Report No. PID8289 Project Name Ecuador-Human Capital Protection (*) Project Region Latin America and Caribbean Region Sector Other Social Sector Project ID CEPE65940 Borrower(s) Republic of Ecuador Implementing Agency Min. of HD, Min. of Education, Min. of Health Environment Category C Date PID Prepared October 24, 1999 Projected Appraisal Date October 31, 1999 Projected Board Date December 16, 1999 1. Country and Sector Background Effect of the crisis on the poor. The current crisis occurs in a context of already high and increasing poverty and inequality. The percentage of the population living in poverty increased from 35t to 49t between 1995 and 1998; those living in extreme poverty (insufficient income to consume a minimum food basket) increased from 15t to 20- of the population. This trend of deepening poverty is accompanied by worsening inequality, with the share of total consumption going to the lowest quintile decreasing from 5.3w in 1994 to 4.3w in 1998. The crisis has resulted in the most critical impact on the extreme or indigent poor, especially with respect to nutrition, health, and education. As their incomes have declined, they are now eating less than a year ago, with mothers and children most affected. Those in the lowest two income quintiles report delaying medical attention (especially for children under 15 years of age), and other discretionary expenditures such as schooling, resulting in increased dropouts. Based on experience in other countries, these effects can result in permanent losses in productivity and employment income to the poor. When families are forced to reduce expenditures on food and health care, the most affected are usually the most vulnerable: mothers and infants. Undernourished women who do not receive pre- and post-natal care may suffer permanent weakening and deterioration in their health. In addition to an increased mortality rate, their infants are also at increased risk of malnutrition and morbidity, resulting in permanent reduction of their mental and physical development potential. School dropouts rarely reenter school, even when economic conditions improve. If they do reenroll, their long absence from school puts them at increased risk of failure and not completing school. The quality of education and the learning of children is also affected by such crises, as governments, as well as households, reduce spending on non-salary items (e.g., textbooks, school materials) for public education. Inadequate health care and nutrition (especially for mothers and infant children), reduced enrollments and lower quality of education result in deteriorating human capital, resulting in lower earned income during the lifetimes of those affected and perpetuating the vicious circle of poverty. Social spending and effect of the crisis on health and education services. Ecuador's public social spending was below LAC averages (8.0% of GDP in 1998, excluding social security) before the crisis. Spending in the social sectors is estimated to drop by an additional 7.9% in 1999. The incidence of such spending is regressive overall. Overall spending on education, which represents over half central government outlays on social services, strongly favors higher income groups, with the bottom two quintiles receiving 27% and the top two quintiles receiving 53% of all education spending. Only primary education is progressive across quintiles. Public spending on health is even more regressive than that on education, with the top two quintiles receiving 61% of all public health expenditures. Some nutrition program expenditures are more progressively distributed, but others distribute up to 40% of all benefits to the top two quintiles, while large numbers of children from poor homes remain uncovered. The Bono de Solidaridad, introduced in late 1998 to replace highly regressive price subsidies on cooking gas and electricity, distributes half of total benefits to the poorest 40%, but over 30% of the benefits reach the top two quintiles. The Bono de Solidaridad currently accounts for 1.3% of GDP and nearly 23% of spending on the social sectors, including both services and targeted programs. With the drop in social spending and the regressive distribution of many programs, assistance to the very poor has been squeezed at the very time they need it most. There is a need to assess the cost-effectiveness and equity of ongoing programs, with a view to reducing or eliminating the less effective ones and restructuring or consolidating others to increase their efficiency. Weak institutional capacity and lack of policy framework for social protection. Lack of coordination in policy making, weak planning and weak analytical capacity have long characterized the social sectors. This fragmentation, together with weak policy making capacity within the sectoral ministries, has made it impossible for the Government in the past to formulate a coherent strategy or policy framework for social protection. Combined with centralized ministerial structures and weak implementation capacity, this has resulted in numerous and often duplicative or contradictory projects and programs. The absence of coordination was accompanied by a lack of capacity for monitoring or analyzing the status of living standards, health and education of the population, tracking social expenditures, or evaluating the effectiveness and efficiency of the many programs under implementation. The Government has taken the first steps to address these problems. Both the Health and Education Ministries have made advances in strengthening measurement of results and are commited to defining and implementing strategies to reform and strengthening of the sectors in the medium-term. In addition, the Government recently created a coordinating Ministry for the Social Sectors, with the mandate to develop a coherent strategy for social protection integrated with the sectoral strategies in health and education and to establish capacity for monitoring and evaluating the effectiveness of spending in the social sectors. Lack of an effective social safety net. As the social impact of the crisis worsened during 1999, a review of existing programs revealed that there were no ready mechanisms suitable for arresting the deterioration of human capital already taking place. While the Bono Solidario had proved to be an efficient transfer mechanism, the targeting mechanism used for the program was found inadequate for identifying those at particular risk of not seeking needed medical care or dropping out of school. Moreover, -2 - the Bono is not linked to behavioral changes that would slow the deterioration of human capital now occurring, and introducing new requirements or eligibility criteria would be politically difficult. Most of the many nutrition programs are poorly targeted, relatively costly, and benefit relatively few people. The FISE (Social Investment Program) is functioning too slowly to qualify as a mechanism to quickly generate unskilled employment, and the financial management of the institution is currently under scrutiny. Government Strategy The Government has developed a strategy for mitigating the social impact of the economic crisis that places top priority on sustaining core services for human capital formation and protecting the most vulnerable groups from erosion of their human capital, while pursuing a strategy aimed at linking short-term actions meant to alleviate the effects of the crisis with actions designed to pursue medium-term goals for reform. Implementing this strategy will require coordination, restructuring or elimination of ongoing programs, introduction of programs targeted at those most at risk, overall monitoring of program execution, and evaluation of program effectiveness. The groups identified as most at risk include pregnant women and lactating mothers, infants under 24 months, pre-school children, primary school children, the elderly and the disabled). Key actions/principles in this strategy include: Definition of priority programs and postponement of less urgent programs; Establishment of appropriate spending levels for priority items and programs; Maintenance of targeted spending levels, including payment on time to teachers and health workers and improving management of budget execution; Application of an effective targeting mechanism to identify potential beneficiaries of social programs; Identification of programs and mechanisms proven effective in assisting the poorest to avoid erosion of their human capital during the crisis; Use of proven operational mechanisms and contracting of services for program implementation; Strengthening of the Government's capacity for coordination and monitoring of social programs; Identification of policies and actions that would help the Government develop a coherent framework for social protection, integrated with basic services, in the medium term. 2. Objectives The primary objective of the project is to protect the poorest and most vulnerable groups from erosion of their human capital during economic crisis, through provision of stipends to mothers and children to cover direct and indirect costs of health and education services. 3. Rationale for Bank's Involvement This project is part of a larger safety net strategy which includes a supplemental loan in health, designed to provide the poor with access to basic services thus protecting them from the effects of the economic crisis. Bank support, together with that of the IDB: has helped to transfer international experience from similar projects - 3- (Mexico, Honduras, Brazil and Indonesia), both in the technical design and in the introduction of implementation arrangements that ensure the participation of the poorest families in the program; would strengthen continuous monitoring and evaluation of project activities during implementation, help identify solutions to problems detected, and facilitate the adoption of necessary adjustments; would facilitate transfer, on an ongoing basis, of lessons and best practice from social sector/safety net projects both regionally and worldwide. 4. Description The project would help the poorest 20t of familes to protect the human capital development of their children during the ongoing economic crisis by providing cash stipends to cover the direct and indirect costs of health and education services. It would also strengthen the capacity of the public sector to plan, target, coordinate, monitor, and evaluate social programs. It would consist of: (a) scholarships to help make it possible for children to attend primary school instead of having to work; (b) payment to mothers to cover the direct cost and opportunity costs of visiting health centers with their infants to receive preventive and curative care and nutrition education; (c) institutional strengthening to help develop a framework for social protection and an effective safety net, and to enhance the capacity to deliver social services cost-effectively and equitably; and (d) project management. Primary school scholarships (Beca Escolar) Mother-infant health stipends (Beca Materno-Infantil) Institutional Strengthening Project Management 5. Financing Total ( US$m) Government 10 IBRD 50 Inter-American Devt. Bank 50 Total Project Cost 110 6. Implementation The Ministry-Secretariat of Human Development would have overall responsibility for implementation. A project unit would be set up that would be responsible for overall coordination, identifying eligible beneficiaries, maintaining the data base of potential and actual beneficiaries and compliance with participation requirements, financial management, and management of technical assistance. Distribution of benefits under the beca components would be managed through contract(s) with private commercial banks. Several other activities, such as public information campaigns, would also be managed under contracts with external providers. The Ministries of Health and Education would be responsible, respectively, for providing health and education services and verifying beneficiary compliance with requirements for participation in the programs. -4- 7. Sustainability The proposed project represents a new program intended to protect the human capital of the very poor during economic crisis. There may be a need to continue the program beyond the foreseen two-year project period; in this case, further external financing, both multilateral and bilateral, would be sought. Experience with stipend programs linked to school attendance and participation in preventive health care indicates that there is a high probability that the behavior patterns encouraged through the program will endure even after the stipend is discontinued. Evidence shows that proper preventive care and improved nutrition of infants made possible through education of mothers during periodic visits has a permanent impact on the mental and physical development potential of infant children. Children who begin attending school at the age of 6 or 7 have a much higher chance of achieving in school and finishing primary school. For those who have less than a primary school education in Ecuador, it has been estimated that each additional year of schooling results on average to a 10% increase in income. Thus, even if the program is not continued beyond the original project period, the benefits to school children participating are likely to be significant and enduring. Finally, the technical assistance component would permit development of a targeting tool that can be used to improve the cost- effectiveness of many social programs in the country; development of a social protection framework; design of a strategy for implementing the modernization and strengthening of two ministries key to implementation of future social protection and safety net programs; and establisment of a system for monitoring both social expenditures and the effectiveness of social programs. These benefits will not require significant recurrent costs to sustain their impact beyond the project period. 8. Lessons learned from past operations in the country/sector The lessons learned and reflected in the project design were drawn from experience in similar projects successfully implemented by Bank-funded projects in Latin America and elsewhere and from IDB-funded projects in Latin America. The most important general conclusions that can be drawn from these experiences are as follows: (a) the importance of an effective targeting mechanism for selection of program beneficiaries, (b) the need to establish from the beginning monitoring indicators to detect changes in beneficiary status and well-being during project implementation, and (c) consultation with beneficiaries and with local groups, including NGOs, during project design facilitates implementation and greatly contributes to the success of the project. The Government has had extensive experience in the use of targeting instruments in the implementation of its cash transfer program (Bono Solidario) and it is currently designing an improved targeting system to select the poorest families to benefit under the proposed project. A set of monitoring indicators have been identified based on LSMS data and sector work done by the Bank, and consultations were conducted with local groups and beneficiaries during project design. Other experiences drawn upon during project design are described below: Study of a program similar to the proposed Beca Escolar, implemented in Brasilia, showed that it has had a positive effect on school enrollment, promotion and attendance rates. It is also an effective instrument to deliver financial support to families, when well targeted. A similar impact was also found in the PROGRESA program in Mexico, which is - 5- currently being evaluated. Evaluations of the Honduras Beca program (the longest experience in the Region with this type of program), showed that primary school enrollment rates rose by 12% on average in the participating departments, compared to an historical annual increase of 3%. Similarly, school performance improved by an average of 11.8%, and repetition rates declined by an average of 39, compared to previous years. With regard to the Beca de Salud Materno-infantil, an evaluation of the Honduras cupon program for poor families showed that when well targeted, it led to increased use of health facilities and to a shift in the demand for health services towards preventive services, which are cost-effective and poverty oriented. The program also has a positive impact on the income of beneficiary families. Similarly, the fear that stipend programs for poor families might have a negative impact on family planning acceptance among rural women has proven to be inaccurate. In fact, the epidemiological survey conducted in 1991 in Honduras, showed a decline in fertility rates in rural areas, including those covered by the cupon program. Evaluations of other stipend programs found some similarities on implementation issues such as eligibility criteria, targeting, frequency of payment of the stipend (may be adjusted to local rural conditions, once the program has started), weaknesses in administration capacity, especially monitoring and evaluation. These factors have been taken into account in the project design, through the design of an improved targeting instrument and arrangement for monitoring and evaluation throughout implementation. Following the positive experience of the administration of the Bono program, many functions will be contracted to private firms. Payments to families will be done through the local banking system and mobile banking units; audits will be conducted periodically by external auditors. Public awareness and information campaigns will be conducted with the help of a public communications firm prior to program startup. An implementation manual is being prepared and will be reviewed by both Banks during negotiations. 9. Program of Targeted Intervention (PTI) Y 10. Environment Aspects (including any public consultation) Issues: 11. Contact Point: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Task Manager Constance A. Corbett The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone: (202) 473-7879 Fax: (202) 614-0110 - 6 - Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. Processed by the InfoShop week ending October 29, 1999. - 7-