PUBLIC EXPENDITURE MANAGEMENT SYSTEM
54.       Nicaragua is attempting an ambitious reform of its economic
structure and institutional organization. Among the prerequisites for the
successful conclusion of these reforms are efficiency in public expenditures
and avoiding the misuse of public funds. These prerequisites are not assured
under the existing institutional setup, however. As outlined below, the
operation of the public expenditure management system needs to be restructured
and/or strengthened.  Moreover, the Ministry of Finance (MIFIN), which will
play a leading role in this process, is presently undergoing organizational
and procedural changes. This process of change has created structural gaps
and operational difficulties.
A. THE BUDGETARY PROCESS
55.       The key to improving public expenditure management, and in
particular, the budgetary process, lies in an efficient and effective
operation of the Ministry of Finance, together with the Office of the Auditor
General -Contraloria General. To this end, it is essential to revise the
general framework of the Ministry's units, to clarify the borderlines of their
duties and responsibilities and to assess the functions of some important
units which have not worked efficiently during recent years, i.e., the General
Directorate of Government Accounting.
56.       Budget Preparation and BudQet Calendar.  MIFIN prepares a detailed
calerdar for budget preparation, called The Work Chronology, which is
basically a budget cycle. This gives a working plan for the General
Directorate of the Budget. According to the calendar, budget preparation
begins in June, with meetings by central financial and planning organizations
to determine macro-economic revenue and expenditure forecasts. These
activities end with the preparation and submission of a proposed budget to the
President for approval in early October and submission to the National
Assembly. The new budget year and financial year start January 1st.
57.       Monitorinq Exnenditures.  It is indicated in Article 7 of the
Budget Law that all Central Government organizations are obliged to submit to



12 -
MIFIN a quarterly report of results of implementation. These reports are to be
submitted prior to the subsequent quarter's allocation release. Although
these quarterly expenditure returns represent the most important tool of
expenditure monitoring and control, the process has not yet been implemented.
Expenditure monitoring is being done on a cash basis via control of checks
being issued by the General Directorate of the Treasury. This allows for
macro-level analysis, but is not sufficient for expenditure control.
Expenditure monitoring is also done by examining the supporting documents that
the institutions submit to the Directorate of Execution.
58.       Inter-/Intra-Program Allocation Transfers.  After budget
allocations, divided into programs and item lines, are approved by the
National Assembly, transfers among them during the course of the year, are
made. As set out in the 1991 Budget Law and the Budget Norms, authority to
approve these transfers, depending on the type, is given to the President, the
Ministry of Finance, and the concerned agency. Based on this authority, the
composition of budgetary expenditures can be changed considerably during the
year. This practice, together with the habit of resorting to unforeseen
expenditure funds, promotes the concept of fluidity, which does not accord
with the goals of proper budgeting. Only in the context of a results oriented
system, together with effective ex-post controls, would this practice be
acceptable.
59.       "Unforeseen Expenditures."  There is a separate section entitled
"Unforeseen Expenditures" ("Imprevistos") in the Budget Document, which
amounted to 1.5* of the budget in 1991. The presence of such a contingency
fund, separate from the National Budget, does not conform with standard
budgetary procedures, since it is counter to the concepts of budgetary unity,
expenditure classification and the practices of expenditure control. Given
the characteristics of Nicaragua, exposed to many potential natural hazards,
the contingency fund would be a reasonable strategy to deal with the risks
implied by these hazards (volcanoes, earthquakes, cyclones, etc.) if it were
included in the budget of a ministry, and its use narrowed down to those
unforeseen natuial hazards.
60.       The Budgets of the Ministries of Defense and of Police.  The
budgets of the Ministry of Defense and the Ministry of Police are especially
important, both because of their volumes --one-fourth of the total national
budget-- and the fact that their budgeting procedures are conducted outside of
the norms of general budgetary principles. The budgets of both of these
Ministries have been indicated in the past as only a one-line entry in the
Budget Document. By 1992, expenditure breakdowns are going to be placed into
the Budget Document, based on a request by the National Assembly. However,
there will still not be any program breakdown.
61.       Budcretarv Monitoring of Autonomous Entities.  The funding of
Autonomous Entities is managed via budgets separate from the Central Budget
under MIFIN. Currently, autonomous entities receive allocations in the form
of block transfers registered in the Transfers section of the Budget. These
transfers represented 12* of the total 1991 budget. The Directorate of
Autonomous Entities was established in March ).991 in the General Directorate



- 13 -
of the Budget to monitor the Treasury transfers granted to these entities and
to provide the entities with technical assistance.
B. GOVERNMENT ACCOUNTING AND ACCOUNTABILITY OF THE SPENDXNG INSTITUTIONS
62.       The Government of Nicaragua lacks a comprehensive accounting
system. In Nicaragua each ministry handles its own bookkeeping through its
Financial Director, who is an officer of the institution in charge of
financial and administrative affairs and is attached to the Vice Minister.
Final accounts are not prepared in accordance with the usual procedures and
the Auditor General's Office has not assumed any responsibility to audit the
final accounts of the KUnistries on behalf of the National Assembly.
Therefore, spending institutions are not held accountable for the way they
spend funds and the Minister, in effect, clears his own accounts.
63.       In addition, problems have occurred due to the lack of a
responsible unit for government accounting. The General Directorate of
Accounting has not performed its functions in recent years, nor has it
prepared final accounts. As a result, the accounting function was partially
assumed by the Directorate of Execution of the General Directorate of the
Budget and partly by the General Directorate of the Treasury, via ad hoc
decisions. MIFIN is planning to abolish the General Directorate of Accounting
and explicitly reassign its tasks.
C. EX-POST EXPENDITURE CONTROL
64.       One of the most important issues in public expenditure management
in Nicaragua, along with the need to revise organizational duties and
responsibilities, is the lack of expenditure monitoring and control. Ex-post
expenditure control in Nicaragua must be institutionalized in order for it to
be effective, particularly in regard to legal and veracity control.
65.       The implementation of expenditure monitoring and control is
considered to consist of three separate concepts: i) monitor the macro-level
revenue/expenditure balance and control the overall budget deficit (or
surplus); ii) monitor the use of allocations given to institutions by the
Parliament to ensure that they stay within the limits and not resort to
overdrafts; and iii) control the legality and veracity of each individual
payment made from the Government Budget to determine if the actual
expenditures are in conformance to the laws, regulations and norms. At a later
stage, the more complicated but more sensible control by results, instead of
by inputs, should be incorporated. In Nicaragua the two first tasks are being
efficiently performed by the Ministry of Finance. The weak point of the
control system is the legality and veracity contxol of individual payments,
both while payments are being made and after they are completed.
66.       Under the existing system, the following units share the
responsibility for ex-post expenditure control: i) the Financial Officer and
Vice-Minister in charge of administration in each institution; ii) the
Internal Auditor of the concerned ministry, if there is one; iii) the Director
of Execution of the General Directorate of the Budget; iv) the rirector



- 14 -
Delegates who have recently been assigned to selected ministries by the
General Directorate of the Budget; v) the General Directorate of the Treasury;
and vi) the Auditor General's Auditors.
67.       Administrative changes have given rise to considerable functional
gaps and problems in the expenditure control system. The borderline between
the core units which are concerned with budgetary practices and expenditure
control, such as the Directorate of Execution, the Director Delegates to the
Ministries, the General Directorate of the Treasury (which is assuming the
function of the G.D. of Accounting), the financial sections of the spending
Ministries, and the Auditor General's Office, have to be identified carefully.
Otherwise overlaps, gaps and vagueness will be inevitable.
Control of Personnel Emoluments
68.       As in most developing countries, personnel emoluments comprise a
large share of budget expenditures in Nicaragua (between one quarter and two-
fitths; the exact amount is difficult to assess, see para. 67 in Vol. II).
Therefore, it is very impertant to exercise effective control over personnel
emoluments.
69.       The 1991 Budget Law states that the administration of the central
registry of positions and personnel of the General Goverrment is given to
MIFIN. In other words, NIFIN is the authority for granting new positions to
the Ministries and making necessary modifications.
70.       Since new employment positions are authorized by the General
Directorate of the Budget, not by a special law, it is easy to create new
positions or abolish them. This flexibility makes it difficult to keep track
of the number of positions by institution and by grade, because there is no
regulated and formatted system. Within the General Directorate of the Budget,
the duty of creating and abolishing Government positions is currently being
assumed by the Directorate of Policies.
71.       No distinction is being made between Establishment ("cargo" or
position) and Staff (individua]s). This is a serious drawback to the Budget
system and for the system of civil service management. MIFIN is prevented
from keeping track of the distribution of positions among institutions and,
consequently, from preventing organizations from using unauthorized positions
on their own initiative. As a consequence of the lack of an inventory of
positions, there is no norm for salary Lales.  For example, in the payroll
table, there are 335 different salary scaleo for 550 secretarial positions.
D. COORDINATION AND CONTROL OF EXTERNAL AID
72.       Given the current and expected size of the flo.-  of foreign aid, its
adequate administration is central to thp c`iciency of public expenditure
management.  Moreover, a good administr)Acio;- will probably s..cure th;
continuity of the flow, a key to the f.ubitcinability of the cirrer,-
macroeconomic program.



- 15 -
73.       Currently, if donors do not voluntarily go through MCE and MIFIN,
MIFIN has no control over the use of funds as there is no central accounting
system for external aid. This has led to abuse, with some Government
officials receiving double salaries. Based on experiences of other countries,
it can be said that problems may increase to serious proportions unless
corrective measures are taken.
74.       Legal status.  A Presidential Decree regarding the organization and
duties of MCE (dated October 30, 1990) is the main legal regulation governing
the mechanism of external aid. This Decree sets out MCE's primary duties in
general terms: obtaining, contracting, coordinating and channeling economic,
technical, and material external cooperation.  However, it does not rtipulate
how aid will be handled and channeled through MCE, nor does it set ..t.c which
administrative and legal measures and/or punishments will be enforced in the
avent of non-conformance.
75.       Budgeting, Accounting and Auditing.  When donor aid comes through
MCE, the purpose of the assistance and the way it is to be used is clarified
through an agreement. Such earma:ked aid is recorded by the Directorate of
Execution of the General Directorate of the Budget in the revenue budget, on
the one hand, and in the expenditure budget of the concerned ministry on the
other. The funds are audited in the same way as other expenditures.
76.       If cash or commodity aid is not notified to MIFIN, no budget
procedure applies. In these cases, MIFIN will ignore the real dimension of
the institution's budget or the current expenditure needs being generated by
the aid-funded projects. Of course, aid outside of the budget is subject to
no auditing whatsoever.
E. MEDIUM-TERM EXPENDITURE PLANNING
77.       Budget cuts and expenditure allocation decisions are based on
negotiating incremental changes over the previous year's figures. The
Government lacks an instrument to prioritize expenditures and plan
reallocation in the medium term, however, a prioritized expenditure planning
instrument would greatly facilitate the process of allocating resources, and
would be a useful guide to budget cuts. Such a medium-term expenditure plan
would establish objectives for both recurrent and investment expenditure over
a three-year horizon, consistent with over-all Government policies.
78.       The expenditure plan would allow synchronization between the
Investment and Recurrent Budgets that is not possible today, by insuring that
all projects in the annual investment program are included in the investmenit
budget, and that their effects on recurrent costs are reflected in the
recurrent budget.



- 16 -
VI. 'PUBLIC SECTOR RESOURCE ENVELOPE AMD PROJECTED EXPENDITURES
A. BASE CASE
79.       The base projections assume a positive scenario which is based on
the consolidation of stabilization, the deepening of structural adjustment,
the developntent of market institutions, and a satisfactory solution to the
external debt overhang. Nicaragua's economic recovery and medium-term growth
will crucially depend on adequate external financing, further debt stock
reductions to solve its enormous debt overhang and a continuation of the flow
of external aid.
80.       Under the above-mentioned assumptions, GDP growth would turn
positive in 1992, and from then on, it would grow steadily to reach atable
levels (5) by 1994. Consumption per capita takes a longer time to
recuperate, however, because Nicaragua needs to reduce public consumption
further. With this growth performance, GDP per capita would reach 1950s
levels around the year 2000.
81.       Tax revenues are the most important source of funds for the
Government and are projected to remain at about 19% of GDP during the
projection years. Foreign grants to the Central Government are projected at
approximately 4.1* of GDP, on average, for the next five years. Overall
Central Government expenditure is projected to decline from 28% of GDP in 1991
to 21% in 1996, but interest payments will increase from 1.5 % of GDP $.o 4W of
GDP.
82.       The balance on the current account of the Central Government
reaches equilibrium in 1993, and a surplus of about 0.4% of GDP, on average,
for the projecticn period.  Adding capital expenditures, the overall-surplus
turns into a deficit before grants. This deficit averages 2.7% during the
projection period. Projected grants average more than this, but they will
contribute to finance the overall non-financial public sector (NFPS) deficit.
83.       Overall NFPS exoenditure is projected to decline from 34% of GDP in
1991 to 30% in 1996, and capital expenditure is projected to increase from 5%
of GDP to 8.5% in the same period. The balance on the current account of the
NFPS reaches eq.ilibrium in 1991 and a surplus of about 4% of GDP, on average,
for the projection period. Adding capital expenditures, which are programmed
to be substantial, the overall surplus turns into a deficit before grants that
averages 6.4% during the projection period. As projected grants to the NFPS
average about 5.3%, there will be a need for additional funds to finance the
public investment program.
B. LOW CASE
84.       Some risks exist that could delay or impede the implementation of
the Government's current reform program. First, the implementation capacity
of the Government is very weak. Second, the levels of external aid may fall
and could result in reduced external flows to finance the significant resource



- 17 -
balance deficit, programmed to average 22.6% of GDP for the period 1992-1996.
85.       The low case scenario assumes that stabilization fails, and foreign
extei-nal assistance is assumed to fall to half of its current level. As a
consequence, the overall fiscal deficit after grants gr_ds (from 2% of GDP in
1995 under the base case assumptions to 10* of GDP under the low case
assumptions) and public investment is halved wit'.l respect to the base case
(8.6% vs. 4.4W of GDP under the base and low case, respectively). The main
result is an increase in inflation to three digit level and no recovery of
GDP.
C. CONCLUSION
86.       The macroeconomic conditions and the tightness of the fiscal budget
constraint will crucially depend on the flow of foreign aid and the
arrangements to be made regarding external debt. Given the risks involved,
the Government of Nicaragua should not assume that the present soft-budget
conditions, resulting from the existence of ample foreign resources, are a
permanent situation. It should make the necessary adjustments in expenditures
to assure financial viability in the medium to long-term.
87.       The long-term goal of a sound fiscal policy should be to finance
all current expenditures and a substantial portion of public investment with
domestic revenues. The average projected domestic financing of the PIP is 40
percent for the period 1992-96. A goal of 70 percent by the turn of the
century should be considered. The extent of dependence on external assistance
currently limits the Government's ability to be fully in charge of resource
allocation.
VII. AGENDA FOR REFORM
88.       This agenda presents the policy recommendations of the report in a
prioritized manner. The recommendations are separated into three phases.
Phase I should be addressed without delay; Phase II should follow immediately
after; and Phase III should be addressed in the medium run, as it would take
more time to implement and register results. These recommendaLions are
organized by topic in the matrices that are attached to the summary.
A. PHASE I
1.  Size and Distribution of Exxenditures
89.       Reduce and restructure the Central Government current expenuatures:
(a)   restructure the pay sched"le, by eliminating fringe benefits and
collective agreement benefits and including a percentage of their
monetary value in the salary;



- 18 -
(b)   reduce expenditures in Goods and Services, in particular, by:
i) rationalizing water consumption and water tariff:
ii) rationalizing the procurement and distrilution if medicines;
and iii) overhauling the system of road maintenance;
(c)   reduce expenditures in defense, by reducing equipment in line with
personnel reduction and continuing with personnel reduction;
(d)   increase allocations for O&M, and monitoring that they are
appropriately used; and
(e)   produce a study of the area of social security, with
recommendations for reforming the system and reducing its potential
effect on public expenditures.
2.  Public Sector ManaQement
90.       To strengthen the public expenditure management system, the
Government should:
91.       Strengthen and Restructure Budgetary Management.  The designated
roles for the core units which deal with budgetary practices and expenditure
control need to be carefully identified in order to preclude overlap of
reiponsibilities and ensure that all duties are performed effectively.  In
order to allow for the orderly and comprehensive handling of budgeting and
accounting affairs, it is recommended that an accounting system (based on
Budgeting and Accounting units -BAUs- that are placed in each ministry) be
established in the shortest possible time. With the existing representatives
of MIFIN in the Ministries, a body of Inspectors should be created.
92.       Establish a New Expenditure Control Mechanism.  This would involve:
i) revitalizing auditing by the Auditor General; ii) limiting the flexibility
to make modifications among allocations; iii) extending operations of the
Directorate of Autonomous Entities; and iv) extending overall budgetary
practices and expenditure control to the Ministries of Defense and Police and
the item of "Unforeseen Expenditures".
93.       Improve the Mecharism for Coordination and Control of External Aid.
Within the existing organizational framework, MEDE and MIFIN should share the
overall decision-making responsibilities for contracting and directing
external aid, assessing initial requests from the institutions, as well as the
offers from donors. MCE should conduct external aid negotiations and handle
the bureaucratic execution of the external aid process as a secretariat.
94.       In addition, the establishment of an External Aid Coordination
Committee is recommended. The External Aid Coordination Committee, would be
composed of one representative from each Ministry involved (MCE, MIFIN, MEDE
and the Central Bank). The committee would make the final decisions on
distribution of aid to the institutions. The primary function of this



19 -
committee would be to regulate aid flows rather than to assess the needs or
daily bureaucratic details of aid use.
95.       Auditing principles and procedures for external aid would be the
same as the system in force for normal budget revenues and expenditures. If
it is determined that the institution has acted in non-conformance with the
related laws and norms, administrative sanctions would be taken against the
offender.
96.       Establish a Preliminary Model for Mid-Term Expenditure Planning.
It is necessary o start with preliminary mid-term expenditure planning using
a planning model consistent with expenditure prioritization. For this
purpose, a one-year preliminary action plan should be prepared. This action
plan should identify the targets, parameters and procedures of the mid-term
expenditure planning model, and also should design the preliminary formats for
forward budgeting.
97.       Prepare and Implement a Technical Assistance Program.  In order to
expedite the above restructuring efforts, short-term technical assistance
needs to be provided to MIFIN. The technical assistance would consist of:
i) workshops for General Directors to gain an understanding of the necessity
for strengthening and reforming public expenditure management; ii) training
seminars for MIFIN staff on improved budget preparation, implementation and
control issues; and some academic training abroad for Budget Directorate
staff; iii) short-term technical assistance for basic budgetary issues;
iv) technical assistance for the formulation of an overall government
accounting system, possibly by the IMF; and v) several short-term consultants
in ex-post expenditure control, revision cf the auditing mechanism by Auditor
General, mid-term expenditure planning and expenditure prioritizaLion1.
3.  Sectoral Strategies
Health
98.       Modify the health care strategy.  An action plan to reallocate
funds from curative to preventive care should be created. The Government
should also introduce a targeted fee system for both consultations and drugs,
to improve efficiency and to signal to people the different costs of the
different kinds of treatment.
99.       Improve the effectiveness and efficiency of financial resource use.
The Government should revise the budgetary process in line with the
recommendations of the previous section, and rationalize MINSA's expenditures
for water, medicines, food, clothing, per diem for workers, and overtime pay.
Some services should be contracted out. This would save several million
dollars a year and permit increased allocations for fuel, maintenance and
supplies.
100.      Reform personnel management policios.  More ou*reach is needed for
remote areas and the payment of per diem should be contingent on leaving the



- 20 -
office. A percentage of specialists should be placed on a retainer basis,
committed to provide certain services when needed. The urban-rural
distribution of hospital doctors should also be reviewed, and incentives
should be devised to reduce the concentration of doctors in urban areas.
Reforms should also restrict the entry of general physicians into specialties
and repeal the hiring guarantee for medical school g-aduates.
101.      Reform the system of procuring, distributing, prescribing, and
pricing medicines.
Education
102.      Reallocate funds towards primary education.  Education sector
reforms should include: i) reducing non-teaching perscnnei; ii) reducing
subsidies to higher education; iii) reevaluating the costs and objectives of
adult education; iv) assessing who benefits from subsidized schools to improve
targeting; v) changing the system of grarnting subsidies, in order to promote
quality; vi) developing cost-recovery options (particularly higher education);
vii) changing the transport subsidy system to a partial subsidy;
viii) accounting for INATEC's payroll tax revenues and adjusting its budget
accordingly; ix) charging universities for the use of public utilities;
x) reforming the retirement provisions of the Ley de Carrera Docentp in line
with INSSBI's national rules; and xi) increasing the student-teacher ratio, in
order to eliminate the practice of using unqualified teachers4l; the funds
generated in this way should be allocated to primary education.
Agriculture
103.      Produce a sectoral strategy.  It is necessary to define the short
and medium-term sectoral objectives, and the roles of the different
institutions in meeting those objectives. The elements of the strategies
should be matched with the investment and technical assistance programs. To
improve coordina_ion between MAG, INRA and IRMNA, the Government should set up
a coordinating Committee in charge of developing a sectoral policy and
defining sectoral short and medium run objectives. The possible areas of
concentration would be extension, research, irrigation, institutional
development, coordination of technical assistance and training. This
Committee should be created after the roles of the different institutions in
attaining sectoral objectives are defined, specializing the institutions in
specific areas.
104.      Reduce the size of the investment program.  A major overhaul of the
investment program is necessary once the sectoral strategy is agreed up on.
Given the poor selection of projects, combined with the historically high
financing for the sector, the agricultural investment program should be
reduced.
4/ It should he noted that a recent survey found the student-teacher ratio to
be 32.



- 21 -
Transport
105.      Reduce the size of the investment program.  Given its
administrative capacity and financing, MCT should: i) reduce the current PIP
by one third; and ii) postpone projects without financing and no assured
benefits. In particular, the two most expensive single road projects in the
Plan (Nejapa-Izapa and San Francisco-Camoapa, 28* of total investment) should
be deferred.
106.      Restructure the ministry in line with present responsibilities.
The Economics and Planning Division needs to be strengthened; and the Highways
Division should evolve into a project management division and undertake little
or no project design in house. The staffing structure should be changed
accordingly.
Public Enterprises
107.      Reduce personnel in public enterprises.  INE, INAA and TELCOR
should devise programs to reduce staffing levels and adapt staffing patterns
to their revised functions.
4.  Public Investment Program
10R.      Give MEDE a clear mandate in the production and supervision of the
iavestment progiam.  MEDE needs to have a clear mandate in order to coordinate
the effort of putting together the national and sectoral strategies. MEDE
also needs a clear mandate from the Ministry of the Presidency in order to
enforce agreed upon priorities and allocate domestic and external resources to
the priority projects.
109.      Strengthen institutional capacity for PIP elaboration.  Efficient
PIP elaboration requires technical assistance to the ccre ministries, the line
ministries, and the public utilities.  In MIFiN, the weaknesses include
financial planning, expenditure prioritization, control of external resources
and macroeconomic analysis. Support is needed to strengthen all of these
areas. The line ministries have very weak institutional capacity for
identifying, preparing, appraising, monitoring and supervising projects. The
public utilities have better project preparation, implementation and
supervision capacity, however standards need to be improved.
110.      Further prioritize the present PIP and reduce it to US$200-210
million (including FISE).
B. PHASE II
1.  Budget
111.      Privatize or close the firms operating under the Ministries.
Several Ministries engage in entrepreneurial activities that were not



- 22 -
transferred to CORNAP. The number of existing firms, their employment, assets
and the amount of implicit subsidies they are receiving need to be determined,
and an action plan to di-rest them should be prepared.
2. Public Sector Mar.aQement
112.      Establish the Accountability of Government Institutions.  The
Auditor General of the Republic should audit all government expenditures and
institutions on behalf of the National Assembly, as a superior organization
and officially inform that body of its findings. A reorganization and
redistribution of tasks should clarify the method of controlling expenditures
in several organizations. This would involve activating the Office of the
Auditor General, abolishing the internal auditors and eliminating overlapping
functions of the Directorate of Execution of the General Directorate of the
Budget and the General Directorate of the Treasury.
113.      Restructure the Civil Service System.  The civil service system
needs to be completely restructured, and a sound salary scale should be
established. This is a prerequisite of an effective control mechanism for
personnel emoluments. To achieve this, the Government needs to: i) establish
a Civil Service organization; ii) set up a system of establishments and
payroll lists; iii) approve the authorized positions as part of the budget
law each year and indicate their numbers in the Budget Documbent, ministry by
ministry and grade by grade. No institution should be allowed to appoint
staff without having an authorized personnel position. Position tables for
each institution should be prepared.
3. Sectoral Strategies
Health
114.      Monetize fringe benefits.  Budget cuts have deteriorated services
for patients but preserved workers' benefits. The workers' benefits, now in
the form of fringe benefits, should be monetized, and a percentage added to
the salary. Fringe benefits should be eliminated for clothing, per-diem (when
paid w/o travel), medicines, overtime pay (when paid w/o overtime work) and,
possibly, food. The savings from the reform in benefits should be directed
toward improving patient services and increasing expenditures on patient
nutrition, sheets, etc.
Transoort
115.      Reform the system of allocating road maintenance expenditures.
Contracts should be granted to private builders through competitive bidding.
116.      Close or restructure the railway.  A study should be commissioned
to decide if the railway should be closed or restructured.



- 23 -
Enercv
117.      Promote private sector investment in the energy sector.  The
existirg institutional structure imposes serious constraints to sector
performance and should be reformed.  This reform should consider two main
points. First, an autonomous regulatory entity designed to promote the
efficient development and use of energy resources should be created. This
entity should set electricity tariffs and fuel prices. Its functions could
include the approval of the power expansion plan, and the supervision of
procurement activities and construction licensing. Second, private sector
participation in power generation, distribution and commercialization should
be promoted. This policy implies a modification of INE's organic law, which
guarantees a public monopoly in power.
Water
118.      Develop a systematic approach to project financing for services
outside the core urban areas. Plans should be elaborated, in coordination
with the donors that pro-iide most of the services in rural areas, for how
donor technical and financial assistance will be phased out and operations and
maintenance handed over to municipal water companies, communities or private
water companies that are regulated by an autonomous regulatory entity.        As
FISE's investments are off-budget, FISE's water project investments should be
treated as donor-financed projects. For these projects, the following
information should be supplied: i) annual recurrent operating costs for
staff, equipment, materials, pumping, chemicals and other needs; ii) a plan
to show how these recurrent costs will be financed or recovered; and iii) the
unit that has been given the responsibility for future operation, maintenance
and replacement.
C. PHASE III
1.  Budget
119.      Reduce expenditures on general services.  This should be carried
out through: i) reducing the number of independent institutes;
ii) restructuring the urban transport subsidy; iii) reducing the expenditure
in external leases and r:epresentation expenses; and iv) reforming the Law
earmarking funds for the University.
120.      Reduce the size of Central Administration.  A study should be
performed to assess where and by how much the ratio of service to
administrative personnel should be increased. As a result of this study, the
Government should restructure staffing patterns in the public sector as a
whole, possibly through the restructured Civil Service.
121.      Restructure the pay schedule.  The wage bill should be reduced, and
incentives given to higher level technical and managerial staff.
122.      Continue with the staff reduction program.



- 24 -
2. Public sector Manacaement
123.      Strengthen the Government-wide Accounting System.  The concept of a
Government-wide, comprehensive accounting system under the responsibility of
MIFIN, needs to be adopted. The problems of ineffective, fragmented
accounting can be solved with the assistance of the proposed BAU in each
institution, headed by a MIFIN-appointed Accountant, who bear key
responsibility for bookkeeping and preparing year-end final accounts of the
institutions. Each institution must submit its year-end final accounts to the
Auditor General via MIFIN for legality and veracity clearance. The Auditor
General (Contralor) should determine whether there have been any excesses or
violations and apply administrative sanctions, acting as a "court of account"
in the event of non-compliance.
3. Sectoral Strategies
Education
124.      Change teacher training alternatives.  In the long run,
"professionalization" (i.e. in-house full-time training for untitled
teachers), should be abolished. It should probably be changed to some system
of distance education (such as distributing the material and taking an exam,
as MED is currently considering). A general exam to provide accreditation at
different levels should also be introduced. Such procedures would free as
much as US$2.5 million, or 5S of the 1992 Budget. The organizational structure
should recognize different career paths for accredited and non-accredited
teachers, and the salary structure should recognize larger salary differences
between the two career paths, as established in the Care:er Law. However, NED
should consider establishing an examination for teachers, and give high points
according to performance in this test, rather than to previously acquired
degrees. Such an exam could also provide accreditation for those "empiricos"
(untitled teachers) who demonstrate their abilities as teachers and disqualify
teachers who do not qualify above a certain level.
125.      Restructure the organization of MED.  Organizational changes should
be oriented towards simplifying the structure and reducing personnel and costs
at the central level. Managerial changes should focus on improving the
management information system, and decision-making and implementation
capacities at the central level, prior to any further decentralization.
Standardized systems that would simplify monitoring and control of
decentralized units, such as achievement tests should be developed. Private
sector subcontracting should be promoted in developing and administering
tests.
126.      Regulate private schools according to the quality of their output.
Tests will allow the regulation and control of private schools to be based on
the quality of their output, and not only on their inputs. A freer curricula
will allow users of the system to judge what are the best institutions that
fit their needs. For equity and efficiency reasons, the authorities should
improve the targeting of the private school subsidies.



- 25 -
AQriculture
127.      Improve the administration of the project cycle.  In particular,
the Government needs to improve monitoring, control and evaluation of
expenditure through both institutional strengthening and training and/or
recruiting adequate staff.
Transvort
128.      Reduce staff costs and change the staffing pattern at MCT. To this
end reforms should: i) streamline activities that are now duplicated at the
central and regional offices; ii) strengthen some Divisions (like Economics
and Planning); and iii) change the role of some other Divisions (like
Highways), away from project design and execution towards project management
and regulation.
Enerzv
129.      Improve the operational and financial performance of INE.
Reforms should: i) undertake further reductions of personnel; ii) undertake
an effective power losses reduction program; iii) eliminate the existing
distortions in electricity tariffs this implies mainly the elimination of the
subsidy to municipalities which do not pay for public lights; and iv)
undertake a short-term institutional strengthening program focussing in
improved budgeting, a managerial information system, auditing and control
systems. This program should include the strengthening of INE's planning
capability (demand and expansion optimization), power systems maintenance and
loss control.
Water
130.      Increase INAA's (and other sectoral institutions') management
capacity to handle more projects (directly or supervising). A key problem to
address in the medium to long run is the low coverage, in particular in rural
areas. The objectives of an increased investment program should be to: i)
repair tine exi.sting network to prevent filtration; ii) provide hygiene
education; iii) implement low cost sanitation and improve waste disposal; and
iv) install latrines in rural communities with existing or proposed water
systems.



POLICY MATRICES'
1/ The institution(s) named in the first box of each action are the ones that
would be responsible for executing the plan of action. Sometimes a second
institution, that would have secondary responsibility, is included.



1. Restructuring the Budget
ISSUE                             POLICY DIRECTION                      RECOMMENDED ACTIONS
P H A S E   I
1.1  The average wage             Restructure the pay schedule          1. Monetize fringe benefits (now included in goods and services) and include a
(inclusive of fringe                                                    percentage in wages.
benefits) is high and pay                                               2. Include collective agreement benefits (now included in current transfers)
schedule is not transparent                                             in wages.
MIFIN                                                                   3. Restructure pay schedule so to reduce average pay and increase pay to high
l_____________________________        level   management   staff.
1.2  Expenditures in most         Reduce expenditures in Goods and   1. Audit inventory of vehicles to rationalize expenditures in gasoline and
"Goods and Services" items is   Services                                vehicle maintenance.
high                                                                    2. Rationalize water consumption in MINSA and MED.
3. Negotiate present high public sector tariff with INAA.
MIFIN                                                                   4. Pay per-diems only when travel occurs.
5. Rationalize food subsidy to MINSA and MED employees.
6. Rationalize procurement and distribution of medicines.
7. Overhaul the system of road maintenance.
1.3  Defense expenditures         Reduce equipment in line with         1. Assess cost-benefit of replacing eastern block vehicles due to high
continue to be too high           personnel reduction; continue        maintenance costs.
with personnel reduction             2. Reduce the number of vehicles; armament; services, etc. in line with the
MIFIN                                                                   reduction in personnel.
1.4  Too little is spent in       O&M expenditures to be increased   1. Institutions to be assigned O&M expenditures in accordance to size of
O&M                               and kept in line with new             assets.
investment                           2. MIFIN to closely monitor that O&M funds are spent adequately and not
MIFIN                                                                   diverted.
P H A S E   I I
1.5  Several Ministries           Firms should be privatized            1. The number of existing firms, their employment, assets and amount of
engage in entrepreneurial                                               implicit subsidies they are receiving need to be determined.
activities that were not                                               2. Firms should be divested from the Ministries and privatized or closed.
transferred to CORNAP
MIPRES
P H A S E   I II I_ 
1.6  General services             General services to be               1. Reduce number of independent institutes.
expenditures are too high         rationalized                          2. Restructure urban transport subsidy, targeting better and reducing subsidy
to a percentage of total cost.
3. Examine and reduce expenditures on external Leases.
MIFIN                                                                  4. Reform Law earmarking funds for the University.
l ___________________________      _  ___________________________        5.   Eliminate   the   item    'unforseen   expenditures'.
1.7  Central administration       Increase the ratio of service to   1. Perform a study of ratios of service to administrative staff.
is too big in several             administrative personnel             2. Produce an action plan to restructure staffing patterns to reduce
ministries                                                              administrative staff.
MIFIN-C.SERVICE



2. Public sector management
ISSUE                                     POLICY DIRECTION                     RECOMMENDED ACTIONS
P H ASE    I
2.1.  Wea': budget management system    Strengthen and restructure             1. Identify the borderlines between core units.
budget management                    2. Establish Budgeting and Accounting Units in all ministries.
MIFIN                                                                          3. Create a body of inspectors (the Director Delegates).
4. Improve content and format of budget documents.
2.2  Weak expenditure control system   Establish a new Expenditure             1. Actions listed above will accomplish this goal also.
Control System                       2. Limit the flexibility to make modifications among allocations.
NIFIN                                                                          3. Extend monitoring activities of the Directorate of Autonomous
Entities.
4. Extend overall budgetary practices and expenditure control to the
Ministries of Defense and Police.
5. Extend budgeting practices, reporting standards and expenditure
control procedures to "unforseen expenditures."
2.3  Lack of a government-wide            Establish a government wide          1. Create a system of accounting units headed by a MIFIN appointed
accounting system                         accounting system                    accountant in all ministries.
2. Final accounts to be submitted to Auditor General (Contralor).
Responsible institutions: MIFIN-                                               3. Auditor General to check legality and veracity of accounts.
CONTRALORIA
oD
2.4  Weak management and                  Establish a new mechanism for        1. Create a committee to coordinate the flow of aid.
coordination of foreign aid               the coordination and control of    2. Pass a law/decree regulating the procedure for receiving aid,
foreign aid                          ackninistrative responsibilities and potential sanctions when
MIPRES-MEDE                                                                    established procedures are not followed.
2.5  Scarcity of qualified personnel   Implement a Technical Assistance   1. Provide training seminars for MIFIN and sectoral staff on budget
Program                              preparation, implementation and control issues.
MIFIN-C.SERVICE                                                                2. Obtain long-term TA for the formulation of the accounting system.
3. Obtain short-term consultants for expenditure control, auditing
mechanisms, MTEP, and expenditure prioritization and program analysis.
P H A S E   I I
2.6  Lack of accountability for           Establish the accountability of    1. Strengthen the operation of Contraloria.
expenditures                              institutions for actual              2. Resolve overlapping responsibilities between the Treasury and the
CONTRALORIA-MIFIN                         expenditures                         Budget Directorate.
2.7  Lack of an adequate Civil            Restructure the Civil Service        1. Produce a plan of action to restructure the Civil Service system.
Service System                            System                               2. Set up a system of establishments and payroll lists.
MIPRES-MIFIN                                                                   3. Prepare position tables for each institution.



2.8  Ueak capacity for investment        Strengthen the institutions          1. Establish a system to produce the PIP and to enforce decisions with
planning                                  involved in the design of the       respect to public investment projects.
Public Investment Program           3. Strengthen coordination of TA with development priorities.
MIPRES-MEDE                                                                   3. Guide TA to improve planning and strengthen implementation capacity
in the line ministries.
P H A S E   I I I
2.9  Lack of public finance pLanning   Create a planning system, and a    1. Prepare an action plan to identify the targets, parameters and
link with the b'Ageting function   procedures of the MTEP model.
2. Establish a mechanism to reguLarly produce a medium term expenditure
plan.
MIFIN                                                                         3. Prioritize expenditures on the basis of evaluating program profiles
and eliminate non priority and least efficient programs.



3. Health Sector
ISSUE                              | POLICY DIRECTION                    ! RECO4MENDATIONS
P H A S E   I
3.1  Lack of clearly established   Strengthen PHC programs                 1. MINSA to adopt a PHC policy.
priority and strategy on primary                                           2. Channel most external financing to PHC.
health care (PHC).                                                         3. Reallocate resources to PHC according to an action plan.
4. Resources can be obtained from: reduction of
MINSA                                                                      administrative personnel; reduction in fringe benefits to
staff; cost recovery for services and drugs (in particular
for hospitals).
3.2  Need to improve financial       Improve effectiveness and              1. Revise budgetary process in Line with recomnendations in
management.                          efficiency of financial resource    matrix 2.
MIFIN                                use                                   2. Use unit costs as programming and budgeting tool.
3.3  Inappropriate staffing          Review manpower policy                1. Strengthen the personnel function in MINSA.
patterns.                                                                  2. Restrict entry of general physicians into specialties.
MIFIN                                                                      3. Repeal hiring agreement of medical school graduates.
3.4  Poor management of              Develop an adequate system for        Design and introduction of regulations for: procurement,
pharmaceuticals and medical          handling supplies                     disbursement, allocation, storage and inventory and
supplies.                                                                  distribution, prescription and utilization by beneficiaries.
MINSA                       __.__
3.5  Facilities are maintained       Improve funding for maintenance       1. Allocate more resources to operations and maintenance.                            O
poorly.                                                                    2. Reduce excess demand by charging for services.
MINSA
P H A S E   I 1
3.6  Budget cuts preserved           Improve services for patients         1. Monetize fringe benefits and add a percentage to the
worker benefits but deteriorated                                           salary.
services for patients                                                      2. Fringe benefits should be eliminated in the items
clothing, per-diems (when paid w/o travel), medicines,
NIFIN                                                                      overtime pay (when paid w/o overtime work) and possibly
food.
3. Assign savings to improve patients services and increase
assigrnent for food, sheets, etc.



4. Education Sector
ISSUE                            POLICY CIRECTION                    RECOWHENDED ACTIONS
P H A S E   I                                    _
4.1  Resources are not           Reallocate funds towards            The following are possible sources of funds to reallocate to primary education:
allocated according to           primary education                   1. Reduce non-teaching personnel.
stated priorities                                                    2. Reduce subsidies to higher education.
3. Reevaluate costs and objectives of adult education.
4. Assess beneficiaries of subsidized school to improve targeting.
5. Change the system of granting subsidies to promote quality.
MIFIN-MED                                                            6. Development of cost-recovery options (in particular in higher education).
7. Change the transport subsidy system to a partial subsidy.
8. Take account of INATEC'R payroll tax revenues and adjust its budget
accordingly.
9. Charge Universities for the use of public utilities.
10.Reform the retirement provisions of the Ley de Carrera Docente in line with
INSSBI s national rules.
_   11. Increase the teacher-student ratio.
P H A S E   I I I
4.2  Low qualitv of              Improve teaching practice           1. Develop and enforce general examinations as accreditation vehicle.
teachers                                                             2. Create salary and career incentives for accredited teachers (reform Ley de
Carrera Docente to reward performance rather than seniority or titles).
MED                                                                  3. Reform Teachers Training program (change nature of professionalization program;
grant credit through examinations and not just attendance; reduce cost).
4.3  Institutional weakness    Improve management practices          1. Improve flow of information in MED.
of MED                                                              2. Improve personnel management.
3. Improve inventory management.
MED                                                                 4. Improve programming and budgeting.
_________________________                                  5. Improve expenditure control.
4.4  High repetitiols and        Reduce repetition and dropout    Reallocate resources towards primary education:
dropout rates in primary         rates in the first two grades    1. Assign best teachers.
school                                                              2. Reduce multi-grade teaching.
3. Increase supply of learning materials.
MIFIN-MED                                                           4. Introduce student standardized testing to provide feedback on service quality.
5. Design a salary structure in the public system and a subsidy structure in the
private sector that rewards high quality of education.
6. Cost/benefit evaluation of a targeted school feeding program.
4.5  Lack of an Education        Definition of Education sector   NED to draft and approve education sector policies, strategies and priorities.
sector policy                    policy
MED



5. Agriculture
ISSUE                   | PCLICY DIRECTION           | RECOMMENDED ACTIONS
P H A S E   I
5.1  Lack of a            Improve coordination          1. Set up a coordinating Committee in charge of developing a sectoral policy.
sectoral policy; lack    between MAG, INRA and          2. Define sectoral short and medium run objectives; concentrating efforts in
of coordination among    IRENA                         extension, research, irrigation, institutional development, coordinating
sectoral institutions                                   technical assistance and training.
3. Define the roles of the different i-titutions in attaining sectoral
MIPRES                                                 objectives.
4. Organize and coordinate dispersed efforts in extersion and research.
5. Study the possibility of contracting out services (like extension, certain
l ______________________  __________________________    research,    training).
5.2  Poor 'nvestment      Overhaul Investment          Revise Investment Program in line with sectoral strategy.
Program      MEDE         Program
P H A S E   I I I
5.3  Weak                 Improve the capaoity to       Improve the monitoring, control and evaluation of expenditure through
ackninistration of the    implement projects            institutional strengthening (see ...) and training/recruiting of adequate staff.
project cycle
SECTOR                   ___________________
5.4  Internal             Reallocate expenditures in  1. Reduce Central Adninistration expenditures.
allocation of current    the sector                    2. Increase funds to travel for extension activities.
expenditures do not                                    3. Redirect funds from direct or indirect productive activities that should be
correspond to the                                       left to the private sector.
sector's problems and
priorities
MIFIN



6. Water and Sanitation
| ISsuE                                 | POLICY DIRECTION                           I RECOMMENDED ACTIONS
P H A S E   II                                                                                                                                         l
6.1  Complete dependance on donors        Develop local institutions to hardle         1. Develop plans on how donors technical and financial assistance
in the rural arees, both                  water ard sanitation projects, and           will be phased out.
financially and institutionally           operations and maintenance                   2. Determine the institutions that will take over the management
of the projects (municipal water companies, the communities, or
private water companies).
MIFIN                                                                                  3. FISE projects (given that FISE is temporary) should be treated
as donor projects and stages 1 and 2 above followed.
4. All projects should include provisions for cost recovery, to
fund O&M expenditures.
6.2  Low coverage, in particular in   Assign high investment priority to the   1. Increase management capacity of INAA to handle more projects
rural areas                               sector                                       (be it directly or supervising the projects).
INAA                                                                                   2. Assign priority to rural areas.
P H A S E   I I I
6.3  Poor quality of service due to    Remove sources of existing                      1. Repair existing network to prevent filtration.
tack of maintenance; suppties are         contamination; reevatuate, and               2. Hygiene education. 
often contaminated                        increase, priority assigned to               3. Implement low cost sanitation and improve waste disposal.
sanitation with respect to water            4. Install latrines in rural communities with existing or proposed
INAA                                      systems                                      water systems.



7. Energy
ISSUE                              |POLICY DIRECTION                        RECOMMENDED ACTIONS
P H A S E   I I
7.1  Existing institutional          Reform the sector's legal              1. Create an autonomous regulatory entity.
setup imposes serious                framework and institutional setup    2. Reform INE's organic law to promote private sector participation.
constraints on sector
performance            MIPRES
P H A S E   I I I
7.2  INE's operational and           INE should be institutionally          1. Improve accounting, budget control and auditing.
finanriat acdinistration needs      strengthened                            2. Improve information systems.
to be iirproved                                                             3. Reduce personnel and reform staffing patterns in favor of professional
INE                                                 staff.
7.3  INE's capacity to               INE's planning and implementation    1. Strengthen planning capability.
undertake expansion projects         capacity to be improved                2. Improve capacity to maintain the power system and control losses.
and maintain the existing is                                                3. Strengthen engineering and supervision of projects.
weak                   INE
8. Transport
ISSUE                            | POLICY DIRECTION                    I RECOMMENDED ACTIONS                                                                       uo
P H A S E   I
8.1  MCT's PIP is overLy           MCT's capacity for planning,          1. Reduce current PIP by one third.
ambitious, given its               selectrol ging  recteng  and          2. Postpone projects u ithout financing and  no  assured benefits.
administrative capacity and        controlling project execution         3. Staff restructuring shoutd strengthen the management of the project cycse.
lack of funds        MEDE-MCT      should be strengthened               4. TA and training for concerned staff.
P H A S E   I I
8.2  Not enough is spent in         Reallocate resources and improve   Road maintenance should be ailocated by a bidding process, and not to the
maintenance activities              cost-effectiveness in road           Regional state enterprises, that should be privatized.
MIFIN         maintenance
8.3  The railway is receiving      Close or restructure the railway   Cost/benefit evaluation of the railway and alternatives for restructuring
a substantial subsidy
MCT_MIFIN
P H A S E   I I I__
8.4  The Ministry o'                Staff costs need to be reduced       1. Activities that are now duplicated at the central and regional offices
Construction and Transport is    and tne staffing structure              should be streamlined.
highly .reaucratized               changed                               2. Some Divisions (like Economics and Planning) need to be strengthened.
3. Some Divisions (like Highways) need to change their role, away from
MCT                                                project design and execution towards project management and regulation.