Document of The World Bank FOR OFFICIAL USE ONLY Report No. 143466-CR INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION AND MULTILATERAL INVESTMENT GUARANTEE AGENCY PERFORMANCE AND LEARNING REVIEW OF THE COUNTRY PARTNERSHIP FRAMEWORK FOR THE REPUBLIC OF COSTA RICA FOR THE PERIOD FY16-20 December 6, 2019 Central America Country Management Unit The International Finance Corporation Multilateral Investment Guarantee Agency Latin America and the Caribbean Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s Policy on Access to Information. The date of the last Country Partnership Framework was April 23, 2015 (Report No. 94686-CR) FISCAL YEAR January 1–December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of December 6, 2019) Currency Unit = Costa Rican Colon (₡) US$1.0=₡566.01 ABBREVIATIONS AND ACRONYMS CAT DDO Catastrophe Deferred Draw Down MIGA Multilateral Investment Guarantee Option Agency CCSS Caja Costarricense de Seguro Social MSME Micro, Small, and Medium-size (Costa Rican Social Security Enterprise Administration) NCD Non-Communicable Disease CPF Country Partnership Framework NDP National Decarbonization Plan DLI Disbursement-linked Indicator OECD Organization of Economic Cooperation DPF Development Policy Financing and Development DRM Disaster Risk Management PAC Partido Acción Ciudadana (Citizens’ Action Party) EMIS Education Management and PforR Program for Results Financing Information System PFR Public Financial Review FEZ Free Economic Zones PLR Performance and Learning Review FY Fiscal Year PPP Public-Private Partnership GDP Gross Domestic Product PUSC Partido Unidad Social Cristiana (Social GDI Graduation Discussion Income SCD Christian Unity Party) HCI Human Capital Index SME Systematic Country Diagnostic IBRD International Bank for Reconstruction SOE Small and Medium-size Enterprise and Development TA State-Owned Enterprise IFC International Finance Corporation Technical Assistance IPP Indigenous Peoples Plan VAT Value-Added Tax LAC Latin America and the Caribbean WBG World Bank Group (region) IBRD IFC MIGA Vice President Humberto Lopez Georgina Baker S. Vijay Iyer (Acting (Acting) EVP) Director Seynabou Sakho Gabriel Goldschmidt Merli Margaret Baroudi Regional Manager Luc Grillet Task Team Tania Dmytraczenko / Carolina Cardenas / Jaya Bexi Francina Jimenez Leaders Oscar A Avalle Anderman TABLE OF CONTENTS INTRODUCTION ............................................................................................................................................. 1 I. MAIN CHANGES IN COUNTRY CONTEXT .................................................................................. 2 Recent Economic Developments ....................................................................................................... 2 Poverty and Shared Prosperity ........................................................................................................... 4 II. SUMMARY OF PROGRAM IMPLEMENTATION ........................................................................ 6 Pillar 1. Reducing Constraints to Productive Inclusion ..................................................................... 6 Pillar 2. Bolstering Fiscal, Social, and Environmental Sustainability ............................................... 8 Portfolio Evolution and Performance ............................................................................................... 10 III. EMERGING LESSONS ..................................................................................................................... 11 IV. ADJUSTMENTS TO THE CPF AND FUTURE WBG ENGAGEMENT .................................... 12 V. RISKS TO THE CPF PROGRAM .................................................................................................... 14 ANNEX 1. UPDATED CPF RESULTS FRAMEWORK ............................................................................ 16 ANNEX 2. MATRIX OF CHANGES TO ORIGINAL CPF ....................................................................... 22 ANNEX 3. PROGRESS TOWARD CPF OBJECTIVES ............................................................................ 26 INTRODUCTION 1. This Performance and Learning Review (PLR) summarizes progress in the implementation of the World Bank Group (WBG) Country Partnership Framework (CPF) for the Republic of Costa Rica for FY16-20 (Report No. 94686-CR) and updates the CPF program. The CPF was designed to support the Government of Costa Rica’s goals of (a) reducing constraints to productive inclusion and (b) bolstering fiscal, social, and environmental sustainability. The goals constitute the two Pillars of the CPF, which are articulated through six objectives (Table 1). 2. The CPF has been implemented amid a challenging and changing political environment. Partido Acción Ciudadana (PAC)’s presidential victory in 2014 severed Costa Rica’s electoral trajectory of the last three decades, in which one of the two major parties—Partido Liberación Nacional (PLN) and Partido Unidad Social Cristiana (PUSC)—tended to replace the other. Despite its victory, PAC held only 13 of the 57 seats in the Legislative Assembly. As a result, the Government had to negotiate key reform agreements with larger parties, generating governing challenges. In addition to the fragmented political environment, PAC’s inexperience in governing, coupled with the complex bureaucratic structure and procedural nature of the Costa Rican State, delayed the passage of key legislative initiatives. Although there were victories on some aspects of fiscal reform, passage of core reforms (value-added and income taxes, etc.) have not yet materialized. 3. In April 2018, PAC won the presidential elections again with an ambitious reform agenda and 10 out of 57 seats in Congress. The administration priorities are to: (a) stabilize the public finances, as a pre-condition to achieving other outcomes such as improved results in education; (b) accelerate the OECD accession which is considered as key to help modernize the country’s key institutions; and (c) advance the process to decarbonize the economy over the long-term to address climate change. The administration reached a historic agreement among political parties on an ambitious consensus-based package of reforms, including legislation to stabilize the public finances and accelerate the OECD accession. These reforms were aided by a simplification in the internal procedures of the legislative Assembly enacted in March 2019. The Government of Costa Rica has also put in place an ambitious National Decarbonization Plan (NDP) 2019-50. 4. Macroeconomic conditions deteriorated over the CPF period, hampering growth and development. Growth, robust at 4 percent on average between 2010 and 2016, slowed-down to 3.4 and 2.6 percent in 2017 and 2018, respectively, reaching 1.4 percent in the first half of 2019. While a deterioration of external conditions played a role in the deceleration -- particularly disruptions to trade resulting from the Nicaragua crisis-- the weakening fiscal situation increased financial costs to the economy and impacted investors and consumers’ confidence, decelerating internal demand. On the fiscal front, a counter-cyclical fiscal stance helped the economy to bounce back from the 2008 global crisis, but its reliance on current spending led to fiscal deficits of over 5 percent of GDP per year since 2010, which doubled the central government debt to GDP ratio from less than 25 to 53 percent of GDP between 2008 and 2018. Market access terms were curtailed with the downgrade of Costa Rica credit ratings in 2018 by all three major credit rating companies placing the country four notches below investment grade. 5. This PLR adheres to the principles for IBRD engagement in Costa Rica, whose income is above the Graduation Discussion Income (GDI), namely the extent of access to external capital markets on reasonable terms, and progress in establishing key institutions for economic and social development. In light of the deteriorated fiscal situation, the principles are very relevant to Costa Rica. At the same time, the Government has launched a process to modernize key institutions and has requested support from the WBG and other development partners, such as the OECD. The FY21 Systematic Country Diagnostics (SCD) Update will examine the key elements of IBRD engagement principles and assess knowledge gaps including key institutional gaps. 1 6. Considering the significant economic changes since 2016, the priorities of the current administration, and the key elements of IBRD’s Graduation Policy, this PLR proposes to introduce adjustments to the CPF – revising one pillar and three of its objectives and adjusting the results matrix—and extend the CPF period by two years. Pillar 1 will be revised to incorporate growth enhancing activities. Within this pillar, Objective 1 will be expanded to cover the larger education sector, and Objective 3 will also be broadened to include sustainable investments in the fisheries sector. The second pillar will remain unchanged, but Objective 4, which originally focused on strengthening fiscal management, will now also aim to promote fiscal sustainability. Similarly, the PLR also proposes adjustments to the CPF results matrix to include indicators that were not formulated with precision at the time of the CPF preparation, to adjust some targets to reflect implementation progress to date, and to add indicators covering the new interventions which should yield measurable outcomes by the end of the CPF cycle, mainly promoting fiscal and environmental sustainability. Table 1. CPF Pillars and Objectives ORIGINAL REVISED Pillar 1. Reducing Constraints to Productive Inclusion Pillar 1. Reducing Constraints to Productive Inclusion and Restoring Growth Objective 1. Enhance higher education to improve skills Objective 1. Enhance education to improve skills Objective 2. Increase access to finance to generate Objective 2. Increase access to finance to generate productive opportunities productive opportunities Objective 3. Promote sustainable investments in energy and Objective 3. Promote sustainable investments in energy, transport to support competitiveness fisheries and transport to support competitiveness Pillar 2. Bolstering Fiscal, Social, and Environmental Pillar 2. Bolstering Fiscal, Social, and Environmental Sustainability Sustainability Objective 4. Strengthen fiscal management and Objective 4. Promote fiscal sustainability and strengthen management capacity to enhance efficiency management capacity Objective 5. Improve efficiency and quality of health Objective 5. Improve efficiency and quality of health insurance system to improve results insurance system to improve results Objective 6. Expand capacity to promote climate-smart and Objective 6. Expand capacity to promote climate-smart environmentally sustainable development and environmentally sustainable development I. MAIN CHANGES IN COUNTRY CONTEXT Recent Economic Developments 7. After almost a decade of relatively robust macroeconomic performance, economic growth has been decelerating since 2016 due to external shocks and weakening domestic demand. The economy grew by an average of 4 percent per year between 2010 and 2016, significantly higher than the OECD (1.9 percent) and LCR averages (2.5 percent), supported by robust foreign direct investment (FDI), increased government spending following counter-cyclical fiscal measures taken during the crisis, and vigorous private consumption fuelled by rising real wages. However, GDP growth slowed to 3.4 percent in 2017, 2.6 percent in 2018 and further declined to 1.4 percent in the first half of 2019 due to external and internal factors. On the external side, the Nicaragua crisis affected exports to Central America, while the fall in international prices of agricultural goods and climatic shocks (El Niño) depressed agricultural activities. On the internal side, a worsening fiscal situation has also increased financial costs to the economy and eroded investors and consumers' confidence, decelerating investments and consumption. 8. A long overdue fiscal reform designed with careful attention to its distributional impacts was enacted in December 2018. The fiscal deficit averaged more than 5 percent of GDP between 2010 and 2018, increasing the public debt-to-GDP ratio from less than 25 to 53 percent. In December 2018, the Legislative Assembly approved a major fiscal reform, the first in more than two decades, with revenue increases and spending containment measures, such as: (a) replacing the sales tax with a value-added tax (VAT) while broadening the base to include services and other items previously 2 excluded (the impact of this reform on the poor is being limited by several exemptions and reduced VAT rates for health services and pharmaceuticals); (b) broadening the income tax base, increasing rates for the upper-income levels, and harmonizing capital income treatment; (c) capping bonuses and freezing public sector hiring; and (d) the introduction of fiscal rules constraining current spending growth for the non-financial public sector to the average nominal growth of GDP over the previous 4 years or less, depending on the debt-to-GDP ratio. In parallel, the authorities launched a thorough modernization process for tax collection. 9. According to the recently completed Public Finance Review, the fiscal reforms can deliver potential fiscal savings of 4 percentage points of GDP over the 2019-23 period. The measures approved in the fiscal reform package are being implemented as planned and in some cases, such as VAT collections, early results are promising. The 2020 budget implies an upfront adjustment of roughly one percentage point of GDP in the primary balance relative to the 2019 budget—with current spending adjusted by more than required by the fiscal rules despite an increase in interest payments. The authorities are also taking additional measures to improve the finances of the non-financial public sector, such as the inclusion of autonomous government agencies (e.g., the Road Fund) into the central government budget beginning in 2021, which will reduce budget rigidities and can generate additional savings. Progress is also being made to reduce the losses of the Central Bank and improve the operational balance of state-owned enterprises (SOEs). Based on the most recent growth projections, the authorities expect the non-financial public debt ratio to peak at around 65 percent in 2023 and to decline to less than 60 percent by 2030. The public sector’s Debt Management Strategy has also been recently revamped with the objective of improving governance and coordination across entities and, ultimately, lengthen maturities and reduce rates by concentrating issuances on a few instruments and broadening the investor’s base. 10. However, reforms might prove insufficient given risks to their implementation and the presence of contingent liabilities. There are important challenges to the implementation of the fiscal reforms, such as the weaknesses in revenue collection, which needs to reduce compliance cost and modernize audit procedures and court challenges to the coverage of the fiscal rules. The authorities are aware of these challenges and are addressing them. In this context, both the General Comptroller’s and Attorney’s Offices have ruled in favor of the full application of the fiscal rule. At the same time, contingent liabilities in Costa Rica emerge from other structural challenges that will need to be tackled over the next few years, such as: (a) the size, sustainability, and efficiency of the large financial and non-financial public sector, as the state is a dominant player in key sectors, such as banking and electricity; and (b) the social security system since Costa Rica is the fastest aging country in LAC. 11. Inflation expectations have converged downward, to around 3 percent, and are well- anchored. Inflation accelerated in 2018 from very low levels, reaching the midpoint of the target range set by the Central Bank of Costa Rica of 2 to 4 percent, but has stabilized in 2019. Given the wider slack in economic activity, and the cut in interest rates from the U.S. Federal Reserve, the Central Bank of Costa Rica appropriately moved to support economic activity by reducing the policy rate for a cumulative 125 basis points (bps) to 4 percent, and reducing the minimum legal reserve and liquidity reserve rate over obligations in national currency, from 15 to 12 percent. 12. The balance of payments situation remains healthy due to exports from Free Economic Zones (FEZ) and still strong inflows of foreign direct investment. International reserves stood at US$7.7 billion (15.2 percent of GDP) in August 2019, up from US$6.5 billion in November 2018. A recent bill reinforced Central Bank’s independence and strengthened its mandate on inflation targeting, which is expected to reduce the scope for foreign exchange interventions and avoid Central Bank financing of the Government. The monetary framework was supported by the approval of the fiscal reform, which contributed to reducing exchange rate market pressures. Greater availability of foreign currency and well-anchored inflation expectations resulted in greater exchange rate stability, which appreciated during 2019, reflecting both one-time factors—such as the tax amnesty package that was 3 part of the fiscal reform—and structural trends (e.g., the recovery of exports in FEZ). Similarly, sovereign yields in colones declined on average 250 bps by October 2019 (year-on-year). However, the EMBI spread remains above 400 bps as of November 7, 2019, albeit down from its peak of 566 bps in December 2018. There has been much progress in 2019 towards the consolidation of the debt stock into fewer lines, which has been fragmented in 2018 across many individual negotiable and non- negotiable instruments. As part of a revamped Debt Management Strategy, Costa Rica successfully issued US$1.5b in eurobonds on November 13, 2019, with 11 ($1.2b) and 26 ($300m) years maturity and yields of 6.25 and 7.16 percent, respectively. 13. Although growth is expected to recover gradually, Costa Rica needs to boost productivity over the medium term to sustain it. GDP growth for 2019 is projected to be 2 percent, and to recover to 2.5 and 3 percent in 2020 and 2021, respectively. The drivers of the recovery include easier credit conditions, a more accommodative monetary policy, and an acceleration in the pace of public investment. Productivity growth has gained some momentum over the past decade, but many institutional obstacles are hampering stronger growth and the spreading of its gains more widely. Obstacles include labor market marginalization, restrictions on competition, low outcomes and inequities in education, and weak institutions, including key macroeconomic management institutions (e.g., tax collection, debt management, and medium-term fiscal frameworks) and SOE management (e.g., ownership policy, introduction of international accounting standards, level playing field). Introducing evidence-based policymaking is also an essential element of the institutional agenda. 14. The Organization of Economic Cooperation and Development (OECD) accession process, dating from 2015, continues to provide an anchor for Costa Rica’s efforts to boost productivity and modernize institutions. Under the accession process, Costa Rica has recently approved reforms in the areas of competition, fisheries, Central Bank independence, the national banking system, securities market regulation, and vocational education and training. The ambitious modernization program also includes public employment reforms, labor market reforms, consolidated supervision for financial sector entities, regulation of public strikes, simplification of business procedures, and the harmonization of statistics, including with respect to methodology and reporting. The Government expects to complete the accession process in the first semester of 2020 and has completed 17 of the 22 reviews by the OECD committees. 15. Prospects for economic growth and an improved fiscal outlook are subject to significant external and domestic risks. Downside external risks includes lower global growth, instability in neighbouring countries and hikes in international energy prices. The high levels of reserves and the flexible exchange rate, acting as a shock absorber, would help to partly mitigate these risks. Domestic risks include a complex political context, that could lead to growing public discontent, especially given the increase in unemployment. The authorities are mitigating these risks by, among others: (a) modernizing revenue collection processes and agencies; (b) developing additional fiscal measures; (c) anchoring reforms to the OECD accession process, which command broad support; and (d) by carrying out a broad consultations and communications. Poverty and Shared Prosperity 16. Costa Rica still has one of the lowest poverty rates in LAC, but there has been no progress in reducing national poverty rates or inequality for nearly a decade now. With an estimated 10.6 percent of the population living below the internationally comparable upper-middle-income poverty line in 2018 (US$5.5/day in 2012 PPP), Costa Rica remains among the least poor countries in LAC, after Uruguay (2.9 percent) and Chile (6.4 percent). Using the national poverty lines (at around US$8.8/day and $6.7/day for urban and rural areas, respectively, in 2011 PPP), the national poverty rates have, however, been flat since 2010 and even increased between 2017 and 2019, rising from 20 to 21 percent. Poverty continues to be characterized by persisting spatial disparities. Using the national poverty lines, four regions have poverty rates between 28-30 percent in 2019: Brunca, Pacífico Central, Huetar Caribe, and Huetar Norte. The Central region remained the least poor region (7 percent), 4 although it also concentrated the largest number of poor people (40 percent of the national total), in large part because the region is home to 62 percent of the population. The National Development Plan (PNDIP) 2019-2022 proposes to prioritize job creation in those regions with largest vulnerable populations. In particular, the Northern Border Area Comprehensive Care Plan and the Huetar Caribe Regional Development Plan have been designed to improve living conditions of vulnerable groups, including indigenous and afro-descendants in the Central and Caribbean regions. 17. Similarly, there has been no progress in reducing inequality for well over a decade and Costa Rica has lost the ranking of being one of the most egalitarian countries in LAC. Although income inequality has slightly declined since 2013—reversing to its 2010 levels—it remains high by international standards. Using an internationally comparable income measure, the Gini stands at 0.479 in 2018 (based on preliminary estimates) compared to 0.481 in 2010. (Recently released data for 2019 shows a national Gini coefficient of 0.514, compared to 0.507 in 2010.) World Bank data, as of 2018, ranked Costa Rica as 19th of 158 countries measured. 18. Poverty has been inelastic with respect to growth making inclusive growth a key priority. The growth of incomes of the bottom 40 percent (B40) of the income distribution was about 4.9 percent between 2004 and 2009, driven by labor income, which resulted in the reduction of poverty but did not improve inequality (income for the overall population was, on average, 5.8 percent over the same period). However, growth patterns changed after 2009. First, even in years of relatively higher economic growth at the beginning of this decade (2010-16), poverty rates moved very little or not at all. Second, income growth has slowed down across the board since 2017 limiting progress towards poverty reduction. Regional comparisons covering 2012-2017 show that income growth of the B40 has been one of the lowest in LAC (at a 2 percent annualized growth rate), albeit this time slightly higher than that of the overall population (1.7 percent). 19. A widening wage gap between skilled and unskilled workers has limited Costa Rica’s capacity to counteract the adverse effect of income inequality on poverty in the past. Between 2001 and 2007, improvements in labor incomes in the agricultural sector contributed to the reduction of both poverty and income inequality. However, the economic model favored the development of high value-added sectors, which (following the global financial crisis) increased the demand for, but not the stock of, skilled workers. This led to an increment in the returns to skills, contrasting with the reduction of the skill premium observed in most LAC countries since 2010. The mismatch between skills and jobs, and the corresponding widening earning gap between skilled and unskilled workers is a contributing factor to inequality trends in Costa Rica. As the economy decelerated in recent years, the returns to skills has also started to fall in line with the situation in other LAC countries - returns to skills in Costa Rica increased from 8 to 9.3 percent between 2010-2014 and fell to 8.4 percent in 2017- and the labor market has overall weakened. 20. The Public Finance Review dated June 2018 concluded that the overall redistributive impact of fiscal policy has been modest. Public transfers and taxes have proven neither sufficient nor effective at redistributing income, in part because of targeting inaccuracy, low coverage, fragmentation of social programs, and the neutrality of indirect taxes (which reduces the progressivity of the overall tax system). The largest impact of fiscal policy on income inequality came from in-kind government transfers for public school and health care. In March 2015 the Government launched the Bridge to Development (Puente al Desarrollo) strategy with the objective of lifting 56,000 families out of extreme poverty by providing financial support to satisfy basic needs and by incorporating these families into the economy. Its implementation brought about a significant improvement in the targeting process of the beneficiary population; however, as of 2017 it covered only 27,500 families. 21. A continued deterioration of the fiscal situation could undermine any progress in terms of reducing poverty and income inequality. Therefore, there is a need to continue to improve the targeting accuracy of social programs and to provide options for reforms to increase the redistributive 5 impact of fiscal policy. Care in this regard was exerted by the authorities when designing the recent tax reforms: a well-tough list of exemptions, for instance to the food basket consumed by the poor, aimed at reducing the inherent lack of progressivity of the VAT; and on the income tax, only the brackets for the wealthiest parts of the population saw an increase in taxation. II. SUMMARY OF PROGRAM IMPLEMENTATION 22. The CPF Pillars and objectives were selected in closed coordination with other development partners to respond to country demand, keeping in mind WBG’s competitive advantage, and to maximize the development impact by exploiting synergies among the WBG’s different instruments. The CPF also considered the small ongoing portfolio and analytical work. The only new Bank lending operation approved under the CPF is the $420 million Strengthening Universal Health Insurance Program for Results Project (P148435). Pillar 1. Reducing Constraints to Productive Inclusion 23. This Pillar aims to promote economic inclusion and reduce inequality. Progress under this Pillar has been substantial and has either already exceeded end-targets or is on track to achieve CPF targets for each of its three objectives with only minor adjustments, as described below. Objective 1. Enhance higher education to Higher Education and the Indigenous Peoples improve skills Plan (IPP). To foster equity in public universities, the Project has supported access of Indigenous 24. The CPF objective to enhance higher students to Costa Rica’s four public universities education to improve skills is on track to be through the implementation of the project’s IPP. achieved. The Costa Rica Higher Education Implementation has been highly satisfactory in terms Improvement Project (P123146) helped four of ownership by the universities, demand, and public universities to implement crucial quantitative and qualitative results, with the result innovative investments in new facilities and that the project is among the most successful laboratories in priority areas (notably engineering, programs in LAC in enhancing Indigenous Peoples medicine, natural sciences), the completion of access to, and graduation from, higher education. For graduate programs for professors, more published the first time in the history of the country, university articles in indexed journals, and improvements in attendance has become a realistic option for universities’ management and information Indigenous youth. Thus, from 2014 to 2016: systems. In the context of the Performance • the number of Indigenous students that enrolled to take the admissions exam rose Agreements (known as Acuerdos de Mejora from 468 to 962 Institucional) between the Government and each • those who took the exam rose from 336 to university, targets were established for 14 key 674 indicators to address access, equity, and quality. • those who achieved qualifying scores for Between 2012 and 2018 significant increases admittance rose from 107 to 221 were recorded in the four universities supported • enrollment of Indigenous students rose from by the project, as follows: 634 to 792 undergraduate enrollment in priority areas • Indigenous students benefiting from rose from 48,270 to 61,261, of which 53 scholarships rose from 250 (45 percent of all percent females Indigenous students) to 600 (72 percent). • graduate enrollment in priority areas rose from 4,064 to 4,423, of which 57 percent females • number of officially accredited programs rose from 47 to 117 • number of graduate programs subject to external evaluation rose from zero to 15 • number of undergraduate programs subject to external evaluation rose from 64 to 171 • number of full-time faculty members holding a master’s degree increased from 1,926 to 3,026 and a doctoral degree from 591 to 1,068 • study on the insertion of graduates in the labor force has also been completed and disseminated 6 Objective 2. Increase access to finance to generate productive opportunities 25. The CPF objective to increase access to finance to generate productive opportunities is on track, although minor modifications are proposed to adjust targets. The International Finance Corporation (IFC) has made notable progress in expanding access to finance to micro, small- and medium-sized enterprises (MSMEs), providing income and employment opportunities for low-skilled workers and the poor, thereby promoting greater inclusion. Specifically, IFC has provided financing to Scotiabank Costa Rica, Banco Improsa, Davivienda Costa Rica, and Promerica Costa Rica for credit lines tailored to the needs of small- and medium-sized enterprises (SMEs), including women-owned businesses, and to Coopenae in expanding access to housing finance for low- and middle-income families who otherwise lack access to mortgage loans. Moreover, IFC is supporting Davivienda Costa Rica with a loan to increase access to finance for a pipeline of low carbon projects that meet the green lending principles. As of 2018, through support to seven financial intermediaries, IFC has provided financing to 8,550 SMEs, including female-owned enterprises, for a total volume of $900 million. It also provided 3,617 micro enterprises with financing totalling $10 million under five projects. Moreover, through an IFC Advisory project, the WBG supported the creation of a National Collateral Registry to facilitate access to finance for MSMEs (particularly, those headed by women). Adjustments to the targets and indicators are discussed in Section IV of this document. Objective 3. Promote sustainable investments in energy and transport to support competitiveness 26. Progress in promoting sustainable investments in energy and transport to support competitiveness is on track. The construction of the Reventazón hydroelectric power plant in the province of Limón was completed, supported by an IFC loan, and the plant entered commercial operations in November 2016. This largest hydroelectric power plant in Central America is expected to reach 348,000 people with new or improved access to electricity. With assistance from the Inter- American Development Bank, the plant was constructed following a river offset approach designed with relevant stakeholders to address residual and cumulative biodiversity impacts. The renewable energy project is contributing to climate change mitigation by displacing fossil fuel-based power stations and thereby reducing greenhouse gas emissions. 27. IBRD has launched a series of technical assistance initiatives to help Costa Rica shift its electricity production matrix toward more renewable energy sources, including through the introduction of cleaner natural gas. It has also supported capacity building, and has advocated for sustainable development of hydro projects in Costa Rica, which helped the country win the prestigious Blue Planet Prize International Award. 1 In the transport sector, the Bank is fostering Costa Rica’s progressive electrification of its public transport system, with the aid of the Nationally Determined Contributions (NDC) Partnership Support Facility, and its efforts to modernize public transport in the metropolitan area of San Jose. Efforts in this direction include the promotion of electric buses, regulation of tariffs and of auxiliary services to integrate the electrical network, production of clean fuels, and, for used electric vehicles, and the potential exemption from the Selective Consumption Tax (Integrated Public Transport Demand Analysis for San José - P171268). 28. Across both the energy and transport sectors, IBRD, IFC, and the Multilateral Investment Guarantee Agency (MIGA) are continuing to work with Costa Rica to foster an enabling environment for public-private partnerships (PPPs) and to support private sector initiatives. Thus, to take one example, MIGA supported the design, rehabilitation, operation, and maintenance of the San José-Caldera toll road through a 25-year concession agreement. The corridor 1 See https://www.elpais.cr/2019/05/15/reventazon-recibe-prestigioso-premio-internacional-blue-planet/. 7 connects the main industrial area of the country to one of the main ports. By providing easier access to the port of Caldera, the road helped to reduce transportation costs and travel time, while improving the country’s trade competitiveness. 2 The WBG has supported the PPP agenda by developing pre- feasibility studies and transaction plans for Route 21, Liberia-Nicoya, and Route 1, Liberia-Cañas- Barranca. Pillar 2. Bolstering Fiscal, Social, and Environmental Sustainability 29. This Pillar has three objectives, as described below. While there is tangible progress, some results will take longer to be achieved than originally estimated. Objective 4. Strengthen fiscal management capacity to enhance efficiency 30. Government efforts to strengthen fiscal management capacity to enhance efficiency advanced but fell short of outcome projections. In chronological order, successive administrations introduced: (a) the Virtual Tax Administration platform (October 2015), providing a unified medium for tax registration, consultation, and filing; (b) the law against fiscal fraud 3 (September 2016); and (c) the fiscal consolidation plan (December 2018, implemented in July 2019). Although, additional reforms are planned (including those required for OECD accession), growth, revenues, and likely debt and deficit levels have lagged projections, as has the tax-to-GDP ratio 4—with unwelcome consequences given the challenge of achieving social/political consensus around further tightening. On a more encouraging note, positive confidence effects from the recent fiscal and structural reforms should lower risk premia, boost investment, and push growth up, and inflation is expected to remain within the target range. 31. The Bank has supported the Government’s efforts to strengthen its fiscal management capacity. The Bank, through the Fiscal Management in Central America analytical and advisory assistance (P151829), provided support to help develop the fiscal rule for Costa Rica (a supplementary CPF indicator), to generate political consensus around the introduction of fiscal rules legislation and the fiscal reform package, and to assist preparing the corresponding draft legislation. The Government’s Fiscal Rules Law, approved as part of a broader fiscal reform package, is a combination of a simple current expenditure rule (linked to trend GDP growth) with a debt-brake mechanism. A second aspect of advisory services and analytics were three efforts to enhance tax compliance: (a) experimental studies that demonstrated the effectiveness of behavioural insights and enforcement messages for enhancing tax compliance; (b) a quasi-experimental study of the impact of withholding on tax compliance; and (c) dissemination of the results of these studies in both policy and research fora. A third aspect of the advisory services analysed options for reform measures in selected areas and sectors to increase revenues and achieve efficiency gains and fiscal savings, while improving equity. 5 2 In 2017, due to the good performance of the project, Autopistas del Sol (the project enterprise) successfully repaid the lender covered by MIGA, thereby annulling MIGA’s coverage. 3 The Ley de Lucha Contra el Fraude Fiscal main elements are: (i) financial institutions are required to provide information of bank account holders to the tax authority; (ii) individuals applying for bank loans, firms applying for municipal licenses, and firms supplying state institutions are required to be in compliance with their tax obligation; (iii) corporations are required to provide information on financial beneficiaries and shareholders to the Central Bank—information that can be accessed by the tax authority; (iv) all incorporated and unincorporated businesses are obliged to accept debit/credit card payments, and the tax authority can offer sales tax rebates and prizes to consumers for demanding receipts; and (v) the penalties for tax non-compliance and advisory activities with the purpose of non-compliance are increased. 4 While the tax-to-GDP ratio rose marginally from 13.2 percent in 2014 to 13.4 percent in 2016, it fell short of the CPF 2019 target of 14.7 percent, due to a stronger-than-projected slowdown in GDP growth. 5 The report identified several priority areas of possible reform efforts, showing that broadening tax bases, increasing rates, and reducing the scope and scale of tax expenditures were the most promising means of boosting revenues while improving economic performance. The report also discussed reform options that could offer budgetary savings through improved 8 32. Fully implementing the recently adopted fiscal reforms is critical to ensure the Government’s ability to obtain macroeconomic-management objectives in key areas such as fiscal balances and debt levels. The Government recognizes the challenges and is considering a broad array of reforms to complement the fiscal package and stimulate growth. As these challenges are well- aligned with IBRD graduation criteria guidance of fostering access to market and improving the functioning of key institutions, the Bank will continue supporting the Government meet this challenge. Also, to help address the Government increase the redistributed impact of fiscal policy, the Bank will provide technical assistance to update the incidence analysis of fiscal policies, including developing and transferring appropriate tools. At the same time, the Bank would offer its expertise to design and implement impact evaluations for key social programs. Objective 5. Improve efficiency and quality of the health insurance system to improve results 33. Important steps have been taken to improve the efficiency and quality of the health insurance system, and this CPF objective is on track to achieve its targets. The Bank has been supporting improvements in efficiency and quality of the health insurance through the Strengthening Universal Health Insurance in Costa Rica PforR Project (P148435). This initiative was informed by analytical work in the Social Expenditure and Institutional Review (P146907), which identified the rise in non-communicable diseases (NCDs) as the greatest challenge to the healthcare system. Improvements in income, environment, lifestyles, and medical services have resulted in rapidly aging populace, which has led to a rise in NCDs, greater demand for key surgery services and long-term care, longer wait times for service, and escalating financial burdens on the system. The PforR, implemented by the Costa Rican Social Security Administration (Caja Costarricense de Seguro Social/CCSS), aims to enhance its institutional efficiency, improve the timeliness and quality of health services, and, as a second-order outcome, strengthen the financial sustainability of public health insurance. Among the steps to achieve these objectives are strengthening primary care (an emphasis on prevention, early diagnosis, control of NCDs, and performing more procedures outside of hospital settings) and creating integrated health care networks, including e-health tools that facilitate coordination across levels of care. 34. Progress toward this objective will now be measured by the PforR’s disbursement-linked indicators (DLIs). 6 Costa Rica has made steady progress toward accomplishing these indicators, with six of the seven meeting their milestones by July 2019. 7 This PLR proposes to adjust the CPF indicators and one of the supplementary progress indicators to align them with those of the PforR. The one supplementary progress indicator that will remain unchanged (the list of surgical procedures to be performed in an outpatient setting to be agreed upon) was achieved in 2017. The percentage of major surgeries from this priority list conducted in outpatient settings has risen from 42 to 50 percent between 2016 and 2019. efficiency, without loss of desired outcomes or adverse equity impacts. Finally, the report identified areas for efficiency gains and potential fiscal savings in health, education, and social programs, which account for a significant share of the budget and represent a substantial share of public service delivery. 6 When the CPF was prepared the original indicators were tentative and contained neither baselines nor targets, as the PforR was still under preparation. 7 These are (a) major surgeries from priority list conducted in outpatient settings (DLI 1); (b) colon cancer screening (DLI 2); (c) diabetes screening and optimal control (DLI 3); (d) a pilot project on integrated health networks approved by the CCSS Board and implemented for a selected population and territory and evaluated, with the results publicly disseminated (DLI 4); (e) expansion of the e-health tools for primary health care (DLI 5); and (f) approval of re-design of patient satisfaction survey (DLI 6). DLI 7—development and execution of a plan to ensure the financial sustainability of CCSS— is on track and is expected to reach its milestone by the end of 2019. 9 Objective 6. Expand capacity to promote climate-smart and environmentally sustainable development 35. The Bank has been supporting efforts to increase resilience to disasters. Aided by the implementation of the Catastrophe Deferred Draw Down Option (CAT DDO; P111926), 8 the Government significantly enhanced its capacity to develop and implement its National Disaster Risk Management (DRM) Program, focused on strengthening the institutional and legal framework and mainstreaming disaster risk in the National Development and Investment Plan. The Government approved and began implementation of a new 2016-2030 DRM Policy and the 2016-2020 National Plan on DRM, aligned with the 2015-2030 Sendai Framework. In October 2016, the National Risk Forum was held, and the DRM National Plan monitoring committees were put in place for risk reduction, preparedness, response, and recovery. The National Risk Management Policy and the DRM National Plan are being used to generate various public policy instruments in sectors such as environment, health, infrastructure, and rural and urban development. The Ministry of Planning updated and published Technical Norms, Guidelines and Procedures for Public Investment in Costa Rica and, together with National Emergency Commission, provided training to public officials on the new norms. With this, government ministries and agencies are now using improved methodologies to better integrate disaster risk considerations into the public investment decision processes. 36. DRM is included in ministries’ annual programs, and all projects approved by the Ministry of Planning integrate DRM considerations. A tool has been developed to monitor the resources that entities assign to DRM activities, and to support the subnational level in elaborating DRM plans, with an emphasis on disaster risk preparedness rather than only on responses. The Bank has also helped the Government design a Disaster Risk Finance and Insurance Strategy, which has been endorsed by the Ministry of Finance, Ministry of Planning, and the National Emergency Commission. The Government is currently evaluating its participation in the Caribbean Catastrophe Risk Insurance Facility as part of its Disaster Risk Financing and Insurance Strategy. Although the deterioration of the macroeconomic situation could jeopardize financial resources for disasters, the Government acknowledges the critical role of the National Emergency Fund and has confirmed its additional capitalization in 2019. 37. Costa Rica’s aspiration to maintain a low carbon and environmentally sustainable development path that assures benefits for local communities and access to renewable energy resources for economic growth is supported through several instruments under the CPF. The Bank is continuing to support the Reducing Emissions from Deforestation and Forest Degradation+ strategy to reduce greenhouse gas emissions through enhanced forest management. An Emission Reduction Program (P160368) with the Forest Carbon Partnership Facility in the amount of $63 million is currently under preparation. Portfolio Evolution and Performance 38. The IBRD portfolio is small and performing well. As of November 2019, the portfolio comprises two operations for a net committed amount of $620 million; the Strengthening Universal Health Insurance PforR, approved in FY16 and still under implementation, and the Higher Education Project, which has been extended to end-2019 to allow completion of key infrastructure works. The undisbursed portfolio balance is $135 million, mostly under the health project. Neither of the projects is at risk, and implementation has progressed well. 39. IFC’s engagement in Costa Rica is limited, but its portfolio has recently expanded. As of June 2019, IFC had a committed and outstanding portfolio of $338 million, with eight clients. Since the beginning of the CPF period, IFC committed five long-term finance projects, for a total of $192 million, focused on local banking and SMEs, housing, and climate finance. IFC also issued a bond in 8 The $65 million CAT-DDO, closed in October 2017, achieved its objectives and was rated satisfactory by the Bank’s Independent Evaluation Group. 10 Costa Rica’s domestic market in local currency, raising the equivalent of $10 million to support housing finance. Moreover, IFC provided a loan to Davivienda Costa Rica to support and incentivize the issuance of a green bond to fund a pipeline of green projects in Costa Rica. In addition, IFC has committed $461 million in trade finance instruments, working with local banks to fund their trade portfolios to SMEs. IFC remains active in renewable energy and access to finance, focusing on generating productive opportunities by helping MSMEs access financial services. 40. MIGA continues to actively explore opportunities to support foreign private investors to promote the sustainable growth and competitiveness of the Costa Rican economy. MIGA will seek to help foster Costa Rica’s efforts to build a thriving private sector through the Agency’s political risk insurance product. Working closely with the IFC, the Bank, and other development partners, by means of the approach of Maximizing Finance for Development. MIGA will continue to look for opportunities to engage with the authorities and private sector investors in search of sustainable private cross-border investment projects. Continued partnership and coordination with other development partners will help avoid duplication of efforts. III. EMERGING LESSONS 41. To secure satisfactory project outcomes, the partnership between Costa Rica and the WBG must continually produce, analyse, and evaluate information throughout the implementation period. To stimulate the definition and preparation of a program supporting the Administration in the second part of the CPF period, the Bank prepared policy notes on priority areas. Following initial meetings with the current Administration, the policy notes were further fine-tuned. Focused, high-level meetings with the Government—the Encerrona—shortly after the Administration took office provided a highly productive forum in which priorities for future assistance were examined. Discussions in the Encerrona, guided by the policy notes and complemented by the participation of high-level WBG experts, resulted in further honing of the policy areas to be supported in the remaining period of the CPF. 42. Technical advisory has been key to maintain a long-term engagement with Costa Rica in times of fiscal stress. Under this CPF, the Bank produced significant advisory and analytical work on Costa Rica’s fiscal reforms to support the Government in advancing its agenda. For instance, the Public Financial Review (PFR) highlighted potential policies to keep reducing the fiscal pressure; the publication of the PFR and its dissemination with members of congress played a key role in the approval of the fiscal reform. The Bank also provided advisory services on the implementation of OECD recommendations in areas of fiscal reform, securities market legislation, protection of financial consumer and quality of statistics. A Bank sponsored workshop on securities market legislation helped create awareness among members of Congress of the importance of approving the legislation incorporating OECD recommendations that are in line with World Bank and international best practices. 43. The Costa Rica CAT DDO—the first of its kind to be approved by the World Bank— leaves behind a legacy that has influenced other operations worldwide. In addition to promoting increased resilience to disasters, it provided contingency financing to the Government and ensured immediate access to liquid capital following a disaster. The availability of such financing alleviated the need to draw on already limited public budget funds. Moreover, the formulation of the Project Development Objectives, framing of the policy matrix, withdrawal strategy, inclusion of more specific indicators with quantitative baselines and targets, expansion of targets at renewal, and many other aspects of the Costa Rica operation have served as the baseline and provided lessons for the preparation and implementation of 15 CAT DDOs around the world. 11 44. Policy Dialogue and engagement in Global Public Goods issues help develop policies in key sectors, such as education, climate-smart approaches and health. The implementation of a strong policy dialogue through the Higher Education Project placed a solid focus on more integrated management and information systems, on service delivery, and on closing labor market skill gaps. More broadly, the Bank’s engagement with this early adopter country of the Human Capital Index (HCI) is centered on outcomes that go well beyond the HCI itself. The Bank is contributing to building a healthier, more productive, workforce (against the challenging background of an aging populace), a key pillar for increased competitiveness in the medium term. The knowledge being generated through the Bank’s involvement in greener policies is also noteworthy. The monitoring of carbon emissions in Costa Rica by SINAMECC (Sistema Nacional de Métricas de Cambio Climático), the platform to facilitate the distribution and management of information on climate change, and the collaboration with the Regulatory Agency of Public Services (ARESEP) in terms of electromobility options, are additional examples of knowledge generation that serve as global public goods. 45. In countries that could be eligible to enter the graduation process, results-based financing can both strengthen institutional capacity and promote efficiency in the use of resources. Given Costa Rica’s need for increasing efficiency in sector expenditures, results-based loans are well-placed to promote quality improvements, modernize institutions, and push for efficiency gains. 46. The WBG engagement in countries with challenging political and/or macroeconomic circumstances, requires a balance between ambition and realism, as well as flexibility. It is likely to take some time for Costa Rica to resolve its fiscal and growth challenges while maintaining social stability. It will therefore be important for the WBG to accompany the country with both dialogue and technical capacity-building, all the while maintaining flexibility in its program to respond to evolving short- and medium-term priorities. 47. Advancing and sustaining tough fiscal and political reforms demand appropriately pacing them against the social and political backdrop of where they are being implemented. Reducing the fiscal deficit and putting the debt on a sustainable path is Costa Rica’s highest priority. Nevertheless, the ambitiousness of the fiscal reform needs to be grounded in the country’s political economy context to ensure that it is implementable and sustainable. IV. ADJUSTMENTS TO THE CPF AND FUTURE WBG ENGAGEMENT 48. As previously elaborated, the PLR proposes adjustments to the CPF program to account for the challenging macroeconomic conditions, the priorities of the current administration, and IBRD’s Graduation Criteria. Pillar 1 will be revised to incorporate growth enhancing activities. Within this pillar, Objective 1 will be expanded to cover the larger education sector, and Objective 3 will also be broadened to include sustainable investments in the fisheries sector. The second pillar will remain unchanged, but Objective 4, which originally focused on strengthening fiscal management, will now also aim to promote fiscal sustainability. Similarly, the PLR also proposes adjustments to the CPF results matrix to include indicators that were not formulated with precision at the time of the CPF preparation, to adjust some targets to reflect implementation progress to date, and to add indicators covering the new interventions which should yield measurable outcomes by the end of the CPF cycle, mainly promoting fiscal and environmental sustainability. (See Table 1 in the Introduction section of this document.) 49. The WBG has had extensive consultations with the current Administration to ascertain priorities and future assistance. As a result of the consultations, the Bank is preparing four new operations to be considered in FY20 and FY21: (a) a fiscal consolidation and decarbonization DPF that supports policies and actions to address Costa Rica’s fiscal situation and its efforts to promote climate-smart policies (P171268); (b) an IPF operation on tax reform and customs administration 12 accompanying the DPF to finance technical assistance to strengthen and modernize key macroeconomic management institutions (P172352); (c) an IPF promoting sustainable investments in the fisheries sector, including the institutional barriers hindering sector growth (P168475); and (d) a PforR in the education sector addressing key bottlenecks to sector efficacy and efficiency, so as to strengthen Costa Rica’s human capital (P169724). Given the stage of preparation of the new operations, outcomes would not be expected within the current CPF for two of them – the education PforR and the fisheries IPF – so the adjusted CPF Results Matrix will not include indicators corresponding to them. 50. Costa Rica’s fiscal and environmental sustainability are essential for its long-term development, in the short- and medium term generating the fiscal space for investing in its infrastructure and the natural and human capital, and in the medium- to long-term contributing to reverse greenhouse gas emissions (GHGs). The Bank will support Costa Rica’s fiscal and environmental agenda through a DPF (and accompanying IPF) that incentivizes key elements of the government’s fiscal policy reform (e.g. tax policy, fiscal rule, debt management) and climate change mitigation agenda (e.g. strengthening capacity to monitor carbon emissions, coordinate sub-national low-carbon efforts, and implement priority sectoral, climate-smart actions). This engagement both responds to the urgency in addressing Costa Rica’s fiscal situation and supports efforts to strengthen policies and institutions for sustainable development. This engagement in the environmental sector has the additional benefit of being a global good and offering lessons for other countries embarking on a similar path. 51. The WBG support to the fisheries sector aims to crowd-in financing and enable Maximizing Finance for Development by laying the foundation for sustained and equitable fisheries-based growth. The industry, dominated by foreign fishing fleets, is currently characterized as environmentally damaging, biodiversity depleting, and lacking inclusive development. The project’s aim is to transform it into an industry that spreads development benefits to disadvantaged fisher communities, who are among the least economically well-off citizens consequent upon their volatile incomes and depleting fishery stocks. Further, improvements in governance, management and regulations, coupled with improvements in key fisheries infrastructure and value addition are expected to stimulate private sector investment in fisheries value chains to access national and international markets. The project will also contribute to the WBG Climate Change Action Plan and climate targets for 2021-2025 by addressing climate change vulnerability of the fisheries sector. Finally, by focusing on Puntarenas on the west coast, and in Limon in a potential second phase, the project is expected to contribute to creating jobs both in tuna fisheries and value-added industries, generate revenues from fishing licenses, rebuild the stock of near-shore fisheries (e.g., shrimp fishing), and support artisanal fisheries—all of which promote environmentally sustainable fishing practices and greater biodiversity. 52. The WBG will also support Government’s effort to strengthen its human capital agenda by targeting the quality of education and foster social inclusion. Bank assistance to the sector is expected to address critical drivers of education outcomes, ensuring that students– especially those in vulnerable situations – gain higher level skills that are critical to successfully engage in the labor market. Among its various interventions, the project seeks to strengthen national institutions responsible for the education sector, which is a key action identified by OECD in its 2018 Report Basic Education in Costa Rica: From Access to Learning for All which assesses best policies and practices of the OECD and other Latin American countries. A second area identified by the OECD report is the need to improve equity in education opportunity; the education project has important potential for inclusion, particularly of Afro-descendant and Indigenous populations (as does the fisheries initiative). 53. The Bank will also continue to focus on providing advisory services and analytics to help the country build knowledge and capacity required for implementing policy reforms and its portfolio. For instance, the Bank is supporting the application of the SABER-Education Management and Information System (EMIS) diagnostic tool to inform strengthening of the EMIS and, through the 13 recipient-executed Statistical Capacity Building Trust Fund, is providing technical assistance on development of the student registration module, including an early warning system to reduce academic exclusion. Another grant from the same trust fund is providing technical assistance to the Institute of National Statistics to develop an integrated system of household surveys. 9 In the health sector, the Bank is supporting a technical exchange with Estonia on application of big data and machine-learning techniques to better distinguish patients at risk and improve NCD treatment. In the transport sector, the Bank is providing technical assistance for an integrated transport system for Metropolitan San Jose, including for the proposed PPP implementation of the Tram Corridor Project. 54. On the DRM front, the Ministry of Finance has stressed the urgent need to access additional financial protection instruments to complement the limited resources available from the National Emergency Fund; these would also enhance Costa Rica’s overall fiscal resilience. Access to a new financial protection instrument is aligned with recently finalized Disaster Risk Financing Strategy. The Bank is financial options to support disaster-risk response needs in Costa Rica, while providing technical assistance to mainstream disaster risk management considerations into the planning, design and implementation of new public investment projects (Strengthening Disaster and Climate Change Resilience in Public Investments and Urban Watersheds - P172011). More broadly, Costa Rica’s leadership role on global public goods-oriented climate change will be supported through the continuation of ongoing activities and an extension to new initiatives, such as supporting the development of an enabling environment for accelerating the decarbonization of the economy and energy transition initiatives. 55. IFC and MIGA aim to explore further opportunities, among others, in infrastructure to maintain their presence in the country. IFC will focus on the implementation of key infrastructure projects through PPPs to support the modernization and the sustainable development of the transport and wastewater sectors. IFC is also planning to find innovative structures to facilitate access to long- term and local currency financing required in Costa Rica for local entities including municipalities. Moreover, IFC looks to maintain its presence in access to finance with further support to climate and housing finance. Trade finance will also remain relevant to IFC and it will continue to work with local banks in this area. MIGA, on the other hand, will continue to explore new opportunities to promote cross border private sector investments. 56. CPF targets are being revised to reflect changes in IFC’s portfolio and pipeline for the next two years. The targets for the number and volume of lending to SMEs are being modified to reflect more accurate projections that consider a lower overall number of loans, but a higher overall lending volume based on the performance of the active projects in the portfolio. For the remainder of the CPF period, IFC aims to explore additional opportunities in access to finance, as well as projects in housing finance to help address the estimated 200,000 housing deficit in the country for low- and middle-income families. Investing in housing finance not only supports a basic human need, it also helps develop local capital markets by providing long-term, local-currency finance for the private sector, which is key to creating jobs and opportunities. Additionally, IFC intends to incentivize climate-smart investments in construction, energy, and transport through green financing in Costa Rica. Therefore, going forward targets for the number and volume of housing finance and climate finance will be added, considering there are new loans in IFC’s portfolio that address these matters V. RISKS TO THE CPF PROGRAM Risk Categories Rating 9 This project will help (a) improve the Multidimensional Poverty Index and enhance the capacity of the National Institute for Statistics to produce more geographically disaggregated information; (b) develop additional welfare indicators; and (c) collect more geographically disaggregated information to monitor the National Development Plan and the regional development assessment (needed for OECD accession). 14 1. Political and governance High 2. Macroeconomic High 3. Sector strategies and policies Moderate 4. Technical design of project or program Low 5. Institutional capacity for implementation and sustainability Substantial 6. Fiduciary Substantial 7. Environment and social Moderate 8. Stakeholders Moderate 9. Other n/a Overall Substantial 57. The CPF initially identified (and this PLR confirms) four potential risks that collectively could have an overall substantial impact on CPF implementation: (a) the fragmented political environment; (b) an uncertain macroeconomic environment; (c) weak institutional and implementation capacity; and (d) a fragile fiduciary environment. Specifically, the risks could derail the achievement of the fourth CPF objective – strengthen fiscal management capacity to enhance efficiency—as its outcome is measured by an increase in Costa Rica’s tax-to-GDP ratio. Further, as explained below, an uncertain macroeconomic environment could have spill over effects, among others, in terms of government’s spending which may hinder the implementation of on-going activities and/or threaten the sustainability of interventions in the education and health sectors supported under the CPF. 58. The fragmented political environment—both on the legislative front and on its underpinning social front—continues to constitute a high risk to the program, and exacerbates the high macroeconomic risk noted immediately below. Fiscal restraint (more especially when undertaken in a challenging macroeconomic context) rarely finds immediate popular support—the lack of which is intensified in a democratic, risk-adverse, partisan legislative environment. The Government is in a clear minority in Congress, and it (and its contending rivals) will struggle to form coalitions on a case-by-case basis to address the challenges now facing the country. On a positive note, Costa Rica is basically stable and has, including in the recent past, found a way to frame measures to address meaningfully their challenges and to push through programmatic implementation of the responsive measures. 59. The macroeconomic risk is high. Although the macroeconomic situation is clearly challenging, the fiscal reform approved in December 2018 should help reduce the deficit and stabilize public debt. High debt levels crowd-out credit to the private sector, reduce domestic liquidity, deepen the country’s perceived risk in international capital markets, increase the cost of financing for the entire economy, and slow economic activity. By raising revenues, the fiscal reform will help address these challenges, but additional efforts will be needed to constrain spending and increase efficiency to ensure sustainable service provision—particularly against a background of uncertainty with respect to potential additional sources of fiscal pressures. 60. Finally, Costa Rica continues to face substantial institutional and fiduciary risks related to weak institutional capacity. The Bank will take a two-pronged approach to addressing these capacity constraints. First, any new Bank lending will set realistic targets to account for the long lead times, and will advance, to the extent possible, any contracting or other decisions that need be taken to begin implementation soon after loan approval. Second, the Bank will continue to provide capacity building as necessary and support the strengthening of public financial management and procurement systems. 15 ANNEX 1. UPDATED CPF RESULTS FRAMEWORK Pillar 1. Reducing Constraints to Productive Inclusion and Restoring Growth CPF Indicators WBG Program Objective 1. Enhance education to improve skills 1.1 Increased number of students enrolled in priority areas in four public universities • Costa Rica Higher Education Baseline: Project 49,638 (undergraduate) (2014) (P123146) 4,265 (graduate) (2014) • Reducing School 24,684 (female, undergraduate) (2015) Dropout in 2,004 (female, graduate) (2015) Central America (P164552) Target: • Central America 57,492 (undergraduate) (2019) School Dropout: 4,400 (graduate) (2019) Causes & 29,250 (female, undergraduate) (2019) Consequences 2,162 (female, graduate) (2019) (P153075) 1.2 Increased number of officially accredited programs at four public universities New engagement: Baseline: 68 (2015) • Learning for All Target: 85 (2019) in Costa Rica (P169724; FY21) Objective 2. Increase access to finance to generate productive opportunities 2.1 Increased microenterprises and SMEs reached with financial services • Davivienda Costa Rica (32965) Baseline: • Promerica Costa 805 micro (2013) Rica (38669) 2,420 (SME) (2013) • Banco Improsa (35132) Target: • Scotiabank Costa 2,091 (micro) Rica (38424) 10,000 (SME) (2021) • Banco Lafise (29568) • Mucap (36024) • IFC Secure Transactions and 16 Collateral Registry (600301) • Development Finance Good Practices (under Central America Financial Sector Programmatic Approach) (P152455) • Coopenae (30325) 2.2 Increased low- and middle-income families with housing finance (number of housing loans) • Coopenae Baseline: 10,549 (2016) (39060) Target: 22,000 (2021) • Mucap (36024) Objective 3. Promote sustainable investments in energy, fisheries, and transport to support competitiveness 3.1 People provided with new or improved access to electricity • IFC Reventazón Hydropower Baseline: 0 (2015) Project (31383) Target: 348,000 (2019) • MIGA Transport Guarantee: San José-Caldera Toll Road (Project 7135) New engagement: • Integrated Public Transport Demand Analysis for San José ASA (P171268) • Sustainable Fisheries 17 Development Project (P168475; FY20) Pillar 2. Bolstering Fiscal, Social, and Environmental Sustainability Objective 4. Promote fiscal sustainability and strengthen management capacity 4.1 Increased tax-to-GDP ratio • Central America Social Sector Baseline: 13.2% (2014) Expenditure and Target: 14.7% (2021) Institutional Review 4.2 Increase in average maturity of central government debt (P146907) • Public Finance Baseline: 5.4 years (2018) Review Target: 7.5 years (2021) (P162556) • Programmatic Development of Inclusive and Sound Financial Systems in Central America (P152455) • Costa Rica Tax and Trade Work (P169838) New engagement: • First Fiscal and Decarbonization Management DPF (P171912; FY20) • Costa Rica Tax and Customs Administration Project (P172352; FY20) 18 Objective 5. Improve efficiency and quality of the health insurance system to improve results 5.1 Increased quality of services, as measured by increase percentage of individuals diagnosed with Diabetes Type II that are under • Costa Rica optimal clinical control (disaggregated by gender) Enhancing Performance of Baseline: 39% (2014) Universal Health Target: 43% (2021) Insurance 5.2 Increased efficiency, as measured by increased percentage of major surgeries from priority list conducted in outpatient settings (P148435) according to CCSS institutional guidelines (disaggregated by gender) • Central America Social Protection Baseline: 41.6 % (2015) and Labor Target: 46% (2021) Systems (P153468) • Central America Social Sector Expenditure and Institutional Review (P146907) • Costa Rica Pensions Reform: Risk-Based Supervision (P148780) Objective 6. Expand capacity to promote climate-smart and environmentally sustainable development 6.1 Increased Government capacity to promote low carbon development, as measured by forest GHG emission reductions achieved • Costa Rica Baseline: 0 (2015) Catastrophe Target: 2 million tons* of CO2 (2019) Deferred Draw Down Option *Final amount depends on price of carbon negotiated. (P111926) • Costa Rica Green and Inclusive 6.2 Maintain government capacity to respond to disasters, as measured by availability of policy and financial instruments for Growth through a disaster risk management Multi-Sectoral Landscape Baseline: 2 (2015) Approach Target: At least 2 (2019) (P147664) 19 • Costa Rica Forest Carbon Partnership Facility Reducing Emissions from Deforestation and Forest Degradation Readiness (P123702) • Costa Rica Partnership for Market Readiness (P129352) • Wealth Accounting and Valuation of Ecosystem Services Partnership in Costa Rica (P143484) • Strengthening Disaster and Climate Change Resilience in Public Investments and Urban Watersheds in Costa Rica (P172011) • IFC Advisory Services on Green Building Regulations 6.3 Policy instruments to meet Decarbonization Plan and Nationally Determined Contribution targets developed and implemented New engagement: (number) 20 Baseline: zero (2019) • First Fiscal and Target: 4 (2021) Decarbonization Management DPF (P171912; FY20) 6.4 Increased volume of climate finance • Davivienda Baseline: $33 million (2017) (40189) Target: $93 million (2021) 21 ANNEX 2. MATRIX OF CHANGES TO ORIGINAL CPF ORIGINAL Pillar 1. Reducing Constraints to Productive Inclusion REVISED Pillar 1. Reducing Constraints to Productive Inclusion and Restoring Growth Original CPF Indicators Proposed Change Rationale Objective adjusted to reflect engagement in Objective 1. Enhance higher education to improve skills Objective 1. Enhance education to improve skills the broader education sector 1.1 Increased number of students enrolled in priority Revised: Target for graduate students changed from Target adjusted to align both with the areas in four public universities 4,600 to 4,400. indicator target for the Higher Education Project (P123146) which is 4,221, while also Baseline: reflecting implementation progress. 49,638 (undergraduate) (2014) 4,265 (graduate) (2014) 24,684 (female, undergraduate) (2015) 2,004 (female, graduate) (2015) Target: 57,492 (undergraduate) (2019) 4,600 (graduate) (2019) 29,250 (female, undergraduate) (2019) 2,162 (female, graduate) (2019) 1.2 Increased number of officially accredited programs at No change four public universities Baseline: 68 (2015) Target: 85 (2019) Objective 2. Increase access to finance to generate No change productive opportunities 2.1 Increased microenterprises and SMEs reached with Revised: Target for SMEs changed from 25,329 to Target adjusted to reflect IFC projections that financial services 10,000 and attainment year changed to 2021. consider a lower overall number of SME loans, but a higher overall lending volume Baseline: (from $332 million to $900 million) based on 805 (micro) (2013) the performance of the active projects in the 2,420 (SME) (2013) 22 portfolio, and timeline extended to Target: accompany CPF extension. 2,091 (micro) (2019) 25,329 (SME) (2019) Added: 2.2 Increased low- and middle-income Indicator introduced to reflect IFC’s new families with housing finance (number of housing projects in housing finance. loans) Baseline: 10,549 (2016) Target: 22,000 (2021) Objective 3. Promote sustainable investments in Objective 3. Promote sustainable investments in energy Objective expanded to reflect engagement in energy, fisheries and transport to support and transport to support competitiveness fisheries sector competitiveness 3.1 People provided with new or improved access to No change electricity Baseline: 0 (2015) Target: 348,000 (2019) Pillar 2: Bolstering Fiscal, Social, and Environmental Sustainability Objective 4. Strengthen fiscal management capacity to Objective 4. Promote fiscal sustainability and Objective revised to broadened to reflect enhance efficiency strengthen management capacity Bank support of fiscal consolidation agenda. 4.1 Increased tax-to-GDP ratio Revised: Expected attainment year revised from 2019 Target year changed to account for slower to 2021. implementation pace than originally Baseline: 13.2% (2014) estimated and to accompany CPF extension. Target: 14.7% (2019) 4.2 Increase share of revenue collected electronically Replaced with: Increase in average maturity of Original indicator moved to milestone. New through credit or debit cards Central Government debt indicator added to reflect Bank’s new engagement supporting fiscal consolidation. Baseline: 0% (2015) Baseline: 5.4 years (2018) Target: 25% (2019) Target: 7.5 years (2021) 23 Objective 5. Improve efficiency and quality of the health No change insurance system to improve results 5.1 Increased quality of services, as measured by Revised to read: Increased quality of services, as Indicator revised to align with results decreased patient hospital readmissions (disaggregated by measured by increase percentage of individuals indicators of project Strengthening Universal gender) diagnosed with Diabetes Type II that are under Health Insurance in Costa Rica (P148435). optimal clinical control (disaggregated by gender) Baseline: TBD (2015) Target: TBD (2019) Baseline: 39% (2014) Target: 43% (2021) 5.2 Increased efficiency, as measured reduced Revised to read: Increased efficiency, as measured Indicator revised to align with results unnecessary hospitalizations for surgical procedures by increased percentage of major surgeries from indicators of project Strengthening Universal eligible to be performed in an outpatient setting priority list conducted in outpatient settings Health Insurance in Costa Rica (P148435). (disaggregated by gender) according to CCSS institutional guidelines (disaggregated by gender) Baseline: TBD (2015) Target: TBD (2020) Baseline: 41.6 % (2015) Target: 46% (2021) Objective 6. Expand capacity to promote climate-smart No change and environmentally sustainable development 6.1 Increased Government capacity to promote low No change carbon development, as measured by forest GHG emission reductions achieved Baseline: 0 (2015) Target: 2 million tons* of CO2 (2019) *Final amount depends on price of carbon negotiated. 6.2 Maintain government capacity to respond to disasters, No change as measured by availability of policy and financial instruments for disaster risk management Baseline: 2 (2015) Target: At least 2 (2019) 24 Added: 6.3 Policy instruments to meet Indicator added to reflect support for Costa Decarbonization Plan and Nationally Determined Rica’s decarbonization efforts. Contribution targets developed and implemented (number) Baseline: zero (2019) Target: 4 (2021) Added: 6.4 Increased volume of climate finance Indicator introduced to reflect IFC’s new projects in climate finance. Baseline: $33 million (2017) Target: $93 million (2021) 25 ANNEX 3. PROGRESS TOWARD CPF OBJECTIVES Pillar 1. Reducing Constraints to Productive Inclusion Objective 1. Enhance higher education to improve skills CPF Indicators Supplementary Progress Indicators WBG Program 1.1 Increased number of students enrolled in priority areas Total number of indigenous students enrolled in the Completed in four public universities – ACHIEVED four participating public universities – ON TRACK • Central America School Dropout: Baseline: Baseline: 634 (2014) Causes & Consequences (P153075) 49,638 (undergraduate) (2014) Current: 792 (2018) • Reducing School Dropout in Central 4,265 (graduate) (2014) Target: 912 (2019) America (P164552) 24,684 (female, undergraduate) (2015) 2,004 (female, graduate) (2015) Ongoing Current: • Costa Rica Higher Education Project 61,261 (undergraduate) (2019) (P123146) 4,423 (graduate) (2019) 32,468 (female, undergraduate) (2019) 2,521 (female, graduate) (2019) Target: 57,492 (undergraduate) (2019) 4,600 (graduate) (2019) 29,250 (female, undergraduate) (2019) 2,162 (female, graduate) (2019) 1.2 Increased number of officially accredited programs at Programs subject to external evaluation – ON four public universities – ACHIEVED TRACK Baseline: 68 (2015) Baseline: 152 (undergraduate) + 4 (graduate) Current: 117 (2018) (2014) Target: 85 (2019) Current: 171 (undergraduate) + 15 (graduate) (2019) Target: 160 (undergraduate) + 100 (graduate)* (2019) 26 Full-time equivalent faculty members in the four public universities holding a master’s degree or a doctoral degree – ACHIEVED Baseline: 2,001 (Master’s) + 631 (PhD) (2015) Current: 3,026 (Master's) + 1,068 (PhD) (2019) Target: 2,199 (Master’s) + 794 (PhD) (2019) Third study on insertion of graduates into labor market completed – ACHIEVED Baseline: No (2015) Current: Yes (2019) Target: Yes (2019) Institutional Improvement Agreements with public universities implemented and monitored on an annual basis – ACHIEVED Baseline: Yes (2015) Current: Yes (2019) Target: Yes (2019) *In the Higher Education Project (P123146) this same indicator has a target of 20 graduate programs subject to an external evaluation for the same time period. Objective 2: Increase access to finance to generate productive opportunities CPF Indicators Supplementary Progress Indicators WBG Program 2.1 Increased microenterprises, and SMEs reached with Volume of micro and SME loans outstanding Ongoing IFC financial services – ON TRACK increased – ON TRACK • Davivienda Costa Rica (32965) Baseline: Baseline: • Promerica Costa Rica (38669) 805 (micro) (2013) $2.5 million (micro) (2013) • Banco Improsa (35132) 2,420 (SME) (2013) $332 million (SME) (2013) • Scotiabank Costa Rica (38424) • Banco Lafise (29568) Current: Current: • Mucap (36024) 3,617 (micro) (2018) $10 million (micro) (2018) • IFC Secure Transactions and 8,550 (SME) (2018) $900 million (SME) (2018) Collateral Registry (600301) 27 Target: Target: Completed 2,091 (micro) (2019) $4 million (micro) (2019) 25,329 (SME) (2019) $727 million (SME) (2019) • Development Finance Good Practices (under Central America Financial Sector Programmatic Approach) (P152455) • Coopenae (30325) Objective 3: Promote sustainable investments in energy and transport to support competitiveness CPF Indicators Supplementary Progress Indicators WBG Program 3.1 People provided with new or improved access to Additional capacity in the system (from IFC hydro Ongoing electricity – ACHIEVED projects) – ACHIEVED • IFC Reventazón Hydropower Project Baseline: 0 (2015) Baseline: 0 annual GWh (GWh) (2015) (31383) Current: 348,000 (2017) Current: 1,400 GWh (2017) • MIGA Transport Guarantee: San Target: 348,000 (2019) Target: 1,400 annual GWh (2017) José-Caldera Toll Road • Integrated Public Transport Demand Analysis for San Jose (P171268) Pillar 2: Bolstering Fiscal, Social, and Environmental Sustainability Objective 4: Strengthen fiscal management capacity to enhance efficiency CPF Indicators Supplementary Progress Indicators WBG Program 4.1 Increased tax-to-GDP ratio – NOT ACHIEVED Legislation passed to increase the tax base – Completed ACHIEVED Baseline: 13.2% (2014) • Central America Social Sector Current: 13.4% (2016) Baseline: No (2015) Expenditure and Institutional Target: 14.7% (2019) Current: Tax reform package approved Review (P146907) (2018) • Public Finance Review Target: Yes (2016) (P162556) 4.2 Increased share of revenue collected electronically through credit or debit cards – MOVED TO INTERMEDIATE • Programmatic Development of Fiscal rule developed – ACHIEVED Inclusive and Sound Financial RESULT Systems in Central America Baseline: No (2015) (P152455) Baseline: 0% (2015) Current: Tax reform package approved Current: N/A includes a fiscal expenditure rule (2018) Ongoing Target: 25% (2019) Target: Yes (2017) 28 • Costa Rica Tax and Trade Work (P169838) Objective 5: Improve efficiency and quality of the health insurance system to improve results CPF Indicators Supplementary Progress Indicators WBG Program 5.1 Increased quality of services, as measured by decreased Beneficiary satisfaction survey in place – Completed patient hospital readmissions (disaggregated by gender) - ON TRACK INDICATOR RE-FORMULATED • Central America Social Protection Baseline: No (2015) and Labor Systems (P153468) Baseline: TBD (2015) Current: Survey in place but results not • Central America Social Sector Current: N/A yet disseminated (2019) Expenditure and Institutional Review Target: TBD (2019) Target: Yes (2017) (P146907) • Costa Rica Pensions Reform: Risk- Streamline mechanism to address patient Based Supervision (P148780; complaints under implementation – ON TF016015) TRACK Ongoing Baseline: No (2015) Current: Mechanism in place but not yet • Costa Rica Enhancing Performance streamlined (2019) of Universal Health Insurance Target: Yes (2018) (P148435) 29 5.2 Increased efficiency, as measured by reduced unnecessary List of surgical procedures eligible to be hospitalizations for surgical procedures eligible to be performed performed in an outpatient setting agreed upon in an outpatient setting (disaggregated by gender) – – ACHIEVED INDICATOR RE-FORMULATED Baseline: No (2015) Baseline: TBD (2015) Current: Yes (2018) Current: N/A Target: Yes (2017) Target: TBD (2019) Resource allocation for specialized hospitals executed using output-based measurements – ON TRACK Baseline: No (2015) Current: No (2019) Target: Yes (2018) Objective 6: Expand capacity to promote climate-smart and environmentally sustainable development CPF Indicators Supplementary Progress Indicators WBG Program 6.1 Increased Government capacity to promote low carbon Low Emissions Development Scenarios Completed development, as measured by forest GHG emission prepared – ON TRACK reductions achieved – ON TRACK • Costa Rica Catastrophe Deferred Draw Baseline: 0 sectors (2015) Down Option (P111926) Baseline:0 (2015) Current: 2 sectors (2017) • Costa Rica Green and Inclusive Growth Current: 0 (2017) Target: 4 sectors (2018) through a Multi-Sectoral Landscape Target: 2 million tons* of CO2 (2019) Approach (P147664) Water and forest accounts mainstreamed into fiscal policy – ACHIEVED On-going *Final amount depends on price of carbon negotiated. Baseline: 0 (2015) • Costa Rica Forest Carbon Partnership Current: 2 (2017) Facility Reducing Emissions from Target: 2 (2019) Deforestation and Forest Degradation 6.2 Maintain Government capacity to respond to disasters, as National Disaster Risk Management Financing Readiness (P123702) measured by availability of policy and financial instruments for Strategy developed – ACHIEVED • Costa Rica Partnership for Market disaster risk management – ACHIEVED Readiness (P129352) Baseline: No (2015) • Wealth accounting and valuation of Baseline: 2 (2015) Current: Yes (2017) ecosystem services partnership in Costa Current: 1 (2017) Target: Yes (2017) Rica (P143484) Target: At least 2 (2019) • IFC Advisory Services on Green Building Regulations 30 Mapping tool for climate-smart National • Possible TA or investment lending on Resource Management options established – productive landscape support ON TRACK Baseline: No (2015) Current: In draft (2017) Target: Yes (2018) Disaster risk information and resilience/response mechanisms integrated into sub-national land-use plans – ACHIEVED Baseline: 25 (2015) Current: 40 (2019) Target: 35 (2019) National Emergency Fund remains well-funded and functional – ACHIEVED 31