Budget execution program

Public Disclosure Authorized
Report No. 32856-SV
Report No. 32856-SV
El Salvador
Public Expenditure Review
Central America Department
Latin America and the Caribbean Region
Public Disclosure Authorized
Public Expenditure Review
Public Disclosure Authorized
El Salvador
Public Disclosure Authorized
December 31, 2004
Document of the World Bank
DIGESTYC
Direcci6n General de Estadisticas y Censos
OMS
Organizaci6n Mundial de la Salud
ECLAC
Economic Commission for Latin America and
the Caribbean
OPS
Pan American Health Organization
EDUCO
Community Based School Program
PAE
Annual School Plan
EHPM
Encuestas de Hogares Prop6sitos Multiples
PAES
Secondary Education Aptitude Test
FATEL
ANTEL's Privatization Fund
PAHO
Pan American Health Organization
PEI
Institutional Education Project
UNDP
United Nations Development Program
PEIP
Presupeusto Extraordinariode Inversi6n Publica
USAID
United States Agency for Intemational
Development
PEP
Budget Execution Project
VAT
Value Added Tax
PLANSABAR
Plan Nacional de Saneamiento BBsico Rural
WDI
World Development Indicators
SAFI
Integrated Financial Management System
WHO
World Health Organization
SIBASIS
Basic Systems of Integral Health Attention
WTO
World Trade Organization
Vice President LCR:
Director LCC2C:
Director LCSPR:
Sector Manager:
Lead Economist:
Task Manager:
Research Analyst:
David de Ferranti
Jane Armitage
Ernest0 M a y
Mauricio Carrizosa
C. Felipe Jaramillo
Ana Lucia Armijos
Ricardo Tejada
...
111
Table of Contents:
EXECUTIVE SUMMARY ....................................................................................................... x
CHAPTER I:Macroeconomic Environment and Fiscal Sustainability ..................................... 1
. Macroeconomic Trends ................................................................................................. 2
I
I1. Fiscal Revenues and Expenditures ................................................................................ 4
Fiscal Cost of Pension Reform ................................................................................ 23
I11.
Fiscal and Debt Sustainability .................................................................................
26
I V.
V . Conclusions ................................................................................................................. 33
ANNEX I:
Sensitivity Analysis T o Changes In M a i n Macroeconomic Assumptions ............ 35
ANNEX 11: The Fiscal Costs o f Pensions ............................................................................... 39
CHAPTER 11: Public Expenditure Management .................................................................... 49
Institutional Framework .......................................................................................... 49
I11.
Budget
Formulation and Reliability ........................................................................ 56
I V.
V . Budget Execution and Controls ................................................................................... 63
Financial Reporting and External Oversight ........................................................... 7 1
V I.
76
VI1. Conclusions and Recommendations .......................................................................
ANNEX I:El Salvador CPAR ................................................................................................. 82
M a i n Weaknesses and Recommendations...........................................................................
82
CHAPTER 111: Education........................................................................................................ 84
. . of the Sector ........................................................................................... 84
I
. Organization
85
I1. Strategic Objectives and Resource Allocation Processes ...........................................
Expenditure Trends ................................................................................................. 87
I11.
Expenditure Outcomes ............................................................................................ 93
I V.
107
V . Conclusions and Recommendations..........................................................................
CHAPTER IV: Health ...........................................................................................................
111
. .
I. Organization of the Sector ......................................................................................... 111
I1. Strategic Objectives and Resource Allocation Process ............................................. 112
Expenditure Trends and Structure .........................................................................
115
I11.
124
Expenditure Outcomes ..........................................................................................
I V.
V . Conclusions and Recommendations.......................................................................... 132
CHAPTER V: Water Supply and Sanitation ......................................................................... 136
. Sector Organization ................................................................................................... 136
I
I1. Strategic Objectives and Resource Allocation Process ............................................. 137
Expenditure Trends and Structure ......................................................................... 140
I11.
Expenditure Outcomes ..........................................................................................
144
I V.
154
V . Conclusions and Recommendations..........................................................................
158
CHAPTER VI: Rural Roads ..................................................................................................
158
I
. Sector Organization ...................................................................................................
159
I1. Strategic Objectives and Resource Allocation Process .............................................
Expenditures Structure and Trends .......................................................................
161
I11.
Expenditure Outcomes ..........................................................................................
165
I V.
171
V . Conclusions and Recommendations..........................................................................
CHAPTER VII: Rural Electrification...................................................................................
174
I
. Sector Organization ................................................................................................... 174
I1. Strategic Objectives and Resource Allocation Process ............................................. 176
Expenditure Outcomes .......................................................................................... 184
I11.
Conclusions and Recommendations .....................................................................
193
I V.
iv
Boxes:
B o x 1.1: Chile’s Fiscal Rule ..............................................................................................
32
Box 2.1: Public Sector Modernization Program ................................................................
50
B o x 2 . 2: M a i n Laws and Regulations Governing Public Financial Management ...........54
B o x 2.3: Expenditure Budget Classifications .................................................................... 59
B o x 2.4: Expenditure Budget Execution Process .............................................................. 64
Box 2.5: Court o f Accounts - Selected Indicators ............................................................ 73
139
B o x 5.1: Water and Sanitation Sector Reform Efforts ....................................................
Box 6.1 : Fund for Road Conservation ............................................................................. 164
B o x 7.1: Principal Measures Implemented to Modernize the Electricity Sector ............177
Box 7.2: Evolution o f Electricity Subsidies .................................................................... 181
Box 7.3: Wholesale Electricity Market ........................................................................... 187
188
Box 7.4: Quality Norms for the Distribution o f Electricity .............................................
Tables:
1.1: Non-Financial Public Sector and C G ($million) ................................................ 5
1.2: Non-Financial Public Sector as Percent o f GDP ................................................ 6
1.3: Non-Financial Public Sector. as % o f Total Revenues and Expenditures ..........7
1.4: Non-Financial Public Sector (US$ m.) ............................................................... 8
1.5: Government Allocations for FODES and FISDL (US$ m.) ............................. 10
1.6: Distribution o f Expenditure b y selected Countries. average 1996 - 2003 .......11
1.7: C G revenues. expenditures and overall deficit (% o f GDP) ............................ 12
1.8: CG Approved and Executed Budget b y Management Area (% o f total budget)
................................................................................................................................... 13
Table 1.9: C G Budget . Approved and Executed by Management Area (% o f GDP) ....... 13
Table 1.10: CG Budget: Executed as Percent o f Approved by Management Area ...........17
Table 1.1 1: Estimated Increase in Public Spending to Implement a National Social Policy
19
for Poverty Reduction................................................................................................
Table 1.12: CG revenues as percent of total revenues....................................................... 20
Table 1.13: C G Tax Revenues as % o f Current Revenues and GDP ............................... 21
Table 1.14: C G Actual Revenues in US$ m. and as percent o f Project Revenues ............22
Table 1.15: Central America Value Added Revenue Productivities ................................. 23
Table 1.16: Structure & Features o f Pension Reforms in Latin America .......................... 25
Table 1.17: N o n Financial Public Sector Debt in U S $ m. and as percent o f GDP............27
Table 1.18: M a i n Macroeconomic Assumptions ............................................................... 28
Table 1.19: NFPS Primary Balance ** and Selected Macroeconomic Variables .............36
Table 1.20: NFPS Primary Balance ** and Selected Macroeconomic Variables .............36
Annex l.A: Fiscal Performance Under the Passive Scenario ........................................... 37
Annex l.B: Fiscal Performance Under the Fiscal Target Scenario ..................................
38
Table A.l: Basic Statistics o f the O l d Pension System .....................................................
39
Table A.2: Population Affiliated and Pensioners. by Social Security Institute .................41
Table A.2: Pension Debt. December 2003 ........................................................................
43
45
Table A.3: Options to Reduce Pension Debt .....................................................................
Table A.4: Detailed Estimates o f the Options to Reduce Pension Debt ............................ 47
Table 2.1: Budget Transparency Perception Survey .Variables 2003 .............................. 53
57
Table 2.2: Budget Formulation Process............................................................................
Table
Table
Table
Table
Table
Table
Table
Table
V
Table 2.3: Aggregate Revenue Budget Execution .
CG ...................................................
60
Table 2.4: Aggregate Expenditure Budget Execution .
CG.............................................. 60
Table 2.5: Average Deviation of Expenditure Budget Execution ..................................... 61
Table 2.6: Budget Execution Volatility Over Time - CG ................................................. 61
Table 2.7: Short-term payables.......................................................................................... 65
Table 3.1 : Student Population, by sector 2002 .................................................................. 84
Table 3.2 Education Vouchers, 1996-2003 ....................................................................... 87
Table 3.3: Public Education Expenditure per Student 1999 .2002 .................................. 88
Table 3.4: MINED Budget by Function 96-03 .................................................................. 90
Table 3.5: Trends in Monthly and Hourly Public and Private Teachers Real Wages .......91
Table 3.6: Pupil-Teacher Ratio in Primary, 1996. 2000/0 1............................................... 91
Table 3.7 MINED’SFinancing Sources. 1997-2003 ......................................................... 93
Table 3.8 Education Vouchers. by Source of Financing ................................................... 93
Table 3 . 9 Trends i n Gross Enrollments. 1996.2002. by Area Gross Enrollment Rate ....94
95
Table 3.10 Gross and N e t Enrollment Rates. 2002 ...........................................................
Table 3.11 Indicators of Educational Efficiency. by Area and Sector. 2002 .................... 98
Table 3.12: Voucher Programs Under Execution............................................................ 100
Table 3.13: Achievement Tests for Basic Education. Average Scores (1994-98) .......... 101
Table 3.14: PAES’s Average Scores by Discipline. 1997 - 2001 a/ ...............................
102
Table 3.15: Reasons for not attending school. by area. 2002 .......................................... 104
Table 4.1 : Total Health Expenditure Per capita. 1996 - 2000......................................... 116
Table 4.2: Public and Private Health Spending and Sources of Financing .................... 116
Table 4.3: MSPASE Expenditures. by Major Economic Category. 1996 - 2003 ........... 119
Table 4.4: Hospital Budgets by Type of Attention and Major Category. 2003 ............... 119
Table 4.5: MSPAS and Public Hospitals Budget. by Category 1996 - 2003 ..................120
Table 4.6: MSPAS’ Staff. 1999 .2002............................................................................ 121
Table 4.7: MSPAS Spending. by Financing Source. 1997 .2003 .................................. 123
123
Table 4.8: External Financing for the Health Sector. 1994 .2002 ..................................
Table 4.9: Key Health Indicators. 1990 - 2002 ............................................................... 124
Table 4.10: MSPAS Selected Indicators. 1996 - 2002 ................................................... 125
Table 4.1 1: Population Covered by Medical Insurance. 2002......................................... 128
Table 4.12: Establishment that Visited When Ill.2002 ................................................... 128
129
Table 4.13: Motives for not visiting MSPAS establishments. 2002................................
Table 4.14: Distribution of Persons Visiting Central Government MSPAS Facilities by
Income Group 2002 ................................................................................................. 130
Table 5.1: Water and Sanitation Coverage. by Institution. 2002..................................... 136
Table 5.2: Public expenditures on water supply and sanitation. 1990 - 2003 ................. 140
Table 5.3: ANDA Expenditures. by Major Economic Category. 1997 - 2003 ............... 142
Table 5.4: Public Investment Programs in Water and Sanitation. 1990 - 2003 .............. 142
Table 5.5: ANDA - Source of investment financing. 1990 .2002 ................................. 144
Table 5.6: El Salvador Water Supply and Sanitation Coverage. 1990 - 2002 ...............145
Table 5.7: Central America - Water Supply and Sanitation Coverage. 1999 .................146
Table 5.8: Central America Water Supply and Sanitation Coverage, 1999 .................... 146
Table 5.9: ANDA’s Water Losses. 1993 - 2002 ............................................................. 147
Table 5.10: Average Water Price in Greater San Salvador. 2002 ................................... 148
Table 5.11: Causes of Morbidity Related to Water Quality and Sanitation. 2002 ..........151
vi
Table 5.12: Distribution of Water Sanitation Services. by department 1990 - 2002 ......153
Table 5.13: FISDL’s Distribution Water Sanitation Projects by Department 1991-2003
................................................................................................................................. 154
Table 6.1: El Salvador - Road Network, 2000 ................................................................
158
Table 6.2: Damage Caused by the 2001 Earthquakes to the Road Network (US$ m.) ...160
Table 6.3: FOVIAL’s Expected Benefits ........................................................................ 161
Table 6.4: Public Expenditure i n Road Network. 1990 - 2003 .......................................
162
Table 6.5: Ministry o f Public Works. Budget Execution. 1997 - 2002 .......................... 162
Table 6.6; FOVIAL’s Expenditures. 2002 - 2004 .......................................................... 163
Table 6.7: Financing of MOP-FOVIAL Investment i n Road Network. 1998 - 2003 ..... 164
Table 6.8: Participation of Rural Roads on Road Network. 1990 .2002........................ 166
Table 6.9: Rural Household Access Indicators................................................................ 166
Table 6.10: Situation of the priority Road Network. 2002 .............................................. 168
Table 6.1 1: Situation of the Priority Road Network by Department. 2002 ..................... 168
Table 6.12: Departmental Distributions of the Sustainable Rural Roads. 1999 - 2003 ..169
Table 6.13: FISDL Investment in Rural Road Improvement. by Department ................170
Table 6.14: Evolution of the Access to Markets. by Poverty Level. 1995 - 2001 .......... 171
179
Table 7.1: CEL - Principal Projects Executed. 1990 - 2004 ..........................................
Table 7.2: CEL’s Electricity Consumption Subsidies. January 1998 - March 2001 ......180
Table 7.3: FINET -Electricity Subsidies Granted. April 2001 - December 2003 ......... 182
Table 7.4: Implicit Subsidy on Rural Electricity Consumption. 1994 ............................ 182
Table 7.5: Public Resource Assigned for Rural Electrification and Subsidies................ 183
Table 7.6; Capital Investment by the Distribution Companies. 1998 - 2003 (US$ m.) ..183
Table 7.7: Electricity Coverage in Central American Countries. 1990 - 2002 ............... 184
Table 7.8: El Salvador - Electricity Coverage. 1991 - 2002 .......................................... 185
Table 7.9: El Salvador - Transmission & Distribution Electricity Losses (1990 - 2002)
................................................................................................................................. 185
Table 7.10: Central America - Transmission & Distribution Electricity Losses (1990 2002) ........................................................................................................................ 186
186
Table 7.11: El Salvador - Electricity Prices. 1998 - 2003 ..............................................
Table 7.12: Central America - Average Prices Residential Customers. 1998 - 2002 (US
cents/KWh) .............................................................................................................. 187
Table 7.13: El Salvador Energy Interruption and Not Delivered (EIND). 1990 - 2002.189
Table 7.14: Frequency of Deficit in Reserves. 2003 ....................................................... 190
Table 7.15: Power Supply and Demand. 1990 - 2003 .................................................... 190
Table 7.16: Electricity Companies - Indicators of Quality Services to Clients. 2003 ....190
Table 7.17: FISDL’s Distribution Rural Electrification Projects. 1994 - 2003 .............. 192
Table 7.18: FINET - Geographic Distribution of Subsidy to Residential Consumption
(2001-2002) .............................................................................................................
192
Charts and Figures:
Chart
Chart
Chart
Chart
Chart
Chart
1.1: Real GDP Growth Rates .....................................................................................
3
1.2: Non-Financial Public Sector Expenditure (9% of GDP) ...................................... 9
1.3: CG Revenues. Expenditures and Overall Deficit ............................................. 12
1.4: Executed as % of Approved CG Budget. by Management Area ...................... 17
1.5 CG Current Revenues and Total Expenditures as percent of GDP ................... 20
1.6: Executed as $4 of Approved CG Budget by Management Area ....................... 21
Chart 1.7: Non Financial Public Sector Debt as percent o f GDP ......................................
26
31
Chart 1.8 Overall NFPS Deficit .........................................................................................
Chart 1.9: NFPS Primary Balance ..................................................................................... 31
Chart 1.10: NFPS Total Public Debt ................................................................................. 31
Chart 1.11: NFPS Interest Payments ................................................................................. 31
Chart 2.1 : Governance Indicators. 2002/2000/1998 and regional comparison 2002 ........ 52
Chart 3.1 : Public Spending on Education.......................................................................... 88
Chart 3.2: Education Budget. 1996/03 .............................................................................. 88
Chart 3.3: Dist . o f MINED’SRecurrent Exp. b y Level o f Education 1996-2003 .............89
Chart 3.4: Gross Enrolments in Basic Education ..............................................................
95
Chart 3.5: Gross Enrolment Secondary Education National Level ................................... 95
Chart 3.6: Repetition Rates in Basic by Grades. 1996 - 2001 ........................................... 96
Chart 3.7 Dropout rates in primary urban areas. b y grade 1996 -01 ................................. 96
Chart 3.8: Dropout rates in primary rural areas. by grade 1996 - 01................................. 96
Chart 3.9: Relationship Education Exp. and Net Enrollment on Primary Education........98
Chart 3.10: Relationship Public Spending and Net Enrolment on Secondary Education .98
Chart 3.1 1: Share o f Public Education Expenditure b y Quintile and Level. 2002 ..........105
Chart 3.12; Net Enrolment in Basic Education Quintile ................................................. 106
Chart 3.13: Average Years o f Schooling for 15 Year Olds ............................................ 106
Chart 3.14: Pop. Income and MINED Spending in Basic Education by Department (2000)
................................................................................................................................. 107
Chart 4.1: Total Health\ Expenditures as percent o f GDP. 2000 ...................................... 115
Chart 4.2: MSPAS Budget as percent o f Total Budget and GDP 1996 - 2004 ............... 117
Chart 4.3: MSPAS Expenditures b y Level o f Attention & Administration (1996 - 2003)
................................................................................................................................. 118
Chart 4.4: Infant Mortality per Socio-Economic Group .................................................. 126
Chart 4.5: Total health expenditure per Capita and life expectancy at birth...................127
Chart 4.6: Total health exp . Per capita and infant ........................................................... 127
Chart 4.7: MSPAS Hospital and Primary Health Care Spending b y Quintile, 2002 .......131
Figure 4.8: Per capita income and M O H spending b y Department (2000) ..................... 132
Figure 4.9: Per capita income and primary health care spending b y Department (2000)
................................................................................................................................. 132
Chart 5.1: ANDA Expenditures by Function, 1997 - 2003 ............................................ 141
Chart 5.2: ANDA Investment b y Financing Source. 1990 - 2002 ................................... 143
Chart 5.3: Nominal and Real Price o f Water Service as Measured in C P I ..................... 147
Chart 5.4: Per Capita Residential Consumption. 1990 - 2002 ........................................ 149
Chart 5.5 Water Qualtiy in ANDA’s Distribution Network. 2002 .................................. 151
Chart 5.6: Availability o f Piped Water per Quintile. 1991 - 2002 .................................. 152
Chart 5.7: Availability o f Sanitation per Quintile. 1991 - 2002 ..................................... 152
Chart 6.1 : Priority Road Network ....................................................................................
165
175
Chart 7.1; Areas o f Influence o f the Electricity Distribution Companies .......................
Chart 7.2: Access to Electricity b y Quintile ....................................................................
191
...
Vlll
ACKNOWLEDGMENTS:
This report was prepared b y a team lead b y Ana Lucia Armijos (LCSPE) and comprising
Ricardo Tejada (LSCPE), Manuel Vargas (LCOAA), Jorge Camacho (LCC2C) and Jose
S. Marques (Consultant). Document Processing Assistance was provided b y Elizabeth
Percesepe-Wallace (LCC2C). The team benefited from comments provided b y W o r l d
Bank staff and Government officials. W e would like to especially thank our Peer
Reviewers J. Humberto Lopez (PRMPR) and Jose R. Lopez Calix (LCSPE) who
provided detailed inputs. The report also received comments from Jesus Maria Fernandez
(LCSHH), Wladimir T. Jadrijev (LCOPR), Andrew D. Mason (LCSHD), Mario Sangines
(LCSPR) and Manuel Sevilla (LCSFP).
The report was written under the guidance and support o f Jane Armitage (LCC2C
Director), Felipe Jaramillo (LCC2C Lead Economist), Mauricio Carrizosa (LCSPE
Sector Manager), and Helena Ribe (LCSHD Sector Manager). The team would like to
express i t s gratitude for the cooperation received from Authorities throughout i t s
elaboration, and particularly during the two missions to San Salvador. In particular, the
team would l i k e to thank Eduardo Zablah-Touche, Technical Secretary of the Presidency,
Roberto F. Siman, Advisor-Technical Secretary o f the Presidency, Guillermo Lopez
Suarez, Minister of Finance, Carmen Regina de Arevalo, Viceminister o f Finance,
Anabella de Palomo, Undersecretary-Technical Secretary, and Manuel Rosales, Advisor
Ministry of Finance, for their support. M a n y thanks also go to Mauricio Sosa de l a Cruz,
Guadalupe A. de Pacas, Jose A. Rivas, Dinora M. Cubias, Francisco Jose Rovira, Jorge
A. Aguilar and Rene S. Garcia who provided timely inputs and responded to numerous
requests.
ix
EXECUTIVE SUMMARY
1. El Salvador faces today two fiscal challenges that w i l l greatly influence i t s economic
performance over the coming years. The first i s to regain a solid fiscal footing, by
reversing partly some o f the recent rapid growth in public debt. The second i s the need to
finance certain priority investments required to accelerate growth and meet pressing
social needs.
2. This public expenditure review (PER) focuses on these fiscal challenges. I t reviews
overall trends in expenditures and revenues and lays out options for reducing debt
gradually to levels that would grant greater flexibility to fiscal policy in the future, which
i s likely to be needed to respond to future shocks and contingencies and to aid in
countercyclical economic management. In addition, the report provides in-depth attention
to critical social expenditures, particularly those in health, education, water and
sanitation, rural roads and electrification, which in aggregate represent over forty percent
o f the Central Government’s budget. I t also reviews the public expenditure management
framework and offers some recommendations to ensure that public funds are used
productively and efficiently.
I.
Recent Economic Trends
3.
With a strong record o f structural reforms in the 1990s, El Salvador has posted
significant gains in economic growth and poverty reduction since the end o f the c i v i l war
in 1992. However, starting in the late 1990s, growth levels have been disappointing,
partly as a result o f terms o f trade shocks (esp., price o f coffee), the international
recession and disruptions caused b y the earthquakes o f 2001. The fiscal situation has
deteriorated, as fiscal receipts have been affected b y l o w economic growth, and
expenditures have increased due to substantial reconstruction investments and the
transition costs associated with pension reform. Due to El Salvador’s strong macro
policies and i t s good standing as a sovereign debtor in international markets, much o f the
fiscal imbalance has been financed at moderate costs, although at the expense o f a rapid
increase in public debt since 2000.
4.
The country has also made impressive progress in advancing in social areas since
1991, including basic education enrollments, infant and maternal mortality, access to
reproductive health services and to safe water. Overall poverty declined significantly
(over 27 percentage points) between 1991 and 2002, while extreme poverty was halved in
the same period. While progress in poverty reduction has slowed in the 2000s, social
indicators have not deteriorated, even in the face o f the 2001 earthquakes, the regional
coffee crisis, and slowdowns in domestic growth and the global economy. Broad gains in
social indicators reflect not only the fruits o f economic growth but increasing public
sector attention in these areas since the mid-1990s which have been translated into some
important reforms and greater budgetary allocations.
X
I1
Fiscal Revenues and Expenditures
5.
W h i l e fiscal performance has been broadly prudent since the 1990s, El Salvador’s
non-financial public sector deficits rose during 2000-2003. The causes o f this
deterioration were the earthquakes o f 2001, which called for a significant boost in
expenditures for reconstruction, and the increasing transition cost o f the 1996 pension
reform. Recent deficits have been mainly financed by a growing public debt burden.
6.
A successful public sector modernization effort, under implementation since
1994, i s responsible for the streamlining and improved efficiency o f key areas o f the
state, including a wage bill reduction o f about one percentage point o f GDP since 2000.
In the same period, tax revenues increased b y about 1 percentage point o f GDP, in
response to the introduction in 2002 o f a new fuel tax to fund spending in road
maintenance (FOVIAL), and to measures that broadened the tax base and improved tax
administration and enforcement.
Composition of Expenditures
7.
Since 2001, expenditure increases have been associated principally with a rise in:
pension outlays following the pension reform that made the public pension system debt
explicit, interest payments, and transfers to the municipalities. Capital expenditures o f the
central Government have been squeezed in this process, partly as a result o f expenditure
inflexibilities in about two thirds o f the budget and difficulties in boosting revenues.
Three types o f expenditures -- which account for nearly 65 percent o f non-financial
public sector expenditures -- are particularly rigid: the public sector payroll, interest
payments and transfers.
8.
The level o f total expenditures o f the Central Government i s s t i l l l o w in relation to
other L A C countries. In the 1996-2003 period, current expenditures averaged 12.4
percent o f GDP and capital expenditures 3.2 percent o f GDP. The latter seems
particularly l o w given the need to boost growth and meet a pressing social agenda.
Expenditure Priorities
9. Trends in public investment reveal a noteworthy increase in budget allocations in
social sectors, a result o f increased attention to the social development agenda in El
Salvador. During the period 1996-2003, the budget allocation to Social Development
increased from 4.7 percent o f GDP to 7.3 percent o f GDP. Within this allocation,
education increased from 2.2 to 3.1 percent o f GDP, and health f r o m 1.4 to 1.5 percent o f
GDP; while transfers explain most o f the increase as both, increasing from 0.1 to 2.4
percent o f GDP. Other areas that feature prominently in the budget were Support for
Economic Development (2.1 percent o f GDP, on average) and Justice and Security (2.5
percent o f GDP, on average).
Past Performance and Prospects in Revenue Policies
10. Government revenues in El Salvador have increased very gradually in the past 8
years, with tax revenues explaining the bulk o f the increase. Non-tax revenues decreased
from 6.3 percent o f GDP in 1996 to 4.2 percent o f GDP in 2003. The tax structure relies
fundamentally on revenues f r o m the VAT and the income tax. Other revenues are derived
f r o m import duties and excise taxes on specific products. The former has been steadily
declining as a source o f government revenue since the early 1990s, as El Salvador has
reduced sharply i t s average tariff levels.
11. According to a number o f recent studies, there i s ample room for El Salvador to
continue improving tax revenues over the coming years. The area with most promise i s
the excise tax on specific products, in which El Salvador ranks l o w in international
comparisons. Greater taxes on beverages and tobacco are a potential source o f future
revenues, particularly as El Salvador has lower rates than most Central American
neighbors. Since El Salvador has developed a well structured VAT, with a broad base, a
single rate and relatively high productivity, further revenues from this source would need
to come f r o m higher rates and the incorporation o f a greater share o f economic activity
currently in the informal sector.
111.
Fiscal Cost of Pension Reform
12. El Salvador adopted a pension reform in 1996 that replaced the existing pay-as-yougo system with a system o f individual capitalization. The reform was aimed at improving
long-term fiscal sustainability b y replacing a system that was projected to yield large and
growing deficits in the future by a sustainable one, implying transitional costs as younger
Salvadorans move to the private account system while the state keeps the obligation to
pay out pensions to older generations. In addition the reform made the conditions for
access to benefits more homogeneous among workers from the private, and public
sectors, and aimed to gradually increase coverage and develop a private savings pool that
could f o r m the basis for long term investments.
13. As o f December 2003, the size o f the actuarial deficit was estimated at 72 percent o f
GDP. This includes the commitments to pay current and future pensioners, obligations to
those who transferred to the private capitalization system, and payments o f the
complement for mandatory minimum pensions. Costs o f the pension reform have been
growing due to the increasing mismatch between contributing and beneficiary
populations, the failure to raise further the retirement age, generous benefits compared to
other social security systems, and the growth o f administrative costs. Given recent fiscal
trends, curbing the transition costs o f the pension reform i s an important challenge in El
Salvador .
IV.
Fiscal and Debt Sustainability
14. N o n financial public sector debt has accelerated rapidly in the last five years, to just
above 40 percent o f GDP. If l e f t unaddressed, further growth in debt and associated
interest payments could be eventually reflected in market spreads and potentially cause
difficulties when tapping domestic and international capital markets.
15. Adjustments are clearly needed to address some o f the underlying trends that have
led to the rapid increase in the non-financial public sector debt. M u c h o f this increase can
be attributed to emergency earthquake reconstruction expenses and the growing transition
costs o f pension reform on the face o f slow growing revenues. While reconstruction costs
w i l l wind down b y 2005, the country w i l l need to ramp up social and growth related
xii
expenditures. Hence, El Salvador’s greatest challenge over the coming years i s how to
regain a solid fiscal footing, while simultaneously financing the expenditures required to
meet social and growth challenges.
16. If recent expenditure and income trends are l e f t unchecked, the debt sustainability o f
El Salvador would be compromised. A passive scenario would lead to increasing overall
deficits, greater interest payments and a gradually rising public debt. These trends
indicate that serious attention i s required in order to preserve the country’s credit rating
and the cost of external borrowing. The investment-grade rating that El Salvador enjoys,
which i s responsible for i t s l o w interest rate spreads, i s based on a solid track record o f
sound debt and fiscal management.
17. Returning to a non-financial public debt level that allows for fiscal flexibility -- to
respond to shocks, contingencies or for cyclical economic management -- should be a
priority in El Salvador. As an illustration o f the type o f adjustment, this report lays out a
path to return to a debt level o f about 35 percent o f GDP over 5 years. This would require
gradual increases in annual revenues o f about 4.0 percent b y 2009. About one and a half
(1.5) percent o f the total increase in revenues could be the result o f greater efforts at
revenue collection through administrative measures. The rest would likely require greater
tax efforts. Additionally, some pension provisions should be amended to address overly
generous benefits in the international context.
V.
Public Expenditure Management
18. The task o f putting the economy on a sustainable and poverty reducing growth path
has to be carried out with the support o f a modern public expenditure management. Good
budget institutions allow governments to balance the three interrelated objectives o f
budgetary performance: aggregate fiscal discipline, efficient allocation o f resources
according to the Government’s policy priorities, and operational efficiency in the use o f
resources. The financial management reform process, initiated in El Salvador in the
1990s under the umbrella o f the public sector modernization program, has produced
significant improvements in the performance o f budget management institutions. The
financial management law (Ley AFI) and other regulations provide a modern and
functional framework o f formal rules pertaining to each relevant area o f budget
management. While the basic foundations o f a well-functioning public expenditure
management system have been built, s t i l l important obstacles to operational efficiency
remain.
19. Drawing from the Country Financial Accountability Assessment (CFAA) report,
recommendations and priority actions are presented w i t h respect to improving internal
controls, comprehensiveness and quality o f financial data, financial management reform,
monitoring o f public investment, cash management, c i v i l service legal framework, and
delineation o f areas o f intervention between central and local governments. Most
significantly, the available aggregate targets and projections that guide fiscal policy
should be the starting point to develop and formalize a medium-term budget framework
that includes the projections, over a three-to-five year horizon, o f fiscal indicators,
...
Xlll
expenditure estimates and forecasts of forward costs o f the most significant investment
projects. This could better inform the annual budget formulation and approval process, b y
increasing accuracy of the future fiscal impact o f current policies and the prioritization o f
expenditures.
Accomplishments and Future Challenges in the Social Areas
VI.
20. Education. There has been a substantial increase in the amount o f public resources
allocated to education during the 1990s. Nevertheless, spending allocations in this area
s t i l l falls short of regional averages. The allocation of resources has supported the
implementation of the Education Development Plan 1995-2005, which contributed to
major improvements in the sector. I t i s likely that the country w i l l meet the 2015
Millennium Development Goals (MDG) on net primary education enrollment, share o f
students that complete the fifth grade, and the universal literacy target for youth. The
targets related to gender in primary and secondary education as well as literacy rates have
already been met. However, to reach the necessary coverage rates in the primary, basic
and secondary cycles, i t has been estimated that the education budget would need to
increase in the next ten years b y about 1.8 percent o f GDP, with respect to 2003 levels. In
addition, although there has been progress in recent years, there i s s t i l l ample room to
increase the efficiency o f the education system. Overage, repetition, and drop out rates
remain high, and programs directed at addressing these problems should continue to be
supported, while an appropriate balance needs to be established between expenditures on
wages and salaries, teacher training, didactic materials and other goods and services, and
infrastructure.
21. Health. El Salvador’s health indicators have improved during the last several years
but significant challenges remain. For instance, in relation t o the MDGs i t i s highly
likely that the country w i l l be able to meet the 2015 targets on infant mortality rate,
mortality rate in children under five, measles immunization, and tuberculosis incidence,
but i t i s unlikely that i t w i l l meet the targets on maternal mortality, deliveries b y trained
staff, and HIV/AIDs. Since 2001, part o f the resources allocated to the sector have
financed the reconstruction o f damaged infrastructure b y the earthquakes. El Salvador’s
overall budgetary allocation for health services as a share o f GDP i s l o w by regional
standards as are total public outlays (including health programs o f the Social Security
Institute) on a per capita basis. The bulk o f budgetary resources are currently allocated to
hospital care and the primary healthcare. Going forward, efforts should focus on
increasing the efficiency and equity o f resource use, including increasing cost recovery
from those that can afford it. There i s a need to increase further primary health care
through cost-effective, outreach programs since the coverage o f the health system i s s t i l l
inadequate as less than 20 percent (6 percent o f the poor) have access to medical
insurance, and as much as 24 percent o f the population s t i l l does not have access to health
services or only has limited access. Providing access to a minimum package of
healthcarehutrition services to those who s t i l l lack regular health services would demand
an additional 0.2-0.3 percent o f GDP with respect to current levels. .
22. Water and Sanitation. Water supply and sanitation coverage has increased since
the early 1990s, mainly in rural areas. The MDG in this area establishes the target o f
xiv
reducing the proportion o f population not having sustained access to safe water and basic
drainage to half b y 2015. Recent data indicates that El Salvador has already surpassed the
MDG target for urban water and sanitation and rural sanitation coverage and i t i s likely
that by year 2015 the target for rural access to water w i l l be met. Nevertheless, there are
s t i l l significant challenges in the sector. To achieve universal coverage o f water supply
and sanitation b y 2015, i t would be necessary to increase annual investments in the sector
b y 0.1-0.3 percent. In addition, the quality o f services needs to improve substantially and
a new tariff policy should allow for recuperating operation and maintenance costs,
financing expansion o f water and sanitation systems, and promoting rational use o f water.
23. Roads. Improved coverage and quality o f rural roads during the 1990s has
contributed to poverty reduction in rural areas, and has given household members access
to markets, educational and health centers, water and security. Nevertheless, renewed
efforts are required to obtain an adequate level o f connection o f districts and settlements
in the country. One set o f objectives consistent with the country’s goals to strengthen
poverty reduction through infrastructure development would be: (i)
to pave or rehabilitate
an additional 1,000 kilometers o f rural roads; and, (ii)
to ensure annual maintenance o f
3,000 kilometers o f rural (secondary and tertiary) roads. Using recent average unit costs
o f road paving, rehabilitation, and maintenance as benchmarks, i t i s estimated that a 5year program to pave and/or rehabilitate an additional 1,000 kilometers o f rural roads
implies additional investments o f approximately 0.1 to 0.2 percent o f GDP, above those
dedicated in 2003.
24. Rural Electrification. Significant improvements have also been made in coverage
and quality of electricity service since 1990, mainly in rural areas. The main sector
challenge i s to lower the cost o f service through more efficient generation and
distribution. In view o f the importance o f rural electrification for income generation, the
study on the situation o f El Salvador in relation to the MDGs, incorporates the goal o f
reaching a rural electrification rate o f 85 percent by 2015, f r o m 71 percent in 2002.
Hence, raising by about one percentage point per year the rural electricity coverage
would cost an estimated o f about U S $ 3 million a year. However, the sector’s resource
allocation priorities need to be reviewed in order to allocate more resources for the
benefit o f low-income populations and rural areas lacking service. Less resources should
be used for subsidies to those that already enjoy the service.
Critical social and growth expenditures for the future
25. Given that some o f the poorest segments o f Salvadoran society have been unable to
take advantage o f recent economic growth, i t i s critical to put in place a coherent set o f
policies and investments to ensure that the poor can benefit from future economic
progress. To build effectively on past achievements, i t w i l l thus be important to
implement a social policy aimed at giving the poor better access to quality education and
health care, and greater access to basic services, such as safe water and electricity. Given
that the fiscal space for increased spending i s limited, strategic choices among priority
areas must be carefully made. This report puts forth a strategic package o f investments
oriented to ensure that the poorest have access to social services and to strengthen their
xv
position to benefit from future income earning opportunities. This package overlaps in
some key areas (Le., education and rural infrastructure) with the agenda o f investments
also required to promote overall growth.
26. Implementing the proposed package would imply increase in expenditures o f 3.2 to
3.6 percent of GDP over current levels, that would need to be gradually phased in over
ten years, due to the tight fiscal situation. The largest commitments o f additional
resources are associated with education and the social safety net. Improving education
through achieving universal primary and basic education and increasing net enrollments
in secondary schooling to 70 percent would require an additional 1.8 percent o f GDP.
Developing an adequate safety net would require spending o f an additional 1 percentage
point o f GDP.
27. While this package o f investments covers significant components o f the growth
agenda that El Salvador requires to boost economic performance over the coming years,
i t admittedly excludes some important investments that need to be included in such an
agenda. Additional investments to promote growth w i l l require commensurate additional
fiscal efforts and creative methods to attract financing from the private sector.
28. In sum, El Salvador faces the difficult dual challenge o f addressing recent fiscal
trends while financing key investments required to accelerate growth and meet pressing
social needs. Meeting both o f these challenges simultaneously w i l l require great s k i l l , as
there can be tradeoffs between them, especially in the short run. However, as the analysis
in this report demonstrates, the level o f new spending required should be manageable and
can be reconciled with the goal o f strengthening fiscal accounts. Ultimately, the
expenditures recommended to ensure that the poor benefit from further economic
progress are not only feasible but necessary to promote growth and poverty alleviation
over the coming years.
xvi
CHAPTER I:Macroeconomic Environment and Fiscal Sustainabilitv
Background
1.1
W i t h a strong record o f structural reforms in the 1990s, El Salvador has posted
significant gains in economic growth and poverty reduction since the end o f the civil war
in 1992. However, starting in the late 1990s, growth levels have been disappointing,
partly as a result o f terms o f trade shocks (esp., price o f coffee), the international
recession and disruptions caused by the earthquakes of 2001. The fiscal situation has
deteriorated, as fiscal receipts have been affected b y l o w economic growth, and
expenditures have increased due to substantial reconstruction investments and the
transition costs associated with pension reform. Due to El Salvador's strong macro
policies and i t s good standing as a sovereign debtor in international markets, much o f the
fiscal deficit has been financed at moderate costs, although the flip side has been a rapid
increase in public debt since 2000.
1.2
A s a new administration comes into office, El Salvador faces two fiscal
challenges that will greatly influence i t s economic performance over the coming years.
The first i s to regain a solid fiscal footing, by reversing partly some o f the recent growth
in debt. The second i s the need to finance certain priority investments required to
accelerate growth and meet pressing social needs. Meeting both o f these challenges
simultaneously w i l l require great skill, as there can be tradeoffs between them, especially
in the short run. However, as the analysis in this report demonstrates, given
improvements in the efficiency o f public expenditures in recent years, the level o f new
spending required should be manageable and can be reconciled with the goal o f
strengthening fiscal accounts in a country where the tax burden i s s t i l l relatively l o w by
international standards. Ultimately, the selective expenditures recommended are not only
feasible but necessary to promote growth and poverty alleviation over the coming years.
This public expenditure review (PER) focuses on the fiscal challenges described.
1.3
I t reviews overall trends in expenditures and revenues, with special emphasis on the key
social expenditures that require the most attention, as well as on the public expenditure
management framework required to ensure that public funds are used productively and
efficiently. I t also evaluates future trends in fiscal accounts and lays out options for
reducing debt gradually to levels that would grant greater flexibility to fiscal policy in the
future, which i s likely to be needed to respond to future shocks and contingencies and to
aid in countercyclical economic management.
1.4
This report focuses i t s in-depth analysis o f expenditures on social investments,
broadly understood, including rural infrastructure. O f these, social sector expenditure
areas represented in 2003 approximately 43 percent o f the Central Government budget.
Areas that are not explicitly evaluated represented about a third o f the 2003 budget.'
'
Areas that are not subject o f in depth analysis in the report include general administration and defense (1 1
percent o f the budget) and justice and security (13 percent), support for agriculture (1.3 percent), the urban
1.5
This chapter focuses on overall fiscal trends. I t reviews recent macroeconomic
developments, recent fiscal trends in both expenditures and revenues, summarizes key
accomplishments and future challenges in each o f the key social expenditure areas
reviewed in more detail in Chapters 111, IV, V, V I and VII. Moreover, it also evaluates
the transition fiscal costs o f the pension reform and presents recommendations on overall
fiscal policies to 2009, based o n a debt sustainability analysis.
I.
Macroeconomic Trends
1.6
Over the past decade, El Salvador has distinguished itself b y i t s record o f sound
macro management and consistent modernization efforts. Structural reforms undertaken
in the 1990s included trade liberalization, financial sector strengthening, re-privatization
o f the financial sector and other state enterprises, comprehensive tax reform, pension
reform and improvements in the competitiveness environment for private investment. As
a result o f these efforts, in 2000 the Heritage Foundation ranked El Salvador at the top o f
the Latin American free-market reforming countries and one o f the freest in the world. In
the social areas, reforms in the education sector have proven very successful in improving
primary coverage, while achievements in health have been somewhat less impressive.
1.7
Structural reforms and sound macro management explain El Salvador’s solid
economic performance since 1990, as illustrated by the achievement o f the second
highest growth rate in the 1990-2003 period in Central America, behind Costa Rica.
However, this apparently stellar showing masks two contrasting phases o f economic
performance of the Salvadoran economy.2 Growth was high (6 percent, annually) over
the 1990-95 period, and has been disappointing since (2.7 percent in the 1996-2003
period). The first phase clearly reflects the strong post war reactivation o f public
investment (reconstruction activities), private investment (especially real state), and
consumption (especially o f durable goods). The consumption boom was to some extent
facilitated and reinforced b y the massive inflow o f workers remittances, which have been
associated with an excessive expansion o f the money supply, higher domestic credit and
high inflation until 1995. The lower growth cycle started in 1996, as a result o f a
tightening o f monetary policy to correct the growing macroeconomic imbalances.
However, i t has been extended by a number o f negative exogenous shocks. A strong
deterioration in the terms o f trade occurred in the 1996-2000 period (about 4 percent per
year on average), U.S. demand for Salvadoran exports declined in 2000-2001
(particularly those coming from the large maquila sector) and the real effects o f the 2001
earthquakes rippled through the economy in 2001 and 2002. What i s remarkable in this
period i s that despite continued l o w growth mainly for reasons beyond i t s control, El
Salvador has been able to maintain sound macro management. (Chart 1.1)
component o f the public works budget (6 percent) and the expenditures of the Ministry o f the Economy
(2.3 percent).
A detailed review of these growth phases i s presented i n Chapter 1 o f the El Salvador CEM (2004).
*
2
Chart 1.1: Real GDP Growth Rates
I
1996 1997 1998 1999 2000 2001 2002 2003
Source: Central Bank o f El Salvador
1.8
The country has also made impressive progress in advancing in social areas since
the end o f the c i v i l war. In the 1990s, basic education enrollment rate increased from 74
percent to 85 percent, infant mortality was reduced from 46 per 1,000 live births to 31 per
1,000 live births; the maternal mortality rate was reduced from 148 per 100,000 to 120
per 100,000 live births. Access to reproductive health services increased from 40 percent
to 60 percent; and population without access to safe water was reduced from 34 percent
to 23 p e r ~ e n t .Recent
~
findings from the Bank’s Poverty Assessment reveal that poverty
declined f r o m 64.4 percent in 1991 to 37.2 in 2002. In the same period, extreme poverty
declined from 31.2 percent to 15.4 percent. While progress in poverty reduction has
slowed in the 2000s, what i s truly remarkable i s that i t has not reversed, even in the face
o f the 2001 earthquakes, the regional coffee crisis, and slowdowns in domestic growth
and the global economy. As w i l l be explained in this report, broad gains in social
indicators reflect not only the fruits o f economic growth but increasing public sector
attention in these areas since the mid-1990s which have been translated into some
important reforms and greater budgetary allocations.
An important economic decision o f recent years which has consequences for
1.9
fiscal policy i s the formal dollarization o f the economy in January 2001 with the
Monetary Integration Law.4 The decision was taken after several years o f keeping an
essentially fixed exchange rate, w i t h a steady increase in net international reserves thanks
in great part to the sustained inflow o f worker’s remittances, which b y 2000 was
equivalent to more than 10 percent o f GDP. The decision was taken in great part to
diminish financing costs for the economy b y eliminating country risk, as well as to
reduce transaction costs and attract foreign investment. Since i t s implementation, El
Salvador has enjoyed a substantial decline in interest rates (beyond what would be
justified b y international trends), as well as sustained l o w inflation rates. With this
decision, El Salvador has effectively abandoned monetary policy and placed the burden
o f stabilization policies squarely o n the fiscal side, for which i t i s critical to maintain
sufficient flexibility to respond to negative shocks.
Progress of El Salvador towards achieving the MDGs i s based on the WB Policy Notes for Poverty
Reduction Report, May 2002 and W B Poverty Assessment report, June 2004.
Under the Monetary Integration Law o f January 2001, the exchange rate was fixed at c 8.75:$1 and the
US dollar became legal currency.
3
1.10 Projecting future growth in El Salvador i s particularly challenging at the time o f
this writing. On the plus side, the pickup in the world economy and particularly in the
U.S. have brightened considerably the outlook for exports, as well as the signing of the
Central American Free Trade Agreement (CAFTA) between the US. and five countries
o f Central America, expected to be approved b y the legislatures b y 2005, which seems to
be already having an effect on FDI levels. On the negative side, high and uncertain future
o i l prices i s a large cost for an o i l importing country l i k e El Salvador. In addition, the end
of the world quota scheme for apparel and textiles, scheduled b y the WTO at the end o f
2004 poses significant challenges to the large “maquila” sector. With these uncertainties
in mind, real growth in the range o f 3 to 4 percent over the next 4 years would be a
reasonable expectation, consistent with the 3.5 percent rate that has been recently quoted
in government and IMF projections. Moreover, this range i s consistent with calculations
presented in the Bank’s own recent C E M (World Bank, 2004) about the average
underlying growth rate for the 1996-2001 period o f between 3.4 and 4.2 percent, using
alternative filtering technique^.^
11.
1.
Fiscal Revenues and Expenditures
Policy Challenges
1.11 The central challenge for El Salvador i s to restore fiscal discipline b y bringing
fiscal balances back to a sustainable path, while allowing for some additional public
expenditures. As w i l l be explained in detail in the following sections, to achieve mediumterm public debt sustainability while accommodating additional expenditures for a social
and growth agenda would require a gradual adjustment between 2005 and 2009 with a
structural primary deficit starting at -1.0 percent o f GDP in 2004 and turning into a
surplus o f 2.4 percent o f GDP in i t s peak year (2009). This outcome would bring deficits
down from 3.2 percent o f GDP expected for 2004 to an average o f only 1.4 percent o f
GDP over the 2005-09 period and would reduce the debt ratio to around 35 percent b y the
end o f the period.
2.
Fiscal Performance
1.12 El Salvador’s fiscal stance i s under stress since 2001 due to a combination o f
adverse external shocks and growing cost o f pensions. L e d b y an increasing primary
deficit that reached 3 percent o f GDP in 2001, the overall fiscal deficit significantly
increased from 1.8 percent o f GDP in 1997 to 4.4 percent o f GDP in 2002, only to be
reduced to 3.0 percent o f GDP in 2003. The Nonfinancial Public Sector (NFPS) deficit
averaged a l o w o f 1.6 percent o f GDP between 1990 and 1995. Such an outcome
coincided with the important increase in growth o f about 6 percent of GDP per year.
However, the NFPS deficit increased to an average o f 3 percent o f GDP during 19962003 resulting basically from fiscal expansion. The main component o f such deficit was
the Central Government (CG) imbalance, which represented about 90 percent o f the
average NFPS deficit. CG fiscal deficits were the result of l o w tax revenue, volatile nonAdmittedly, the same report also presents projections using an international cross country framework that
would forecast annual average growth o f 5.6 percent for El Salvador under a “realistic” scenario, although
it questions the reliability of such an optimistic estimate.
4
tax revenue and the highly volatile behavior o f current and capital expenditure (Table
1.1).
Table 1.1: Non-Financial Public Sector and CG ($million)
Source: Ministry o f Finance
1.13 While fiscal performance has been broadly prudent since the 1990s El Salvador's
non-financial public sector6 deficits rose during 2000-2003, peaking at 4.4 percent o f
GDP in 2002. The causes o f this deterioration were: (i)
the earthquakes o f 2001 which
called for reconstruction expenditures totaling 1.5 percent, 2.2 percent and 1.6 percent o f
GDP in 2001, 2002 and 2003, respectively; (ii)
the increasing transition cost o f the 1996
pension reform, which rose from 0.7 percent in 2001 to 1.1 percent and 1.7 percent in
2002 and 2003, respectively; and (iii)the decrease o f the surplus coming from public
enterprises, that after reaching 2.2 percent o f GDP in 1996, declined substantially in 1998
and 1999, reaching only 0.6 percent o f GDP in 2003. Recent deficits have been mainly
financed b y public debt which climbed by 10 percentage points in the period 2000-2003,
reaching 40.6 percent of GDP at end 2003.
1.14 The public sector modernization reform that started w i t h the Government's
development plan of 1994-1999, and was further extended b y the economic plan o f 19992004, created room for the wage bill to decline, from 8.4 percent o f GDP in year 2000 to
7.4 percent in 2003. In the same period, tax revenues increased f r o m 11.1 percent to 12.1
percent o f GDP in response to the introduction in 2002 o f a new fuel tax to fund spending
in road maintenance (FOVIAL), measures that broadened the tax base and improved tax
administration and enforcement. Notwithstanding this fact, the fiscal deficit increased
from 2.8 percent o f GDP in 1999 to 4.4 percent of GDP in 2002 and fell t o 3.0 percent of
GDP in 2003 due to cuts in the reconstruction program and some increases in tax
revenues (See Table 1.2).
For fiscal reporting purposes, the non-financial public sector (NFPS) consists o f 21 central government entities,
including 12 ministries, 34 hospitals and other health entities, 47 decentralized institutions, including four state
enterprises, and 262 local governments. Decentralized institutions have functional autonomy and Municipalities have
financial, technical and administrative autonomy. The 262 municipalities account for around 5 percent of overall NFPS
expenditures
5
Table 1.2: Non-Financial Public Sector as Percent of GDP
Pensions Expenditure
0.0
0.0
0.0
0.0
0.0
0.7
1.1
1.7
Primary Deficit
-0.7
-0.2
-1.1
-1.4
-1.5
-3.0
-2.7
-1.0
Overall deficit with pensions
-2.4
-1.8
-2.6
-2.8
-3.0
-4.4
-4.4
-3.0
Overall deficit without Pensions
-2.4
-1.8
-2.6
-2.8
-3.0
-3.7
-3.3
-1.3
GDP
1.7
4.2
3.7
3.4
2.2
1.8
2.3
2.0
1.15 While i t i s too early to t e l l if the formal dollarization o f 2001 has changed
significantly the cyclical behavior o f fiscal policy, the overall behavior o f fiscal balances
indicates broadly counter cyclical variations since at least 1996. The NFPS primary
balance, which i s a commonly used counter-cyclical indicator o f fiscal policy, has been
negative throughout the period 1996-2003 but has been positively related to the rate o f
growth. That is, lower deficits have tended to occur during years o f higher growth, and in
periods o f lower growth (2001-2003) the reconstruction investments helped to stimulate
the economy and generate employment, suggesting that fiscal policy has behaved counter
cyclically. Moreover, recent fiscal performance shows a decline in public sector current
savings. NFPS savings were substantial, nearly 2 percent o f GDP in 1996-97, began to
fall on a sustained basis in 1998, were negative in year 2000, and recuperated thereafter,
giving signs o f future higher economic growth. However, the higher infrastructure
spending made b y the government without an increase in public savings has given way to
growing fiscal deficits, as Table 1.2 clearly shows. Public savings and public investment
averaged 0.9 percent and 4.3 percent, respectively, in 2001-2003 and the overall deficit
averaged 4 percent o f GDP in the same period.
6
3.
Composition and Evolution of Expenditures
a.
Nonfinancial Public Sector
1.16 In terms o f the economic classification o f spending, the largest components o f
total expenditures in the period 1996-2003 were: current expenditures (80 percent), o f
which wages and salaries (40 percent o f total expenditures), transfers to specific sectors,
including pensions (15.2 percent o f total) external and domestic interest payments (8.4
percent o f total) and goods and services (16.3 percent o f total expenditures). In the last
three years (2001-2003) the expenditure increases have been associated principally with a
rise in: pension outlays - following the pension reform that made the public pension
system debt explicit- interest payments, and transfers to the municipalities. In 2003
current expenditures reached 83.5 percent o f total expenditures in response to increases in
consumption expenses, interest and pension payments, while capital expenditures were
reduced to 16.6 percent o f total expenditures, thus, reducing the overall deficit to 3
percent o f GDP. The adjustments relied mostly on capital expenditure due to the rigidity
in almost two thirds o f the expenditure budget and the difficulty to increase revenue.
Three types o f expenditures are rigid: public sector payroll, representing 37 percent o f
total expenditures, interest payments, amounting to 10 percent o f expenditures, and
transfers to the municipalities, pensions and others, which represented 18 percent o f total
spending in 2003. These items amount to nearly 65 percent o f NFPS expenditure, and
over 100 percent o f the tax revenues in 2003. (Table 1.3)
Source: Ministry o f Finance
1.17 NFPS current expenditure in El Salvador went from $1,616 m in 1996 to $2,474
m in 2003. As a percentage o f GDP, current expenditures in the period 1996-1999
averaged 14.7 percent o f GDP, and for the last four years i t averaged 16.0 percent o f
GDP, displaying a growing trend despite the fact that wages and salaries in the period
1996-2000 amounted to an average o f 7.8 percent o f GDP, decreasing their share to 7.5
percent o f GDP during the period 2001-2003, in response to c i v i l service changes that
7
make El Salvador’s public sector small b y international standards. One o f the main
reasons for the change in current expenditure i s the increase in transfers that besides
pensions include transfers to the municipalities, which by legal mandate must receive 6
percent o f total current revenue annually. During the period 1996-2003, NFPS transfers
reached an average o f 2.5 percent o f GDP and in 2003 they accounted for 3.7 percent of
GDP, of which 1.7 percent goes to pensions and 0.8 percent to the municipalities,
respectively. (Table 1.4).
Table 1.4: Non-FinancialPublic Sector (US$ m.)
Of which reconstruction1
Source: M i n i s t r y of Finance
0
I
194.5
I
282.0
1
209.6
1
1.18 In contrast to the growing current expenditure, non-financial public sector capital
expenditure during the period 1996-2000 was pretty stable, fluctuating between $403 and
$470m. However, after the earthquakes o f 2001, capital investment increased
considerably reaching $620 and $706m, in 2001 and 2002. As a percentage o f GDP
capital expenditures in the period 1996-2000 averaged 3.7 percent o f GDP, and in the last
three years i t increased to 4.3 percent o f GDP, o f which reconstruction expenditures
accounted for 1.6 percent o f GDP, on average.
1.19 In the consolidated non-financial public sector statistics, expenditures are
classified functionally into current and capital expenditures. Current expenditures include
consumption (basically wages and good & services), interests, and transfers (pensions,
judiciary and municipalities). During the last three years (200 1-2003) consumption,
interests and transfers accounted for 68, 12 and 20 percent o f total current expenditures.
Capital expenditures include gross investment, o f which reconstruction investment has
accounted for 40 percent o f total investment between 2001 to 2003.
8
Chart 1.2: Non-FinancialPublic Sector Expenditure (% of GDP)
25.0%
20.0%
Q
F 15.0%
c
8
$ 10.0%
n
5.0%
0.0%
1996
1997
1998
1999
2000
2001
2002
2003
Period
[Ed Current Expenditures UCapital Expenditures UTotal Expenditures
1
Source: Table 1.2
Interest Payments. As a percentage o f GDP, interests increased together with the public
debt and since inflation declined, the burden o f interest increased more than what the
table shows, which do not capture the effect o f declining inflation on real interest rates.
Wages. Following the Public Sector Modernization, wages as a percentage o f GDP
decreased f r o m 8.4 percent in 2000 to 7.4 percent in 2003. A reduction o f public
employment has been one o f the instruments through which El Salvador has sought to
achieve fiscal balance and increase public sector efficiency. I t has been a difficult
instrument to apply due to institutional constraints. I t i s estimated that there are about
110,000 public sector employees that in 2003 received a total wage bill o f $1 103 million
and accounted for about 20 percent o f the economic population.. As a percentage o f
GDP, the public sector wage bill i s about the same as other Central American countries.
In Costa Rica, for instance, the wage bill reached 7.9 percent o f GDP in 2003, while the
average for Latin America in 2000 was 5-5.5 percent o f GDP.
'
Pensions. Together w i t h interest payments, NFPS transfers, which include pensions,
explain most o f the recent increase in public sector expenditures, particularly since 2001.
Transfers and interest payments alone account for 44 percent o f the increase that total
public expenditure experienced between 1996 and 2003. O f this increase, pensions more
than doubled the rise in interests. The rapid growth o f this item i s explained by the
transition costs o f the pension reform approved in 1996 which created individual
capitalization accounts and provides for the gradual phase out o f the pay-as-you-go
system. The fiscal costs o f this reform are spelled out in more detail in Annex 11o f this
report.
Reconstruction. Capital expenditures increased importantly mainly in 200 1 and 2002
due to the reconstruction after the earthquakes. Capital expenditures increased from 3.3
9
o f year 2000 to 4.5 and to 5 percent o f GDP, in 2001 and 2002 respectively. O f this
increase, reconstruction accounts for more than 90 percent.
Transfers to Local Governments. The Ministry o f Finance (MH) includes in the NFPS
statements data on the municipalities, on a sampling basis, due to the incomplete
coverage available. Central government transfers to the municipalities are mandated b y
the L a w o f the Municipal Economic and Social Development Fund (FODES), which
earmarks 6 percent o f the current (net)’ central government revenues for this purpose.
FODES funds are distributed among municipalities on the basis o f a pre-established
formula and i t s regulations stipulate that 80 percent must be used for investment and 20
percent for current expenditure by each municipality. In 2003, transfer flows amounted to
$104.7 m, or 0.7 percent o f GDP. Flows to the FODES w i l l increase in 2005, since the
National Assembly voted mid-June to raise the transfers to the municipalities to 7
percent o f current government income. In 2003, a sample o f about 50 municipalities was
included in the NFPS statements. These municipalities reported revenues o f $180 m o f
which 42 percent were obtained from local revenues and 58 percent f r o m central
government transfers.
1.19 The municipalities are also financed b y transfers from the central government to
the Investment Fund for Local Development (FISDL), which has traditionally been
financed by external loans. While municipalities derive revenues from a number o f fees
and taxes there i s no comprehensive data on them. Table 1.5 show the amount o f total
transfers to the municipalities through both funds (FODES and FISDL), which accounted
for around 4.4 percent o f total government expenditures. Pressures to increase transfers
to municipalities are likely to continue in the future. To avoid repeating some o f the
problems seen in other decentralization experiences elsewhere in L A C , responsibilities
should be matched with any further transfer. Moreover, municipalities need to strengthen
the capacity to raise their own revenues to avoid relying excessively on transfers.
Table 1.5: Government Allocations for FODES and F I S D L (US$ m.)
e/ estimate
Source: Ministry o f Finance
’Net central government revenues = current revenues - income tax devolutions and VAT tax drawbacks.
10
b.
Central Government
1.20 Between 1996 and 2003, El Salvador’s Central Government total expenditures
averaged 15.6 percent o f GDP. Current expenditure totaled 12.4 percent of GDP and
capital expenditures averaged 3.2 percent of GDP. Total expenditure i s b y and large the
lowest in relation to other countries o f the Central America Region, with the exception o f
Guatemala (12 percent). In the same period, current expenditure as a percentage o f total
expenditure, reached 80 percent, one o f the highest in the region together with Costa Rica
(83.4 percent); while capital expenditure shows a l o w participation in total expenditures
with 20 percent. Even though cross-country comparisons can be misleading, El Salvador
level o f total spending and l o w tax revenue suggest that new sources o f income are
necessary or the level of public debt w i l l raise over the 40 percent o f GDP limit that the
authorities have themselves established. Countries in the region sharing El Salvador high
level o f current expenditures as a share o f total expenditures either spend less in capital
expenditures (Costa Rica) or both, spend less and collect more revenue (Honduras). This
highlights the need for El Salvador to reduce current expenditures while strengthening
efforts to increase revenue (Table 1.6).
Current Expenditure
79.4
83.4
64.5
75.1
66.2
73.1
Capital Expenditure
20.6
16.6
35.5
24.9
33.8
26.9
1.21 The overall deficit o f the Central Government was in a worrisome ascending trend
between 1997 and 2002 (Chart 1.3). In 1997 current revenues were 12.5 percent o f
GDP, current expenditures 11.3 percent o f GDP, and capital expenditures 2.4 percent o f
GDP; b y 2002 they were 13.2 percent o f GDP, 13.1 percent o f GDP, and 4.3 percent o f
GDP, respectively. The Central Government overall deficit increased f r o m 1.1 percent
o f GDP in 1997 to 4.3 percent o f GDP in 2002, mostly as a result o f the reconstruction
investment following the earthquakes and pension related payments. However, in 2003
the overall deficit decreased to 3.8 percent o f GDP resulting f r o m President Flores’
Decree formalizing the austerity program, the government efforts to contain non-essential
current expenditures and the improvement in tax collections which in effect rose to 12.1
percent o f GDP in 2003 from an average o f 11 percent o f the period 1996-2001. Current
expenditures (excluding pension payments) have not increased due to cuts in wages and
salaries and restricted capital expenditure. (Table 1.7)
11
Chart 1.3: CG Revenues, Expenditures and Overall Deficit
I
;
8
mL.
v)
Q
3
f
3
.-
4
$W
1
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
I
~
,
I
,
T 0.0%
-0.5%
-1.0% ,
-1.5% I
-2.0% ,
-2.5%
-3.0%
-3.5%
-4.0%
-4.5%
0
e
pr
1996 1997 1998 1999 2000 2001 2002 2003
e- Current Expenditures
t Revenues & grants
+Cap
+Overall
Expend & net lending
-8-
Overall deficit (right side)
deficit with pensions (right side)
Table 1.7: CG revenues, expenditures and overall deficit (% of GDP)
Source: Ministry o f Finance
4.
Expenditure Priorities and allocation
1.22 Between the 1999-2003 period, the broad allocation o f resources was initially
guided b y the Government’s Development Plan, which comprised the areas o f
Macroeconomic stability; support to sector policies (agriculture, micro enterprise,
exports); public security and judicial security, and environment. The Government’s Plan
contemplated detailed objectives and measures in each o f these areas. The disruption
caused b y the 2001 earthquakes and consequent change in priorities put the Plan on hold,
but since earthquake reconstruction progressed quite rapidly, the Government focused
again on i t s original Plan in 2003 and 2004. The budget priorities were established by
management areas, which are: social development, support to economic development,
administration o f justice and citizen security.
12
Table 1.8: CG Approved and Executed Budget by Management Area ( % of total
budget)
-
W i c Detd
StateCUigbiaS
W i c Werpises
21.2
5.8
0
a.1
6.6
0
Total
la,
la,
~
~
~~~
16.4
7.4
0
18
8
0
la,
la,
~
15.4
15.6
155
16.1
14.7
6
0.9
la,
6.5
1
6.6
0.3
6.8
0.3
7.5
0.9
8
0.2
la,
la,
la,
la,
la,
~
14.6-
~~~~~
129
13.9
5.1
1.8
103
5.6
1.9
5.3
0
5.5
0
5
1.4
5.2
1.5
la,
la,
la,
la,
la,
~
31.1 -326
~
159
~
Table 1.8 shows the approved and executed budget allocation b y management area. The
executed budget for the social development area o f management was lower than the
approved during 2001-2003 mainly due to management issues in education and health, as
discussed in detail in Chapters I11 and IV. Executed public debt service (18 percent o f
total budget) i s higher every year than the amount originally approved, consistent with
the persistent increase in public debt.
Source: Ministry of Finance
1.23 In recent years, El Salvador has made significant progress in social indicators due
in part to increased attention to the social development agenda. During the period 19962003, the budget allocation to the Social Development area was the largest. In fact, the
amount o f resources allocated to this area increased from 4.7 percent o f GDP to 7.3
percent o f GDP. Within this allocation, education increased from 2.2 to 3.1 percent o f
GDP, and health from 1.4 to 1.5 percent of GDP; while transfers explain most o f the
increase as both, increasing from 0.1 to 2.4 percent o f GDP. Other areas that feature
prominently in the budget were Support for Economic Development (2.1 percent o f GDP,
13
165
on average) and Justice and Security (2.5 percent of GDP, on average), both of which
also contributed to the social and growth agenda. (Table 1.9). What follows i s a brief
summary o f accomplishments and future challenges in each o f the key social expenditure
areas: education, health, water and sanitation, rural roads and rural electricity, which are
reviewed in more detail in later chapters.
a.
Education Sector
1.24 There has been a substantial increase in the amount o f public resources allocated
to education during the 1990s. Although spending has increased significantly to 3.3
percent o f GDP in 2002, in the last two years i t has declined to 3.1 percent in 2003 and in
the proposed budget for 2004 i t i s at 3 percent o f GDP, well below the 4.4 percent o f
GDP average for L A C . The allocation o f resources were aimed at supporting the
implementation of the Education Development Plan 1995-2005, which contributed to
major improvements in the sector. The recent study on the situation o f El Salvador in
relation to the Millennium Development Goals (MDGs) concludes that i t i s likely that the
country w i l l meet the 2015 targets on net primary education enrollment, share o f
students that complete the fifth grade, and the universal literacy target for youth. The
targets related to gender in primary and secondary education as well as literacy rates have
already been met.* However, to reach the necessary coverage rates in the basic cycle and
secondary, i t has been estimated that the education budget would need to increased by
about two percentage points o f GDP, or to 5 percent o f GDP. And to increase the quality
o f education, an appropriate balance needs to be established between expenditures on
wages and salaries, teacher training, didactic materials and other goods and services, and
infrastructure. Resource use in El Salvador’s basic education sector has been broadly
efficient but challenges remain in secondary education.
b.
Health Sector
1.25 El Salvador’s health indicators have improved during the last several years but
significant challenges remain. For instance, in relation to the MDGs i t i s highly likely
that the country meets the 2015 targets on infant mortality rate, mortality rate in children
under five, measles immunization, and tuberculosis incidence, but i t i s unlikely that i t
meets the MDGs targets on maternal mortality, deliveries by trained staff, and H l V / A I D S
Since 2001, part of the resources allocated to the sector have financed the reconstruction
o f the damaged infrastructure, and in the near future the health authorities should focus
on increasing the efficiency and equity o f resource use given the fiscal constraints. El
Salvador i s among the countries in Latin America that spends less (as a percentage o f
GDP) in health services. The allocation o f budget resources to the sector reached 1.5
percent o f GDP in 2002 and 2003, and the execution o f the allocated budget has been
deficient in the last three years. The bulk o f resources has been allocated to hospital care
and the primary healthcare share has tended to increase. Nonetheless, there i s a need to
increase further primary health care through cost-effective, outreach programs since the
“El Salvador: lnfortne de Pais Sobre el Avance de 10s Objetivos de Desarrollo del Milenio”, final draft,
Presidential Commissioner for the Social Affairs, April, 2004
14
coverage o f the health system i s still inadequate as less than 20 percent (6 percent o f the
poor) have access to medical insurance, and as much as 24 percent o f the population s t i l l
does not have access to health services or only has limited access.
C.
Water and Sanitation
1.26 Water supply and sanitation indicators for 1996-2003 reveal an increase in
coverage, mainly in rural areas. The MDG in this area establishes the target o f reducing
the proportion o f population not having sustained access to safe water and basic drainage
to half b y 2015. Recent data indicates that El Salvador has already surpassed the MDG
target for urban water and sanitation and rural sanitation coverage and i t i s likely that b y
year 2015 the target for rural access to water w i l l be met. Nevertheless, there are s t i l l
great challenges in the sector. Public spending during 1996-2003 has been equal to an
annual average o f 0.3 percent o f GDP, o f which 70 percent was destined to water systems
and 30 percent to sanitation To achieve universal coverage o f water supply and sanitation
b y 2015, i t would be necessary to increase annual investments in the sector. However,
given the uncertainty about the nature and timing o f water and sanitation sector reforms
and about the most cost-effective and appropriate service delivery models, estimating
with precision the necessary increases in investments i s difficult. Nonetheless, recent
estimates suggest a possible range o f costs using international calculations o f efficiency
prices and differentiating between the costs o f investments in rural and urban areas, that
would need an average annual investment o f US$ 21 million between now and 2015, or
about 0.14 percent o f GDP per year'. Because these calculations use estimates o f
efficiency costs, rather than actual costs, they may be interpreted as lower-bound
estimates. Following an analysis presented in the recent Human Development Report
(2004), and using unit cost estimates that do not differentiate between the unit costs o f
rural and urban areas, i t i s estimated that the additional investment costs would range
from US$45 to US$ 50 million or about 0.3 percent o f GDP. per year" between now and
2015.
d.
Rural Roads
1.27 Improving rural roads during the 1990s has contributed to poverty reduction in
rural areas, and has given household members access to markets, educational and health
centers, water and security. However, great deal o f effort i s s t i l l required to obtain an
adequate level o f connection o f districts and settlements in the country. One set o f
objectives consistent with the country's goals to strengthen poverty reduction through
infrastructure development would be: (i)
t o pave or rehabilitate an additional 1,000
kilometers o f rural roads; and, (ii)
to ensure annual maintenance o f 3,000 kilometers o f
rural (secondary and tertiary) roads. The costs associated with a program to continue
expansion and improvement o f the rural road network, as well as to develop a
Yepes, Tito, 2004, "Infrastructure and Poverty Reduction in Rural El Salvador," draft, Poverty Reduction
and Economic Management and Human Development Departments, Latin America and the Caribbean
Region, World Bank.
lo
In the absence o f sector reforms and the identification o f a cost-effective service delivery model for rural
areas, the costs are likely to be closer to the upper- than the lower-bound estimate.
15
maintenance capacity for rural roads depends on the specific goals and the timeframe set
for achieving them. Analysis o f El Salvador’s road investments suggest that the unit costs
o f the road’s development i s in line with international norms. Using recent average unit
costs o f road paving, rehabilitation, and maintenance as benchmarks, i t i s estimated that a
5-year program to pave and/or rehabilitate an additional 1,000 kilometers of rural roads
would cost approximately an additional US $25 million per year over 2003 spending
levels. This implies investments o f approximately 1.4-1.5 percent o f GDP per year, up
from 1.3 percent o f GDP in 2003. Hence the allocation o f resources to the sector needs to
be increased b y about 0.1 to 0.2 percent of GDP.
e.
Rural Electrification
1.28 El Salvador’s electricity indicators for the period 1990-2003 reveal improvement
in coverage and quality o f service, mainly in rural areas, however the main sector
challenge i s to lower the cost o f service through more efficient generation and
distribution. In view o f the importance o f rural electrification for income generation, the
study on the situation o f El Salvador in relation to the MDGs,” incorporates the goal o f
reaching a rural electrification rate o f 85 percent b y 2015 (from 7 1 percent in 2002.
During 1991-2002, rural electricity coverage increased from 44 percent to 71 percent
with an investment in rural electrification b y public entities equivalent to 0.5 percent o f
GDP. Hence, raising b y about one percentage point per year the rural electricity
coverage would cost an estimated o f about $ 3 million a year, but i t i s important that the
sector’s resource allocation priorities be reviewed in order to allocate more resources to
low-income population and rural areas lacking service; and less resources for subsidies to
those that already enjoy the service.
Budget execution
1.29 Although there has been consistency between the Government’s priorities and the
allocation o f resources, the implementation record o f different institutions within each
management area has been mixed. Table 1.10 shows that total expenditures have had an
execution o f 92 percent o f the approved budget during the 1996-2003 period. The
management area with higher execution on average i s Public Debt ( 95.2 percent);
followed b y Justice and Security (94.4 percent); General Administration (93.8 percent )
in the middle of the rank; Social Development (92.7 percent); and Support to Economic
Development (80.7 percent) lagging behind. Chart 1.4 also illustrates that the execution
o f the total budget in the different areas o f management has not been very efficient until
1999, but has since improved.
l1El
Salvador: Avance de 10s Objetivos de Desarrollo del Milenio- Primer Informe de Pais, 2004.
16
Table 1.10: CG Budget: Executed as Percent of Approved by Management Area
General Obligation of the State
Public Enterprises
94.3
97.5
97.6
100.0
100
99.9
0.0
98.9
100.0
99.7
0.0
21.5
98.3
0.0
99.9
Total
82.0
90.4
92.3
94.4
93.7
92.3
95.5
96.2
100.0
Chart 1.4: Executed as % of Approved CG Budget, by Management
Area
1996
1997
1998
moo
1999
2001
2002
2cO3
Period
aSocial Development .&stice
and Secunty i-Support to Economic Development UAdministration UTotal
Source: Table 1.9
5.
Critical social and growth expenditures for the future
1.30 The Country Economic Memorandum of El Salvador (2003) states that the
experience o f the 1990s suggests that economic growth has been a key feature of El
Salvador’s accomplishments in reducing poverty and points t o four broad areas to
reinvigorate economic growth in the 2000s: (i)
increase education levels of the
17
population, (ii)develop the country’s economic infrastructure, (iii)foster greater
technology adoption and local innovation, and (iv) improve the investment climate,
including efforts to reduce violence and increase the rule o f law. Expansions in some
needed infrastructure (Le. ports or large trunk roads) need to be financed mainly through
partnerships with the private sector, as El Salvador has simply too few public resources to
dedicate t o these tasks. While in recent years El Salvador has made important advances in
this area, there remains considerable potential through such partnerships to enhance
national development as a whole and poverty reduction in particular.
1.31 The recent Poverty Assessment concludes that the poorest segments o f the most
vulnerable Salvadorans have been unable to take advantage o f recent economic growth
and therefore i t w i l l be important for the incoming government to put in place a coherent
set o f policies and investments to ensure that the poor can benefit f r o m future economic
progress. To build effectively on past achievements, i t w i l l thus be important for El
Salvador to implement a social policy aimed at giving the poor better access to quality
education and health care, and greater access to basic services, such as safe water and
electricity. The implementation of a social policy has potentially important gains in
poverty reduction and increased economic participation o f the poor.
1.32 Given that the fiscal space for increased spending i s limited in El Salvador, i t i s
necessary to be selective and make strategic choices among priority areas. Table 1.11
presents a strategic package of investments to meet key social targets in education,
health, water and sanitation, rural roads and social protection. While this package i s
oriented to ensure that the poorest have access to social services and to strengthen their
position to benefit from future income earning opportunities, i t also overlaps in some
areas (education and rural infrastructure) with the agenda o f key investments spelled out
in the Bank’s C E M to promote broad based growth. The total cost o f implementing the
proposed package implies an increase in annual expenditures between 3.2 and 3.6 percent
o f GDP that would need to be gradually phased in, due to the tight fiscal situation. The
largest commitments o f additional resources are associated with education and the social
safety net. I t i s estimated that improving education through achieving universal primary
and basic education and increasing to 70 percent net enrollments in secondary schooling
would require an additional 1.8 percent o f GDP until year 2015; developing an adequate
safety net would require spending o f an additional 1 percentage point o f GDP over the
next five years; ensuring access to safe water and sanitation among the poor who
currently lack access would require an additional 0.1-0.3 percent o f GDP until year 2015;
providing access to a minimum package o f healthcare/ nutrition services to those who
s t i l l lack regular health services would demand additional 0.2-0.3 percent o f GDP in the
next ten years; and finally to rehabilitate an additional 1,000 kilometers o f rural roads and
give annual maintenance to 3,000 kilometers o f rural, secondary and tertiary roads over
the next five years, would require a minimum increase in spending.
18
Sector
Current
Public
spending as
percent of
GDP
Objective
Target
Public
spending
as
percent of
GDP
100 percent completion of primary
education (basic cycles 1 & 2) by 2015
(MDG2)
Education
Proposed increase as
percent of GDP
0.5
100 percent completion of basic education
(3'd cycle): 70 percent net secondary school
enrollments by 2015
1.8
Total
Health
Provide access to a minimum package of
healthcare/nutritionservices to those who
still lack regular health services
3.8
4.0-4.1
0.2-0.3
Water
Ensure access to safe water and sanitation
among the poor who currently lack access
0.8
0.9-1.l
0.1-0.3
Roads
Rehabilitating an additional 1,000 kilometers
of rural roads over 5 years; annual
maintenance of 3,000 kilometers of rural
(secondary and tertiary) roads
Ensure access to basic service by the
poorest, most vulnerable Salvadorans
1.3
1.4-1.5
0.1-0.2
0.5
1.5
1.o
Totals
9.6
12.8-13.2
Safety Net
6.
Revenue policies
a.
Past Performance
3.2-3.6
1.33 Government revenues in El Salvador have increased very gradually in the past 10
years, with tax revenues explaining the bulk o f the increase. Tax revenue in 2003
accounted for 88 percent o f total revenue, while non-tax revenues have fallen f r o m 16
percent o f government revenues in the mid 1990s to 6 percent in 2003, mostly as a result
o f privatizations and the corresponding decrease in transfers from public enterprises to
the central government. Revenue from tax sources in El Salvador has increased very
gradually, from 10.9 percent in the mid 1990s to 12.1 percent in 2003.
19
Source: Ministry o f Finance
This proportion i s s t i l l one o f the lowest in all o f L A C and in the Central American
region as shown in the chart 1.5.
Chart 1.5 CG Current Revenues and Total Expenditures as percent of
GDP
Total Expenditure
.Current
Revenue
17 7%
25 8%
21 9%
13 3%
21 7%
20 0%
1.34 The tax structure depends basically o n revenues f r o m the VAT and the income
tax, which generated jointly over 82 percent o f the total in 2003. With a current rate o f 13
percent, the VAT has been the most significant o f the two, contributing with a little over
half o f tax revenues. The remainder i s collected through import duties (9.8 percent in
2003) and excise taxes on specific products (3.4 percent). The former has been steadily
declining as a source o f government revenue since the 1990s, as El Salvador has reduced
sharply i t s average tariff levels to around 5 percent, one o f the lowest in L A C (Table
1.13)
20
Table 1.13: CG Tax Revenues as % of Current Revenues and GDP
Source: M i n i s t r y o f Finance
1.35 The record for projecting annual revenues for the purposes o f fiscal policy in El
Salvador has had mixed results. Actual current revenues and tax revenues have fallen
short of projected values over the 1996-2000 period b y about 10 percent. This resulted
from consistently overestimating revenues f r o m income taxes, value added taxes and
specific taxes, while import duties were severely underestimated (Table 1.14). According
to the Ministry o f Finance, the underestimations o f 1996 and 1999 resulted from delays in
approving the tariff reform. In 2000 the overestimation resulted from the fact that the
planned crackdown on contraband did not yield the revenues anticipated that year. In
addition, 2001 projections were affected by the economy wide effects o f the earthquakes.
Chart 1.6: Executed as % of Approved CG Budget by Management
Area
BSocial Development
OSuppo rt to Economic Development
' OTotal
Source: Table 1.14
21
.Justice and Security
OAdministration
Table 1.14: CG Actual Revenues in US$ m. and as percent of
Project Revenues
Source: Ministry of Finance
b.
Prospects
1.36 According to a number o f recent studies, there i s ample room for El Salvador to
continue to improve tax revenues over the coming years.I2 The area with most promise i s
the excise tax on specific products, in which El Salvador ranks l o w in international
comparisons. Greater taxes on fuels, beverages and tobacco are a potential source o f
future revenues, particularly as El Salvador has lower rates than most Central American
neighbors. VAT i s an area in which the greatest challenge lies in continuing to
incorporate the informal sector into the network. Moreover, El Salvador exhibits already
a high yield from the 13 percent VAT rate (Table 1.15) 13. Since El Salvador has a well
structured VAT, with a broad base and a single rate, further revenues from this source
would likely require higher rates.
l2 These studies include Stotsky and WoldeMariam (2002), Acevedo (2003), Acevedo and Gonzalez
Orellana (2003) and Velasco and Rodriguez (2003).
l3The ratio for Latin America corresponds to the latest year for which the data i s available. In effect, in
2003 VAT revenue productivity, defined as VAT revenue as a share of domestic consumption divided by
the standard VAT rate, averaged 0.46 in Central America, higher than the ratio o f 0.43 in Latin America.
22
Table 1.15: Central America Value Added Revenue Productivities
(CG data for 2003)
Source: Ministry o f Finance o f each country (using IMF methodology)
1.37 A number o f technical proposals have been made in recent years to improve
collection and eliminate distortions in the personal and corporate income tax regimes.
Some o f these include eliminating the accelerated depreciation for investment,
eliminating some deductions to personal and corporate income, and taxing interest
income. Such changes could yield 0.4 percent o f GDP from personal taxes and 0.6
percent in corporate taxes.I4 B y contrast, import duties are likely to deepen their secular
decline in coming years, particularly as El Salvador implements the trade agreements
with the United States and other Central American Countries. Recent estimates o f the
accumulated loss from CAFTA, once all tariff elimination commitments are phased in
over a 10 to 20 year period, indicate that this i s likely to reduce revenues b y about 0.5
percent o f GDP.
111.
Fiscal Cost of Pension Reform
1.38 El Salvador adopted a pension reform in 1996 that replaced the existing pay-asThe reform was
you-go system with a system o f complete individual capita1i~ation.l~
aimed at homogenizing the conditions for access to benefits by workers from the private,
public, and municipal sectors, increasing coverage o f the system and laying out the
groundwork for a deeper capital market. As was clear from the beginning, the adoption o f
such a reform would entail transition costs for a substantial period o f time, stemming
from the decline in government revenues f r o m the shift o f the younger population to the
private account system, while preserving the obligation to pay pension benefits to retirees
and the older cohorts who remained in the old defined benefit system.
l4ES Fiscal
Performance, Prospects and Policy Options. Velasco & Rodriguez.
Decree 926 of December 19, 1996 also created the Superintendence o f Pensions.
23
1.39 As of December 2003, the size o f the actuarial deficit, estimated b y the
Superintendence o f Pensions as equivalent to 72 percent o f GDP, has several
components: (i)the payment o f pensions for the current pensioners; (ii)
payments for
future pensioners; (iii)
the redemption of the transfer certificates and the complementary
transfer certificates; and, (iv) payment o f the complement for mandatory minimum
pensions.'6 In effect, the costs o f the pension reform have been higher than first expected
due to: unrealistic financial projections when the reform began, generous benefits
compared to other social security systems, the growth o f administrative spending and the
negative yield of the technical reserves. In December 2001 legal provisions were
approved to allow the government to amortize the transfers certificates over a period o f
15 years instead o f paying them in full when due, generating some fiscal relief. However,
this was offset b y the creation o f a complementary transfer certificate aimed at equalizing
benefits between the private account system and the public one. Given recent fiscal
trends, curbing the transition costs o f the pension reform represents an important
challenge in El Salvador.
1.40 Most Latin American countries went through pension reforms since the 1980s.
This process was lead b y Chile in 1981 and followed in the 1990s by several other
countries like Peru in 1993, Argentina and Colombia in 1994, Uruguay in 1996, Bolivia
and Mexico in 1997 and most recently Costa Rica in 2001. El Salvador reformed i t s
pension system in 1998 although some retirement benefits remained comparatively
generous, both in terms o f age and contribution limits. Retirement ages in countries such
as Argentina, Chile, Mexico and Peru ranges between 60 to 65, differentiating b y
genders in some cases. The Salvadoran regime grants retirement benefits at age 55 for
women and 60 for men, while countries like Costa Rica set the retirement age at 65 years
for both men and women. Regarding early retirement, El Salvador pension system allows
i t after 30 years o f contribution or with accounts that can finance pensions o f at least 60
percent o f the Basic Regulatory Salary. B y contrast, in Chile, to be eligible for early
retirement a person must have saved enough to finance a pension equal to 110 percent o f
guaranteed minimum pension, almost twice as much as in El Salvador. In Bolivia
contributors must work until they are 65, both men and women, or account sufficient to
finance a pension equal to 70 percent o f the Basic Regulatory Salary. (Table 1.16).
l6
The transfer certificate corresponds to the present value of the payment o f the rights of acquisition for
those persons who transferred to the system administered by Private Funds Administrators (AFPs in
Spanish). The complementary transfer certificate i s the actuarial value that it sufficient for a person to
obtain a pension in the private Savings System for Pensions (SAP) equal to what the pensioner would
obtain in the System of Public Pensions (SPP).
24
Table 1.16: Structure & Features of Pension Reforms in
Latin America
sufficient to finance a pension
Mixed
M & F:60 years, or 70 years with
15 contributed terms.
M & F:65 years, and at least 240
contributions.
Uruguay, Apr 1996
Costa Rica, May 2001
Source: ES Fiscal Performance, Prospects and Policy Options. Velasco & Rodn'guez.
1.41 Even though the benefits that El Salvador's pension system offer are more
generous than in most countries o f the region, the total payroll tax rate i s 13.5 percent,
one o f the lowest in L A C . In fact, the payroll tax rates in other countries o f the region are
20 percent in Chile, 22 percent in Peru, 21.5 percent in Nicaragua, 24 percent in Bolivia,
26 percent in Costa Rica and Mexico, 34 percent in Colombia, 40 percent in Uruguay and
46 percent in Argentina. In El Salvador as well as in Costa Rica, Nicaragua, Mexico and
Chile, the participation o f new workers i s mandatory, while in Peru, Colombia, Argentina
and Uruguay the participation o f new workers i s voluntary. Finally, another important
dimension along which reforms in Latin America vary i s the degree o f choice afforded to
workers. In Chile, Mexico, Bolivia, and El Salvador, PAYG (pay-as-you-go) systems
were closed and workers were forced to take up individual retirement accounts. In
contrast, in Peru, Colombia and Argentina, workers that j o i n the labor force are allowed
to choose between the pay-as-you-go system and individual retirement accounts.
1.42 In El Salvador, options to deal with growing fiscal pressures include (i)
raising the
retirement age to 65 for men and 60 for women; (ii)
increasing t o 35 the number o f years
paid in order to obtain an o l d age pension, regardless o f age; and (iii)
eliminating the
right to have an o l d age pension, regardless o f age, after contributing 30 years. The fiscal
25
impact o f these options are analyzed in detail in Annex II.
The third alternative i s the one
that would yield most savings in relation to the base case, equivalent to almost 10 percent
o f the actuarial value. In this case, the maximum annual fiscal cost would be reduced
from 2.3 percent o f GDP to 1.8 percent o f GDP.
IV.
1.
Fiscal and Debt Sustainability
Public Sector Debt Trends
1.43 Public sector debt has accelerated rapidly in the last five years. In 1999, total
public debt was close to $3.5 billion and b y the end o f 2003 i t had reached $6.1 billion.
As a percentage of GDP, public debt increased between 1999 and 2003 from 28.1 percent
o f GDP to 40.6 percent of GDP (Table 1.17). This rapid accumulation o f debt comes after
a decade o f decline. El Salvador started the 1990s with a debt level at around 60 percent
o f GDP, which began to decline substantially after 1993, reaching a l o w o f 28 percent in
1999. Between 1999 and 2003 the increase in debt led to higher interests payments,
which went from 1.4 percent to 2.0 percent o f GDP. This i s a warning signal, as further
growth in this indicator could be reflected in market spreads and could potentially cause
difficulties when tapping domestic and international capital markets. As can be seen in
Chart 1.7 the bulk of the increase o f debt accumulated since 1999 has been contracted
externally through Eurobond issues. This has been possible thanks to El Salvador’s
investment grade rating, record of sound fiscal management and l o w initial debt levels.
.
Chart 1.7: Non Financial Public Sector Debt as percent of GDP
n 3 000 %
. 0 ~ ~ ~
25.0%
250%
6 200%
20.0%
8 150%
15.0%
10 0%
5 0%
0 0%
1999
2000
2001
2002
Period
@Total NFPS D e l External Demlnternal DemShort term De
26
2003
2. Long Term Internal Debt
6.3
6.6
8.8
11.9
11.4
Central Government
6.2
6.5
8.7
11.4
11.1
Non Financial Public Companies
0.0
0.1
0.1
0.5
0.3
Other Central Government (municipalities)
0.1
0.1
0.1
0.1
0.1
1.8
3.7
5.0
0.0
0.6
3. Short Term Central Government Debt
2.
Debt Sustainability
1.44 This section develops fiscal scenarios for El Salvador during the next 10 years in
an attempt to quantify the adjustment needed to ensure fiscal sustainability. Adjustments
are clearly needed to address some o f the underlying trends that have led to the rapid
increase in El Salvador’s total public debt. As explained in this chapter, much of this
increase in public debt can be attributed to emergency earthquake reconstruction
expenses (5.3 percent of GDP in the period) and the growing transition costs o f pension
reform (3.5 percent o f GDP). While reconstruction costs will wind down by 2005, the
country w i l l need to ramp up social and growth related expenditures. Clearly, El
Salvador’s greatest challenge over the coming years i s how to lay out a path for debt
sustainability while simultaneously financing the expenditures required to meet social
and growth challenges. Furthermore, given the absence o f monetary policy tools, all of
the required adjustment w i l l need to be addressed explicitly through fiscal policy levers.
1.45 The sustainability analysis has been prepared on the basis o f expenditure and
revenue patterns observed during the past five years, using conservative macroeconomic
assumptions as a baseline and an accounting consistency framework that allows for timevarying GDP growth and interest rates (see Table 1.18 below). GDP i s expected to grow
by 2.5 percent in 2004 and then by an average 3.5 percent for the rest o f the projected
27
scenario, consistent with growth prospects presented earlier in this chapter. As a
dollarized economy, El Salvador i s expected to enjoy low inflation (3 percent on average)
and interest rates that closely follow US trends and current market rates for Salvadoran
bonds.
-
1.46 Passive Scenario No significant changes to current fiscal policy and tax
structure. In this macroeconomic context, a path for NFPS revenues i s estimated,
assuming some increases in government revenues at the beginning o f the period due to
ongoing administrative measures to improve tax collection.” The scenario also takes into
account the expected reduction in tariff revenue (about 0.5 percent o f GDP) that w i l l
gradually take place between 2005 and 2013 due to the implementation o f CAFTA, while
other revenue items are projected to continue growing at nominal GDP growth rates.
1.47 O n the expenditure side, this scenario includes the fiscal impact o f current
pension liabilities as presented in the Base Scenario o f Annex I-A. Also, public
investment levels reflect the elimination of earthquake reconstruction expenditures by
2005, while other investments are projected at 3 percent o f GDP f r o m 2006 to 2013,
consistent with recent historical trends. Wages and salaries o f public servants grow at a
rate equal to nominal GDP growth, as no significant further downsizing o f government
personnel i s expected.
I
Table 1.18: M a i n Macroeconomic Assumptions
I
Average interest rate that applies to NFPS debt. New financing is obtained at current market rates for El Salvador (app.
8percent). The interest rate on old debt increases gradually following US LIBOR projections from the Global Development
Finance 2004 report.
1.48 The results o f the Passive Scenario are shown in charts 1.7 to 1.10 for four main
fiscal indicators: the overall fiscal deficit, i t s underlying primary balance, total public
debt and total interest payments (for details see Annex l . A o f this chapter). As can be
seen from the charts, the Passive Scenario yields an unsustainable path for public debt as
all major variables shift towards increasing levels o f public deficits and indebtedness.
The overall NFPS deficit increases from 3.2 percent o f GDP in 2004 to 4.3 percent in
2013, as a result o f a steady increase in total interest payments from 2.3 percent to 3.7
percent o f GDP and an average primary deficit o f 0.7 percent o f GDP during the same
period. Public sector debt increases from 40 percent o f GDP in 2003 to 50 percent o f
GDP in 2013 (roughly equivalent to an annual increase o f 1 percent o f GDP), an
admittedly much lower pace o f debt accumulation than that observed between 2000 and
” These measures include (i)
strengthening of tax administration and enforcement; (ii)
the implementation
of electronic audits and (ii) the continued use of an electronic tax payment system.
28
2003. However, this pattern i s unsustainable as debt indicators further deteriorate after
2013 at a m u c h faster pace given the resulting debt dynamics. For example, total public
debt could increase to 58 percent o f GDP b y 2018, only five years later.
1.49 W h i l e the Passive Scenario does not show a rapidly explosive debt situation, i t
should be noted that this i s partly the result o f some simplifying assumptions adopted for
the projections. Perhaps the most salient i s the assumption that all new financing w i l l be
obtained at a constant average nominal interest rate o f 8 percent. More realistically, given
the usual reaction of international financial markets to deteriorating fiscal and debt
indicators, El Salvador could eventually loose i t s investment rating from Moody’s and
the cost o f i t s sovereign financing could increase to levels observed in other dollarized,
but more indebted, economies. The scenario also assumes that there are no negative
shocks (additional terms o f trade declines, natural disasters or financial sector
contingencies) in the 10 year period that may require additional significant expenditures.
In addition, i t does not include any o f the additional expenditures included in the package
presented o n section I1 of this chapter to meet key social targets and improve growth
prospects.
1.50 Fiscal Target Scenario - Lowering public debt to 35 percent of GDP and
addressing critical social and growth expenditures. The Passive Scenario develops
into further fiscal deterioration if no fiscal reforms are taken to turn the NFPS primary
balance into a neutral, debt sustainable path. But how much fiscal adjustment i s needed
to achieve this? Which public sector debt level could be considered as sustainable and
desirable over the long run? El Salvador’s current debt level i s probably inconsistent
with the fiscal flexibility that the country requires for the future. El Salvador’s fiscal
policy needs to retain the capacity to respond rapidly to important contingencies in the
future for several good reasons. One i s the possibility o f further natural disasters (e.g.,
earthquakes, hurricanes), which require emergency attendance and reconstruction, and
which occur with some regularity in Central America. The second i s the growing need to
use fiscal policy in a counter cyclical manner, as i t i s the only significant policy tool left
for this purpose since dollarization was implemented. The third reason i s the need to
respond to sudden, costly contingencies, such as those that can arise f r o m the financial
sector. These reasons, coupled with recent research,’* suggest that debt levels above 40
percent o f GDP increase the likelihood o f a debt crisis and can be harmful for growth.
Therefore a reasonable goal for El Salvador would be to keep debt levels at no more than
35 percent o f GDP. In addition, El Salvador should adopt a package o f new investments
as the one suggested in this report in order to meet social and growth needs. Such a
package would require additional expenditures that would eventually reach a minimum
3.2 percent o f GDP b y 2012 - 2013.
1.5 1 Using the same baseline macroeconomic assumptions o f the Passive Scenario,
this report estimates the fiscal adjustment necessary to achieve a debt to GDP ratio o f 35
percent within the next 5 years (2005 to 2009) and the phasing in o f the additional
expenditures. The level o f the primary balance i s derived from the requirement that the
For further details, see IMF (2002), Detragiache & Spilimbergo (2001) and Pattillo, Poirson, and Ricci
(2002).
29
debt to GDP ratio needs to remain roughly stable for the rest o f the projection period
(until 2013). The results obtained for the same four variables discussed before are shown
in charts 1.8 to 1.11. Further details are included in Annex 1.B.
1.52 A gradual primary adjustment path i s projected between 2005-2009, with the
primary deficit starting at -1.0 percent o f GDP in 2004 and turning into a surplus of 2.4
percent by its peak year in 2009, when the debt ratio reaches 35.7 percent o f GDP (Chart
1.10). The paths o f the primary balance and public debt are also consistent with lower
interest payments. Starting with interest payments equivalent to 2.3 percent o f GDP in
2004, public debt interest payments would stabilize at around 2.6 percent of GDP by
2013 (Chart 1.11). Ifcompared to the Passive Scenario, fiscal savings equivalent to 4.5
percent o f GDP would accrue between 2005 and 2013 only due to the difference in
interest payments between both scenarios. This would yield an average primary surplus
o f 1.2 percent of GDP between 2005 and 2009. Annex Ipresents the sensitivity analysis
to changes in key assumptions. For instance, if growth were to be only 2.5 percent in the
2005-09 period, the total primary savings required would be 1.6 percent on average.
Moreover, if the nominal interest rate turned out to be 9.5 percent, El Salvador would
need to generate total primary savings o f 1.8 percent on average.
30
Chart 1.8 Overall NFPS Deficit (as % of GDP)
T-
-5.0
"."
I
-4.3
-4.2
1
2002 2003 2004 2005
2006 2007
2008 2009 2010 2011 2012 2013
Chart 1.9 NFPS Primary Balance (as % of GDP)
2.0
-
1.0
-
0.0
-
-+-
Passive
-Target
1.7
A
1.7
A
-1.0 -
7
7
-0.6
-06
-0.7
-0.7
-0.8
-0.8
-0.8
-0.7
-0.6
2005
2006
2007
2008
2009
2010
2011
2012
2013
-2.0 -3.0
7
2002
2003
2004
Chart 1.10 NFPS Total Public Debt (as % of GDP)
5501
&Passive
50.0
-
Target
n7
48.9
33.6
33.5
50.2
I
45.0
40.0
35.0
35.7
\
30.0
34.2
33.6
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Chart 1.11NFPS Interest Payments (as % of GDP)
4.0 -. ....... ....I
................
-C- Passive
-
..._....I
......
.
Target
3.2
1 7
3.0
..............
2.8
2.6
2.5
2.6
2012
2013
~
11.7
1.0
1
t
2002
2003
2004
2005
2006
2007
31
2008
2009
2010 2011
1.53 In order to achieve the required primary balance while at the same time
increasing social and growth expenditures, there are several potential actions on the
expenditure and revenue sides. Nevertheless, based on the analysis presented in this
chapter, there i s l i t t l e room for action on expenditure cuts or substitution in El Salvador
today, given the relatively small size o f the state and the improved efficiency levels. The
only potential area o f expenditures in which some savings could be envisioned i s in
pensions. A s pointed out earlier, despite the reform in 1996, pension benefits in El
Salvador s t i l l remain overly generous b y international comparison. While several
potential changes are possible, eliminating the provision that allows Salvadorans to retire
after 30 years o f work, regardless o f age would yield 2.3 percent o f GDP in savings
between 2005-2009 with respect to the Passive Scenario (Scenario 4 o f Annex I-A).
1.54 Due t o the limited space that El Salvador has on the expenditure side, i t appears
that the bulk o f the adjustment would have to be made on revenue. There are two clear
options in this regard. The first i s improving revenues via administrative and operational
improvements for which there s t i l l seems to be substantial room according to recent
studies. Given recent trends and plans being implemented with the help o f external
cooperation, a reasonable assumption i s to expect revenue gains o f 0.3 percent o f GDP
annually for a total of 1.5 percent between 2005 and 2009.
1.55 The second options deals with changes in the tax code to widen the tax base,
reduce exemptions or increase tax rates. Several studies have been recently conducted on
the key areas that El Salvador needs to address. . Such research suggest that i t i s
technically feasible to make changes that would yield the required increase o f 2.5 percent
o f GDP in a reasonable time horizon to meet the 35 percent o f GDP debt target before the
end o f the decade. However, i t i s difficult from the political point o f view, as witnessed
b y the relatively small increase in tax revenues over the past eight years (from 10.9 in
1996 to 12.1 percent o f GDP in 2003) and the bitter debate that any adjustment in the tax
base, exemptions has generated in the past. For this to be feasible, i t needs a consensus
building process in which Salvadorans agree on the importance o f financing a minimum
social and growth agenda while maintaining sound public finances.
1.56 I t should be noted that while the fiscal target scenario outlined above seems to be
technically feasible, i t assumes that there are no negative shocks (Le., further terms o f
trade declines, natural disasters or financial sector contingencies) during the period
covered in the projection. According to the IMF (2003), the most important contingent
fiscal liabilities in El Salvador would come f r o m private and public financial institutions,
and would include non-performing loans, loans to coffee sector, repossessed collateral,
and real estate exposure.'' Given the likelihood o f these contingencies some leeway
should be built into these plans.
l 9 The estimated fiscal implications o f these contingent liabilities that could, under adverse circumstances,
become an explicit part of public debt range from about 3 percent o f GDP to 9 percent, with a middle
scenario of 5.3 percent.
32
V.
Conclusions
1.57 This chapter has delineated the major fiscal challenge that confronts El Salvador
today: addressing the recent deterioration in the debt sustainability outlook while at the
same time creating the fiscal space for certain priority investments required to meet
pressing social needs and accelerate growth. As the analysis in the chapter indicates, the
level o f new spending required should be manageable and can be reconciled with the goal
o f strengthening fiscal accounts in a country where the tax burden i s s t i l l relatively l o w
b y international standards.
1.58 El Salvador should consider funding a strategic package o f investments to meet
key social targets in education, health, water and sanitation, rural roads and social
protection. This package i s oriented to ensure that the poorest have access to social
services and to strengthen their position to benefit from future income earning
opportunities. The total cost o f implementing this proposal implies an increase in annual
expenditures o f about 4.0 percent o f GDP that would need to be gradually phased in over
several years, due to the tight fiscal situation. While this package covers significant
components of the growth agenda that El Salvador requires to boost economic
performance over the coming years (Le., education and rural infrastructure) as described
in the recent Country Economic Memorandum (World Bank, 2004), i t admittedly
excludes some important investments that such an agenda requires (i.e., larger
infrastructure investments, and competitiveness-type expenditures such as funds for R&D
and labor training to complement private sector-led efforts). An in depth analysis o f
infrastructure investments, including public and private sources, will be conducted for El
Salvador during Fiscal Year 2005, using a new diagnostic tool called "REDI" that would
cover the energy (electricity and gas), telecommunications, transport (roads, rail, ports
and airports), water and housing sectors. The REDI diagnostic will produce an integral
assessment o f El Salvador's infrastructure sectors, explore the relationship between
infrastructure and El Salvador's development strategy, include benchmarks against
regional and competitor economies; analyze the challenges o f financing infrastructure
requirements; and look at institutional and regulatory issues. The additional investments
to promote growth not included in the proposed package, w i l l require commensurate
additional fiscal efforts and creative methods to attract financing f r o m the private sector.
1.59 If recent expenditure and income trends are left unchecked, the debt sustainability
of El Salvador would be compromised. A passive scenario would lead to: (a) increasing
overall deficit to an average o f 4.3 percent o f GDP b y 2013; (b) interest payments of
nearly 3.7 percent o f GDP in 2013 (one percentage point o f GDP higher than in the Fiscal
Target scenario); and (c) total public debt close to 50 percent o f GDP by 2013, increasing
at an even faster rate afterwards. These trends indicate that serious attention i s required in
order to preserve the country's credit rating and the cost o f external borrowing. The
investment-grade rating that El Salvador has built and which i s responsible for i t s low
interest rate spreads i s based o n a solid track record o f debt and fiscal management.
33
1.60 Returning to a public debt level that allows for fiscal flexibility to respond to
shocks, contingencies or cyclical economic management should be a priority in El
Salvador. The chapter lays out a path to return to a debt level o f 35 percent o f GDP over
5 years which would require gradual increases in revenues which reach about 4.0 percent
by 2009, o f which 1.5 percent should be collected b y administrative measures and the rest
will require additional tax efforts. In addition, some pension provisions should be
amended t o remove benefits that are too generous in the international context and that can
increase the degrees o f freedom o f fiscal policy.
1.61 El Salvador may benefit in the future from adopting more formally fiscal rules
s i m i l a r to those in force in other Latin American countries, in which a fiscal balance
needs to be achieved on an annual basis, with some flexibility to allow for counter
cyclical fiscal policy. The latter i s important in the Salvadoran context, as formal
dollarization leaves only fiscal instruments to stabilize the economic cycle.
1.62 The remainder o f this report concentrates on two key aspects o f the fiscal agenda
facing El Salvador today. Chapter I1 presents an evaluation o f the public expenditure
management framework required to ensure that scarce public funds are used productively
and efficiently. The remainder of the report presents detailed reviews and analyses o f
recent trends in expenditures in the most important areas for social advancement and to
promote broad-based growth. Education, health, water and sanitation, rural roads, and
electrification are the subjects o f Chapters 111, lV, V, V I and VII.
34
ANNEX I:Sensitivity Analysis To Changes In Main Macroeconomic
AssumDtions
Both fiscal scenarios presented in Chapter 1 are based on strong assumptions about
economic growth, interest rates and inflation that follow the corresponding paths
summarized in Table 1.18. Changing any o f these factors would have an important effect
on the fiscal tightening needed to achieve a sustainable fiscal position. T o determine how
critical these assumptions are, sensitivity analysis was carried out on the average primary
balance that, if maintained between 2005 and 2009, would allow the government to
comply with the Fiscal Target o f achieving a stable debt to GDP ratio o f 35 percent o f
GDP b y 2009 and maintained i t thereafter.
Table 1.19 can be interpreted as follows. The Fiscal Target scenario assumes that annual
real GDP growth w i l l stabilize at around 3.5 percent in the long-run (2005-2013). With
this long-run growth rate, an average primary balance of 1.2 percent of GDP between
2005 and 2009 would result in a total public debt ratio close to 35 percent o f GDP by
2009. If, however, growth turned out to be 2.5 percent annually, the average primary
balance that would support a debt ratio o f 35 percent b y 2009 would be 1.6 percent of
GDP. Note that the only assumption that changes i s the GDP growth rate-everything
else remains unchanged.
As would be expected, higher growth would allow a more modest adjustment or the
achievement of the 35 percent debt ratio in less than the proposed five years. Economic
growth will depend on factors such as local infrastructure, stable export markets and
terms o f trade, and a competitive investment climate. A public sector debt perceived as
unsustainable deters external financing and discourages private investment, thus
hindering economic growth.
A similar interpretation can be given to the sensitivity analysis around the interest rate.
Under the Fiscal Target scenario, the nominal interest rate approaches 7.5 percent in the
long-run, in which case the average primary balance that results in a debt ratio o f 35
percent by 2009 i s equivalent to 1.2 percent o f GDP. If the nominal interest rate turned
out to be closer to 9.5 percent, however, El Salvador would need to keep an average
primary surplus equivalent to almost 2.0 percent of GDP between 2005-2009 to achieve a
debt ratio o f 35 percent o f GDP by 2009.
35
Real GDP Growth (2005-2013)
NFPS Primary Balance**
1.5
2.5
3.5'
4.5
5.5
2.0
1.6
1.2
0.8
0.5
5.5
6.5
7.5*
8.5
9.5
0.6
0.9
1.2
1.5
1.a
Nominal Interest Rate (2005-2013)
NFPS Primary Balance**
As illustrated in Table 1.19, an increase in the interest rate would require higher savings
to reach the desired debt target o f 35 percent o f GDP. Given that approximately 45
percent o f El Salvador public debt i s at variable interest rates, the authorities can hedge to
some degree b y issuing long-term debt in exchange for short-term debt, as they done
recently in 2002. O f course, this would raise the average interest rate on the debt, but i t
would provide a safety cushion and reduce volatility.
Using the same methodology, we could estimate the average primary surplus that w i l l be
necessary to stabilize the debt/GDP ratio at current levels (40 percent at end 2003). The
results for different levels o f GDP growth and nominal interest rates are shown in Table
1.20 below. In this case, under the base macroeconomic assumptions (3.5 percent growth
and 7.5 percent nominal interest rate), the average primary surplus w i l l have to be 0.5
percent of GDP between 2005 and 2009, for total savings o f 2.4 percent during the
period.
Table 1.20: NFPS Primary Balance ** and Selected Macroeconomic
Variables
*Assumption use in the Passive and Fiscal Target scenarios.
** Average Primary balance that stabilizes the public debt-GDP ratio at 40% by 2009, i f
maintained between 2005-2009.
36
Annex l.A: Fiscal Performance Under the Passive Scenario
(NFPS as % of GDP)
Memo Items:
Overall Deficit w/o
Reconstruction Exp.
-1.4
-2.3
-2.8
-3.0
-3.1
-3.3
-3.5
-3.7
-3.9
-3.9
-4.0
Primary Balance w/o
Reconstruction Exp.
0.6
-0.1
-0.3
-0.3
-0.4
-0.4
-0.5
-0.5
-0.5
-0.4
-0.3
* Preliminary figures.
“Includes Public Enterprises operating surplus
37
Annex l.B: Fiscal Performance Under the Fiscal Target Scenario
(Nonfinancial Public Sector, as percent o f GDP)
*Preliminary Figures. **Includes Public Enterprises Operating Surplus
38
ANNEX 11: The Fiscal Costs of Pensions
Background
Prior to the 1996 reform, the problems o f the existing system were: major
disconnection between contribution and benefits, crossed subsidies between programs,
heterogeneity o f contributions, perverse incentives inside the benefit structure, l o w
profitability o f reserves. Ultimately, the problems lead to a lack o f financial viability o f
the systems because o f the increasing mismatch between contributing and beneficiary
population (Table A. 1). In this context, the following objectives for the reforms were put
forward:
0
0
0
0
Improve the benefits for workers by granting adequate and timely pensions.
Homogenize the conditions for workers’ access to the system.
Have the workers’ pension funds be administered securely and efficiently.
Create incentives for including new population groups in the system.
Source: Synthesis Consultores Intemacionales “Opciones para enfrentar l a deuda
previsional” 1999.
With the objectives defined, the next step was to select the model appropriate for
the economic and social conditions o f El Salvador. After a thorough evaluation, i t was
decided to replace the existing pay-as-you-go system, the financing o f which was based
on the mechanism o f the scaled average premium, with a system o f complete individual
capitalization. In 1996, the National Assembly approved the legislation that created the
new system: the L a w o f the Savings System for Pensions and the law that create the
Superintendence o f Pensions.
39
Organization of the Reform Pension Sector
Legislative Decree 927 “Law for the Savings System for Pensions” o f December
20, 1996 created the Savings System for Pensions (SAP) and the System for Public
Pensions (SPP). The reform excluded the Social Insurance Institute of the Armed Forces.
The Savings System for Pensions (SAP) i s private in nature, administered b y private
firms given faculties b y the State and called Pension Fund Administrators (AFPs). The
AFP system began with five administrators, but with the merging o f three o f them in
2000, the market was left with only three. One o f these AFP i s under liquidation,
therefore two AFPs remain. Those affiliated to this system are covered for the
contingencies o f disability and death b y common risks, as well as old age.
The SAP i s based on complete capitalization from contributions to social
insurance, from both employers and employees, in individual accounts owned b y each
worker affiliated. With the creation o f this system, i t was possible to homogenize the
conditions for access to benefits b y workers from the private, public, and municipal
sectors. The legislation required that persons who on April 15, 1998 were less than 36
years old and were affiliated to the ISSS or the INPEP should j o i n an AFP. It also
established that persons on that same date who were between 36 and 50 for women and
between 36 and 55 for men had the option o f transferring to an AFP or staying with the
old system. They had a year to make that decision and if they did not exercise the option
during this period, the law obliged them to j o i n an AFP. Lastly, any worker who started
their first labor relation after April 15, ,1990 was obliged to j o i n an AFP, regardless o f
their age.
The System o f Public Pensions (SPP) comprises the programs for disability, old
age, and death that are administered b y the ISSS and INPEP. The Law gives the faculty
to all those affiliated to the ISSS and INPEP who on April 15, 1998 were women 50
years or older or men 55 or older to remain in the SPP. With the reform, the conditions
for access to benefits, the contributions, and the beneficiaries themselves were made
homogenous in both Institutes. Further, in the ISSS, the health and pension programs
were separated in terms o f their administration and financing, with the Pensions Unit
being created specifically for the organization, development, and execution o f the
program o f coverage for disability, old age, and death. The SPP w i l l continue being
administered under the pay-as-you-go model o f defined benefits until i t disappears.
Decree 926 o f December 19, 1996 also created the Superintendence o f Pensions as the
institution responsible for overseeing, supervising, and controlling compliance with the
legal dispositions applicable to the specific operation o f the AFPs, the ISSS, and the
INPEP. The highest authority in the institution i s the Superintendent, who i s appointed by
the Council o f Ministers from a proposal by the President o f the Republic.
Coverage of the System
There were 547,470 people in 1997, or 24.6 percent o f the Economically Active
Population (labor force), affiliated to some program to protect them from the old age,
40
disability, and death. As o f 1998, the new system o f AFPs began operations and the
coverage o f the integrated system rose to 39.8 percent o f the labor force b y 2001 and to
42.3 percent b y 2003. If pensioners are added to the affiliates the coverage increases to
47.3 percent (Table A.2). There i s low density of contributions, or the existing relation
between effective contributors and the total number o f affiliates. According to data from
the Superintendence o f Pensions this relation was 56.9 percent in 2001. In general in
other countries, this relation i s between 45 percent and 70 percent. Behind this relation
are a number o f difficulties that stem from the lack o f stable employment and the
existence o f temporary jobs, the double accounting for the effects o f transfers between
AFPs, the arrears in paying into the system, and evasion o f payment into the system. But
the l o w density o f contribution stems especially from a process o f indiscriminate
affiliation to the AFPs o f people who are simply unemployed. The reason for this
irrational affiliation was that the AFPs paid their recruiting agents a commission for each
person enrolled. At present, the criteria have changed so that a commission i s paid per
person once the contributions for the following month o f affiliation are received.
Consolidated
1997
-
415,843 192,658 32,780 641,281
2,227,409
28.8 percent
2001
881,989
65,031
76,483
55,450 1,078,953 2,444,959
44.1 percent
2003
1,086,267 65,658
73,609
59,401 1,284,935 2,715,516
47.3 percent
Source: Synthesis Consultores Intemacionales “Opciones para enfrentar l a deuda previsional” 1999.
Contributions and benefits
Article 16 o f the SAP L a w stipulates that employers and workers w i l l pay the
contributions. The rate w i l l be a maximum o f 13 percent o f the respective base income
10 percent o f the IBC w i l l go to
for contribution (IBC) and i s distributed as follows: (i)
the individual account; o f this total, 6.75 percent w i l l be paid b y the employer and 3.25
percent b y the worker; (ii)
a maximum commission o f 3 percent o f the IBC, charged to
the worker, goes to contracting insurance for o l d age and survival and the payment o f the
administration o f the individual accounts by the AFP. T o reach these contribution
ceilings for both the individual account and the commission, the L a w foresaw a transition
that would begin the year the new system started operations until the end o f 2001.
Starting in 2002, all affiliates t o the new system, regardless o f what sector they
are from, w i l l pay a maximum o f 6.25 percent and the employer 6.75 percent, for a
maximum total o f 13 percent. If a person decides to increase their level o f benefits, the
system allows them to make voluntary contributions to be accumulated in the individual
account. On the other hand, though i t i s true the commission has been fixed at a
maximum of 3 percent o f the base income, this was also affected by a transition, going
41
f r o m a maximum o f 3.5 percent in 1998, to 3.25 percent in 1999 and 2000, and to 3
percent in 2001. In setting this commission, there i s a certain flexibility s o that the AFPs
can compete through commissions, being able to set them under that percentage and in
that way, reducing the total contribution o f the worker.
For those who stayed in the SPP, the total contribution rate was set at 14 percent
o f the I B C in equal portions from the employer and the worker. However, given the
structure for contributions that there was before the reform, i t was also necessary to have
a transition so that i t w i l l reach 14 percent in 2003 for workers in the public
administration sector and in 2002 for private sector workers. The workers in the public
teaching sector contribute 14 percent since 2000. The criteria that gave rise to the
difference in contributions between the new and old systems appear to have their roots in
the incentive for transfer. Each affiliate or beneficiary with the right to a pension in the
SAP i s free to choose under some conditions between three modalities for pensions:
scheduled income, lifetime income, and scheduled income with deferred lifetime
income.2o Also in the SAP, unlike the SPP, the pensions have different sources o f
financing like the balance accumulated in the savings account for pensions, the
Certificate o f Transfer, the State Guarantee when i t corresponds, and the Insurance for
Disability and Survival contracted b y the AFP with an insurance company.2'
In the SAP, the amount o f the old age pension may vary depending on the
modality o f pension chosen b y the affiliate. O n the other hand, in the SPP, the amount o f
the pension w i l l depend on the average o f the salaries deducted f r o m in the last 10 years,
that is, the basic regulator salary (SBR), and the total time over which contributions were
made. In the SPP, the estimate for the pension starts with 30 percent o f the SBR for the
last three years of contributions plus 1.5 percent of the SBR for each additional year.22
Besides the benefits o f disability and survival, the State grants a minimum pensions for
old age, common disability, and survival. The amount o f the minimum old age and total
disability pensions i s established annually by the Ministry o f Finance in the Budget Law.
The minimum survival pension i s determined as a percentage o f the minimum old age
percentage in conformity with the percentages established for each beneficiary. On the
other hand, the minimum pension for partial disability i s equivalent to 70 percent o f the
minimum old age pension.
The pension by Scheduled Income consists in having the affiliate, at the moment o f accessing a pension,
maintain the balance o f their account in an AFP so that i t can give them a pension each month. Lifetime
Income will be an insurance contract for persons with which the affiliate can sign a contract with a Personal
Insurance Company o f their choice, obliging i t to pay the affiliate a monthly income as well as survival
pensions in the event the affiliate passes away from the moment o f signing the contract until i t expires. The
modality o f Scheduled Income with Deferred Lifetime Income i s a combination o f the two previous ones.
21 For an affiliate of the SAP to enjoy insurance coverage for disability and survival, they must meet the
following requirements: a) they are paying in and have contributed for at least six months during the twelve
prior to the date o f death or disability; or, b) they have been paying in during the period o f twelve months
prior to their date of death or the occurrence o f the their disability according to the first ruling, having
recorded six months of contributions in the year prior to the date when they stopped paying in.
22 I t should be noted that the SAP law also sets rules that persons that were obliged to stay in the reformed
public system will have the right to a calculation o f a different pension, receiving 30 percent o f the SBR for
the first three years paid in, plus 1.75 percent for each additional year. Further, these persons have the
option to choose the percentage benefit scales o f the schemes o f the old system, if they feel i t suitable.
2o
42
With the SPP, pensions that are calculated based on the SBR and are less than the
minimum pension in force are readjusted to the amount o f this, subject to verification o f
the requirements. O n the other hand, the minimum SAP pension operates when the
balance o f the individual account i s exhausted in the event that the affiliate has opted for
the pension by scheduled income or i s in the phase o f temporary scheduled income, as
long as the requirements are met. At present, the amount o f the minimum old age pension
i s $100, which i s below the urban extreme poverty line o f $127 and only slightly above
the rural line of $93. A pensioner with a minimum pension would have to have an
additional source o f income in order not to fall into extreme poverty. Finally i t should be
noted that the Law allows one to obtain an old age pension after paying in for 30 years,
regardless of age. Also, in the SAP, once the account balance i s able to finance a pension
o f 60 percent o f the SBR, which in turn i s equal to or more than 160 percent o f the
minimum pension one may retire. Early retirement has a negative effect on savings since
requiring resources before reaching the legal ages means putting an end to putting
resources to other alternative uses, with the consequent impact on reduced savings.
Actuarial Financial Deficit
According to the Superintendence o f Pensions, the size o f the actuarial deficit o f
the SPP in December 2003 was $10,800.8 million, equivalent to 72 percent o f GDP. The
actuarial financial deficit i s the result o f the updating o f the annual income flows from
contributions minus the total expenditures for pensions and administration. In the case o f
El Salvador, this accumulated deficit has i t s roots in different problems that come from
the initial design of the system. The old system had a heterogeneous structure for
contributions and benefits; the contributions and the benefits were disconnected, creating
the incentive to inflate the incomes for paying in from the last years in order to obtain a
bigger pension; i t had different institutions for attention to different population groups
with heterogeneity in the retirement ages.
Table A.2: Pension Debt, December 2003
I$ Millions
I percent
Total (1+2)
10,800.80
100
1. Cost attributed to the Old Public System
9,912.40
90.8
i) Payment to Current & Future Pensioners
5,499.20
50.9
ii) Transfer Certificates (TC&CTC) a/ b/
4,236.90
39.2
iii) Operational Deficit of Public System
69
0.6
995.7
9.2
2. Cost Attributed to the New System
The above difficulties, together w i t h the l o w coverage o f the system, the fall o f
the relation between assets and liabilities, the growth o f administrative spending, and the
negative yield o f the technical reserves were determinant in having that system
accumulate a high social security debt. The components o f this deficit are: (i)
the
payment of pensions for the current pensioners; (ii)
payments for future pensioners; (iii)
43
the redemption o f the transfer certificates and the complementary transfer certificates;
and, (iv) payment o f the complement for minimum pensions. Regardless o f the reform,
the first three components would have always had to be dealt with since they pertain to
the implicit debt o f the public system.
The payment to current and future pensioners on the SPP i s equivalent to $5,499.2
million. This represents 50.9 percent o f the social security debt and corresponds to the
commitment acquired b y the State with about 105,192 affiliates who are currently
pensioned with the ISSS and the INPEP.23 The redemption o f the transfer certificates
(regular and complementary) represents 39.2 percent of the social security debt ($4,236.9
million). The “regular” transfer certificate corresponds to the present value o f the
payment o f the rights o f acquisition for those persons who transferred to the private
system administered b y the AFPs. This right has the basic condition o f having paid in for
at least 12 months to the ISSS or the INPEP and i s materialized in a value title that w i l l
earn annual interest equal to the inflation o f the preceding year. I t s redemption w i l l be the
responsibility o f the State on the date the affiliate meets the requirements for accessing a
pension.
The complementary transfer certificate i s the actuarial value that i t sufficient for a
retiring person to obtain a pension in the SAP (AFP) equal to what the pensioner would
obtain in the SPP. This i s just for those that had the option o f staying in the old system
(between 36 and 50 for women and between 36 and 55 for men) but decide to joint the
new system and now find out that their pension would be lower than in the old system.
In December 2001, the Assembly o f the Republic passed some modifications to the law
that makes i t possible for he government to amortize the transfers certificates over a
period o f 15 years instead o f paying them in full when due as originally contemplated in
the law.
The operational deficit o f public system i s equivalent to $690 or 0.6 percent o f the
social security debt. This corresponds to the present value o f the administration costs for
the ISSS and the INPEP until i t s extinction and the payment o f old age, disability, or
survival pensions that these affiliates would generate minus the present value o f the
contributions that w i l l be made b y approximately 34,075 persons who opted to remain in
the old system or who, because o f age, were obliged to remain in it.24
The payment o f complements in order to grant a minimum old age, common
disability, and survival pension, which corresponds to 9.2 percent o f the social security
debt, i s equivalent to $995.7 million. This component i s the only one attributable, in part,
to the reform. B y law, the minimum pension w i l l be established each year b y the Ministry
o f Treasury based on the resources available to the Central Government. The actuarial
pension deficit would be equivalent to 2 percent o f the GDP for the period from 2003 to
To June 30, 1999.
O f which, 36,987 voluntarily opted to remain i n the public pension system because of dispositions of
Article 184 o f the SAP Law, while 37,364 were obliged to remain i n the public pension system because of
their age because o f dispositions o f Article 186.
23
24
44
2014, reaching a maximum o f 2.3 percent o f the GDP in 2009, and declining gradually to
1 percent until 2024, and then dropping to zero b y 2067.25
Options to Reduce the Fiscal Cost of the Pension System
There are a number of options for dealing with the social security debt. Three
scenarios have been considered:26
1. Raise the retirement age in the SPP and SAP to 65 for men and 60 for women;
2. Increase to 35 the number of years paid in order to obtain an old age pension,
regardless of age;
3. Eliminate the right to have an old age pension, regardless o f age, after
contributing 30 years in the SPP and SAP.
Scenario 3 i s the alternative that yields the largest savings in relation to the base case,
equivalent o f 9.9 percent less o f the actuarial value. In this case, the fiscal cost would be
reduced f r o m 2.3 percent of GDP to 1.8 percent of GDP (see Table A.4, Figure A.l, and
details o f estimates at the end of the Annex).
Pension Debt
percent Reduction
($ millions)
Respect Base Scenario ( percent GDP) a/
Maximum Fiscal Cost
Base Scenario
10,800.80
2.3 b/
Scenario 1
10,694.70
-1
2.2 c/
Scenario 2
10,750.80
-0.5
2.2 b/
Scenario 3
9,918.90
-8.2
1.9d/
Scenario 4
9,732.40
-9.9
1.8 e/
a/ Assuming average growth of 4 percent and inflation of 3 percent during 2003-2089.
b/ 2009; c/ 2009-2011; d/ 2014; e/ 2009-2014
Source: Staff estimates on the base of Superintendence of Pension data
25
26
Assuming 4 percent GDP annual growth and 3 percent annual inflation rate during the 2003-2067 period.
Scenarios 1,2, and 3 would imply reforms to Articles 104 and 200 of the SAP Law.
45
Figure A.l: Profiles of Pension D e b t Reduction Scenarios
I
___
...........
2.5
""
__l__l_.
1
2.0
0.5
I
0.0
$o
2o , 2 0 , 2o , 2o , 20 '20 ' 2 0 '20 ' 2 0 ' 2 0 ' 2 0 ' 2 0 ' 2 0 ' 2 0 ' 2 r
03 06 09 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66
-Base
Scenario
-Scenario
111
-Scenario
-Scenario
I
IV
Scenario II
Conclusions
The main causes that explain the enormous accumulated social security debt in
the old system are the constant decline o f the relation between active and passive
affiliates and the disconnection between the contributions received and the pensions
granted by the SPP. Also influencing: l o w coverage, increased administrative costs, and
investment o f the technical reserve in operations that offered real negative profits in the
1980s (mainly Central Government bonds at a fixed rate in the most inflationary period in
the economic history o f El Salvador). The pension deficit would be equivalent to 2.0
percent o f GDP for the period from 2003 to 2014, reaching a maximum of 2.3 percent of
the GDP in 2009, and declining gradually to 1 percent until 2024, and then dropping to
zero by 2076. A number of options to reduce the fiscal deficit have been explored , being
the elimination o f the right to pension regardless o f age after 30 years o f contributions,
the option that yields most savings in relation to the base scenario (9.9 percent).
46
Table A.4: Detailed Estimates of the Options to Reduce Pension Debt
(percent of GDP)
Year
lominal
iDP
i mm
scenario
2003
1.78
1.73
1.72
1.64
1.61
4,996
2004
1.91
1.87
1.93
1.63
1.61
6,064
2005
2.02
1.98
2.05
1.62
1.61
7,207
2006
2.12
2.08
2.12
1.66
1.66
8,433
2007
2.15
2.1 1
2.10
1.71
1.72
9,745
2008
2.18
2.14
2.09
1.74
1.74
!I
,151
2009
2.25
2.22
2.16
1.78
1.78
12,657
2010
2.24
2.21
2.14
1.79
1.78
14,270
2011
2.21
2.18
2.13
1.84
1.79
15,998
2012
2.09
2.07
2.06
1.82
1.76
!7,849
2013
2.05
2.03
2.03
1.83
1.76
!9,832
2014
2.00
1.98
1.98
1.86
1.76
11,956
2015
1.89
1.87
1.89
1.83
1.73
14,231
2016
1.82
1.80
1.83
1.79
1.70
16,668
2017
1.79
1.78
1.80
1.72
1.69
19,279
2018
1.69
1.68
1.70
1.65
1.62
12,076
2019
1.55
1.53
1.55
1.55
1.53
15,072
2020
1.41
1.40
1.42
1.43
1.44
18,281
2021
1.29
1.28
1.29
1.33
1.33
jl,718
2022
1.19
1.18
1.20
1.24
1.23
5,401
2023
1.09
1.08
1.10
1.15
1.14
59,345
2024
0.97
0.97
0.98
1.04
1.04
j3,571
2025
0.90
0.89
0.91
0.97
0.95
j8,097
2026
0.82
0.81
0.83
0.87
0.86
72,945
2027
0.75
0.75
0.77
0.81
0.80
78,139
2028
0.66
0.65
0.67
0.73
0.72
33,703
2029
0.58
0.58
0.59
0.62
0.62
39,662
2030
0.52
0.52
0.53
0.55
0.55
36,046
2031
0.46
0.45
0.46
0.47
0.47
102,885
2032
0.38
0.38
0.39
0.41
0.40
110,210
2033
0.33
0.33
0.34
0.36
0.35
I 18,057
2034
0.29
0.29
0.29
0.32
0.30
126,463
2035
0.25
0.25
0.25
0.28
0.26
135,467
2036
0.22
0.22
0.22
0.24
0.23
145,112
47
Year
base
icenario
Nominal
Scenario IV GDP
$"
Scenario I Scenario 11
I
0.18
I
2038
0.17
0.17
0.16
0.17
0.17
2039
0.14
0.14
0.14
0.15
0.14
178,368
2040
0.12
0.12
0.12
0.12
0.12
191,067
2041
0.12
0.12
0.12
0.10
0.10 204,671
2042
0.1 1
0.1 1
0.11
0.08
0.08 219,244
2043
0.10
0.10
0.10
0.07
0.07
234,854
2044
0.1 1
0.1 1
0.1 1
0.06
0.06
251,576
2045
0.10
0.10
0.10
0.05
0.05
269,488
2046
0.09
0.09
0.09
0.05
0.05
288,675
2047
0.08
0.08
0.08
0.04
0.04
309,229
2048
0.08
0.08
0.08
0.03
0.03 331,246
2049
0.07
0.07
0.07
0.03
0.03
354,831
2050
0.06
0.06
0.06
0.03
0.03
380,095
2051
0.05
0.05
0.05
0.02
0.02 407,158
2052
0.05
0.05
0.05
0.02
0.02
436,147
2053
0.04
0.04
0.04
0.02
0.02
467,201
2054
0.04
0.04
0.04
0.02
0.01 500,466
2055
0.03
0.03
0.03
0.01
0.01
2056
0.03
0.03
0.03
0.01
0.01 574,269
2057
0.03
0.03
0.03
0.01
0.01 615,157
2058
0.02
0.02
0.02
0.01
0.01
2059
0.02
0.02
0.02
0.01
0.01 705,874
2060
0.02
0.02
0.02
0.01
0.01
756,132
2061
0.01
0.01
0.01
0.01
0.01
809,969
2062
0.01
0.01
0.01
0.00
0.01 867,638
2063
0.01
0.01
0.01
0.00
0.00 929,414
2064
0.01
0.01
0.01
0.00
0.00
995,588
2065
0.01
0.01
0.01
0.00
0.00
1,066,474
2066
0.01
0.01
0.01
0.00
0.00
1,142,407
0.01
0.00
0.00
1.223.747
48
0.20
I
0.18
2067
0.18
I
2037
0.20 (155,444
I
166,512
536,099
658,956
CHAPTER 11: Public ExDenditure Management
2.1
Good budget institutions allow governments to balance the three interrelated
objectives o f budgetary performance: aggregate fiscal discipline, efficient allocation of
resources according to the Government’s policy priorities, and operational efficiency in
the use o f resources (Schick, 1998). Institutions, understood as sets o f formal and
informal rules, influence behavior o f public officials involved in the process o f planning,
allocating and spending public money aimed at implementing government policies and
programs.
2.2
This chapter i s drawn from the Country Financial Accountability Assessment
(CFAA) report.*’ I t analyzes the performance and transparency o f Salvadoran public
expenditure management institutions and systems, with a focus on the central
government, and provides recommendations that would in due course help to strengthen
fiscal discipline and increase operational efficiency.28 Given the relatively small size o f
public expenditures in El Salvador, i t i s critical to strive for a framework that assures that
public priorities are efficiently transformed into programs and projects that yield high
social payoffs, while maintaining sound systems for financial and overall expenditure
controls. The chapter i s organized as follows: Part Idescribes the institutional framework
for public expenditure; Part II looks into the process o f budget formulation and i t s
reliability; Part I11 examines the process o f budget execution and related controls; and
Part I V evaluates the arrangements for financial reporting and external oversight. Finally,
the chapter draws some conclusions and suggests priorities for action.
111.
Institutional F r a m e w o r k
T h e Public Sector
2.3
Composition and size. Title V I o f the Constitution regulates the attributions and
competencies o f the Government, which i s defined broadly as the legislature, the
executive, the judiciary, the Public Prosecutor, the Court o f Accounts, and local
governments. The non-financial public sector (NFPS) consists o f 2 1 central government
entities (including 12 ministries), 34 hospitals and other health entities, 47 decentralized
institutions (including four state enterprises), and 262 local government^.^^ Decentralized
’’World Bank and IDB, Draft o f June, 2004.
Other processes that have a significant impact on the three levels o f budgetary performance are analyzed
in other Chapters of this PER (fiscal sustainability, quality o f public expenditure planning and allocation)
and in the CPAR (effect of contracting and procurement practices in operational efficiency). While this
Chapter discusses some evident issues regarding availability (or lack) o f information on municipal
finances, the subject of local government expenditure management i s not covered in this PER.
29 The Central Bank (BCR) consolidates data on municipal finances, on a sampling basis, into the NFPS
statistics. The Ministry of Finance (MH) does not include municipal data in the state financial statements,
which i n turn do contain six entities from the financial public sector.
28
49
institutions have legal status, their own regulations, and functional autonomy.
Municipalities have financial, technical and administrative autonomy.
Box 2.1: Public Sector Modernization Program
The ongoing public sector modernization reforms started with the Government’s 1994- 1999 plan for
economic and social development, followed by the 1999-2004 alliance for an effective government. In the
early 1990s, El Salvador’s public sector was suffering from major structural weaknesses and deficiencies:
(i)high functional inefficiencies caused by overextension and centralization o f the State; (ii)
low economy
and efficiency caused b y i t s organizational structure, i t s extremely weak financial and human resources
management, and the low level o f professionalization o f its civil service; (iii)
poor service delivery; and (iv)
outdated and inadequate administrative infrastructure and equipment. The Public Sector Modernization
Program has targeted these weaknesses under five major components
Institutional Restructuring and De-bureaucratization. A major accomplishment has been the successful
restructuring o f the Ministry o f Public Works (MOP), which has reduced that ministry’s expenses by
approximately 40 percent. Although less comprehensive, progress has also been made in the modernization
of other ministries, showing a notable 12 percent reduction in the number o f public employees. The main
challenge ahead i s to implement a strategy to consolidate and maintain the reform process and to replicate
the successful experience o f the M O P in other ministries.
Human Resources Management. Major accomplishments include the development o f an HR management
system (SIRH), and the design o f tools for selection, evaluation, classification, remuneration and promotion
o f government employes. The challenge ahead will be to update, pass and implement modern civil service
legislation, and put the tools that have been developed into practice.
Financial Management. The major accomplishments have been the issuance and implementation o f modern
financial management, procurement, tax, and customs legislation, and the introduction o f integrated
financial management and tax information systems (SAFI and SIIT, respectively). The main challenges
ahead w i l l be to increase coverage o f SAFI, introduce performance monitoring, develop procurement
information systems, and enhance judicial performance on tax and customs issues.
Privatization and Private Sector Participation in the Provision o f Public Services. Major accomplishments
include the privatization o f telecommunications, electricity distribution and thermal generation, the
enactment and implementation o f General Ports and Civil Aviation Laws, and the development o f
regulatory frameworks. Other important initiatives include the reform o f the postal agency, railroad system
concession, and the reform o f the pensions system. The main challenge ahead w i l l be the strengthening o f
regulatory agencies.
Decentralization. Major accomplishments are the development o f projects for decentralization of public
services in water (13 systems) and health (28 basic health units “SIBASIS”). The main challenge ahead will
be to clarify the functions o f local governments.
2.4
B y international standards, El Salvador’s public sector i s small. According to the
World Economic Forum’s Global Competitiveness Report 2002, El Salvador i s 14th
among 120 nations ranked according to government expenditure as percent o f GDP.
Moreover, after a decade o f reforms, El Salvador’s public sector has made considerable
progress in modernizing and refocusing i t s role. The modernization program (see B o x 1)
has lead to significant advances in reforms related to privatization, pensions, and
deregulation. Relevant improvements have been made in financial management and
decentralization, and some steps have been taken towards creating a professional civil
50
service. As noted in Chapter I,a significant outcome o f the modernization program has
been the decline o f the wage bill, from 8.4 percent o f GDP in 2000 to 7.4 percent in 2003.
2.5
C i v i l service. The C i v i l Service Law o f 1961 lays out the rules for a civil service
career, both in the central and local governments; however, the law was never regulated
despite various efforts to do so over the years. The outdated nature o f the law and the lack
o f regulations have given way to multiple norms, creating ambiguity and contradictions
in their application. There i s no j o b classification system in the public sector;
consequently, remunerations on s i m i l a r posts differ from one entity to another; similarly,
there i s not an overreaching merit-based employment and promotion system.
2.6
Since 2002, as part o f the public sector modernization program, the Technical
Secretariat o f the Presidency (SETEC) prepared a comprehensive program to modernize
c i v i l service. The program i s based on the development o f technical instruments for
classification o f positions, entering employment and promotion, remuneration,
evaluation, and development. Executive training for senior staff and technical training to
institutional human resources units (URHIs) have been provided to help introduce the
techniques while legislation i s being prepared.
Governance Environment
2.7
Efforts to modernize the public sector have not led to changes in public
perceptions o f governance. In fact, the Worldwide Governance Research Indicators
Dataset3' portrays a worrisome decline in all but one o f the six indicators when compared
with the 1998 results (Figure 1). When compared to the Latin America and the Caribbean
average, El Salvador does well in preserving political stability, slightly less than average
in terms o f i t s regulatory framework and promotion o f voice and accountability, but
shows disappointing performance in rule o f law, government effectiveness and control o f
corruption.
2.8
Public expenditure management performance can affect the perception o f
government effectiveness, which focuses on the inputs required for the Government to be
able to produce and implement good policies and deliver public goods. Similarly, the
perception o f corruption, conventionally defined as the exercise o f public power for
private gain, can be affected b y public expenditure transparency. In this case, the picture
i s not better.
30 The Governance Indicators, compiled by the World Bank Institute, reflect the statistical compilation o f
responses on the quality o f governance given by a large number o f enterprise, citizen and expert survey
respondents in industrial and developing countries, as reported by a number of survey institutes, think
tanks, non-governmental organizations, and international organizations.
51
EL SFlLVADOR (2002)
Voice and Accountability
Political Stability
Governnent Effectiveness
Regulatory Quality
Rule o f Lau
Control o f Corruption
EL SALVADOR (2002)
Voice and Accountability
Political Stability
Governnent Effectiveness
Regulatory Quality
Rule o f Lau
Control o f Corruption
I
e
1
I
25
58
~~
I
Comparison u i t h r e g i o n a l average ( L a t i n America & Caribbean) (louer bar)
Country's P e r c e n t i l e Rank (8-188)
Source: D. Kaufmrnnr R . K r a a r and H. M a s t r u z z z r 2003: Governance M a t t e r s 111: Gouwnance I n d i c a t o r s C e r 1996-2002
(http://WIW.~lrldbank.ors/r.bi/9~upmanc.~~b+/g~umrtters?.htnl)
Vote: Percentile rank indicates the percentage o f countries worldwide that rate below El
Salvador (subject to margin o f error). The statistically likely range o f the governance indicator
i s shown as a thin black line.
El Salvador ranked 9th among ten participating countries in the 2003 Latin
2.9
American Index of Budget T r a n ~ p a r e n c y . ~As
~ shown in Table 1, for none of the 14
variables surveyed did positive responses exceed 50 percent o f total responses, with the
most negatively qualified areas being the level o f citizen participation in various stages o f
the budget process, the effectiveness and reliability o f external controls, the timeliness o f
The Index of Budget Transparency, part o f the International Budget Project, was based on a perceptions
survey on 14 variables o f budget transparency, applied among experts and users o f budget information
(Probidad, 2003).
31
52
publication o f budget formulation, execution and audit information, the clarity o f budget
responsibilities between central and local governments, and the availability o f indicators
to evaluate budget implementation.
Table 2.1: Budget Transparency Perception Survey
Variables 2003
Citizen participation in the budget
Capacities o f the institutions o f external oversight
Timeliness o f budget information
Responsibilities among government levels
Accountability
Control over public officials
Changes i n the budget
Budget allocation
Information on national debt
Quality o f information and statistics in general
Budget oversight
Information on macroeconomic criteria o f the budget
Authority and participation o f the legislature in the budget
Source: Probidad, 2003.
I
5
8
8
13
19
21
23
23
31
32
33
33
1 45
-
I
Formal Rules for Public Expenditure Management
2.10 The legal instruments for public expenditure management are contained in various
laws and regulations listed in B o x 2. The Financial Management L a w o f 1995 (Ley AFI)
governs the formulation, approval, execution and monitoring o f the national budget, the
single treasury account, the government accounting system, and the investment and
public credit functions.
2.1 1 Budgetary Attributes of Different Branches of Government. El Salvador's
Executive has powers o f proposing and executing the budget that are similar to those in
other Latin American countries, with the same tendency towards a strong executive role
vis-&vis the legislature, for the purpose of strengthening the Executive's capacity to
control the overall fiscal balance. Still, the Legislative Assembly retains the power to
authorize public debt, approve tax legislation and, o f course, pass the annual Budget Law.
The Assembly can reduce or reject budget credits requested b y the Executive, but never
increase them; in practice, it makes only marginal modifications to the
The
President holds the right o f veto o n laws passed b y the Assembly, which can be
overturned b y a two-thirds majority.
32 However, the 2004 Budget Law was approved only on -,
2004 following a stand-off between the
Executive and the majority opposition party in the Assembly over various issues, mainly the amount o f
transfers to local governments.
53
Box 2.2: M a i n Laws and Regulations Governing Public Financial Management
Articles 223-234 o f the 1983 Constitution regulate public finances, particularly the General State
Budget. Articles 195-199 regulate the fiscal control function o f the Court o f Accounts o f the Republic.
The Financial Management Law (Decree 516 o f 1995, as modified by Decree 716 o f 1996 and Decree
172 o f 1997) and i t s Regulations (Decree 82 of 1996) establish the integrated financial management
system (composed o f the budget, treasury, investment, public credit, and accounting functions) o f the
NFPS (excluding municipalities).
The annual Law o f the General Budget o f the State and Special Budgets lays out the revenue and
expenditure budgets and how the deficit i s to be financed. I t contains two main sections, one on central
government and another on decentralized institutions.
The Ministry o f Finance (MH) has issued various manuals: Budget Formulation, Budget Execution
Processes, Organization o f Institutional Financial Units (UFIs), Classification o f Public Sector
Financial Transactions, Chart of Accounts, and Technical Aspects o f the Integrated Financial
Management System (SAFI).
The Public Administration Procurement and Contracting Law (Decree 868 o f 2000 and i t s
amendments) regulates for public procurement.
The regime for external audit i s established in the Organic Law o f the Court o f Accounts (Decree 438
o f 1995, as modified by Decree 998 o f 2002 and Decree 1147 o f 2003). That same law governs the
“national system o f control and audit in public management.” The Court of Accounts has issued
Internal Control Technical Norms (Decree 15 o f 2000).
The Internal Regulations o f the Executive Body (Decree 24 o f 1999) dictates the organizational
framework o f the Executive Branch.
The Municipal Code (Decree 247 o f 1986) regulates municipal finances.
2.12 I f by the start o f the fiscal year the Budget Law has not been approved, the
approved budget allocations from the previous year are put into effect; once the new
Budget L a w i s approved, adjustments are made in accordance with actual execution. The
authority to modify the budget during the fiscal year can be summarized as follows:
0
0
0
Budget modifications resulting from an increase or reduction in the overall budget
totals, as well as transfers o f allocations between different sectors or
administrative units, must be approved b y the Assembly; however, certain transfer
authorizations may be given upfront to the Ministry o f Finance (MH) via the
annual Budget Law.
The MH can authorize transfers between allocations within a central government
sector or administrative unit, except those considered nontransferable; i.e.,
allocations for investments cannot be transferred to current expenses (excepting
counterpart funds and taxes generated b y investments, in which case authorization
from the Council o f Ministers i s required), and allocations for debt service.
Decentralized institutions (including non-financial public enterprises) can
authorize transfers between allocations within their budgets, unless these affect
their current balance or investments, in which case authorization from the Council
o f Ministers i s required.
54
0
Central government entities can only make transfers between lines o f expenditure
within the same object group. Transfers between different object groups require
MH’s prior approval.
2.13 The MH i s responsible for the direction and coordination o f public finance. Each
budget-executing entity maintains an institutional financial unit (UFI) responsible for
budget, treasury and accounting functions. UFIs serve as the link with the Ministry o f
Finance’s central normative directorates for these functions.
2.14 The Constitution grants the Court o f Accounts o f the Republic the power to
exercise fiscal oversight (fiscalizacih) of public finances and budget execution. I t s
Organic L a w establishes, inter alia, the Court o f Accounts’ responsibility for the external
audit o f all entities that manage state resources and i t s authority to set governmental
policies and procedures on internal control, internal audits and external audits. The same
law stipulates that every public sector entity must have an internal audit unit, which
though reporting directly to the head o f each entity, must submit i t s annual work plans
and copies o f each report to the Court o f Accounts.
2. I 5 Non-financial public enterprises. The privatization reforms have reduced
significantly the size o f enterprises in the public sector (around 10 percent o f the 2003
budget). Moreover, the four remaining enterprises, National Water and Sewerage
Administration (ANDA), Hydroelectric Power Commission o f the Lempa River (CEL),
Autonomous Port Commission (CEPA) and the National Lottery, are subject to the
provisions o f the Ley AFI and the annual Budget Laws.
2.16 Local Governments. The 262 municipalities, which have financial and
administrative autonomy as stipulated in the Constitution, account for around 5 percent o f
overall NFPS expenditures. A sample o f 92 local governments showed that, in 2003, their
expenditures were financed b y local revenue (59 percent), debt and donations (5 percent),
and central government transfers (36 percent). However, a separate study from the
Corporation o f Municipalities places at up to 68 percent the share o f municipal expenses
financed through central government transfers (COMURES, 2003). There are no legal
limits on municipal borrowing; authorization i s required only for the use o f a central
government guarantee.
2.17 Most central government transfers are funded under the L a w o f the Municipal
Economic and Social Development Fund (FODES), which earmarks 6 percent o f the
current central government revenues for this purpose. The FODES i s distributed among
municipalities on the basis o f a pre-established formula and i t s regulations stipulate that
80 percent must be used for investment expenditures b y each municipality. Municipalities
are only required to report budget execution o f the use o f transfers from central
government. The Local Development Social Investment Fund (FISDL) implements
certain investment projects (financed through external loans and grants) at the municipal
level.
55
Analysis
2.18 There i s a comprehensive set o f laws and regulations that cover each relevant area
o f budget management. The distribution of fiscal functions within the central government
i s clearly defined and functional, but as reflected in the Budget Transparency survey and
a recent study from COMURES, the demarcation o f functions o f central and local
governments i s not clearly defined in practice.33This, together with the lack o f limitations
on local government borrowing, can affect the quality o f budget management.
2.19 B y developing and promoting awareness o f modern human resource management
techniques, the Government i s moving in the right direction. The effective
implementation and sustainability o f those techniques w i l l depend, however, on a
renovated and consolidated legal and regulatory framework.
IV.
Budget Formulation and Reliability
The Process of Budget Formulation
2.20 Revenues. An inter-institutional effort underlies the preparation o f the revenue
budget. A committee chaired by the Budget Directorate (DGP) o f the MH and composed
o f representatives from the Directorates o f Internal Revenue and Customs (DGII and
DGRA), Treasury (DGT), the Macroeconomic and Fiscal Analysis Unit (UAMF), all o f
the MH, plus the Central Reserve Bank (BCR), i s responsible for the analysis and
monitoring o f fiscal revenues.
2.21 The committee relies principally on a methodology combining statistical analysis
o f annual series for each revenue collection coefficient with simulation models built
around macroeconomic projections and fiscal targets. Daily monitoring o f collections i s
performed b y the DGT, and monthly detailed reports on compliance with revenue targets
are prepared b y the DGII. The quarterly “economic conjucture” prepared b y the UAMF
summarizes quarterly revenue performance, and an annual “memoire o f tax information”
by the DGII documents annual performance.
2.22 Expenditures. In the absence o f a formal medium-term budget framework, the
budget formulation exercise focuses on the upcoming fiscal year. L e y AFI requires that
an approved Budget Policy document (laying out the overall availability of resources and
expenditure ceilings, priorities and variables for allocation, and norms for budget
formulation) precede the preparation o f the Budget Project, which in turn has to be
presented to the Legislative Assembly no later than three months before the beginning o f
the fiscal year. The stages in the process, which are well documented, are summarized in
Table 2.
33 The reports from COMURES and Probidad claim that 44% o f central government transfers are invested
i n projects whose competency areas correspond to the central government or are not clearly delimited.
56
Dates
Feb. - March
March - April
April
June
June - July
July - Aug.
Aug.
Aug. - Sep.
Sep.
I
I
Process
Estimates of tax and other revenues
Estimates o f loan and grant receipts
Debt service and estimated public investment program
Estimates o f expenditure ceilings
Approval o f estimates
Preparation o f Budget Policy proposal
Approval o f Budget Policy
Distribution o f the guides for the annual budget
formulation and communication o f ceilings
Formulation of draft institutional budgets
Analysis o f draft institutional budgets
Preparation o f Budget Project proposal
Approval o f Budget Project
Presentation of Budget Project to Assembly
I
- I
-
Participants
Inter-institutionalcommittee
Executing entities, DGICP, DGP
DGICP
DGP
Minister o f Finance
DGP, Minister o f Finance
Council o f Ministers
DGP
Executing entities
DGP
DGP, Minister of Finance
Council o f Ministers
President
2.23 Based on the Budget Policy and specific directives from the MH’s Budget
Directorate, each executing entity formulates i t s draft institutional budget, which are
discussed with the MH before their incorporation in the Budget Project. There i s more
room for discussion o f options for capital than for recurrent spending, but the MH
ultimately commands the decision-making process. Exceptions granted by Ley AFI are
those related to the budgets o f the legislature, judiciary, and Court o f Accounts, which are
incorporated into the Budget Project as proposed by the respective institutions.
2.24 The most prominent rigidities that affect flexibility in budget formulation,
expressed as the share of allocations in the total budget for 2003, are: remunerations (29.7
percent), debt service (17.9 percent), pensions (9.2 percent), transfers to the judicial
branch (4.5 percent), transfers to municipalities (4.3 percent), and the road-maintenance
fund F O V I A L (2.9 percent). The constitutionally mandated transfers to the judiciary
amount to 6 percent of current revenues.34 The tax on gasoline and diesel i s earmarked to
finance the F O V I A L .
2.25 Public investment program. L e y AFI requires that the public investment
program be consistent with the Public Investment and Credit Policies, both approved b y
the National Commission o f Public Investment
Investment requests from the
executing entities are reviewed b y MH’s Investment and Public Credit Directorate. These
requests are based on pre-investment studies, for which detailed guidelines have been
prepared, and five-year investment programs. The quality o f these documents i s s t i l l
perceived as limited and guided b y a “wish list” approach.
2.26 Each executing entity i s responsible for incorporating i t s approved institutional
investment program into i t s draft institutional capital budget. A single project code in the
FUSADES has noted repeatedly that, as a percentage o f GDP, transfers to the judiciary in El Salvador are
large by international standards, e.g. larger than those in the U. S., Argentine and Spain. (FUSADES,
2001).
35 The CONIP consists o f the Minister and Vice-Minister of Finance, the Ministers of Economy and
Education, and the President of the Central Bank. N o formal meetings o f the CONIP were held in 2003.
34
57
institutional public investment system (SIIP) and the integrated financial management
software (SAFI) permits cross-checking o f aggregates. However, SIIP does not have the
same institutional coverage as SAFI.
Coverage and Content of the Budget
2.27 Coverage. In accordance with Ley AFI, the NFPS budget comprises the general
budget o f the State, which includes 21 entities o f the central g o ~ e r n m e n t ;the
~ ~ special
budgets o f decentralized institutions, which contain 63 entities (including 34 hospitals)
and 4 public enterprises; and the extraordinary budgets.
2.28 The extraordinary budgets are envisaged in the Constitution for legislative
authorizations to commit funds for special projects (“works o f public or administrative
interest”, or consolidation or conversion o f public debt) that span multiple budgetary
periods. These funds, which are not part o f the annual budget law, in 2003 were
composed of: the extraordinary public investment budget PEP 2001-2003 (originally
financed from privatization proceeds but later, after the earthquakes, incorporating local
and external resources for specific investments); the extraordinary institutional resources
(e.g., electricity infrastructure projects b y CEL); the extraordinary economic recovery
budget (PEE); and the extraordinary budgets for organization o f elections.
2.29 Other major extra-budgetary activities are those financed b y special activity
funds. These funds are generated b y the sale o f goods and services b y central government
institutions and may be used b y these entities for specific purposes with MH’s
authorization. Finally, there are around 14 autonomous entities whose organic laws
provide for their budgets to be approved b y executive decrees or governing board
accords. Together, extra-budgetary funds represent around 15 percent o f NFPS
expenditures. While excluded from the annual budget law, their operation i s captured b y
the fiscal reports (see Part D). A marginal portion o f donor funds may s t i l l escape the
budgetary system. Aggregated information on municipal budgets i s not systematically
compiled.
2.30 Content. L e y AFI requires that the Budget Project approved b y the Council o f
Ministers before submittal to the Assembly be composed o f an introduction (mensaje
presupuestario) containing the macroeconomic and financial analysis upon which the
budget i s based; the Budget Project L a w containing the general and special budgets; the
Salaries Project Law; a summarized consolidation o f the NFPS budget; norms for budget
execution; and other annexes and summaries.
2.31 The introduction to the Budget Project contains summarized information on the
macroeconomic environment (including growth and inflation projections for the year),
the fiscal policy objectives (including targets for five aggregate variables over a threeyear period), the overall budget policy, and aggregate data from the general and special
budgets.
Central government includes the legislature, the judiciary, the national judicial council, 12 ministries, 3
entities of public prosecution (Ministerio Pdblico), the Court of Accounts, and the electoral and c i v i l
service tribunals.
36
58
2.32 B o x 2.3 lists the five expenditure classifications used in the 2003 Budget Law.
The summaries provide aggregate data by management areas (Areas de gestibn), major
economic groups (rubros de agrupa~ibn)~’,and sources of funds. The same information
i s provided for each executing entity’s budget, which additionally disaggregates
expenditures in accordance with “purposes” at two levels (“budgetary units” and “lines of
work”), and provides summarized information on: (unquantified) policies, priorities, and
objectives; a l i s t of public investment projects; and remunerations classified b y salary
types and ranges.
2.33 The Budget Law and introduction to the Budget Project for recent years are
posted on MH’s webpage (http://www.mh.gob.sv/mh~2003/presupuesto.htm). In
addition, the MH prepares (ex-post) a Citizen’s Guide to the Budget, posted on the same
page, that contains a summary o f the budget introduction and major plans b y sector.
Budget Outcomes as Indicators of Budget Reliability
Box 2.3: Expenditure Budget Classifications
Administrative classification
21 central government entities
63 decentralized entities (including 34 hospitals and health sector institutions)
4 public enterprises
Functional classification (management areas - areas de gesti6n)
1.
Administrative conduct
Justice administration and citizen security
2.
3.
Social development
4.
Support to economic development
5.
Public debt
General obligations o f the State
6.
7.
Public entrepreneurial production
Economic classification
The detailed budget line items (cuentas and objetos especificos), which are not part o f the budget law, are
classified under these groups (rubros de agrupaci6n):
5 1.
Remunerations
54.
Goods and services
55.
Financial and other expenses
56.
Current transfers
61.
Investment in fixed assets
62.
Capital transfers
63.
Financial investments
7 1.
Debt service
81.
Transfers o f special contributions
Outstanding allocations (asignaciones por aplicar)
99.
Sources o f funds
1.
General Fund
3.
External loans
5.
Donations
Programmatic classification (prop6sitos)
Budgetary unit (unidad presupuestaria)
Line o f work (linea de trabajo)
37 The MH’s Manual for Classification o f Public Sector Financial Transactions further breaks down the
economic groups into “accounts” and “specific objects”, and also provides for a geographical classification.
59
2.34 A comparison o f budgeted and actual revenue can provide an overall indication o f
the quality o f revenue forecasting, a critical factor since budgeted expenditure allocations
are based upon it. Since 1999, tax revenue outturn has been generally close to (though
always below) the initial budget, reaching a 99 percent rate o f execution in 2003 (Table
3). The l o w level o f execution in 2001 can be explained b y the effect o f earthquakes,
decrease in coffee prices, and other events that slowed down taxable economic activity. I t
i s notable that in 2002, despite increased performance o f the revenue administration
agencies, the level o f execution reached only 95 percent, a reflection o f over-optimistic
growth forecasts.
(% of Budgeted)
2002
2003
1999
2000
2001
Modified Budget as percent of Initial Tax
100
100
100
100
102
Non Tax
104
157
153
161
157
Total
100
104
104
104
107
Source: WB database (based on budget laws and MH execution documents)
Source: WB database (based on budget laws and MH execution documents).
2.35 The ratio o f expenditure execution can shed light on the degree o f realism in the
budget document. The close execution shown in 1999 and 2000 went off-track in 2001
due to the extraordinary increase in capital spending for reconstruction efforts. Part o f the
over-execution in current expenditures during 2002 and 2003 shows unplanned spending
60
in some entities, an effect partially off-set b y sharp cuts in capital spending during
2003(Table 2.4). In all cases, actual spending was within the modified budget ceilings.
2.36 The credibility o f the budget can be roughly indicated b y the extent to which
budget entities receive the resources initially indicated: where the composition o f
expenditure varies regularly from the original budget, the latter w i l l not be a useful exante statement o f intent. After 1999, the inter-institutional variation o f execution against
the initial budget has deteriorated, but 2003 showed a significant improvement over the
preceding year, with a 12 percent average variation across 22 budget entities (see Table
5). The rates o f execution o f the capital budget remained markedly more variable than
those o f the current budget.
Table 2.5: Average Deviation of Expenditure Budget Execution
Central Government
I
1
Source: W B database (based on budget laws and MH execution documents)
Coverage: 22 entities from 2002-2003 and 25 entities from 1999-2001, including in each case a line covering “other obligations and
transfers” from the central government. Interest on debt i s excl~ded.’~
2.37 A measure o f budget execution volatility may be calculated using a simple
which
methodology developed in Dorotinsky, Knack, Manning and Kugler (200 l),
defines volatility as the median o f year-to-year changes in percentage share o f the budget,
in each administrative and functional classification, over the preceding four years. The
0.13 median value o f variability in expenditure execution for the period 2000-2003 for El
Salvador (see Table 2.6) indicates that on average, entities executed 13 percent more or
less in total expenditures than they did in the previous year. While volatility in execution
has persisted in recent years, i t s level has been stable and not particularly high.
Table 2.6: Budget Execution Volatility Over Time - CG
~
~
Administrative
Functional
1996-1999
0.40
0.07
1997-2000
0.14
0.07
1998-2001 1999-2002 2000-2003
0.15
0.14
0.13
0.09
0.23
0.1 1
Source: W B database (based on budget laws and MH execution documents).
Coverage: Administrative classification, 21 entities. Functional classification, six areas. Inboth cases, interest on debt i s excluded. 39
The table reflects, for any given year, the average absolute percentage change in allocations at the
administrative level. For instance, while the total execution for 2003 was 3% higher than the initial budget ,
the average absolute deviation of the 22 entities from the initial budget was 12%. The entities with annual
capital budget allocations o f less than U S $ 100,000 were excluded from the calculation o f capital
expenditure deviation.
38
61
Analysis
2.38 The sound methodologies used b y the inter-institutional committee for analysis
and monitoring o f revenues and the coordinated application o f these methodologies have
increased the credibility o f the budget document. Still, tax revenue budgets have been
under-executed as a result o f over-estimation o f GDP growth (FUSADES, 2002).
2.39 As in many Latin American countries, the expenditure budget formulation process
i s dominated b y concern for aggregate fiscal discipline, with the MH exercising a strong
role, While the process follows a comprehensive legal and procedural framework in an
orderly and timely manner, over-execution in current spending and inter-institutional
variations during 2002 and 2003 show that there i s s t i l l room to increase the credibility o f
the initial expenditure budget.
2.40 Funds for current spending are allocated on a largely incremental basis, i.e. the
previous budget i s taken as the base for discussion, with some room for expenditure
savings plans. The PIP allows more room for prioritization, and i t i s well integrated into
the budget cycle. However, there i s no systematic effort to calculate or take into account
the current spending portion o f investment projects or their implications in future current
expenditures. Moreover, there i s generally limited capacity in executing entities to
produce quality medium-term investment programs and pre-investment studies, and i t i s
uncertain how useful they are.
2.41 Most government spending i s subject to annual legislative approval and extrabudgetary funds are included in the consolidated government financial statements (but
not disclosed as attachments to the annual budget documentation). There i s no
consolidation o f the general government budget, nor any aggregated information on
municipal budgets.
2.42 The budget law documentation provides a large set o f data on the planned uses of
budgetary funds, but i s s t i l l short o f international standards. Good practices from the
I M F ’ s Fiscal Transparency Code are not yet implemented, specifically the disclosure o f
0
0
0
clearer identification o f the overall balance supplemented by other fiscal
indicators;
comparable information for the outturns o f the two preceding fiscal years and
aggregate forecasts for the two following years;
statements describing the nature and fiscal significance o f contingent liabilities,
tax expenditures and quasi-fiscal activities;
Budget execution volatility over time i s calculated as the median o f the year-to-year changes in each of
the 21 entities (and 6 management areas) over the preceding 4 years, where budget execution changes are
defined as the absolute values o f the difference in shares in total expenditure (for each entity and for each
management area) from year n to year n+l, calculated as a proportion of the year n figure.
39
62
0
0
improved and more comprehensive information on the quantitative
macroeconomic framework and fiscal policy, sustainability and rule;
identification o f major fiscal risks, including variations in economic assumptions.
2.43 There i s a robust classification system in terms o f administrative and economic
items, but there i s s t i l l room to improve the functional (broad “management areas”) and
programmatic (“budgetary units” and “lines o f work”) classifications, which are in large
part aggregations and dissections, respectively, o f the administrative classification. There
i s no specific identification o f poverty related expenditures in the budget. Further levels
o f functional detail (e.g., the second- and third- level groups and classes contemplated in
the United Nation’s Classification o f Functions o f Government) could provide a better
framework for program (and, in due course, performance) budgeting and monitoring,
analysis o f inter-functional interventions o f administrative units, and historical and policy
analyses.
2.44 The Government took a significant leap towards enhanced public sector
accountability with the introduction o f a management-by-results system (SGPR)40.
However, i t s roll-out was not supported by a clear conceptual and procedural framework
linked to the budget formulation process. A set o f public investment indicators has been
developed, but these are either not reflected in budget documentation, too broad, or not
particularly relevant for efficiency and effectiveness measurement. Interesting initial
efforts for public service costing (e.g., at the Ministry o f Health) have not yet had any
impact on budget formulation.
2.45 Although the MH prepares aggregate fiscal targets and projections to orient fiscal
policy, there i s no formal medium-term budget framework that informs the annual budget
formulation and approval process.
V.
Budget Execution and Controls
The process of Budget Execution
2.46 The Constitution establishes that public funds cannot be committed or paid in
absence o f a budgetary credit. L e y AFI and i t s Regulations delineate three overall stages
of budget execution: (1) the credit (authorized allocation per the voted budget and
subsequent modifications), (2) the commitment, and (3) the accrual, and establish the
requirement for a DGP-approved execution program (PEP). MH’s Manual o f Budget
Execution Processes further details the execution procedures, summarized in B o x 4.
2.47 Integrated financial management system (SAFI). The S A F I system, born in the
mid-nineties as part o f the public sector modernization program (see B o x 2 above), has a
clear legal base in L e y AFI. I t integrates the budget, treasury, public investment and
credit, and accounting systems through a common set o f rules and procedures applicable
~
~~
40
With the earthquakes o f 2001, the SGPR was focused on the reconstructionefforts.
63
to the NFPS (excluding municipalities). As such, S A F I i s at the center o f the budget
execution process, under the premise o f normative centralization (by MH) and
operational decentralization (by executing entities, via legally mandated institutional
financial units UFIs). But, as i s clear in B o x 5, the MH does maintain a critical
operational role in the budget execution cycle, a reflection o f concern for aggregate
spending controls.
2.48 The system’s software for budget formulation and execution has been
deconcentrated to the 21 central government entities, 34 hospitals and two public
enterprises. In most (not all) o f these entities, payrolls are prepared via the Integrated
Human Resources System (SJRH, which combines nominal and payroll information), and
downloaded to SAFI. Decentralized institutions, while not yet using SAFI for internal
budget execution, do report to i t using formats that allow incorporation by the MH into
the government accounting records.
.
Box 2.4. Expenditure Budget Execution Process
Budget execution program (PEP). This annual document, prepared by the institutional financial units
(UFIs) at each budget entity and approved by the Budget Directorate (DGP) o f the Ministry o f Finance
(MH), distributes the approved budget over the twelve months o f the fiscal year, thereby setting the
monthly ceilings for commitments and the parameters for monthly execution reports. Public
enterprises are exempt from the PEP.
Budget commitment. Commitments, provided there i s availability of resources in the PEP, are
triggered b y the issuance o f purchase orders (goods or services), monthly payrolls (salaries), fund
requirements (transfers to decentralized institutions), or bills (utilities). Expenses committed but not
accrued by the end o f the fiscal year are automatically transferred (credited) to the following year’s
budget. Commitments can be reversed if they are legally rescinded.
Expense accrual (devengado). Provided there i s an open commitment, accruals are recorded against
the legal documentation (invoices, payrolls) that sets the financial obligation to pay for goods and
services received. Accruals are accumulated in the Accounts Payable Register.
Funds requirement. The U F I s use this instrument to request transfers from MH’s Treasury
Directorate (DGT) against accruals recorded in the Accounts Payable Register, in accordance with the
Treasury’s payment schedules.
Transfer receipt. The purpose o f this document i s to record the deposit o f funds transferred from the
DGT’S Account to the Subsidiary Institutional Account, which i s managed by the UFI.
Expense payment. Accrued expenses are paid from the Subsidiary Institutional Account via check or
deposit issued b y the UFI.
Record keeping. All steps in the budget execution cycle are made through the integrated financial
management system (SAFI). Supporting documentation o f all expenses and payments i s maintained b y
each UFI.
Closing of accounts. The monthly and annual closings o f accounts represent the UFI Accountant’s
validation o f accounting records for the respective financial reports.
Bank reconciliations. These are prepared within eight working days after the end o f each month.
Source:
Manual of Budget Execution Processes (2003)
2.49 Treasury operations. L e y AFI explicitly mandates the centralization o f public
revenues in a single fund, administered b y MH’s Treasury Directorate (DGT), and the
decentralization o f payments to each budget executing entity. In line with this, the
64
Treasury Single Account i s composed o f DGT’s principal accounts in the Central Bank
(BCR)4’ and a number o f subsidiary accounts managed b y executing entities. The latter
are held in commercial banks (if authorized by the DGT and the BCR) that in theory
work as zero-balance accounts, with monies being transferred to them only to cover
approved accrued expenses.42 While the DGT has the power to recall idle funds in the
subsidiary accounts, the same L e y AFI allows decentralized institutions to carryover endof-year balances that are deducted from the next year’s transfers).
2.50 A treasury accounting unit within the DGT i s in charge of bank reconciliations o f
the principal accounts i t manages. These are performed and documented on a timely basis
but do require a significant level of manual efforts. The executing entities are responsible
for reconciliations o f subsidiary accounts.
2.51 Overall control o f the cash position i s based on payment schedules and annual,
monthly and daily cash flow programs that consider the PEP. The DGT can use two
major legal instruments in case o f temporary cash shortfalls: access o f up to 90 percent o f
the funds in custody balance (composed o f outstanding deposits, mostly judicial, from
third parties); and issuance o f short-term debt (LETES) under annual ceilings approved
b y the legislature in the annual budget law.43 In general, DGT’s cash management
strategies have resulted in high predictability o f flow o f funds to executing entities.
2.52 Accumulation of arrears. The accounting system records expenditures on an
accrual basis, but does not accumulate the share o f total accounts payable that i s in
arrears. Arrears are not perceived as a problem in El Salvador because o f the instruments
available to the DGT to cover cash shortages. As shown in Table 7, the ratio of shortterm payables at the end o f the year to total annual expenditures has decreased since
2001.
Table 2.7: Short-term payables
ISource: WB database (based on MH execution documents).
I 30 I
43 I
52 I
18 I
13 J
2.53 Donor funds. L e y AFI allows the existence of bank accounts separate f r o m the
single treasury account when required b y international agreements, but the same law
assigns to the DGT the responsibility for managing those accounts. While executing
entities maintain separate subsidiary accounts for loan and grant funds, the transfers from
The regulations grant exceptions in the cases o f accounts linked to international agreements, revenues
from state enterprises, and special activity funds.
42 I n practice, though, there i s the possibility o f accumulation o f idle funds when executing entities do not
deliver the checks or these are not cashed. I n light o f this, the DGT i s developing a system linked to the
banks for control of subsidiary account balances.
43 The 2003 Budget Law placed the limit for issuance o f LETES at 40 percent o f current revenues.
41
65
the DGT follow the same mechanism used for local funds; i.e., transfers against recorded
accrued expenses. These procedures have allowed donor funding to be effectively
In terms of financial administration, the
captured b y the budget management
arrangements differ from entities where the UFI plays a major role (e.g, Education) to
those where project administration units are set up (e.g., Health). Overall, donor funding
i s characterized b y traditional individually negotiated investment projects, as opposed to
sectoral aid.
2.54 Monitoring of budget execution. In accordance with Ley AFI, there are three
levels o f responsibility for monitoring and evaluation o f execution: the UFI at operational
level, the head of each budget entity at institutional level, and the DGP at the overall
level. Moreover, i t assigns the Directorate o f Public Investment and Credit (DGICP) the
responsibility to inform the DGP o f the public investment program (PIP) execution.
2.55 Executing entities and the DGICP are required to report monthly to the DGP,
which should consolidate that information and present periodic physical and financial
execution reports to the MH. This i s done b y the DGP on monthly budget execution and
PIP progress reports, and an annual report on central government budget outturns (of
these, only very aggregated monthly financial execution data i s published). In practice,
the Presidential Commission for Monitoring o f Public Investment (CPSIP) and the
Technical Secretariat o f the Presidency, which administers the management-by-results
system (SGPR), also play a role in monitoring the PIP.
2.56 MH’s Financial Management Directorate (DINAFI) has developed a plan to
create a data warehouse for managerial information (SIG), that would permit access to
several databases (SAFI, treasury-SITEP, investment-SIIP, tax-SIIT, customsSIDUNEA, and debt-SIGADE) for the production o f customized data in friendly formats.
In i t s initial phase, the SIG w i l l be limited to budget execution data and be accessible
through MH’s Intranet.
D e b t Records
2.57
Ley AFI stipulates that the MH i s responsible for the formulation o f public debt
policy and the authorization o f all NFPS debt and guarantees, which procedures are
documented in the regulations. Debt management responsibilities, including maintenance
o f public debt records and debt service administration, are assigned to MH’s DGICP.45
The internal and external debt databases are maintained b y the DGICP on UNCTAD’s
Debt Management and Financial Analysis System (DMFASBIGADE). In practice, the
B C R also registers public external debt, including that o f the financial public sector.
2.58 Debt databases are the basis for debt service program data incorporated into the
annual budget law, execution o f debt service payments through the treasury single
account, and incorporation o f balances into government accounting records. In absence o f
automatic links between SIGADE and the S A F I software, however, debt-related
44
45
Small donations may s t i l l escape the system, but the effect i s perceived as marginal.
This Chapter does not cover matters of debt management or sustainability.
66
transactions are manually uploaded to SAFI. The DGICP prepares internal monthly
reports on domestic and external debt service budgetary execution, and the B C R
publishes monthly reports on the level and composition o f public debt.
Internal Control Framework
2.59 The Organic Law o f the Court o f Accounts establishes the “national system o f
control and audit in public management” and provides the Court with the power to issue
Technical Internal Control Norms applicable to public sector entities. The current set o f
norms (2000) i s divided into general, human resources, goods and services, financial, IT
systems, and public investment norms. There are no quantified data to estimate the extent
o f their application, and in any case the various internal control systems in use b y
executing entities do not seem to be a product o f specific plans to put the norms into
practice. The norms are being restructured b y the Court to conform to the C O S 0
framework and introduce the concept o f risk assessments and risk-based controls.
2.60 Internal audit. As part o f the national system o f control and audit, the internal
audit function has i t s legal basis in the Organic L a w o f the Court o f Accounts o f the
Republic, and this entity has the power to set policy and technical norms. Moreover, the
Court receives internal audit plans and reports, and has the responsibility to evaluate
internal auditors. In absence o f internal audit standards, the Court’s (external auditrelated) manuals are the technical point of reference for internal audit work.
2.61 Every public entity with an operational budget exceeding US$570,000 i s obliged
to have an internal audit unit, which i s named by, and reports to, the head o f the entity.
Internal auditors are prevented from undertaking any administrative or prior control task.
Most internal audit work i s related to certain financial reviews (not financial statement
audits) and unplanned special reviews. The Ministry o f Education also has an audit
committee - a rare occurrence among public entities.
Analysis
2.62 Expenditure execution systems. The modern normative framework for
expenditure execution, the standardization o f procedures (with the exception o f payroll
controls), and the introduction o f the S A F I software, have all contributed to the
production of timely, reliable, and fairly complete information on government spending
supported b y audit trails. At the same time, the formal norms are progressively generating
a healthy accountability and fiscal prudence culture in officials responsible for public
expenditure. At the end o f the day, S A F I has made a significant contribution to the MH’s
capacity to control aggregate spending. Behind these achievements i s the dedicated work
o f qualified professionals, particularly in M H ’ s central directorates (Financial
Administration, Budget, Treasury, Accounting, and Public Investment and Credit).
2.63 While the basics are covered, there i s room t o enhance expenditure management
performance. The streamlining o f flows between executing entities and the MH has not
been effectively replicated within the entities. There i s s t i l l a certain degree o f
fragmentation, complication and duplication in internal administrative systems and
67
procedures that ultimately affect efficiency in the use o f public funds-the multiple
operational manuals, action plans and software applications within institutions are
probably a reflection o f a more structural issue.46 There i s room to upgrade the
institutional SAFI software from i t s current budget accounting form towards the
incorporation of certain administrative functions (most notably, procurement and
management o f fixed assets and inventories).
2.64 The payroll system (SIRH) i s not used consistently among different entities and
there are no standards for information to be captured; hence, there i s no comprehensive
public sector payroll database. In any case, SIRH’s platform i s already obsolete and lacks
security safeguards embedded in more modern applications. Finally, there are no
provisions for the execution o f routine payroll audits.
2.65 The lack o f I T policies has encouraged the proliferation o f different - and
sometimes incompatible applications and databases, not only across different executing
entities, but even within the MH.47On the other hand, the sustainability o f the current
database management application for SAFI i s uncertain and the provision o f equipment i s
uneven and varies greatly f r o m one entity to the next.48
2.66 Treasury. The DGT exercises good management and control o f the
Government’s cash position. This achievement flows from the operation o f single
treasury account system that captures, with documented exceptions, all government
revenues; a financial programming function that has resulted in reliable cash flows; and
from the use o f effective legal instruments to deal with temporary cash shortages. The legally instituted- deconcentration o f payments, however, may be generating unquantified
transaction costs and idle balances.
2.67 While the DGT transfers funds to executing entities only in accordance with
recorded accruals, once funds reach the entities, these may exercise discretion in delivery
o f checks; such a system can produce arrears and idle funds at the executing entity level.
The situation i s aggravated in decentralized institutions that receive global transfers not
linked to accruals. Furthermore, the disaggregation o f government accounts makes it
more difficult to enter cost-effective arrangements to substitute the current payment-bycheck system to electronic deposits into accounts.
2.68 Donor funds. Through the provisions of Ley AFI and the implementation o f
SAFI, external financing has been effectively incorporated into, and makes good use of,
the budget management system. Still, there has been limited use o f potential economies
For example, within the Ministry o f Education there are various systems, on top o f SAFI and SIRH, that
bear an effect on financial management: S M A E L (transfers to schools); SAP+ (investment projects);
SIGAP (management information); “patrimonial accounting” (institutional accounting records); “fixed
assets inventories”; and “budget formulation”. A similar situation can be found in the Ministry o f Health.
47 In fact, different directorates within the MH have their own I T units. Just within the DGT, on top of
SAFI there are systems for treasury (SITEP), programming, collection targets, tax information (SIIT), and
the (new) control o f bank accounts.
48 For example, i n the largest public hospital, one computer was shared among various UFI officers.
46
68
o f scale in enhanced donor coordination and sectoral assistance, for which donors are
partly responsible.
2.69 Execution monitoring systems. The SAFI software allows timely tracking o f
budget execution figures in each entity and at the MH, but the evaluation reports are not
made public. The SGPR captures physical data on execution o f the PIP, but the context
and quality o f indicators are subject to improvement. As regards the SIIP, there seems to
be overlapping with both SAFI and SGPR. While s t i l l in the works and accessible
initially only to the MH, the SIG can become a powerful tool to foster use o f information
for decision making.
2.70 Debt records. MH’s NFPS debt databases are rather complete and well used to
introduce data into the budget formulation, execution and accounting systems, even
though the information transfers are currently “manual”. Although debt management
capacity was not covered by this PER, anecdotal evidence points to the need to introduce
continuing programs for skills development in this highly specialized area, and to turn the
DGICP into an active debt manager that undertakes systematic debt sustainability and
risk analyses to minimize borrowing risks and
2.71 Internal controls and internal audit. There are no quantified aggregate data to
estimate the extent o f application o f internal control norms, but the fact that roughly half
o f the individual financial audit reports issued b y the Court o f Accounts contain opinions
other than “clean”, may point to the existence o f serious problems in the effectiveness o f
the internal control framework (which i s not risk-based). The new draft internal control
norms based on the C O S 0 framework are sound and modern, but their introduction in the
absence o f an evaluation o f the practicality and application o f current norms, and without
a credible plan of implementation, would make little difference in the quality o f
government controls. A similar plan would be necessary for the release o f the draft
government audit norms that would introduce internal audit standards.
2.72 The legal mandate o f the internal audit function provides a sound foundation to
build i t s legitimacy and empowerment. However, internal audit units have in general
been constituted on an ad hoc basis without technical studies or objective criteria to
justify their size or budget.” They usually lack sufficient numbers o f professional and
experienced staff, and do not have directly relevant training programs. There i s general
absence o f risk-based approaches, and i t seems that coordination with the Court o f
Accounts to prevent duplication o f efforts i s weak. Internal auditors do not produce
statements on their overall assessment o f the entities’ internal control system, and the
In the medium term, the DGICP could be organized into front, middle and back office organizational
functions. The front office i s responsible for executing transactions in financial markets and funding
operations such as the management o f auctions and negotiations for other types o f borrowing; the middle
office i s responsible for analysis and advice on the debt management strategy as well as for the operational
role o f implementing risk controls, and the back office handles the settlement o f transactions, the financial
records and the debt database.
50 The proportional size o f staff can vary significantly from one entity to another. For example, the Ministry
of Education, with more than 42,000 employees and a budget o f $485 million, has 16 auditors. The
Supreme Court, with 8,500 employees and $1 12 million in budget, has 29 auditors.
49
69
effectiveness o f their work seems limited.5' Finally, there i s no effective quality control
system: while the Court i s responsible for internal audit evaluations, these evaluations are
not formally and systematically reported back to the internal auditors.
51 Adequate performance indicators are lacking, but i t should be noted that in 2002 only 18 percent of
presumed administrative liability (responsabilidad administrativa) resolutions, based on internal audit
reports, have been ratified by the Court o f Accounts.
70
VI.
Financial Reporting and External Oversight
Financial Statements of the Government
2.73 The Ministry o f Finance (MH) i s required b y the Constitution to submit to the
Legislative Assembly, within three months after the end o f the fiscal year (which
coincides with the calendar year), the “general account o f the latest budget, and the
statement on the situation o f public treasury and fiscal patrimony.” L e y AFI further
institutes the figure o f government accounting, applicable to the NFPS and the central
government transfers to municipalities, as a unique model for budgetary and accounting
transactions in accordance with “generally accepted accounting principles applicable to
public sector.” The only requirement set by Ley AFI and its regulations to publish
financial information i s with regards to a summary o f this annual document, within ten
days after i t s submittal to the Assembly.
2.74 L e y AFI assigns to MH’s Government Accounting Directorate (DGCG) the
responsibility to set accounting norms and consolidate financial information for the
public sector. In line with this, each executing entity, while maintaining responsibility
over i t s own accounting records, must also submit i t s monthly financial statements to the
D G C G within ten days after the end o f the month. Anecdotal evidence points to the fact
that this requirement i s not completely and regularly complied with, particularly in
certain entities lacking the S A F I software.
2.75 Monthly reporting. A timely (though not always complete for the reasons noted
above) monthly report on budget execution by the NFPS i s distributed internally in the
MH, and externally to the Office o f the President, the Ministry o f Economy, and the
Legislative Assembly. A summary containing aggregate data i s made public through
MH’s website. Similar quarterly reports are also prepared.
2.76 Annual reporting. In order to fulfill i t s constitutional mandate, the MH prepares
an annual State Financial Management Report within the timeframe stipulated in
legislation. After submittal to the Assembly and the Court o f Accounts, the report i s made
available on MH’s web-site (http://www.mh.,oob.sv/mh 2003/informefinanciero.htm).
The report consolidates budget execution, financial statements, and state o f public debt o f
the central government, decentralized institutions and state enterprises (including six
entities from the financial public sector), and special funds and extraordinary resources.
Some aggregate data i s presented on a comparative basis over a five-year period. N o
information on contingent liabilities i s reported.
2.77 The financial statements are prepared on an accrual basis. The reasonableness o f
i t s application, however, has never been certified b y the Court o f Accounts, though
“clean” audit opinions have been issued on the consolidation process.
71
2.78 Municipalities. The government accounting software has been installed in 152 of
the 262 municipalities. O f those, 92 municipalities reported their budget execution (3 1
more reported solely the use o f FODES) to the D G C G in 2003. Due to the incomplete
coverage, the D G C G has not included the municipal data in i t s financial reports.
2.79 Central Bank (BCR). The B C R has subscribed to the IMF’s Special Data
Dissemination Standard (SDDS), and as such it makes monthly and annual public
aggregate fiscal sector data available on a timely basis. The annual figures contain
municipal data on a sample basis.
2.80 Public views. In terms of public perception, the Index of Budget Transparency
(Probidad, 2003) noted the lack o f performance and geographical indicators to
complement financial data, and that these are too aggregated for in-depth reviews.
The External Audit Function
2.81 The Constitution grants the Court o f Accounts o f the Republic the power to
exercise fiscal oversight (fiscalizacibn), in administrative and jurisdictional matters, of
public finances in general, budget execution, and economic performance o f public
entities. Its Organic L a w (1995) establishes i t s functional, administrative and budgetary
independence from the Executive.
2.82 The Legislative Assembly elects the Court’s President and two Magistrates for a
three-year period, may re-elect them and remove them, approves the Court’s annual
budget and may audit i t (but has never done so). The Court’s President must present an
annual report o f activities (informe de labores) and a report on the annual government
accounts to the Assembly, but the Court i s not in practice a branch o f the Assembly.
2.83 In line with i t s constitutional mandates, the Court i s organized into audit and
jurisdictional functions. The audit divisions are organized b y sectors: economic
development and administration; justice and economy; social development and
environment; municipalities; and external cooperation. B o x 5 in the next page contains
selected statistical data on the audit function. The jurisdictional tasks are in charge o f the
Chamber o f First Instance, integrated b y chamber judges, and Chamber o f Second
Instance, integrated b y the President and t w o Magistrates. The Court bears authority to
determine and sanction administrative and patrimonial responsibilities via account trials.
2.84 Annual reporting. The Court’s Organic L a w makes reference to operational and
financial audits, and establishes that the Court must issue an audit report on the
government financial statements within four months after the Executive presents them to
the Assembly. The audit report for 2002, however, contains an opinion solely on the
reasonableness o f the DGCG’s consolidation process, rather than on the financial
statements themselves.
2.85 The Court can legally delegate audit functions to private sector external auditors
whom it would supervise, but this option has not been operationalized. In practice, each
72
decentralized public institution and the majority o f external funds are currently subject to
separate audits from audit firms and the Court. I t should be noted, however, that U S A I D
has authorized the Court’s External Cooperation Department to undertake audits, under
USAID supervision, o f i t s grants to the Government.
Box 2.5: C o u r t of Accounts - Selected Indicators
During 2002 and 2003, the following audit work was performed:
The data show that, i n 2003 36% (54% i n 2002) o f the activities corresponded to “special exams”, o f which
46% (48%) were not programmed. The 31% (24%) o f total audit activities were operational, 30% (21%)
were financial and the remaining 3% (1 %) responded to other (incipient) types o f audits. I t should be noted
that the nature o f “operational audits” (mostly related to municipalities) i s more o f a special exam, given
the lack o f parameters to measure efficiency and effectiveness.
O f the 114 financial audits concluded i n 2002, 44% contained qualified audit opinions, 3% were adverse
and there was one disclaimer. The presumed irregularities identified in audits and special exams amounted
to US$197 million. These cases are subject to evaluation o f administrative liability (responsabilidad
administrativa), which could lead to fines, patrimonial liability, and criminal prosecution (if transferred to
the public prosecutor). I n 2002, o f 2,753 reports in process o f resolution o f liability, 61% were processed
and the remaining 39% were pending. O f resolutions issued, 62% were absolutions, 13% were subject to
follow-up, and liability was found in 25% o f the cases, for sentences amounting to US$3 million.
The 106 financial audits performed in 2003 correspond to 89 entities. N o other statistics were yet available
for 2003.
Source: Based on documents from, and interviews held in, the Court o f Accounts o f the Republic.
2.86 Public view. The Index o f Budget Transparency (Probidad, 2003) points to two
major challenges to the Court’s credibility: i t s perceived politization and lack o f
transparency. Apparently, over the last t w o decades the Court’s presidency has been
granted to persons associated with one specific party, and public access to audit reports i s
73
generally restricted. There has been no known official response from the Court to the
cited Probidad document.
Legislative Oversight
2.87 While the Constitution mandates the MH to report on the annual government
financial statements and the Court o f Accounts to report on i t s audit, both to the
Legislative Assembly, the Assembly’s process o f scrutiny i s neither regulated nor
operationalized. There are no formal examinations o f the documents it receives, nor
hearings held about them. In fact, anecdotal evidence points to somewhat restricted
access to audit reporting (other than the annual report).
2.88 I t should be noted, however, that the Assembly’s Finance and Budget
Commission has established a Unit o f Analysis and Monitoring o f the Budget (UASP),
which staffed with only two professionals produces regular studies as requested b y the
Commission. The UASP, created as part o f an U S A I D grant, i s not sustained b y legal
basis.
Analysis
2.89 Financial reporting. The accounting function has been effectively
institutionalized and shows some sophisticated advances, most notably the accrual base
o f recording and the timely consolidation o f monthly and annual financial statements for
the public sector. While this information excludes municipal finances, commendable
efforts are underway to provide the municipalities with accounting systems and to
gradually approach full aggregation o f local government data. The existent strong
accounting foundations provide a good basis for enhancements in financial reporting
standards and analysis; specific enhancements that could be made to the State Financial
Management Report include:
.
.
Budget execution statements could be presented in the same format as the budget
document. For example, the aggregation o f entities could be c o n ~ i s t e n t ; ~the
~
detailed statements could measure execution not only against the modified
budget, but also against the initial voted budget; individual execution o f entities
could be presented as an annex to the same level o f detail in the annual budget
law (e.g., execution b y budget units, lines o f work, public investment programs,
and classification o f personnel expenditures).
A distinction could be made between notes to the financial statements that include
narrative descriptions or more detailed schedules o f figures from the financial
The annual budget law i s organized in three parts covering the central government, NFPS decentralized
institutions, and state enterprises. The budget execution information i s shown in the annual financial
management report i n two parts, covering the central government, and an aggregation of decentralized
institutions and state enterprises that includes some entities (e.g., from the financial public sector) not
covered in the budget law. While these entities should be reported on, a better classification would allow
comparisons o f actual execution against initial budget allocations.
52
74
.
statements, and additional information to assist users in assessing the
Government’s performance, i t s stewardship o f assets, and the allocation of
resources. In both cases, there i s considerable room for improvement.
The arrears portion, if any, o f the liabilities could be clearly identified. An effort
could be made to disclose contingent liabilities.
Financial statements congruent with those published b y the BCR on the fiscal
sector could be incorporated as an annex, complemented with a reconciliation o f
figures between the two sets o f data.
The aggregated data on special funds and extraordinary resources could be made
more transparent b y adding an annex with detailed information by fund.
2.90 In terms of transparency, the MH has taken a good first step with the publication
o f the full contents o f the State Financial Management Report, but there i s s t i l l room for
improvement. Specifically, the MH could disclose the detailed monthly reports on budget
execution (not just the aggregate data) and execution o f the public investment program.
Following the precedent set with publication o f the citizen guide to the budget, a similar
document could be prepared with regards to budget execution and government financial
statements.
2.91 C o u r t of Accounts. The Court has taken two important steps toward i t s
modernization: the preparation o f a five-year strategic institutional plan and new sound
government audit norms (currently in draft form). Moreover, i t has recently introduced a
citizen claims facility, i t s auditors are subject to a code o f ethics (unique in the public
sector), and i t has been certified b y U S A I D to carry out audits o f grants. Current
legislation provides the Court with adequate independence and room to exercise its
external audit function, but there are two potential sources of conflict: the national
internal control and internal audit system i s regulated by the Court, which at the same
time i s responsible for the audit o f internal controls; and the Court administers justice on
the basis o f audits i t itself performs.
2.92 T w o achievements o f the Court o f Accounts are that i t s 475 auditors have
university degrees (although only 22 percent from the audit field), and that it has a
continuing training plan (although only 12 percent o f the training hours delivered in 2003
were directly related to audit techniques). The quality o f current performance, however,
i s irregular: the fact that in 2002 only 25 percent o f resolutions resulted in declaration of
liability (responsabilidad) may reflect insufficient quality in the collection and analysis o f
audit evidence; moreover, for a sample o f six entities, it took the Court an average of 14
months to issue the audit reports.
2.93 While an effort i s underway to bring financial audits to date, the Court’s inability
to opine on the state financial statements as a whole i s related to the persistent backlog o f
individual entity financial audits. Important components, such as revenues, debt and
pension costs have never been audited. While this partly reflects a lack o f specific
75
technical and technological capacity, the situation can be linked to the priority given to
special exams and operational audits (which, in lack o f methodology and parameters to
measure efficiency and effectiveness, are far from international standards), and the
limited use o f i t s legal power to use work o f private auditors (e.g., in decentralized public
institutions).
2.94 Legislative oversight. As opposed to i t s clearly established role in the budget
approval process, the Legislative Assembly’s ability to scrutinize budget execution,
public finances, and audit reports i s very constrained. A significant step t o help reverse
that situation has been the creation o f a specialized unit for analysis and monitoring o f the
budget (UASP), which has made considerable efforts to undertake studies and produce
regular reports. However, having only two professional staff and lacking a legal basis, i t s
effectiveness i s limited and its sustainability uncertain.
VII.
Conclusions and Recommendations
2.95 The financial management reform process, initiated in the 1990s under the
umbrella of the public sector modernization program, has produced significant
improvements in the performance o f budget management institutions. The L e y AFI and
other regulations provide a generally modern, clear, complete, and functional framework
o f formal rules pertaining to each relevant area o f budget management. The
methodologies and processes o f budget formulation and execution are well documented
and normally followed. The Government i s able to track spending under budgetary
provisions, effective controls o f i t s cash position are in place, and complete debt records
are maintained. Both the annual budgets and financial reports provide considerable data
on government finances.
2.96 There i s an internal control framework, the internal audit function has a legal
basis, and the external auditors are granted with independence and room to exercise their
functions. In summary, the basic foundations o f a well-functioning public expenditure
management system have been built, the result o f competent work f r o m groups o f
committed public sector professionals. Still, important obstacles to operational efficiency
and transparency remain.
2.97 First o f all, the lack o f an independent financial audit opinion on budget
execution, let alone the state financial statements, prevents a basic external assurance on
reasonableness o f financial data and conformity with budgetary laws and regulations. The
problem i s compounded b y the internal audit general lack o f capacity to provide
assurance that internal controls are effective. And while the implementation o f a financial
management system has introduced good budgetary controls, there i s a significant portion
o f public resources managed out o f the system. Finally, the information available for
public scrutiny of use o f funds, both budgetary and extra-budgetary, i s subject to
enhancements in i t s clarity, completeness, analysis, and dissemination.
76
2.98 Given that some crucial financial controls are not yet in place, the capacity to
measure and increase efficiency and cost-effectiveness cannot be better. The fact that the
same systems that should be used to facilitate and monitor performance are inconsistently
and uncoordinatedly used from one entity to the other - even within a single entity - i s
not a good sign. Other possible source o f inefficient financial management i s the
proliferation o f government bank accounts.
Priorities for action
2.99 The analyses in the preceding parts o f this Chapter lead to the conclusion that,
building on the impressive achievements o f the last decade, the budget management
institutions can envision further enhancement o f their performance to increase efficiency
and effectiveness in the administration o f public funds, and to positively influence the
governance environment through improvements in transparency. This i s o f particular
importance in light o f country circumstances. As explained in the previous chapter, the
earthquake reconstruction investments and the transitional costs derived from the pension
reform have put strong pressure on public finances in recent years, while looking
forward, there i s a need to expand key investments in the social area that are also
important for the growth agenda. All o f this raises the need to increase revenues and
efficiency in public spending. At the same time, perception surveys suggest that
governance indicators have deteriorated and transparency i s low. Should that trend
continue, the Government’s capacity to enhance the country’s investment climate could
deteriorate.
2.100 T o contribute to the enhancement o f performance and transparency o f budget
management institutions, the CFAA report presents a set o f recommendations that
various government entities could incorporate into their modernization plans. The
following paragraphs, in turn, suggest the critical areas o f action.
2.101 External oversight. The current lack o f external audit reports on the content o f
government financial statements, and of legislative examination o f financial and audit
information, i s a serious obstacle to transparency in public finances.
2.102 While capacity to perform operational audits i s gradually being built, the Court o f
Accounts should concentrate i t s efforts on getting the basics right; Le., producing a
comprehensive financial audit on the reliability o f government financial statements,
regularity o f transactions, and functioning o f internal control systems. In the short term,
this would require a policy shift, some technical assistance to help build risk-based
approaches (including making wider, informed use o f the work o f private auditors and
internal auditors), and training (to be followed in the medium term with a program o f
certification of government financial auditors). The Court could also take a policy stand
to actively promote the legislature’s (and others’) prompt access to audit findings.
2.103 In the medium term, the Court’s credibility could be increased b y a revision o f the
current form o f appointment o f the Court’s authorities; for instance, a transparent,
77
independent, and technically based process for selection o f short l i s t s put forward for the
Assembly’s vote could be introduced.
2.104 The Legislative Assembly should provide more appropriate resources (e.g.,
through available grants) and sustainability (issuance o f regulation) to i t s own unit for
analysis and monitoring o f the budget (UASP). In the short to medium term, the function
o f legislative scrutiny o f public finances and audits should be gradually institutionalized.
2.105 Internal controls. The low rate o f “clean” reports from the Court o f Accounts,
together w i t h the internal auditors’ inability to produce assessment statements on internal
controls, may be symptoms o f ineffectiveness o f the current internal control system.
2.106 The Court’s planned introduction o f the C O S 0 framework for internal controls,
and o f government audit standards for the internal audit function (both o f which should
be closely interrelated, so that internal auditors can focus their scope o f work on
assessments o f the internal control systems), should be preceded b y evaluations o f the
current framework and by a comprehensive plan o f training and gradual implementation
to develop understanding and ownership. At the same time, objective criteria for the
provision o f internal audit resources (under a risk-based approach and connected to sound
quality controls) should be developed. While indicative in the beginning, such criteria
could be subject to certain enforcement measures in the medium term.
2.107 Comprehensiveness and quality of financial data. Incomplete information on
municipal finances prevents the formation o f an overall view and assessment o f general
government finances. Incomplete information on extra-budgetary funds at the time o f
preparation and approval o f the annual budget prevents comprehensive analyses to
support the budgetary fiscal and allocation decisions. Some financial documents could be
publicly disclosed, and the information content o f those currently available to the public
could be further improved.
2.108 COMURES has shown i t s interest in increasing municipal transparency; a first
natural policy step would be to make information on municipal budgets and their
execution public. In the short term, I S D E M could help with the collection o f information;
in the short to medium term, the MH and COMURES should continue to expand the
municipal coverage o f the government accounting system. In the medium term,
regulation on provision o f information could be introduced.
2.109 The Executive could take short term decisions to disclose better extra-budgetary
funds (extraordinary budgets, special activity funds and budgets o f autonomous entities),
as the subject o f annexes to the annual budget documentation and o f disaggregated
schedules (e.g., b y institution) to the consolidated government financial statements. In
due course, the current exemption o f certain NFPS funds and entities from inclusion in
the annual budget law could be reexamined.
2.110 T o further increase transparency, in the short term the MH could broaden the
dissemination of interim reporting on detailed budget and investment program execution,
78
and in the medium term it could make better use o f information technology to enable
customized queries from citizens (building upon the ongoing development o f SIG).
Finally, the content o f information in both the annual budget law documentation and the
annual state financial management report could be enhanced with relative ease in the
short term b y incorporating certain elements from international practice, under a plan to
reach convergence in the medium to long term.
2.1 11 Financial management reform. While conceived under the overall public sector
reform program, financial management interventions seem to run parallel to that reform
program. The segmentation o f organizational responsibilities-with
the Technical
Secretariat o f the Presidency leading public sector reform and MH leading financial
management efforts-may have fostered the perceived disconnect that i s reflected, for
example, in the proliferation o f unconnected systems and procedures across and within
entities, in SAFI’s lack o f administrative (other than financial) tools, and the presence o f
separate skills development programs. 53
2.112 While the MH should continue to take the lead in financial management
modernization, a greater awareness o f financial management elements should be brought
back into the public sector modernization program, and financial management efforts
should be clearly coordinated with reforms on the c i v i l service, procurement, and
institutional restructuring fronts (in time, operational coordination measures ought to be
developed, but they necessarily have to be preceded b y a high level directive within the
Executive). This framework should serve as basis for MH’s planned (and needed)
technological upgrade o f the financial management (SAFI) and human resources (SIRH)
systems, their coverage extension to decentralized institutions and extra-budgetary funds,
and the incorporation o f certain administrative functions (most notably, procurement and
management o f fixed assets and inventories).
2.1 13 Public investment. Various entities and systems are involved in the monitoring
o f public investments, but the effect o f these on the budget formulation process and the
efficiency o f expenditures i s unclear, mostly because o f the lack o f quality indicators to
measure performance. Moreover, there i s generally limited capacity in executing entities
to produce quality medium-term investment programs and pre-investment studies.
2.114 In the short term, administrative actions could be taken within the Executive to
carefully revise, and simplify, the multiplicity o f systems and responsibilities for public
investment monitoring. Similarly, the criteria and decision process followed for selection
(and rejection) o f projects into the public investment plan, including related cost-benefit
analyses, could be made transparent. As a step to integrate better capital and current
budgeting, the MH could develop a methodology to calculate the recurrent cost
implications o f the public investment program and identify investment and current costs
in capital projects. The successful experiences in practical SAFI-related training could be
replicated for the development o f a training program on planning and costing capital
budgets under tight fiscal envelopes.
53
Development agencies may also bear some responsibility on the apparent disconnect.
79
2.115 W h i l e performance-based budgeting54 i s not advisable in the short term, the
current framework and procedures for public investment programming and monitoring
could benefit from the incorporation of certain measurement principles and techniques
associated with performance budgeting (this would require technical assistance). Another
area where international experience could be adopted in the short to medium term, i s in
the development o f sectoral approaches to external development assistance. These could
help reduce the transaction costs related to the administration o f several investment
projects.55
2.1 16 Cash management. The basic concept o f normative centralization and
operational decentralization applied to treasury operations has resulted in a proliferation
o f accounts (and possibly idle funds in the case o f decentralized institutions funded b y
transfers) throughout the public sector. On a related issue, the lack o f an objective system
for sequencing release o f payments in executing entities could encourage opacity in
dealings with government providers.
2.1 17 With advances in technology, particularly in light o f the need to upgrade the SAFI
and S I R H software systems, the Government could consider in the medium term the
introduction of payment centralization (while maintaining authorization to accrue
expenses in the executing entities), and o f a release-of-funds mechanism to nonentrepreneurial decentralized institutions based on accruals (as opposed to global
transfers). Such actions would need to be preceded b y further study and a change in
legislation. In the meantime, better control mechanisms for subsidiary account balances
and reconciliations could be implemented, and objective procedures for delivery o f
payments (e.g., adapted first-in first-out) could be issued.
2.118 Medium-term budget framework. The available aggregate fiscal targets and
projections to orientate fiscal policy could be the starting point to develop and formalize a
medium-term budget framework that includes the projection, over a three-to-five year
horizon, o f fiscal indicators, expenditure estimates b y main aggregate classifications, and
forecasts o f forward costs of the most significant investment projects. This could better
inform the annual budget formulation and approval process, b y increasing transparency
o f the future fiscal impact o f current policies and the prioritization of expenditures.
2.119 Human resources. A n y effort to modernize budget management must be built
upon a strong base o f public sector financial management and audit professionals. Hence,
there i s a clear need for the Government to: prioritize the carrying out o f SETEC’s plans
to reform the c i v i l service legal framework, create an administrative career based on
merit-based employment, and upgrade related information systems; and ensure strong
links between c i v i l service and financial management reforms. In the meantime, the
54 As a result o f the development o f I T systems, instruments such as performance and cost measurement are
regaining attention i n OECD countries. In a few countries, “resource agreements” between the center (e.g.
ministry o f finance) and spending agencies may subject a certain portion o f expenditures to performance
agreements. (OECD, 2001)
55 Sector-wide approaches (SWAPS) are emerging internationally as a means to strengthen government
ownership and coordination o f development assistance, and reduce transaction costs associated with
multiple project, each with its own individual procedural requirements.
80
ongoing program to help introduce modern human resource management techniques
could continue under implementation with expanded coverage of government entities.
2.120 Municipal finances. W h i l e the scope o f this PER does not encompass local
government expenditure management, and granted that this i s a politically sensitive issue,
budget management policies for decentralization and related fiscal strategies would
benefit enormously from a clear delineation of areas o f intervention between central and
local governments, and from regulation o f municipal debt.
81
ANNEX I:
El Salvador CPAR
Current Situation ,Trends and Progress
The adoption in M a y 2002 o f the Law on Public Sector Procurement and
Contracting (LACAP) represented a significant improvement over the previous
procurement legal framework as it promoted open and transparent competition and
included many sound international procurement principles and practices. The L A C A P
established a comprehensive Public Administration Procurement and Contracting System
(SIAC) to manage the public sector procurement function, and included the Procurement
Regulatory Entity (UNAC), as a dependency o f the Ministry o f Finance, and the
institutional procurement implementing units (UACI’s) in each government agency,
including municipalities. The control and independent oversight of the procurement
activities i s performed b y the Corte de Cuentas o f the Republic and the office o f the
Attorney General.
Since the adoption o f the procurement law, the government demonstrated i t s
commitment to the procurement reform, the Technical Secretariat o f the Presidency
(STP) undertook various training and capacity building initiatives to disseminate the new
law amongst the UACI’s and the private sector and to strengthen the overall new
procurement system, and the Procurement Regulatory Entity (UNAC), provided technical
assistance to government agencies on technical matters related to the application o f the
L A C A P . However, despite all these efforts, the procurement processes established b y the
new law have not been fully implemented in all public agencies, the U N A C has not been
able to efficiently discharge i t s functions mandated b y law, many UACI’s s t i l l have
difficulties in performing i t s procurement functions in an efficient manner, and the
procurement public information system i s s t i l l limited.
Main Weaknesses and Recommendations
The main reasons for the delays to fully implement the new procurement system
are the lack of: (i)
the regulations o f the law; (ii)a strong and effective regulatory entity;
(iii)technical and institutional capacity at most o f the procurement implementing
agencies; and (iv) the availability o f an electronic information system to increase
efficiency and transparency.
The recommendations o f the CPAR to tackle above weaknesses are included in a
action plan to be discussed with the Government. The main recommendations can be
summarized as follows: (i)
preparation and issuance o f the regulations o f the law as soon
as possible; (ii)
strengthening o f the UNAC and the UACI’s through a comprehensive
training and institutional strengthening program funded b y the IDB and the World Bank
(IDF grant and public sector modernization project); (iii)
developing, installing and
maintaining and e-procurement system, as part o f the e-Government strategy, starting
with an e-disclosure module and gradually moving to a comprehensive electronic bidding
82
system. Implementation o f these actions w i l l require a strong leadership at the most
highest level o f Government and a well coordinated integral implementation plan, and be
supplemented b y other actions to increase efficiency through the usage o f harmonized
standard bidding documents, better structure and regulate in the civil service law the
career o f procurement professionals, to combat corruption in a more effective manner;
and to further improve the procurement law to better meet international standards and
procurement requirements of the Central American Free Trade Agreement.
83
CHAPTER 111: Education
3.1.
The evaluation o f education expenditures that follows focuses mostly on those
incurred b y the Ministry o f Education (MINED). MINED has the responsibility for
sector policy and for providing pre-primary, basic and secondary education to the
Salvadorans that attend public schools. The Constitution o f the Republic mandates that
the first t w o levels o f education are provided free o f charge in public institutions.
MINED also provides support to the tertiary level o f education, including the
autonomous University of El Salvador and several technical institutions. After reviewing
the organization of the sector, the government’s sector objectives, and the process o f
allocation o f public resources, public expenditures trends and sector outcomes are
discussed. The chapter concludes with the identification o f the sector’s key expenditure
issues and recommendations.
I.
Organization of the Sector
3.2.
The public education system in El Salvador i s organized in four levels: three years
o f pre-primary education usually for children age 4-6; nine years o f basic education for
children 7-15, which in turn i s divided in three cycles of three years each; two or three
years o f secondary education depending o f the modality: general studies two years and
technical -vocational education three years; and the higher level o f education which
includes university and technological education. Most students attend public institutions
up to and including the secondary level; the private sector has a preponderant presence in
university education. In terms of enrollment, the public sector covers el 81 percent o f
pre-primary, 89 percent o f basic, and 68 percent o f secondary (Table 3.1). The National
University o f El Salvador, UES, enrolls 30 percent o f a total university population o f
100.000.
Establishments
Pre-primary
Basic
Secondary
Total
183,691
44,373
228,064
1,148,044
144,175
1,292.219
106,651
5 1,308
157,959
1,438,386
239,856
1,678,242
81
19
89
11
68
32
86
14
Public
Private
Total
Public %
Private %
Source: Ministry of Education
84
3.3.
During the 1990s, the administration o f the public education system was
substantially d e ~ e n t r a l i z e d . ~ In
~ the early 1990s, MINED established EDUCO, a
community-based school program managed through community associations, ACEs,
which has been the instrument to expand pre-primary and basic education in rural areas.57
The ACEs have the responsibility for managing the school resources including the hiring
and firing of teachers. In mid-1990s the authorities began transferring the positive
experience with the ACEs to the traditional system where School Councils were created,
CDE, with the responsibility for: i)planning and implementing the school activities; ii)
manage the resources transferred to schools; and iii)raising additional funds to support
school activities. Other instruments were developed at school level to empower the
schools such as the Institutional Education Project (PEI) that sets forth the school
medium term objectives and the associated Annual School Plan (PAE).
11.
Strategic Objectives and Resource Allocation Processes
3.4
MINED’Sstrategic objectives and targets are set forth in the Government’s Ten
Year Education Plan (1995-2005), which has received broad based support from the
various sectors o f the Salvadoran society. The Plan calls for: i)increasing coverage at all
levels but with emphasis on the third cycle o f basic education and secondary education,
particularly in the rural and peri-urban areas; ii)creating and strengthening the different
programs that facilitate the access to education and permanence in school o f the poor; iii)
improving the curriculum content and teaching-learning methods; iv) establishing
learning evaluation systems as an instrument to improve continuously the quality o f
education; v) establishing monitoring, evaluation and incentive systems for teacher
performance; and vi) strengthening school autonomy over resource management.
In 2000, the new MINED authorities revised the progress made with the
3.5
implementation o f the Plan and prepared their strategic program -- Education Challenges
in the New Millennium, which details the challenges faced b y education in each key area,
the objectives to be accomplished, and the strategic guidelines. The program’s principal
objectives are to increase education quality, strengthen community participation,
facilitate access to education, and promote values and personal development. I t details
the programs, targets and financial requirements to achieve these objectives.
Until 1996, MINED resources were managed in a centralized manner.
3.6
Departmental offices and traditional schools had virtually no decision-making capacity
over any o f the budgeted resources. Staffing and procurement decisions were taken at the
center. For the EDUCO schools, resources were administered in a decentralized manner.
For a review of the sector reform effort during the 1990s see Marques, JosC SilvCrio and Ian Bannon.
2003. “Central America: Education Reform in a Post-Conflict Setting, Opportunities and Challeges”,
World Bank, Conflict Prevention and Reconstruction Unit, Working Paper 4, April.
57 The number of EDUCO students i n pre-primary and basic education increased from 10,721 and 42,851 in
1993 to 47,551 and 202,719 i n 2002. Currently, EDUCO students represent about 16 percent of preprimary and 18 percent o f basic education students in public schools.
56
85
ACES received transfers to pay for the teachers (who are hired under an annual contract)
and for school materials.
3.7
In 1996 and consistent with i t s strategy o f giving autonomy to the schools,
MINED established a Education Quality voucher (or bono) that transfers resources to the
schools (pre-primary, basic and secondary) to buy key goods and services to improve
education quality. The voucher systems was accompanied b y a series of other reforms
that were gradually implemented, including: i)a teacher training/development program
that i s administered in a decentralized manner with strong school participation and the
support o f the Pedagogic Advisors, who replaced the previous school supervisors; ii)a
decentralized system o f administrative support to the schools; iii)incentives for teachers
in rural areas; and iv) a performance-based incentive system for all teachers. At the same
time MINED strengthened the capacity o f i t s Departmental Offices to support the
schools.
3.8
In 1999, the voucher system was used to transfers resources to repair the damage
caused b y Hurricane M i t c h to the schools. In 2000, MINED established another seven
types o f vouchers as can be seen in Table 3.2. W i t h the 2001earthquakes, MINED again
used the voucher system to help finance the reconstruction of damaged infrastructure in a
decentralized manner. In addition it created two other vouchers: to finance administrative
assistance to the schools and to support the program Quality Models o f Education. In
2002, i t created a voucher to finance preventive maintenance in schools that had been
reconstructed with IDB support. Table 3.2 shows the evolution o f the vouchers and their
increasing importance; in 2003 they represented 6.4 percent o f MINED’Sbudget.
86
11For 1996-2000, executed budget; for 2002-3, approved budget.
Source: Marques, Jose SilvCrio, “Cosro E j c i e n a u de los Bonos Educutivos”, Background paper prepared for the World Bank, processed,
December 2002 and MINED,
111.
Expenditure Trends
3.9
The public education budget has increased significantly in the last several years.
As a share of GDP, i t increased from 1.9 percent in 1992 to 3.2 percent in 2003 (Chart
3.1); as a share o f the overall Central Government budget from 12.4 percent in 1996 to
19.5 percent in 2003 (Chart 3.2). Public education spending in El Salvador is, however,
s t i l l below the average for Latin American and Caribbean (LAC) as well as below i t s
neighbor Costa Rica. Moreover, in the last two years the education budget has declined
as a share o f GDP; the proposed 2004 MINED budget would drop to 3 percent o f GDP
and to 16.6 percent of the overall Central Government budget, certainly a worrisome
development.
87
I
Chart 3.1: Public Spending on Education
Chart 3.2: Education Budget, 1996/03
i
1.o
00
01992
~~
~
El Salvador
19
I
costaiiia
33
~
~
L A C
1
+I
31
% of Total
J
Note: MRD-most recent data: El Salvador (2003); Costa Rica (2000);
Latin America and Caribbean, L A C (2000). Includes total public
spending on education including subsides to private education entities
Source: World Bank, W D I
Source: Ministry of Finance (1996/01executed budget; 2002/03 approved budget
2004 proposed budget).
3.10 El Salvador also spends relatively too little on per student basis. Table 3.3 shows
the World Bank latest comparable estimates o f education expenditures per student as
percentage o f GDP per capita for El Salvador, Costa Rica and L A C . I t can be observed,
El Salvador spends 23 percent less than LAC on primary education students and 39
percent less than Costa Rica on secondary education students.
Spending by Level and Function
3.11 Basic education absorbs the greatest share o f MINED’Srecurrent budget (Chart
3.3). During1996-2003, i t s share averaged 63 percent o f the recurrent education budget;
pre-primary and secondary education absorbed 8.2 percent and 6.9 percent, respectively
(Chart 3.3). Allocations for higher education, which include the transfers to the
University o f El Salvador (UES), averaged 6.7 percent. Resources assigned to basic
education increased during the period while for the other levels had an erratic trend. The
item “other” includes administrative expenditure or overhead that cannot be assigned to
any individual level. These other expenditures declined substantially during the period,
from 19 percent o f the overall recurrent budget in 1996 to 12.5 percent in 2003.
88
Chart 3.3: Dist. of MINED’SRecurrent Exp. by Level of
Education 1996-2003
Chart 3.3 Distribution of MiNEDs Recurrent Expenditures by Level of Education,
1996-2003
60
n
70
--
60
0
50
-
40
0
D
c
P
-0
L
30
20
10
I-0
,-“
1996
QPre-Primary
Basic
OSecondary
OHigher
Bother
I
85
588
1997
1
1996
8 4 -~
60
602
592
7.0
6.2
1
7 . 1 F 7 1 6 . 6
~~
18.6
19.8
6.5
__
16.4
10 Pre-Primary
i
1999
77
624
1
2000
79
674
1
2001
66
663
I
2002
82
645
1
2003
83
646
6.6
7.2
7.2
7.3
6.6
6.3
6.3
7.1
7.4
16.7
11.2
11.6
12.9
12.5
Basic OSecondary OHigher Bother
7.2
1
Source: MINED (Executed recurrent budget 1996-2001; approved recurrent budget 2002-23)
3.12 MINED’Sexpenditure on wages and salaries constitutes over one-half of i t s total
budget but has been generally declining in importance, from 71 percent o f the budget in
1996 to 57 percent in 2003 (Table 3.4). This relative decline has been continuously since
2000. In contrast, expenditures on goods and services, which include textbooks and other
materials, have had an increasing trend form 12.4 percent in 1998 to 15.8 percent in
2003. Current transfers that includes the transfers to the UES (60 percent o f current
transfers in 2003) and to other educational and cultural institutions, have average 12
percent o f total expenditures during the period.
3.13 Despite the decline in the share o f wages and salaries in total expenditures,
teachers’ salaries have been increasing. The relative reduction in wages and salaries
results from an early retirement program implemented b y MINED in 2001/02. A number
o f teachers elected to retire under that program and a new generation o f teachers has
entered the system, at lower average wages.
89
Table 3.4: MINED Budget by Function 96-03
% of total executed bud
a/ Includes purchase of goods and services financed by loans from the World Bank and IDB (including vouchers)
b/ Includes transfers for the University of El Salvador and vouchers for EDUCO and other schools
c/ Includes vouchers and other transfers for the purchase of capital goods financed by loans from the World Bank and IDB
Source: Ministry of Finance, Executed budgets
3.14 The 1996 law that regulates public teachers pay (Ley de Carrera Docente)
introduced a new salary scale and made teachers salaries a function o f education
background and experience rather than the level o f teaching. Public teachers real hourly
wage has increased b y 37 percent between 1995 and 2002 and i s very similar to the
private teachers wage level (Table 3.5). Also, public teachers pay compares well with
other professions. In 2002, the hourly wage o f a public teachers w i t h a non-university
degree was US$ 3.83 compared to the hourly wage of US$ 3.2, US$ 2.48 and US$ 2.73
for public technicians, nurses and accountant with similar academic background,
respectively. The latest public teachers wage increase was negotiated in early 2003 for
about 5 percent.
3.15 In addition to the salary, teachers receive monetary incentives if they serve in
rural areas (incentivo de ruralidad) or i f they perform well (Reconocimiento a la Labor
Educativa Znstitucional). In 2002, the former incentive was US$480 a year; i t was given
to 15,249 teachers (of a total o f about 31,000 teachers) at a total cost o f US$ 7.3 million
for MINED. The incentive for working in rural areas has since been added to the teacher
salary (sobresueldo). The performance incentive i s equivalent to US$ 228 a year and i s
attributed to the school on the basis o f an independent and standardized evaluation
conducted by UES; i t reviews the quality o f the school’s institutional plan, school
administration, quality o f education, and teacher’s classroom management.
For
comparison, the minimum and maximum current monthly salaries for level 2 teachers
(with three years o f university education) are US$ 372.00 and US$ 537.15; for level 1
teacher (with a complete university degree), US$409.15 and US$ 592.00. Level 1 and 2
are both divided in six categories (escalafon).
90
Table 3.5: Trends in Monthly and Hourly Public and Private Teachers Real Wages
(1995 = 100)
Real Monthly
Hours Worked per
Hourly Real Wage
Wage
Week
Private I Public
Private
I Public
Private I Public
100
100
100
100
100
100
1995
207
152
105
197
137
111
2002
Memorandum
21 14
2267
24.6
20.6
2002 Values a/
27.5
21.5
I
I
1
3.16 The pupil-teacher ratio i s o f acceptable size. For primary education, i t has
declined f r o m 33 to 26 between 1996 and 2000/01, below the average for L A C and close
to that o f Costa Rica. Pupil/teachers ratios in the departments o f Sonsonate, Cuscatlan,
Ahuachapan, L a Libertad, Cabaiias y L a Paz are above the national average.58
Table 3.6: Pupil-Teacher Ratio in Primary, 1996, 3.17 El Salvador does not have a
2000/01
teacher supply problem as there
I 1996 1 2000/01 are 15,000 teachers not working in
the sector and, as discussed,
El Salvador
32.8
25.6
salaries
are
quite
attractive
Costa Rica
29.5
24.9
compared to other professions.
LAC
25.2
26.5
Teacher distribution b y department
I
I
demand for schooling, approximated b y the distribution o f school age children (4-1 8
years) b y department. Rural areas have the bulk o f public teachers while private teachers
can be found mostly in urban areas. The department o f San Salvador concentrates the
larger share of teachers, though there i s a relatively undersupply o f public teachers that i s
more than compensated b y the private ~ e c t o r . ' ~
3.18 MINED'Scapital expenditures have fluctuate widely in recent years. Since 2001,
a large share of MINED capital budget was to reconstruct the infrastructure damaged b y
the 2001 earthquakes. O f the 2,647 existing educational centers, the earthquakes
destroyed about 8 percent (232) and another 56 percent (1,530) was damaged. According
to MINED, most o f the damaged infrastructure had been reconstructed at a cost of about
U S $ 50 million. Notwithstanding, school infrastructure continues to be a challenge. A
diagnostic o f the state of school infrastructure conducted in late 1990s revealed that 50
percent o f the buildings presented some physical deterioration. M a n y schools do not
have basic facilities such as water or sanitation.
3.19 School infrastructure (classrooms) distribution in the country i s closely related to
the potential demand for schooling (Le., distribution o f school age children b y
deparment). Rural areas have the bulk o f public school infrastructure. The department
58 See Marques, Jose SilvCrio "Policy Options to Increase Coverage in Upper Basic (3rd Cycle) and
Secondary Education ", Backgroundreport prepared for the World Bank, August 2003
j9Ibid
91
1
o f San Salvador concentrates the larger share o f the infrastructure, though there i s a
relatively undersupply o f public infrastructure that i s more than compensated b y the
private sector. The departments with highest pupilklassrooms ratios are: Sonsonate, L a
Libertad, San Salvador and Ahuachapan. ' O
3.20 MINED does not have a permanent program to finance school maintenance.
MINED has prepared a school maintenance manual which has been distributed to the
schools. It has also authorized the schools to use part o f the Education Quality voucher
for infrastructure repairs. In 2002, with financing from the IDB, MINED established a
new voucher to finance the maintenance o f schools that had been reconstructed after the
earthquakes with IDB support." The World Bank i s also supporting school maintenance.
Funding Sources
3.21 External resources have financed an important share o f MINED'Sspending in the
last several years (Table 3.7). External loans and grants have increased from an average
o f 7 percent o f the overall budget in 1996-99 to more than 17 percent in the last four
years. The large increase in external finance in 2000 resulted from a large grant received
from USAID to support basic education. The continued relatively high percentage o f
external finance since then i s mostly related to the 2001 earthquakes. Comparing Table
3.7 and 3.4, i t can be seen that in the last several years, external loans and grants have
financed not only capital expenditures and capital transfers but also recurrent
expenditures.
3.22 The vouchers are partly financed b y external loans. They do not have a line item
in the budget and are classified according to the destination o f funds. I f they are for the
purchase o f goods and services, they are included in current transfers; if they are to
purchase capital goods they appear as capital transfers. The vouchers for Education
Quality and school lunches are financed b y local funds; all other vouchers are financed
either b y World Bank or IDB loans (Table 3.8). In 2003, o f a total o f U S $ 31 million
spent on the vouchers, the Government financed U S $ 18 million (58 percent) and the
W o r l d Bank and the IDB the remaining U S $ 13 million (42 percent).
Ibid.
To determine the cost of maintenance, MINED did a pilot project and devise a formula that takes into
account the type of construction, i t s age, and the number o f students attended. The cost o f an average
classroom of 51.8 m2 (7.20mX7.20m) i s US$ 15,000. The average cost o f annual maintenance i s U S $ 200
or 1.3 percent o f the cost of construction.
6'
92
Table 3.7 MINED’SFinancing Sources, 1997-2003
Source: Ministry of Finance
Table 3.8 Education Vouchers, by Source of Financing
a/ FANTEL i s the fund that administers the proceeds o f the privatization o f the telecommunication
Company FANTEL
Source: Marques, JosC SilvCrio, “Costo Eficiencia de 10s Bonos Educativos”, Background paper
prepared for the World Bank, processed, December 2002
IV.
Expenditure Outcomes
3.23 Did the increase in MINED’Sbudget during the last several years resulted in
higher enrolments? H o w has the decentralization o f resources to the schools impact the
efficiency o f resource use? And how have the education systems perform in terms o f
quality? H o w have education expenditures impacted the different income groups? These
and other related questions are discussed in the following paragraphs.
Enrollments
3.24 Table 3.9 shows the evolution o f gross enrollments for the 1996-2002 period.
Gross enrollments compare the number o f children enrolled in a specific level or grade
with the school age population that correspond to it. Gross enrollments at national level
have increased rapidly in the last several years. Enrollment in pre-primary education
increased from 38 percent in 1996 and to 48 percent in 2002; for basic education, they
increased from 95 percent in 1996 to 99.5 percent in 2002. Enrollments in rural areas
have increased much more rapidly that in urban areas. This resulted from EDUCO,
which focused on the most isolated, rural communities as well as f r o m other MINED
programs that gave priority to the rural areas where poverty was more pervasive and
93
education enrollments were lower.
almost exclusively on rural areas.
For instance, the school lunch program focuses
3.25 Basic education gross enrollments in urban areas have declined continuously in
recent years, from 96 percent in 1996 to 87 percent in 2001, though the absolute number
o f children in school has been increasing (Chart 3.4). This drop in the urban enrollment
rate may result from a lack o f supply o f education facilities in fast growing peri-urban
areas. For secondary education, gross enrollments at national level have increased from
34 percent t o 40 percent between 1996 and 2002 (Table 3.9 and Chart 3.5). Most o f the
increase has been taking place in urban areas, as the supply o f secondary education in
rural areas i s quite limited. Already in the 3rd cycle of basic education, gross enrollments
in rural areas (59 percent) are much lower than in urban areas (about 90 percent), as
many schools s t i l l do no offer this cycle. In recent years MINED has made a strong
effort to extend the 3rd cycle to EDUCO schools, which i s reflected in the significant
increase in 3rd cycle coverage in rural areas (from 34 percent in 1996 to 59 percent in
2002), though enrollments s t i l l remains low by any standards.
I and11 Cycle
121.0
127.9
127.6
130.9
132.0
137.6
N/a
Ill Cycle
34.0
39.3
41.0
41.5
45.9
51.4
59
Secondary
3.2
3.8
3.9
3.1
4.1
5.4
7.0
3.26
Increasing the enrollment in the 3rd cycle and secondary education i s a major
challenge facing the authorities. A recent study has estimated that to increase enrollment
from 75 percent to 100 percent in the 3rd cycle and from 40 percent to 70 percent in
secondary education, there was a need to increase the education budget b y the equivalent
o f about two percentage points of GDP, or to 5 percent o f GDP.62
62
See di Groppello, E. “El Salvador: Education Strategy Paper”, processed, World Bank, 2004.
94
,
Chart 3.4: Gross Enrolments in Basic
Education
Chart 3.5: Gross Enrolment Secondary
Education National Level
80
70
60
50
5
g2
I
40
30
20
10
1996
1997
I+National
I
I
1998
1999
+Urban
2000
2001
Rural
0
2002
1996
1997
1998
1999
2000
2001
2002
I
Source: Table 3.9
Table 3.10 Gross and Net Enrollment Rates. 2002
Source: Enrollment Census (MINED)
Efficiency
3.27 The increase in retention o f students in the system (or decline in dropout rates)
indicate that the efficiency o f the systems has improved in the last several years, though
overage, repetition rates, and drop out rates remain high. Overage, that i s children
enrolled in grade for which the official age i s lower, i s a serious problem in El Salvador.
I t can be approximated b y the difference between gross and net enrollment rates. As
mentioned, gross enrollment rates are calculated b y dividing the number o f all students
attending a particular level/grade b y the number o f children of the official age to attend
that level/grade. Net enrollment rates consider in the numerator only the number o f
students with the official age to attend that particular level/grade. Thus, the difference
between gross and net enrollment rates gives an estimate o f the share o f students in a
particular level/grade that are under- or overaged. Table 3.10 shows that in the 1st cycle
o f basic education, 42 percent o f the students have ages outside the official established
range (7-9 years). I t i s reasonable to presume that most o f these children are overaged
and that the problem originates mainly in the rural areas given the registered high gross
rates (176 percent). Overage may result from repetition or late entry in school. Children
that are overaged in a particular grade take space and demand teacher time away from
other children that could enter the system.
95
Chart 3.6: Repetition Rates in Basic by Grades,
1996 - 2001
------
3.28 Repetition rates remain
high in the first grade (about
16 percent) but decline rapidly
for higher grades. For the
1996-2001 period, after a drop
in 1999, repetition rates have
increased for all grades o f
basic education (Chart 3.6).
3.29 Dropout rates remain a
problem, particularly in the
rural areas. Chart 3.7 and 3.8
shows dropout rates for
I
1
2
3
4
5
6
primary
education in urban and
Grades
rural areas. I t can be observed
a1996 H I 9 9 7 0 1 9 9 9 02000 H2001
that these rates are s t i l l quite
high for the first grade (about
17 percent and 9 percent in
Source: Annual Census o f Registration, MINED
rural
and
urban
areas,
respectively) and decline rapidly for grades 2 through 5. In rural areas, drop out rates
increase again sharply for the 6th grade. Difficulties to pursue studies because o f lack o f
facilities and/or demand constraints may explain this behavior. On the other hand,
dropout rates have been declined since 1997 and at an accelerated pace for the 6th grade
in rural areas. This may be a result o f MINED effort to add the 3rd cycle to E D U C O
schools and therefore giving rural students an opportunity to continue t o pursue their
studies near home.
Chart 3.7 Dropout rates in primary urban
areas, by grade 1996 -01
i
I
,
Chart 3.8: Dropout rates in primary rural
areas, by grade 1996 01
-
~
1
2
3
4
5
Grades
1
I
Source: Annual Census o f Registration, MINED
96
2
3
4
5
Grad6
( 1 1 9 9 6 0 1 9 9 7 0 1 9 9 9 0 2 0 0 0 02001
6
3.30 Table 3.11 presents the result of an exercise to estimate the internal efficiency o f
the education system. I t i s based on the reconstructed analysis.63 I t reveals that survival
rates are only 65 percent at the end o f primary education, 52 at the end o f the third cycle,
and 39 percent at the end o f the second year o f secondary. That i s only about one-half o f
children that enter primary education completes the nine years of basic education. The
estimates also indicate that the efficiency o f the public and private sector are similar. The
table shows that for completing primary, the public sector requires 7.6 and the private
sector 7.7 years; for completing the 3rd cycle, the public sector requires 12.8 years and
the private 12.2 years. I t also indicates that on this measure, urban are more efficient
than rural schools both in the case o f public and private schools.
3.31 Several programs seek to reduce dropout, repetition and overage rates. Among
these are the Healthy SchooZ program which provides healthcare in schools, a school
lunch, and improved physical environmental in schools, with the objective o f increasing
student learning and retention rates and promote community participation in schools;
Accelerated Education which seeks to reduce overage in basic schools b y helping
children w i t h more than 2 years over the official age for the grade in which they are
enrolled, t o recuperate losses and get at par with the peers; and Alternative Classrooms
which offers more than one grade in the same classroom in rural schools with l o w student
population density; and scholarships for secondary and higher education, which
encourages students to progress to higher levels o f education (see paragraph 3.51). The
W o r l d Bank supports the latter three programs.
3.32
H o w efficient i s public education spending in general? As a first approximation,
the expenditures and outcomes for similar education levels in El Salvador can be
compared to other countries. Charts 3.9 and 3.10 relate per student spending on primary
and secondary education (as percent o f GDP per capita) and the net enrollment at these
levels.64 The values are plotted for the most recent data available for a large sample o f
developing countries from the World Bank’s WDI database. Each Chart i s divided in
four segments determined b y the average value o f the sample. The segments identify
countries with low spending and l o w outcomes (southwest); high spending and l o w
outcomes (southeast); high spending and high outcomes (northeast); and low spending
and high outcomes (northwest). The most cost efficient countries are those in the
northeast segment; the worse cost efficient in the southwest segment. I n the other two
segments there i s either l o w or high outcomes and spending.
In terms o f primary education, El Salvador i s situated in northwest segment
3.33
which implies that with relatively l o w spending per student i t gets a reasonable rate o f net
primary enrollment (more value for money). A s for secondary education, El Salvador i s
in the southwest segment, which means that it spends too little per student but also has
A “school cohort” i s defined as a group o f pupils who j o i n the first grade o f a given cycle in the same
school year, and subsequently experience the events o f promotion, repetition, dropout or successful
completion o f the final grade. The reconstructed cohort method i s used to analyze the internal efficiency of
an education system. T o apply this method, data on enrollment by grade for two consecutive years and on
repeaters by grade from the f i r s t to second year are sufficient to enable the estimation o f three main flowrates: promotion, repetition and drop-out.
64 Notice that for El Salvador the data refers to basic education.
63
97
l o w net enrollment. Therefore, El Salvador appears to be relatively efficient in terms of
primary education while in secondary education, i t s situation does not reflect inefficiency
but that this level has received l o w priority.
2001 and 2002
Source: Marques, Jose Silvbrio “Policy Options to lncrease Coverage in Upper Basic (3rd Cycle) and Secondaly
Education”, Background report prepared for the World Bank, August 2003
Chart 3.10 Relationshipbetwen Public
Spending on SecondaryEducationand Net
Enrollment on Secondary Education
Chart 3.9 Relationshlp between
Education Expenditures on Primary
Education and Net Enrollments on
Primary Education
0
0
18
36
Expenditureson secondaryeducationper
GDP per
12
24
Expenditure on primary educatrion per student as % GDP
percapita
Note: Most recent estimate circa 2000; Public expenditure p
Student (primary) is the public current spending on educi
divided by the total number of students by level, as percen
of GDP per capita; for El Salvador data corresponds to 1:
education. El Salvador coordinates: (9.9,84); Sample aver
(12,SO). WDI sample of 44 LDC countries.
Source: Marques, Jose Silverio, El Salvador: Evaluation
of Public Expenditure on Education and Health,
processed, report prepared for the World Bank, June
2003. based on WDI
Note: Most recent estimate circa 2000; Public expenditure
student (secondary) is the public current spending on educi
divided by the total number of students by level, as percentage of
GDP per capita. El Salvador coordinates: (11.9,26); Sample aver;
(18, 60). WDI Sample of 37 LDC countries.
Source: Marques, Jose S. ES: Evaluation of Public
Expenditure on Education and Health, processed, report
prepared for the WB, June 2003, based on WDI
98
3.34 H o w cost-effective are the vouchers? Some vouchers seem to be cost-effective,
though there are already too many vouchers. Currently, there are ten types of voucher
being transferred to the schools. Nine are shown in Table 3.12. A new voucher created in
2004 (Grutuidud) w i l l compensate the schools for the lost money given the decision o f
the National Assembly in late 2003 to prohibit the so-called “voluntary payments” or
cuotas in public schools.
All schools are eligible to receive the Professional
Development (training) and Administrative Assistance vouchers. Basic education schools
receive also the Fundu Alegriu voucher and the secondary schools the Youth Fund
voucher. These vouchers are to promote and finance extra curricular activities. In
addition, rural schools receive a school lunch voucher. The C R A voucher i s for
secondary education to finance the purchase o f technological-based teaching equipment.
Finally the preventive maintenance voucher established in 2002 was only for a group o f
schools that were reconstructed rehabilitated with the support o f IDB but in 2003 another
group o f schools also benefited from this voucher financed with funds from a World
Bank loan.
3.35 An initial analysis o f the cost-efficiency o f the voucher system indicates that the
voucher for Administrative Assistance to the schools and the voucher for Professional
Development (teacher training) may be cost-efficient appro ache^.^^ For several vouchers,
i t i s not possible to determine their cost-efficiency because each voucher finances several
activities, some o f which are new activities. This applies for instance to the Quality o f
Education, CRA, Excellence, Youth and Alegriu vouchers. The voucher for preventive
maintenance could not be compared to previous expenditures made, since MINED did
not allocate resources for this purpose and the little maintenance that took place was done
by the school community for which records are not available. Nevertheless, the voucher
for preventive maintenance i s considered a sound investment, as i t w i l l prevent i t s
premature reconstruction or replacement.66
3.36
The Professional Development (teacher training) voucher appears to be costefficient compared to the previous system o f centralized teacher training. The cost per
teacher i s about one-third compared to the previous system and the number o f teachers
with access to training increased from one-half to the full teacher corp. While the quality
under the two systems could not be evaluated, under the new system, schools and
teachers with the support o f a Pedagogic Advisor, decide what teacher training and
therefore may be a better match between needs and the procurement o f training.
See Marques, JosC SilvCrio “Costo Eficiencia de 10s Bonos Educativos”, processed, December 2002.
According to the World Bank (Western Java Education Project, Indonesia, Best Practices in Cost Benefit
Analyses, World Bank, web page on Education) the expenditure on school maintenance should be
equivalent to about 2 percent o f the original cost o f the facility.
The existing maintenance voucher
corresponds to about 1.2 percent o f the cost o f the facility.
65
66
99
Table 3.12: Voucher Programs Under Execution
I
Basic Education
Rural
Education Quality
Administrative Assistance
Teacher PDfessional
Development Plans
“Fondo Alegria ”
School lunches
Preventive Maintenance of
Furniture and Infrastructure
Excellence (selected
Gratuidad (2004)
Urban
Education Quality
Administrative Assistance
Teacher Professional
Development Plans
”FondoAlegria”
Preventive Maintenance of
Furniture and Infrastructure
Excellence (selected
Gratuidad (2004)
I
I
Secondarv Education
I
I
Education Quality
Administrative Assistance
Teacher Professional
Development Plans
Preventive Maintenance of
Furniture and Infrastructure
Excellence (selected
Gratuidad (2004)
Youth Fund
Development d Center for
Education ResourcesCRA
3.37 The Administrative Assistance voucher i s also having a positive impact on the
quality o f school administration. Since the introduction o f the voucher in 2001, the
number o f citations made b y MINED’SInternal Auditor to the schools have declined
significantly.
3.38 The administrative process o f passing the voucher funds to the schools i s
cumbersome because of the large number o f vouchers and the procedure to disburse the
funds. Schools at the basic level receive at least 5 vouchers; if they are in rural areas, 6
vouchers. For each voucher each A C E K D E director and treasurer must sign o f f a receipt
before the funds are requested b y the Departmental Office to the MINED-center;
MINED-center in turn requests the Ministry o f Finance the funds; when the funds are
received, they are transferred to the Department Office and then to the school. I t may take
as much as three months for the schools to get the funds.
Quality
3.39 The quality o f the education system remains a major challenge. I t can be assessed
b y the results of standard evaluation
MINED has conducted two types o f tests: the
achievement test for the 3rd, 4th, 6th and 9th graders o f basic education, which was
realized during 1994-1998 and the PAES that has been conducted to the secondary
education leavers since 1997. The achievement test i s conducted for a sample of schools
and i t s results refer to the number o f objectives met in each discipline o f a total o f 10
predetermined objectives per discipline. In contrast the PAES test i s applied to the
universe o f students and i t s results are determined b y reference to the group evaluated or
67 MINED does not realize any education tests that are comparable with other countries.
This year,
MINED plans to participate in a UNESCO’s regional education test-- the Latin American Education
Evaluation Laboratory Program. The test w i l l likely be conducted for the 6‘h graders.
100
the so-called norm or curve (the highest score being 10 and the lowest 0). The results of
both tests for the years they were conducted are shown in Tables 3.12 and 3.13.
Table 3.13: Achievement Tests for Basic Education,
Average Scores (1994-98)
Social Studies
Note: For each discipline 10 objectives were defined; scored indicate the number of objectives
achieved--: Not evaluated; *: only nine objectives explored
Source: MINED
3.40 Basic education test scores for the1994-98 period show a m i x picture (Table
3.13). For 3rd graders there has been generally improvement in performance in all
disciplines but for 6th graders, w i t h exception o f language, there has been deterioration.
For the 4th and 9th graders, tests were conducted only in 1996 and 1998, respectively, so
no trend can be derived from the data.
3.41 Secondary education test scores also show mixed results (Table 3.14). I t can be
observed that there i s a marked break in the trend in 1999. There i s an improvement in
scores between 1997 and 1998 and some improvement in 2000 and 2001 relatively to
1999. There i s no solid explanation for the break in 1999. Education authorities indicate
that a drop o f over one point in one year in average scores i s not reasonable and that most
likely the standards used in 1999 were different from those used in previous years and
feel more confident in the consistency of the scores o f the last three years. In terms o f
disciplines, social sciences had the highest score in 2001 with mathematics registering the
greatest improvement since 1999.
101
I
Table 3.14: PAES’s Average Scores by Discipline, 1997 - 2001 a/
Overall National Average
Language
Mathematics
Science, Health and Environment
199
199
6.2
6.4
61
5.d
6.11
6.d
5.d
6.d
1
199
5
200
5.1
700
5.2
4.4
5
5
5A
4.d
51
52
52
57
3.42 MINED changed the student evaluation system in 2001. The Basic Achievement
tests for the 3rd, 6th, 9th graders and the PAES were integrated in a consistent system.
Both tests are now based on minimum standards o f achievement with pre-established
criteria. Scores are based on a continuous scale, ranging from 300 points for the bottom
o f the third grade test to 1900 for the top secondary test. Tests for each grade are divided
in three levels. For instance, for the 3rd grader, scores from 300 to 450 are considered
“basic achievement”; from 45 1 to 600 “intermediate achievement”; and f r o m 6001 to 700
“superior achievement”. The tests scores for 6th, 9th, and secondary school leavers are
divided in a similar manner.
3.43 In 2001, MINED conducted the new test for the 3rd, 6th and 9th graders; in 2002
the PAES for the secondary school leavers. The results o f the tests are not comparable to
previous tests but convey similar messages. For basic education, the average score in all
disciplines was within the “intermediate achievement” range; mathematics had the lowest
score in the 6th and 9th grades; private schools performed better than public schools, and
urban schools better than rural schools. As for the PAES, the results o f the 2002 test
shows also overall scores at the “intermediate achievement” level, with language rating
the highest score. Private schools did better than public in all disciplines with
mathematics ranking lower than other disciplines in both sectors. Boys ranked better than
girls but not b y much
3.44 To improve the quality o f the education system a recent study suggests the need
to: i) increase the investment in didactic material, labs, libraries; ii)improve school
management; iii)improve teacher performance and teaching methods; iv) institutionalize
and disseminate in a more effective wage the education achievement scores; v) give more
emphasis to reading and writing in the curriculum o f the first three grades; and v) reorient EDUCO model towards high quality learning.@
Expenditure Incidence
3.45 H o w are public education expenditure distributed among income groups? D o
public expenditures benefit the poor or the better off? H o w accessible and affordable i s
the public education system? Are there gender issues in the education system? These are
some o f the questions discussed below.
See di Gropello, E., “El Salvador: Education Strategy Paper”, processed, World Bank, 2004,
102
Access and aflordability
3.46 Education coverage i s s t i l l low at the pre-primary and secondary levels. Even in
basic education, a significant number of children do not attend school. Despite the rapid
increase in enrollment, 52 percent o f children o f o pre-primary education age (4-6 years),
8 percent o f children o f primary education age (7-12), 20 percent o f children o f 3rd cycle
education age ( 13-15 years), and 44 percent o f young adults o f secondary education age
(16- 18 years) are out o f schools. Most of these children are from poor households. 69
3.47 A large share o f Salvadoran youth does not attend school because they cannot
afford. Basic education in public schools i s in principle free o f charge. In practice,
students have not only implicit costs such as time that i s not dedicate to work, but also
direct costs with transportation, materials and contributions to the different school
activities. Until recently, school directors frequently asked parents to contribute with a
payment (cuotas) to help finance school spending. In some cases, parents even paid the
salary o f the teachers until MINED could assign teachers to the school. In other cases,
parents would contribute to school maintenance, purchase o f equipment or materials, or
to finance extra-curricular activities. As mentioned, in late 2003, the National Assembly
prohibited schools to ask parents for cuotas and MINED i s transferring additional
resources to schools (bono de gratuidad ) to compensate partly for this loss o f financing.
3.48 As for public secondary schools, students are charged a monthly tuition that
varies between US$1 to US$15. The amount of the tuition i s determined by the School
Councils. Low-income students may be totally or partially exempt. Students in the
technicalhocational education track usually pay higher fees than those in the academic
track.
3.49 When asked in the 2002 Household Survey why they did not attend school, 40
percent o f the youth give as reasons either because i t i s too expensive, need to work, need
to work at home, o f family reasons which are directly or indirectly associated w i t h
affordability (Table 3.15). The percentage o f youth giving these money-related reasons
for not attending school increases very rapidly with the age o f the cohorts: for those in
upper basic and secondary education age group, they reach 48percent and 64percent,
respectively. The magnitudes and pattern i s similar between urban and rural areas.
69 See Marques, JOSCSilvCrio, El Salvador: Evaluation of Public Expenditure on Education and Health,
processed, report prepared for the World Bank, June 2003
103
Table 3.15: Reasons for not attending school, by area, 2002
(% of school age children, 4-18 years)
Source: Household survey data.
3.50 School availability i s not a major reason for not attending school: only 3 percent
o f the youth give as reason for not attending school that there i s “no school nearby or no
space available”, with the percentage being somewhat higher in rural areas compared to
urban areas, as expected (3.8 percent versus 1.8 percent). The percentage o f youth in the
3rd cycle and secondary education age giving this latter justification i s lower than for
primary age group. This i s surprising in view o f the apparent lack o f public infrastructure
at these levels, though it may be that other reasons such as cost overshadow the school
availability factor. The unavailability o f schools owing to the 2001 earthquakes i s not
anymore a significant reason for not attending school, which i s consistent with the
successful reconstruction effort mentioned earlier.
3.51 About one-third o f children age 13-15 years (3rd cycle age group) give “lack o f
interest” as the reason for not attending school. W h y so many youth have such little
interest in studying? A recent study b y the World Bank shed some light on this issue.” I t
has estimated the private rate o f return to one year o f additional education for different
levels. The estimates indicate the value o f one additional year o f schooling depends
crucially upon the level o f schooling. For primary education, the return i s close to 7
percent while for the 3rd cycle i s only 4.2 percent. In contrast, for secondary education
the return increases to 11 percent and i s even higher for higher education. The study
concludes that without public intervention, progress i s unlikely to be forthcoming rapidly
in increasing coverage o f 3rd cycle and secondary education.
’ O World Bank, El Salvador Countly Economic Memorandum, Report No.26238, 2003, Chapter VI,
Volume 11.
104
3.52 Existing public programs to reduce the demand constraints facing the poor have a
limited impact. There are three scholarships program: 1) the FATEL scholarships for
higher education studies in El Salvador or abroad which are financed with resources from
the privatization of the telecommunication company ANTEL; it awards about 200
scholarships a year; 2) the Rodriguez Porth scholarships for low income/ high achievers
secondary graduates that finances about 80 scholarships a year;7' and 3) the secondary
education scholarships financed with the support o f a World Bank loan that awarded
about 500 scholarships in 2003.
Gender
3.53 Equity o f gender does not seem to be a major issue anymore in the education
sector. Household survey data indicate that though 22 percent o f women had no
schooling compared to 20 percent of men in 2001, for girls age 6-14 years, 31 percent
had no schooling compared to 32 percent o f boys of the same age. Also, the same
proportion o f man and women, 21.4 percent, had completed the first 6 grades of
schooling in 2001.
Distribution of Resources by Income Group
3.54 Public education spending i s progressive for pre-primary and basic education. At
these levels, MINED spends more on the poorest income groups (lower income quintiles)
than on the richest income groups (Chart 3.1 1). At secondary and tertiary levels, spending
favors the richest groups (upper income quintiles), given the l o w enrollment rates o f the
poor at these levels.
Chart 3.11: Share o f Public Education Expenditure by Quintile and
Level, 2002
60
0,
50
F 40
c)
30
20
n
10
0
k
Pre-Primary
Basic
Secondary
Tertiary
Total
H l s t Q W2nd Q 0 3 t h Q 0 4 t h Q W5th Q
Source: Household Survey and MINED
The Presidency of the Republic also gives Excellence Awards (US$ 114 per student) to the 500 most
outstanding basic education students
7'
I05
3.55 The progressively of spending at the basic level i s reflected on education
outcomes, both in enrollment and years o f schooling. Household survey data shows that
during the last several years, net basic education enrollments o f the poorest quintiles has
increased faster than for the richest quintiles, albeit from a lower based. Net enrollment
in basic education for the first and second quintiles increased by 14 percentage points
between 1991 and 2002, while for the 5th quintile it increase b y 6 percentage points
(Chart 3.12). Also, the average number of years of schooling increased significantly
since 1995. For children 15 years in 2002 in the lowest quintiles the increase was over
one year; for children in the highest quintiles the increase was visibly smaller (Chart
3.13).
Chart 3.12; Net Enrolment in Basic Education Quintile
1st Q
5th Q
2nd Q
/ E l 1991
1995 02000 02002
I
Source: World Bank Staff estimates based on household surveys
Chart 3.13: Average Years of Schooling for 15 Year Olds
Income
Source: Household survey
106
Geographic distribution of resources
3.56 The analysis o f the distribution of MINED resources b y department indicate that
there i s not a bias towards the departments with higher per capita income. Chart 3.14
shows no relationship between public education spending per student enrolled in basic
education and the per capita income o f the departments. For secondary education, there
seems to be a negative tendency, that i s poorest department receive relatively higher
allocations from MINED.'*
Chart 3.14: Pop. Income and MINED Spending in Basic
Education by Department (2000)
260
240
220
200
180
160
140
70
20
120
170
Percapita Departamental Income (US$/month)
j-
Education Spending per student
Loaaritmica (Education SDendina Der student)
~
Note: Includes only recurrent spending. Coeficient of Correlation= -0.006; R2= 0.00004.
Source: Marques, JosC SilvCrio, El Salvador: Evaluation o f Public Expenditure on
Education and Health,
processed, report prepared for the World Bank, June 2003, MINED and Household Survey
V.
Conclusions and Recommendations
3.57 As a result of a broad-based consensus, there has been a substantial increase in the
amount o f public resources allocated to education during the 1990s, in support of the
implementation o f the Education Development Plan 1995-2005, which contributed to
major improvements in the sector. The recent study on the situation of El Salvador in
relation to the MDGs prepared under the direction o f the Presidential Commissioner for
Social Affairs with the participation o f several sectors, concludes that i t i s likely that the
country meets the MDGs 2015 targets on net primary education enrollment (100 percent)
and the share of students that complete the firth grade (100 percent), and i t is very likely
that i t meets the universal literacy target for youth (15-24 years). The targets related to
Marques, Jose SilvCrio, El Salvador: Evaluation of Public Expenditure on Education and Health,
processed, report prepared for the World Bank, June 2003
l2 See
107
gender in education (equal share o f girls and boys in primary and secondary education
and the male and female youth literacy rates) have already been met.73
3.58 The new President’s Government Plan -Safe Country, 2004-2009, calls for the
development and implementation o f a new National Education Plan for 2006-2021,
which can also command a broad-based consensus and that w i l l serve “as a renewed
vision for sector development”. This plan may take into consideration the challenges
identified in the previous analysis: low coverage at pre-primary, 3rd cycle o f basic and
secondary education; declining but s t i l l high rates o f dropout, repetition, and overage in
basic education; and general l o w academic achievement.
Allocation o f resources to the sector
3.59 The sector w i l l need more resources to be able to increase enrollments and
improve the quality o f education. Public education spending has increased significantly
during the 1990s to 3.3 percent o f GDP in 2002. However, in the last two years i t has
declined, w i t h the proposed budget for 2004 at only 3 percent o f GDP, well below the 4.4
percent o f GDP average for L A C . Spending per student i s also much lower in El
Salvador than in L A C or Costa Rica.
3.60 Enrollment in 3rd cycle and secondary education are s t i l l quite l o w and should
increase. M a n y low-income students do not attend school at these levels. T o reach
coverage rates of 100 percent in the 3rd cycle and 70 percent in secondary, it has been
estimated that the education budget would need to increase b y about two percentage
points o f GDP, or to 5 percent o f GDP. On the other hand, to achieve the required
quality improvements at all levels, it w i l l necessitate a comprehensive approach that
includes increased investment in education resources and improved school management
and teacher performance.
Intra-sectoral allocation of resources
3.61 As suggested, incremental resources allocated to the sector should favor the 3rd
cycle and secondary education. Primary education absorbs the bulk o f the education
budget and very little resources are assigned to secondary education. Additional resources
assigned to the sector may preferably be allocated to increase enrollments at those levels
but without disregarding the objectives o f ensuring universal enrollment at primary level
and gradually strengthening pre-primary education, as well as increasing the quality o f
education. Increasing coverage at cost o f quality o f education w i l l be a disservice to all
students.
3.62 The increase in the quality o f education requires that an appropriate balance i s
established between expenditures on wages and salaries, teacher training, didactic
materials and other goods and services, and infrastructure. The functional composition o f
the expenditures has improved in recent years: wages and salaries’ share o f the education
budget has declined as a result o f a teacher early retirement plan, while expenditure o f
73
“El Salvador: Avance de 10s Objetivos de Desarrollo del Milenio- Primer Informe de Pais ”, 2004.
108
goods and services has tended to increase. Teacher salaries are quite competitive, and
there are incentives for teachers to move to rural areas and to improve performance.
However, school infrastructure construction and maintenance continues to be a challenge.
There i s a need to strengthen the programs o f school construction and rehabilitation,
particularly where there appears to be undersupply (peri-urban areas) and develop
publidprivate partnership to exploit private sector excess capacity in urban areas.
Efficiency and equity of resource use
3.63 Although there has been progress in recent years, there i s s t i l l ample room to
increase the efficiency o f the education system. Overage, repetition rates, and drop out
rates remain high, and programs directed at addressing these problems should continue to
be supported. Efficiency o f spending appears to be adequate compared with other
developing countries. El Salvador appears to be getting the value for the money in basic
education but i t spends too little in secondary education.
3.64 The decentralization o f spending has empowered the schools and it should
continue, though a more streamlined process of transferring resources to schools i s
needed. An initial analysis o f the cost-efficiency o f the voucher system indicates that the
voucher for Administrative Assistance to the schools and the voucher for Professional
Development (teacher training) may be cost-efficient approaches. Nevertheless,
administrative process to transfer these resources to schools i s cumbersome, in part
because of the sheer number o f vouchers involved and the controls established on them.
In 2003 MINED introduced some simplification to the procedure to transfer the vouchers,
but a more bold approach may be warranted, such as unifying the vouchers in a school
budget that would support the implementation o f the Proyecto Educational Znstituciunul,
including school performance indicators.
3.65
Programs to remove demand side constrains need to be strengthened. In general,
public education spending i s progressive and the average number o f years o f schooling
has increase significantly more for the lowest income groups since the mid-1990s.
Nevertheless, many low-income children do not attend school because they cannot afford
i t and existing programs including scholarship programs have very limited impact.
Recommendations:
3.66
0
0
The above conclusions suggests that there i s a need to consider the following:
Increase the budget resources assigned to the sector gradually to 5 percent o f GDP
over the next several years to finance the expansion o f 3rd cycle and secondary
education for lowest income students.
Continue to pursue a composition o f spending that favors the purchase o f goods
and services for the schools while ensuring the teacher salaries remain
competitive and performance based.
109
Strengthen the programs o f school construction and rehabilitation, particularly
where there appears to be undersupply (peri-urban areas) and develop
public/private partnership to exploit private sector excess capacity in urban areas.
Consider unifying the vouchers in a school budget that would support the
implementation of the Proyecto Educacional Institucional including school
performance indicators.
Invest in scholarships and other programs to reduce the demand constraints facing
poor children and young adults.
Improve the efficiency o f spending by strengthening the programs to reduce
overage, repetition and dropouts rates.
110
CHAPTER IV: Health
4.1
The evaluation o f health spending that follows focuses mostly on the Ministry o f
Public Health and Social Assistance (MSPAS). MSPAS has the responsibility for sector
policy and f o r providing primary healthcare and hospital care in i t s network o f health
facilities, t o those Salvadorans that are not covered b y medical insurance, who are the
majority o f poor. After reviewing the organization o f the sector, the government’s sector
objectives, and the process o f allocation o f public resources, recent trends in public
expenditures and sector outcomes are discussed. The chapter concludes with the
identification o f the sector’s key expenditure issues and recommendations.
I.
Organization of the Sector
4.2
The health sector in El Salvador comprises the MSPAS, the Salvadoran Social
Security Institute (ISSS), the military health facilities, the private sector and over 30
ONGs that provide mostly primary healthcare services. Total health spending has been
distributed as follows: 22.1 percent MSPAS; 18.4 percent ISSS; 56 percent household out
o f pocket expenditures; 2.4 percent private insurance; and 0.2 percent O N G S . ~ISSS
~ is
financed b y payroll taxes and caters to formal sector employees and their families
covering about one million people (17 percent o f total population); MSPAS i s financed
from government revenue and external loans and grants.
4.3
MSPAS has 30 hospitals (27 general hospitals and 3 specialized hospitals), 365
health centers, 168 health clinics (casus de salud), and 47 rural health and nutrition
centers; the ISSS 16 hospitals, 70 health centers and 170 enterprise clinics; the military
three hospitals; and the private sector, 36 hospitals. ISSS rents several MSPAS facilities
including a full hospital (Hospital de Especialidades) in San S a l ~ a d o r . ’ ~
4.4
The public health infrastructure was severely damaged b y the 2001 earthquakes.
The first earthquake on January 13, left two MSPAS hospitals severely damaged and
another six hospitals partially damaged, requiring full or partial evacuation. The most
badly damaged hospitals continued to operate under provisional structures, while the rest
reduced their operations. Altogether, about one-thirds o f MSPAS health facilities were
Institutional Development Strategic Plan, MSPAS, October 200 1
The Hospital de Especialidades (or Specialty Hospital) was built after the 1986 earthquakes with a grant
from France. I t was to replace the Rosales Hospital that was severely damaged b y the earthquake. The
authorities decided not to close the Rosales and since M S P A S had n o resources t o operate both hospitals, it
decided to rent the Hospital de Especialidades to ISSS. The proceeds from the rent (US$ 2 million a year)
go to the Treasury. Since the 2001 earthquakes, there has been reportedly negotiations t o terminated this
arrangement and return the hospital to the MSPAS.
74
75
111
affected. The second quake on February 13, left more than 2,00076hospital beds out o f
service, which compares to the 4,843 MSPAS hospital beds in 2000. The Government’s
ongoing earthquake reconstruction program i s supported b y the IDB, the Central
American Bank for Economic Integration (CABEI), Japan and the World Bank.77
11.
Strategic Objectives and Resource Allocation Process
4.5
In contrast to the education sector, there has been no broad based consensus on
the direction o f the health sector reform, though in recent months there have been some
positive development in this respect. During the 1990s, there were several proposals to
reform the sector that did not prosper. In 2000, a Presidential Commission for the Health
Sector Reform produce a diagnostic of the sector and some guidelines for sector reform7’
but fail to reach agreement on key issues such as those related to sector financing. In
September 2003, the President o f the Republic appointed a Commission to Follow Up the
Reform o f the Health Sector, which has organized five “di~cussion’~groups (financing,
human resources, organization, social participation, and legal issues) that are currently
working to reach a consensus on the direction o f the reform. Reportedly some progress
has been made in these discussions, which the new government i s actively supporting.
4.6
Historically, hospitals in the major urban centers and particularly in the capital
city o f San Salvador absorbed the bulk o f public health resources in detriment o f primary
healthcare and the rural areas, where most o f the poor live. During the 1990s, MSPAS
sought to improve healthcare services in rural areas b y expanding infrastructure, hiring
health promoters, and training midwives. While progress was made, especially in terms
o f infant mortality rates, problems remain: many families s t i l l do not have access to
health services; the presence o f a MSPAS promoters in the communities had l i t t l e o no
impact and the demand for health care b y the poor; and MSPAS providers were
considered o f l o w quality, in part because o f the l o w and irregular availability of and long
waits for medi~ation.~’
4.7
MSPAS’ Institutional Development Strategic Plan o f October 2001 seeks to
address these problems b y changing the organization and delivery o f health services
through: i)a community-based approach to primary care provision; ii)a functional
planning approach that specifies the functions (such as the projected volume o f
For estimates o f the damage, Earthquake Emergency Reconstruction and Health Services Extension,
Project Appraisal Report, World Bank, page 3; for number o f existing hospital beds, Institutional
Development Strategic Plan, MSPAS, October 2001.
77 On June 3, 2003 the National Assembly approved the World Bank loan to finance the “Earthquake
Emergency Reconstruction and Health Services Extension Project” for US$ 142.6 million.
78 The agree principles are: Consolidate a National Health System; consolidate a attention model based on
the promotion, prevention and primary health care; consolidate a mixed provision model (public and
private); consolidate a model under the direction o f the MSPAS; institutionalize social participation and
decentralization as transversal systems; invest in human resources for health; strengthen intersectoral
coordination; and guarantee basic services to all Salvadorans.
79 See Earthquake Emergency Reconstruction and Health Service Extension Project, Project Appraisal
Document (Report NO. 22626-ES), October 31,2001.
76
112
procedures, equipment requirements, patient flows, service definition, numbers and
categories o f staff, and inter-hospital referrals) that w i l l take place in the health facilities;
and iii) closer ties between hospitals and primary care providers b y decentralizing a
subset o f management functions, improving the referral system, and raising quality o f
care.8o
4.8
The cornerstone o f the Plan i s the establishment o f Basic Systems o f Integral
Health Attention (SIBASI) or health district units, which would replaced the
Departmental management units, and the introduction o f a new model o f health service
management in which the financing and the provision o f services may be performed b y
different institutions. The SIBASI would be the basic operative structure o f the reformed
public health service. MSPAS w i l l continue to have the responsibility for the financing
but the provision of services may be done by NGO, the private sector, etc. In addition,
the Strategic Plan calls for developing and implementing performance agreements and
contracts and an incentive scheme to make health providers accountable to both the
MSPAS and service users and introducing community participation in basic health and
nutrition service delivery.81
4.9
MSPAS has established 28 SIBASI and has prepared the operational protocols.
The purpose i s to provide integral services to the population through the coordination o f
primary healthcare and general hospital care in the delimited geographic areas under the
responsibility of each SIBASI. Within the SIBASI area, a network o f health providers
and a general hospital w i l l work in a coordinated manner, avoiding duplicity o f efforts,
and referring cases to the three specialized hospitals in San Salvador, through a National
Reference Center. The impact o f the health providers’ work on the health status o f the
population under their responsibility w i l l be monitored. The management functions
related to planning o f activities, provision o f services and decisions concerning human,
technological, and financial matters are being transferred to the SIBASI. Each SIBASI
has a Managing Committee, which i s advised by a Social Consultation Committee. The
Managing Committee comprises representatives o f the SIBASI’s health providers and the
SIBASI manager. Technical, financial and administrative teams support the manager.
The SIBASI health providers include ONGs, the ISSS, the MSPAS, the private sector and
others. The organizational development o f the 28 SIBASI varies. In some SIBASI there
i s already a strong NGO presence, in others the organization i s s t i l l incipient.
4.10 USAID has been supporting the organization o f seven SIBASI since 2002
covering about 20 percent o f the total population o f El Salvador and comprising 27
percent o f all the health facilities in the country. These S I B A S I are located in L a Paz,
Suchitoto, Cojutepeque, Usuluth, San Miguel, San Vicente and Jiquilisco. According to
USAID, the assistance provided i s helping strengthen the decentralization process and
reinforce the new managerial systems.
4.1 1 The World Bank’s Earthquake Emergency Reconstruction and Health Service
Extension Project plans also to support ten SIBASI, seven covering 73 municipalities in
81
Ibid
“SIBASI: Marco Conceptual y Operacional”, version revisada, MSPAS, 200 1.
113
the northern part of the country where M A S P A reach i s limited and three other SIBASI
in the central part o f the country most affected b y the 2001 earthquakes, where MASPS
primary healthcare infrastructure w i l l be strengthened. For the former seven SIBASI, the
project w i l l finance the contracting o f NGOs by the SIBASI to delivery a basic healthcare
package to between 8,000-10,000 people per NGOs; in the latter three SIBASI, the
project will negotiate a performance agreement with each SIBASI which w i l l receive
financing t o strengthen its primary health care activities. I t i s expected that after three
years, M S P A S w i l l gradually begin absorbing the costs o f these operations.
4.12 Traditionally, the budgets o f MSPAS and i t s hospitals have been prepared on the
basis o f historical (incremental) allocations. MSPAS’ hospitals have administrative and
financial autonomy and manage their own budgets. MSPAS managed primary healthcare
and other public health programs in a highly centralized manner. Departmental offices or
health centers had virtually no decision-making capacity over any o f the budgeted
resources.
Staffing and procurement decisions were taken at the center. The
establishment o f the SIB AS1 system involves profound changes in the resource allocation
process. In 2003, the MSPAS began transferring the management o f resources o f
primary healthcare to the SIBASI. T w o major problems arose. First, the criteria to
allocated resources to the SIBASI for the first level o f attention (primary healthcare) were
not clearly defined and the distribution o f resources was made again on the basis o f
historical allocations. The allocation o f resources based on an agreed performance
contract has s t i l l not be established.
4.13
Secondly, since the SIBASI did not have legal status, MSPAS decided to use the
general hospital budgets as the legal and administrative vehicle to make the transfers o f
funds to the SIBASI. The general hospitals created a new budget line for the resources
assigned to primary healthcare in their SIBASI. This created a potential conflict between
the SIBASI manager and the director o f the general hospital because while the SIBASI
manager is responsible for all health matters in his area including the care provided b y
the general hospital, the hospital directors i s responsible to the Controller o f the Republic
(Cuerte de Cuentas) for the resources assigned to the hospital including those assigned
for the S I B A S I primary healthcare activities. T o address this conflict MSPAS has
appointed managers in many S I B AS1 that also accumulate the function o f hospital
director for administrative purposes; these hospitals have also retained a technical
director. In some other SIBASI the hospital directors were appointed as SIBASI
managers. This arrangement i s unsatisfactory because the hospital should be another
element o f the SIBASI’s service network; having the financing going through the hospital
and having the director of the hospital accumulating functions as director o f the SIBASI
may created conflicts in terms o f allocation o f funds and accountability. In this respect,
concerns have been expressed over the possibility that funds assigned to the SIBASI for
primary healthcare would be diverted to general hospital use, and that expenditures on
health prevention would decline. Again, the disbursement of resources against agreed
outcome could help overcome some o f these problems.
114
111.
Expenditure Trends and Structure
4.14 El Salvador i s among the countries in Latin America that spends more in health.
World Bank (WDI) reports El Salvador’s total health spending at 8.8 percent of GDP in
2002 (3.8 percent public spending and 5 percent private spending), above Costa Rica (6.4
percent) and the average for Latin America and the Caribbean (LAC) (7 percent). While
El Salvador’s public sector spends (as percent of GDP) less than Costa Rica’s, i t s private
spending i s more than twice Costa Rica’s. El Salvador’s public and private health
spending are higher than the average for LAC.
Chart 4.1: Total Health Expenditures as
percent of GDP, 2000
n
0
s
10 0
5.0
0.0
~~~
Private
mPublic
1
5.0
20
3.8
44
Private
I
33
Public 0 Total
Note: Total health expenditure i s the sum of public and private health
expenditures. I t covers the provision o f health services (preventive and
curative), family planning activities, nutrition activities, and emergency aid
designated for health but does not include provision o f water and sanitation.
Private expenditure includes out-of-pocket and private health insurance
plans.
Source: World Bank. WDI
4.15 Given El Salvador’s low GDP per capita, i t s total health spending per capita i s
much lower than Costa Rica or LAC, however.’* Table 4.1 shows that in 2000, Costa
Rica and LAC spent 52 and 42 percent more on a per capita basis than El Salvador.
Since public spending in El Salvador i s much lower than Costa Rica, per capita public
spending i s just a fraction of that country, which impact on the coverage and quality of
public health services, particularly of the poor.
’’
In 2000, WDI shows total population o f El Salvador and Costa Rica at 6.3 million and 3.8 millions,
respectively; El Salvador GDP at US$ 11 billion and Costa Rica GDP at U S $ 14 billion (in 1995 US$); and
per capita GDP in El Salvador, Costa Rica and L A C at U S $ 1,752, US$ 3,912 and U S $ 3,856, respectively
(all i n 1995 US$)
115
1996
1998
2000
El Salvador
135
164
184
Costa Rica
200
236
279
LAC
260
265
262
4.16 MSPAS estimates total health spending at 8 percent of GDP in 2001, a figure
somewhat lower than the one reported by the World Bank for 2000. Of total health
spending, 46 percent was financed by public sources, namely the treasury, 47.4 percent,
the ISSS, 44.5 percent, external donors, 2 percent, and other sources for 6.1 percent
(Table 4.2).
Table 4.2: Public and Private Health Spending and Sources of
Financing
I
I
I
I
I
Private Insurance % private spending
2.0
3.3
2.6
Out-of- Pocket, % private spending b l
97.7
96.7
97.4
a/ Includes mostly the "own resources" of the hospitals and other public facilities, paid by the
patients or their institutions (Le., Teachers Health Program).
a/ Excludes co-payment in MSPAS facilities
Source: Cuentas Nacionales en Salud, MSPAS, mayo 2003
4.17 MSPAS budget in relation to GDP has remained relatively constant in rec n
years hovering around 1.6 percent; as a share of the Central Government budget i t has
increased from 7.8 percent in 1996 to 9.7 percent in 2003, or by about two percentage
points (Chart 4.2). For 2004, the proposed MSPAS budget i s equivalent to 1.6 percent of
GDP and to 9 percent of the Central Government
The World Health Report (2002) shows that health expenditures by the General Government, which
includes the Ministry of Health and other autonomous public institutions such as the social security, as a
percentage o f total General Government expenditures was much higher i n El Salvador that other Central
America Countries in 2002: E l Salvador, 26.2 percent; Honduras, 18.3 percent; Costa Rica, 18.2 percent;
and Guatemala, 16.4 percent.
83
116
Chart 4.2: MSPAS Budget as percent of Total Budget and
GDP 1996 2004
-
m
P
c
:
E
a
Source: Ministry o f Finance (1996-2001: executed budget; for 2002-2003,
approved budgets; for 2004, proposed budget).
Spending by Level and Function
4.18 Traditionally, MSPAS has classified healthcare in three levels: Level Ior primary
healthcare; Level I1 or general hospital care; and Level I11 or specialized hospital care.
Chart 4.3 presents the distribution o f MSPAS approved budget for these levels o f
attention, for administration, and “other” expenditures that include transfers t o other
entities and investment expenditures. The bulk o f MSPAS resources continued to be
allocated to hospital care (57 percent on average during the 1996-2003 period), with the
share going to hospitals declining marginally since 1997. In contrast, primary health care
participation in MSPAS budget has declined f r o m a peak o f 34 percent in 2000 to 29.6
percent in 2003. Since the MSPAS budget as a share o f the GDP has remained relatively
constant, this implies that public primary healthcare spending as a proportion o f GDP has
decline in recent years, certainly a worrisome development. According to the MSPAS,
the amount budgeted for administration has declined from 6.6 percent o f total spending in
1996 to 4.7 percent in 2003. The item “other”, which includes investment related to the
earthquake reconstruction, has doubled i t s share in the total budget from 6.6 percent in
1996 to 12.4 percent in 2003.
117
Chart 4.3: MSPAS Expenditures by Level of Attention & Administration
(1996 - 2003)
1
1996
1
1997
1
1998
1
1999
1
2000
1
2001
~
2002
1
2003
11
Note: Refers to approved budget. Primary healthcare includes level I(public health and primary care i n health units);
general hospital care includes level 11; specialized hospitals includes level 111. Administration spending refers only to that
incurred by MSPAS-center. Other includes transfers to other entities and investment expenditures.
Source: MSPAS
4.19 Table 4.3 shows MSPAS executed budget b y major economic category for the
1996-2003 period. I t reveals the impact o f MSPAS transfers to the SIBASI. In 2003, 86
percent o f the MSPAS budget was transferred to the specialized hospitals and to the
SIBASI (for primary health care and general hospitals). MSPAS-center retained 14
percent o f the total budget (about US$33 million) o f which 3.4 percent were for wages
and salaries and the remainder for goods and services, which s t i l l are procured ~ e n t r a l l y ~ ~ ,
and for investment expenditures. In the near future, as MSPAS-center focuses on the
functions of policy making and regulations and the SIBASI become responsible for
procuring most goods and services, the budget o f MSPAS-center should be further
reduced.
84
This i s for instance the case of fuel.
118
Memo:
Executed US$ mm
143.3
145.9
176.6
189.4
209.6
216.0
223.7
235.3
Budget US$ mm
150.6
150.6
151.6
188.3
205.9
222.4
232.0
240.6
% Executed
95.0
97.0
116.0
101.0
102.0
97.0
96.0
98.0
4.20 MSPAS has executed over 95 percent o f i t s budget during 1996-2003 period.
Table 4.3 shows that execution varied from 95 percent the 116 percent. This latter figure
i s a result o f mid-year upward revision o f the budget in 1998 related t o a sharp increase in
the salaries of nurses (US$ 18 million that year) and other emergency expenditures in the
wake o f Hurricane M i t c h (US$ 13 million).
4.21 Hospitals spend about two-thirds o f their budget in wages and salaries and onethird in goods and services. Table 4.4 shows the budget break down o f the specialized
hospital B l o o m and o f the general hospital L a Union. B y type of attention, over half o f
the budget o f hospital L a Union i s now for primary health care o f the SIBASI to which
the hospital belongs. Administrative expenses absorb 5.6 and 6.6 percent of the L a
Union and Bloom budgets, respectively.
Table 4.4: Hospital Budgets by Type of Attention and
M a j o r Category, 2003
Source: Ministry o f Finance
4.22 The allocation o f resources between general hospitals and specialized hospitals
has been based on historical allocations and has had no explicit relationship with
outcomes. A study published in 1999 showed that specialized hospitals in El Salvador
received significantly larger budgets per patient than general hospitals apparently, owing
to the believe that specialized hospitals treat persons with more difficult (and costly)
119
illne~ses.’~The study analyzes hospital expenditures over a 12-year period and, after
controlling for patient morbidity, outputs and other characteristics, concludes that general
hospitals are substantially under-funded relative to specialized hospitals. This issue
deserves close attention by MSPAS authorities, particularly because under the new
SIBASI financial arrangements the relatively under-funding of general hospitals may lead
to diversion of resources from primary health care to hospital care, reducing even further
the share o f actual resources spent on primary healthcare.
4.23 The consolidated budget b y spending category o f MSPAS and the public hospitals
indicates that during the 1996-2003 period, about two-thirds of the budget was to pay for
wages and salaries; the remaining to pay for medicines, medical inputs, investment and
other goods and services (Table 4.5). The purchase of medicines absorbed between 11
percent and 17 percent o f total spending while medical inputs between 5 percent and 6
percent. The share o f physical investment was below 3 percent o f the budget until 2001,
but i t has since increased to almost 9 percent in 2003 as a result o f the earthquakes.
Table 4.5: MSPAS and Public Hospitals Budget, by Category 1996 2003
Note: Refers to approved budget
a/ Includes other purchase o f goods and services such as water, electricity, telephone, office
materials, cleaning and taxes as well as transfers to other non-hospital institutions
Source: MSPAS
4.24 The amount spent on wage and salaries have increased sharply during the 19962003 period, b y 76 percent. What explains this trend? On the wage front, most o f the
increase took place in 1998 and 1999 owing to the adjustment to nurses’ wages following
their strike in 1998. Also, from 1996 to 1999, MSPAS staff received an annual increase
in wages that averaged 7 percent (escalafon). Since 2000, this increase has not been
granted and the share o f wages and salaries in total spending has declined. N o analysis o f
MSPAS wages i s available, but according to senior MSPAS officials, the salaries o f the
administrative staff compares well with their public and private sectors counterparts; at
technical level salaries are reportedly lower than in the private sector.
4.25 The number o f MSPAS staff from i t s web page i s presented in Table 4.6.86 There
are wide annual variations in the number of some staff; for instance, the number o f
doctors dropped sharply in 2000 but then increase back in 2001 to drop again in 2002. In
the MSPAS, the number o f positions (plazas) and the number o f employed staff may
85 Fiedler, John L et. al. “Risk Adjustment and Hospital Cost-Based Resource Allocation, With an
Application to El Salvador”, Social Science and Medicine, 48, 1999, 197-212.
86 MSPAS’s Division of Administration and Human Resources does not keep historic information on staff.
120
differ substantially. In the case o f doctors, one doctor may occupy more than one
position, and in case o f medical interns, more than one intern may occupy one position.
Also, one position may refer to different daily hours o f work. The information in the table
seems to refer sometimes to the number o f staff, other times to the number of positions.
Notwithstanding these difficulties, the data indicates that the number o f positions
assigned in the budget to MSPAS has been declining since 2000, which would be
consistent with a reduction in the share o f wage and salaries in the MSPAS budget
indicated above.87 Strengthening MSPAS human resource management systems i s a
priority.
-
Table 4.6: MSPAS’ Staff, 1999 2002
a/ Budget L a w
Source: MSPAS (Web page) and Ministry of Finance (Budget documents)
4.26 The share o f the budget spent on medicines has declined sharply until 1999 and
has recuperated only slightly in recent years. In 2003, the share o f medicines was 12
percent compared to 17 percent in 1996.88 This does not appear to be a result o f a more
efficient pharmaceutical procurement system. Indeed, a study by the Management
Sciences for Health (MSH) found that for a sample o f critically needed medicines, only
82 percent were available at MSPAS primary healthcare facilities and 62 percent at
hospitals. Moreover, i t discovered that El Salvador routinely purchases pharmaceutical
products at prices higher than the international median. In addition, products o f
substandard quality were found in “50 percent of samples collected from public facilities
(...) and 28.6percent from private p h a m z a ~ i e s ” . ~
In~2003, MSH proposed a new system
to manage pharmaceutics, which involves joint procurement by the specialized hospitals
and the SIBASI to obtain a better price and a single distributor to manage the purchase
orders, storage and distribution; MSPAS would monitor the quality o f pharmaceutical
products ordered and purchased by the network facilities. During its first year o f
operation, the new system suffered logistic problems that MSPAS i s seeking to
overcome.
” The number of positions approved by category i s from the Wage L a w (Ley de Salarios), which
accompanies the annual Budget Law.
88 In dollar terms, US$9.5 million were spent in medicines in 1996; US$ 12 million in 2003.
89 Reported in the web page of Management Sciences for Health (www.msh.org/seam/3.1.2b.htm)
121
4.27 Between 1996 and 2000, physical investment average less than 1.5 percent o f the
MSPAS budget. In 2003, the investment budget increased to 8.8 percent o f the total
budget as a result o f the reconstruction o f the infrastructure damaged b y the earthquakes.
MSPAS infrastructure i s a combination o f modern facilities and very old and obsolete
ones. In some hospitals there are very old wings (over 75 years) side b y side with more
recently build ones. Weak anti-seismic construction specifications and lack o f
maintenance made the infrastructure more vulnerable to the natural disasters.
Maintenance expenditures for infrastructure and equipment have been minimal.
4.28 M S P A S has developed a program to reconstructhehabilitate i t s facilities,
including 23 o f 30 national hospitals and 82 health centers. Existing IDB loans and
CABEI funds, are being utilized to cover the costs o f provisional structures and for the
rehabilitation o f the 15 less badly damaged hospitals. For the reconstruction o f the eight
hospitals w i t h the greatest damage, the government has obtained the support o f the World
Bank and Japan.9o The World Bank Emergency Reconstruction project w i l l support the
strengthening and implementation o f a comprehensive preventive maintenance program
for the seven hospitals being reconstructed under the project. As mentioned, the project
w i l l also support the extension o f basic services in remote areas and the strengthening of
primary health care services and facilities in areas affected b y the 2001 earthquakes
Cost Recovery and External Funding Sources
4.29 To help finance hospital costs, patients usually pay a fee for the services, the socalled co-payments. In the early 1990s’ with support from USAID’s APSISA program
(Support to El Salvador’s Health Services program) MSPAS developed the different
components of a cost recovery system for the hospitals: costing o f services;
socioeconomic evaluation o f patients; administrative-financial management; and required
legal changes. A pilot program was initiated but the system was never fully implemented
or institutionalized, though hospitals continued to charge for some services. Reportedly,
hospitals charge to all patients that use their facilities unless they claim that they cannot
pay. The charges vary from hospital to hospital and past attempts to rationalize the
systems have failed. Since the introduction o f the SAFI, these resources colleted b y the
hospitals are treated as part o f their budgets (own resources). If the hospitals recover
more funds than those originally included in their budgets, they need to request the
National Assembly authorization to spend the funds. Reportedly this i s done routinely
and does not constitute a major disincentive to cost recovery, though i t may take up to
three months to obtain the authorization from the National Assembly to use the funds.
4.30 The resources from co-payments are quite important for the hospitals. In 2003,
income from the “sale o f goods and services”, most o f which are co-payments from
patients, at Hospital B l o o m represented 8.2 percent o f i t s total budget of U S $ 15.3
The World Bank loan w i l l help rehabilitate and replace some equipment in three hospitals (San Juan de
Dios in San Miguel, San Pedro in Usulutan, and Santa Teresa in Zacatecoluca) and replace four other
hospitals (Maternidad in San Salvador, Santa Gertrudis i n San Vicente, Cojutepeque in Cuscatlan, and San
Rafael i n L a Libertad). Japan i s expected to help reconstruct Hospital Rosales.
90
122
million; the remaining being transfers from the treasury; for the general hospital L a
Union, the “sale o f goods and services” corresponded in 2003 to 6.2 percent o f i t s budget
o f U S $ 3.6 million. As can be observed in Table 4.4, co-payments more than cover the
administrative costs o f these hospitals.
4.31
Until recently health centers also charged a fee for services, or the so-called
“voluntary quotas”. In June 2002, a Presidential Decree (Executive Decree 2002)
abolished these quotas. Local governments are now working closely with
communities to mobilize resources to finance some services in health centers that
are not covered b y MSPAS.
Source: External Cooperation Unit, Directorate of Planning, MSPAS
-
Table 4.8: External Financing for the Health Sector, 1994 2002
Source: Ministry o f Health
I
144.778
I
100
4.32 External sources have also provided an important support to the health sector.
External support received b y MSPAS should in principle be all accounted for in i t s
budget. In practice, all loans are included in the ordinary or extraordinary budgets, while
for the grants received the type o f recording varies: grants that finance expenditures over
a extended period o f time such as those received from the European Community and
Luxemburg, are included in the budget; grants received sporadically to buy goods or
services or grants in kind often are not included in the budget. Table 4.7 presents the
recorded loans and grants received b y MSPAS. I t shows that between 1997 and 2000,
external sources financed on average 7.3 percent o f MSPAS budget. This includes a
large loan (valued at U S $ 15.3 million) for hospital equipment and ambulances f r o m
Spain in 1998. With the earthquake in 2001, external financing increased to about over
123
8.4 percent of MSPAS budget in 2003. In the last six years, about two-thirds o f the
financing came in the form o f grants and one-third in the form o f loans. The European
Union, U S A I D , Spain, Pan American Health Organization (WHO), and Japan accounted
for the bulk (80 percent) o f external support to the sector since mid-1990s (Table 4.8).
IV.
Expenditure Outcomes
4.33 There i s no simple relationship between health spending and outcomes. Health
outcomes are not only a function o f the amount o f public and private spending in the
sector, but are also influenced b y the efficiency and incidence o f pubic spending as well
as b y other variables that are to a large extent outside the control o f the sector such
sanitary and education conditions. These considerations should be kept in mind as health
indicators and the overall efficiency of health expenditures are discussed in the following
paragraphs.
Key health indicators
4.34 During the 1990s, El Salvador made progress in life expectancy and infant
mortality rates but progress in reducing child malnutrition has lagged, while in
immunization the coverage dropped. Table 4.9 shows key health indicators for El
Salvador, Costa Rica, and L A C . El Salvador’s life expectancy and infant mortality rates
improved during the 1990s and these indicators are now similar or better than LAC.
Measles immunization in 2002 was 93 percent for children under 12 months, a drop from
98 percent in 1990, but still above LAC.91 O n the other hand, malnutrition in children
under five i s s t i l l four times greater than Costa Rica.
I
I
I
Table 4.9: Key Health Indicators, 1990 - 2002
I
fe expectancy at
~ulrth,total (years)
I
Mortality rate,
,
I
Malnutrition in
infant (per 1,000
children under
live births’,
Sfpercent) a/
I
I
1
Measles
I
DTP
I
1%
Immunization% o f
Immunizatiol
Children under IL Zhildren under 12
.^
mnnthr
Note: Data i s for the most near year available.
a/ weight for age
Source: National Family Health Survey (FESAL) conducted by the Salvadoran Demographic Association,
“El Salvador: Informe de Pais Sobre el Avance de 10s Objectivos de Desarrollo del Milenio”, final draft,
April, 2004, and World Bank, W D I
I t should noted that according to MSPAS there has been no recorded case o f measles since 1996 and i n
2002, i t introduced the multipurpose vaccination against six diseases including measles, and the triple viral
vaccination (SPR).
9’
124
4.35 Despite the general progress in health indicators, substantial differences remain
between the health outcomes for the different income groups. According the National
Family Health Survey (FESAL) conducted b y the Salvadoran Demographic Association,
infant mortality i s almost twice as high for low-income families than for higher income,
though in recent years the gap has been closing (Chart 4.4). Also, 15.3 percent o f
children o f low-income families suffer malnutrition (weight for age), only 3.7 percent o f
the better o f f children were found in this condition.
Efficiency of Overall Spending
Table 4.10: MSPAS Selected Indicators. 1996 - 2002
I
1998197
1999198
2000199
2001100
2002/01
13
11.9
18.5
-6.9
6.7
-2.6
7.5
13.8
-6.4
3.7
3.7
0.1
5.5
-7.9
-0.5
0.4
5.3
7.9
-7.2
4.4
-0.5
2.6
-0.5
-7.1
1.8
2.1
2
2
1.9
1.9
Source: Ministry o f Health
4.36
Table 4.10 shows recent MSPAS “production” indicators. I t can be seen that
ambulatory visits, major surgeries, and hospital discharges have increased rapidly
in recent years, with the exception of 2001 owing to the earthquakes. All the
indicators recovered in 2002 with the exception o f institutional deliveries?’ The
fall in institutions delivery in 2002 may be associated at least in part w i t h the
damaged suffered b y the Hospital de Matemidad in San Salvador during the 2001
earthquakes. Hospital utilization rates, averaging 86 percent since mid- 1990s,
have been at acceptable levels. For comparison, hospital occupation rates in
Honduras during the same period average about 70 percent.93
Recall that this i s one of the hospital to be replaced with the World Bank loan.
Honduras Public Expenditure Management for Poverty Reduction and Fiscal Sustainability, World Bank,
June 2001, page53.
92
93
125
Chart 4.4: Infant Mortality per Socio-Economic Group
60
50
$ 40
2
c)
2
0
30
6 20
7
$ 10
P o
Low Income
Middle Income
High Income
~
10FESAL 1993 EFESAL 20021
Source: Ministry of Health
4.37 Notwithstanding these results, the report o f the Presidential Commission for the
Health Sector Reform published in December 2000, indicated that the poor quality and
limited efficiency o f public institutions were among the key debilities o f the
The
major determinant o f poor quality o f services in MSPAS facilities appears to be the lack
o f the proper number o f trained staff in public facilities (most o f them rely almost fully
on different kinds o f trainees) as well as the missfunction o f doctors incentives and
dedication at public institutions. Only half of the medical staff in public institutions i s
fully paid by MSPAS. K e y clinical personnel spend approximately one-third to one-half
o f their time in non-clinical activities. 95
4.38 H o w cost-effective i s El Salvador’s health sector compared to other countries?
As a first approximation, health expenditures can be related to key health outcomes.
Charts 4.5 and 4.6 plot total health spending per capita against life expectancy and infant
mortality, respectively, for 27 Latin American countries from the W o r l d Bank’s WDI
database. In terms o f life expectancy, El Salvador i s situated between the northeast and
the southwest segments, which implies that i t spends a reasonable amount o f money and
obtains a l i f e expectancy that i s also reasonably high compared to other countries in the
sample. The most efficient countries in the sample are Cuba, Jamaica and Belize; the
most inefficient Brazil.
94 The report indicated as other debilities the following: lack o f equity and insufficient coverage; legal
framework i s not applied adequately; fragmentation and lack o f coordination between institutions; sector
institutions with centralized management styles; and incipient social participation.
95 Seiber, Eric. Baseline and Best Practices Assessment of seven SIBASI in El Salvador. PHRPlus. Dec
2002).
126
Chart 4.5: Total health expenditure per Capita
and life expectancy at birth.
Chart 4.6: Total health exp. Per capita and
infant.
-
__
- . __
Total Health Expenditure per capita (US$)
0
I
0
171
342
342
171
Total Health Expenditure per capita (US$)
Note: Most recent data (circa 2001); Total health expenditure i s the sum o f
public and private health expenditures. I t covers the provision o f health
services (preventive and curative), family planning activities, nutrition
activities, and emergency aid designated for health but does not include
provision of water and sanitation; El Salvador coordinates: (185,70); Sample
average: (171,71)
Source: W B ’ s WDI sample o f 27 Latin American countries
Note: Most recent data (circa 2001); Total health expenditure i s the sum o
public and private health expenditures. It covers the provision of healtt
services(preventive and curative), family planning activities, nutritior
activities, and emergency aid designated for health but does not includc
provision o f water and sanitation; El Salvador coordinates: (185,25); Sampk
average: (17 1,26)
Source: WB’s WDI sample o f 27 Latin American countries
4.38 As for infant mortality, El Salvador i s also situated between the northeast and the
southwest segments, which implies that i t spends a reasonable amount o f money and
obtains a infant mortality rate that i s not l o w compared to other countries in the sample
(Note that to keep the interpretation o f the Chart similar to that presented previously, the
infant mortality scale i s presented in the inverse form because higher spending should
correspond to lower infant mortality). The most efficient countries in the sample are:
Cuba and Jamaica; the most inefficient i s again Brazil. In conclusion, El Salvador does
not appear to be inefficient though i t i s not among the most efficient countries.
Expenditure Incidence
4.39 The following paragraphs discuss how public spending have impacted the access
and affordability o f health services to the poor, the possible existence o f inequitable cross
subsidies between I S S S and MSPAS in detriment o f the latter, and the distribution o f
MSPAS expenditures b y income groups and department.
Access and Affordabilitj
4.40 The coverage o f the health system i s still inadequate. Table 4.1 1 shows that less
than 20 percent o f the Salvadorans have access to medical insurance. The ISSS covers 17
percent o f the population; private and institutional insurance another 1.8 percent; and the
remaining 81.3 percent (97.3 percent for those in extreme poverty) has not insurance.
MSPAS should cover the population without insurance, particularly the poor.
127
Nevertheless, 24 percent of the population s t i l l does no have access to health services or
only has limited access.96
Table 4.11: Population Covered by Medical Insurance, 2002
(% of total population)
I
___
Poverty Level
Pouulation
Poverty
Extreme Poverty
Relative Poverty
No Poor
~
Without
Insurance
Total
81.3
93.8
97.3
90.9
71.9
Affiliate
11.4
3.6
1.7
5.1
17.2
ISSS
I Beneficiary
I
5.6
2.3
0.8
3.6
8
Institutional
Insurance
Private
I
Insurance
1.7
0.3
0.2
0.4
2.8
0.1
0
0
0.1
Source: Household Survey, 2002
4.41 Substantial differences remain between the access of the poor and the better o f f to
health services. Salvadorans in the highest quintiles are one-third more likely to receive
medical care than those in the poorest q~intiles.~’FESAL-1998 indicates that 32 percent
of l o w income expecting mothers had no prenatal care visits compared to 9.7 percent o f
the better off; also while 80 percent o f the better o f f mothers delivered in a hospital, only
41 percent o f the low income mother had an institutional delivery. 14 percent o f the poor
go to private or N G O facilities rather than to MSPAS facilities (Table 4.12). One-quarter
o f the poor (30 percent in extreme poverty) do not seek MSPAS facilities because o f lack
o f funds. (Table 4.13).98 In addition, one in each three poor persons that get ill,do not
trust the public system and/or prefer to seek alternative cares.
Table 4.12: Establishment that Visited When Ill,2002
(% of ill)
MSPAS
ISSS
Private
Total
67.5
10.2
17.1
5.3
Poverty
81.3
4.5
9.6
4.6
Extreme Poverty
86.2
1.2
7.5
5.1
Relative Poverty
77.4
7.1
11.2
4.3
No Poor
56.5
14.7
23.1
5.7
Poverty Level
NGO or Other
Reported by the UNDP’s Human Development Report 2003 (Table 3.8) based on FUSADES estimates.
FUSADES derives the lack of access to MSPAS services b y calculating from the household survey the
share o f those that indicated than when ill they did not seek MSPAS facilities because o f all the reasons
asked in the survey minus that “it was not necessary” (Table GO6 o f the Household Survey) on the total
number o f those that got ill (Table GO4 o f the Household Survey). The reasons not to seek MSPAS include
included in the survey are: there are no medicines, lack o f attention, too expensive, there i s no nearby heath
center, does not believehrust medical attention, bad attention, need to work, etc (see Table 4.13). The
MSPAS acknowledges that about 20 percent o f the population has not “regular” access to i t s services.
97 An Earthquake Emergency Reconstruction and Health Service Extension Project, Project Appraisal
Document (Report NO. 22626-ES), October 3 1,200.
98 Note: Executive Decree 2002 of June 2002, payments in health centers were eliminated. Future household
surveys should indicate whether this impacted on visits to health centers. Nevertheless, the cost o f accessing
MSPAS facilities includes not only direct costs such as co-payments but also other costs such as transportation.
96
128
4.42 The latest estimate o f the annual cost of providing a minimum package o f
healthcare and nutrition services in El Salvador based on differentiated capitation i s
estimated at about $ 20 per person. The cost o f the package o f health and nutrition
established b y MSPAS (SESYN or Essential Heath and Nutrition Services) and based on
universal capitation, which i s the basis for providing basic health care in the IDB's
Support to the Modernization Health Program, i s US$ 31 per person.99 Taking these two
estimates as extremes, the annual cost o f covering the 1.6 million people without regular
health services could vary between $ 3 2 m and $ 50 m, equivalent to between 0.2 and 0.3
percent of GDP."
I
Table 4.13: Motives for not visiting MSPAS establishments, 2002
(% of ill)
Poverty Level
IIt
was
necessary
not(Lack
oflCenter
lmoney I
too
attention
Poverty
Extreme Povert
Relative Poverty
No Poor
36.2
47.1
45.1
20.8
19.4
26.9
far,IDoes
not
I
trust,
medicine other
20.1
Source: Household Survey, 2002
Cross-subsidies
4.43 There i s a major difference between ISSS and MSPAS notional spending per
capita. ISSS i s responsible for about 45 percent o f total public spending but it serves
only 17 percent of the population (6 percent o f the poor population). In contrast, MSPAS
with 55 percent o f public spending must cover 80 percent o f the population. ISSS spends
about U S $ 220 per beneficiary a year; while MSPAS' annual budget corresponds to only
US$50 per person i t should cover. Only 6 percent o f the poor have access to ISSS.
4.44 The renting of MSPAS facilities to ISSS further raises equity concerns. MSPAS
may send patients to I S S S facilities, the cost of the treatment being deducted from the
rent ISSS i s required to pay to the treasury. Reportedly the number o f patients sent to
ISSS operated facilities (Hospital de Especialidades) i s small, as referrals require formal
An Earthquake Emergency Reconstruction Project, PAD (Report 22626-ES), Oct. 2001, indicated a
preliminary cost of $ 15 per person per year based on the Guatemala and Honduran experiences. Recent studies
prepared for the WB project point out to higher costs of about $ 20. These studies are based on a differentiated
capitation, where the cost of the package for children, adults, are different, while the IDB project uses an
universal capitation..
100
UNDP 2003 HD Report estimates the cost at $ 31 per person per year; with a annual cost of $ 50 million to
reach 1.6 m. people or 0.3 % of GDP. To eliminate malnutrition in children under 5 years, UNDP estimates that
i t would cost an additional $ 23 m. a year, equivalent to 0.15 % of GDP. The estimate i s based on the number o f
children with malnutrition in urban areas (29,655) and rural areas (49,841) and assuming the annual cost o f
eliminating malnutrition equivalent to the urban minimum basket ($ 385) and rural minimum basket ($ 240).
99
129
authorization from the Minister o f Health. ISSS' members and beneficiaries also use
MSPAS facilities. FESAL-1998 reports that 33 percent o f ISSS' members and
beneficiaries had their delivery in MSPAS hospitals, while only 3.3 percent o f those not
related to ISSS had the delivery in ISSS' hospitals.""
Aside from rents paid for the
Hospitd de EspeciaZidades or other facilities, ISSS does not pay anything to MSPAS
when i t s beneficiaries use MSPAS facilities. In April 2004, the MSPAS hospitals and the
I S S S reached an agreement in which MSPAS hospitals w i l l begin charging ISSS for
emergency treatments to ISSS beneficiaries. In the near future, MSPAS authorities
expect to reach a similar agreement with ambulatory treatments .
Distribution of Resources
4.45 A large proportion o f the better o f f uses MSPAS facilities. Household survey
data shows that o f those that visited MSPAS hospitals in 2002, the majority or 53 percent
were no poor; 26 percent relative poor, and 21 percent extreme poor (4.14). Overall, 47
percent o f the people that use MSPAS facilities are no poor.
Table 4.14: Distribution of Persons Visiting Central Government
MSPAS Facilities bv Income GrouD 2002
National
Poor
Extreme poor
Relative poor
No poor
Source: Household Survey
Hospitals
100
47.5
21.3
26.2
52.5
Health Centers
100
55.6
26.8
28.8
44.4
Health Units
100
73.5
44
29.5
26.5
Total
100
53.3
25.3
28
46.7
4.46 Since 64 percent o f the MSPAS budget i s for the hospitals, the better o f f benefit
disproportionably from MSPAS. Chart 4.7 shows the distribution o f MSPAS resources
by quintile for hospital and primary healthcare. In primary care, expenditure favor the
poorest quintiles, while for hospital care, it favors the middle quintiles. This calls for
strengthening the cost recovery policies in hospitals so that those that can afford to pay
for the attention received do pay, and MSPAS may redirect resources to finance the
delivery o f basic health and nutrition services to the population currently underserved.
'"ISee
FESAL-1998, Table 8.14, page 232.
130
,
Chart 4.7: MSPAS Hospital and Primary Health Care
Spending by Quintile, 2002
J
m
.E 35
E
e: 25
30
-
;20
15
p
10
5
$
5
0
+
n
Poorest Q 1
I
Q2
0 3
[BHospitalcare .Primary
Q4
Richest Q 5
Healthcare
Source: Staff estimates based on household survey and MSPAS data
4.47 O n a geographic basis, MSPAS distribution of resources seems to be somewhat
progressive. Charts 4.8 shows per capita income of each Department plotted against
MSPAS total per capita spending. No clear relationship emerges which indicates that
MSPAS resource distribution does not favor the better o f f Departments or the worse
off."* Given that hospital expenditures are concentrated in San Salvador where the three
specialized hospitals are located, Chart 4.9 shows MSPAS spending on primary
healthcare alone in relation to Departmental per capita income. I t reveals a negative
tendency between per capita income and per capita healthcare expenditure but the
relationship i s weakIo3Therefore MSPAS distribution o f primary healthcare expenditures
b y Department may be said to be somewhat pro-poor.
Correlation Coefficient=O.OB; R2=0.003.
of Correlation= -0.34; R2= 0.1 18.
lo3
Coefficient
131
Figure 4.8: Per capita income and M O H
spending by Department (2000)
20
40
60
80
100 120
Figure 4.9: Per capita income and
primary health care spending by
Department (2000)
140 160
40
Departmental Percapita income (US$)
-
Per Capita Total Health Spending
Loa. (Per CaDita Total Health Soendina)
60
80
100
120
Per Capita Primary Healthcare Spending
-
I
Log. (Per Capita Primary Healthcare Spending)
Note: Per capita health expenditure excludes investment expenditures.
Source: Staff estimates based on household survey and MSPAS data
V.
Conclusions and Recommendations
4.48 El Salvador’s health indicators have improved during the last several years. A
recent study on the situation o f El Salvador in relation to the MDGs prepared under the
direction o f the Presidential Commissioner for the Social Affairs, concludes that it i s
highly likely that the country meets the MDGs 2015 targets on infant mortality rate,
mortality rate in children under five, measles immunization, and tuberculosis incidence,
but it i s unlikely that i t meets the MDGs targets on maternal mortality, deliveries b y
trained staff, and HIV/AIDs. Relative to malnutrition, the study concludes that it i s
unlikely that the MDG target be met at national and rural levels, but highly likely at
urban level.’04
4.49 Thus, significant challenges remain. The MSPAS needs to recover the
infrastructure that was severely damaged b y the 2001 earthquakes and take benefit o f this
large investment in hospital infrastructure to build a rationalized, modern, and wellmanaged public hospital network. The outputs o f this network needs to recover and
surpass its level of production before the earthquakes, without substituting for care that
should be done at earlier stages and less costly facilities. Public health expenditure for
poor people w i l l need to increase in the coming years since, on one hand, per capita
expenditure i s very l o w and, on the other hand, the government budget w i l l need to
absorb the expansion o f services that the W o r l d Bank project i s executing once the
Bank’s loan i s finished. Allocation o f resources within the sector needs also to be
IO4
140
DepartamentalPer Capita income (US$)
“El Salvador: Avance de 10s Objetivos de Desarrollo del Milenio- Primer Informe de Pais”, 2004.
132
carefully streamlined and enforced. Financial protection o f the poor against health shocks
needs t o b e better regulated and enforced, focalizing user fees in public institutions,
expanding formal social security, and exploring other ways o f community health
insurance. Existing cross-subsidies between the ISSS and MSPAS need to be corrected
and the cooperation between these two institutions harnessed.
4.49
The reform o f the sector in such a direction w i l l require a national consensus. In
this respect, the new President’s Government Plan -Safe Country, 2004-2009, calls for
the reform of the health sector in a “concerted manner which may lead to and efficient
national health system, functioning in a decentralized manner, with universal coverage,
and free of charge to all persons that can not afsord.”
Allocation of resources to the sector
4.50 Since most o f the additional resources allocated to the sector w i l l be needed to
finance the reconstruction o f the damaged infrastructure, MSPAS should focus on
increasing the efficiency and equity o f resource use in the sector, including increasing
cost recovery from those that can afford it. El Salvador i s among the countries in Latin
America that spends more in health (as a percentage o f GDP) because o f large private
spending. The public sector spends slightly above the average for Latin America, though
on a per capita basis, El Salvador spends much less than Costa Rica or LAC. Given
overall budgetary constraints, the heavy demands on the treasury that are being made b y
the reconstruction o f health infrastructure, and other competing demands, i t i s unlikely
that additional significant public resources w i l l become available to the sector in the
foreseeable future other than for the reconstruction o f hospital and clinics, thus requiring
MSPAS to focus on increase the efficiency o f resource use.
4.51 In this context, i t i s important make a systematic evaluation about to what extent
the decentralization program to the SIBASI has been implemented and, more
importantly, how this reform i s contributing to the overall performance o f the sector.
This assessment should focus in particularly on the efficiency and equity gains,
managerial capabilities built in SIBASIS, changes in the quality services, balancing
primary-hospital care and coordination of care, the role o f management contracts to foster
and reward better performance, the capacity o f central MSPAS to perform i t s stewardship
role and the strengthening o f social participation.
Intra-sectoral allocation of resources
4.52 MSPAS allocation o f resources should favor primary healthcare. Hospital care
continues to absorb a disproportionate share of the sector resources. The coverage o f the
health system i s still inadequate as less than 20 percent (6 percent o f the poor) have
access to medical insurance, and as much as 24 percent o f the population s t i l l does not
have access to health services or only has limited access. The annual cost o f providing a
minimum package o f healthcare and nutrition services to this population i s estimated at
between U S $ 32 million and U S $ 50 million (0.2 and 0.3 percent o f GDP). MSPAS’s
budget in recent years has been equivalent to 1.6 percent o f GDP.
133
4.53
The allocation o f resources between general hospitals and specialized hospitals
must be reviewed. The allocation o f resources between general hospitals and specialized
hospitals has had no explicit relationship with outcomes, and reportedly general hospitals
are substantially under-funded, relative to specialized hospitals. In this context, there i s a
great concern about the current channeling o f public funds for primary healthcare through
hospital budgets and the important share o f the public budget that i s devoted to hospital
care when hospital care i s less pro-poor than primary health care. The establishment o f
performance contracts between MSPAS, the SIBASI, and the providers, such as those
being supported under the World Bank financed project, and the implementation o f a
performance incentive system could help address such concerns.
4.54 Strengthening MSPAS human resource management systems i s a priority.
MSPAS expenditure on wage and salaries absorbs two-thirds o f i t s budget. The lack o f
information on MSPAS staff i s a clear indication that human resource management in
MSPAS, which absorbs the bulk o f the ministry’s budget, must be substantially improved
to ensure an efficient use o f resources. A new human resource policy i s badly needed to
address the long lasting bottlenecks: the lack o f sufficient, well-trained and professionally
balanced staff, operating under enforced labor rules and stimulating reward systems.
4.55 Establishing an efficient and cost effective pharmaceutics management system i s
another priority. There i s some evidence that El Salvador purchases pharmaceutical
products at prices higher than the international median. In addition, products o f
substandard quality were found in several public facilities. MSPAS needs to improve i t s
management of pharmaceutics products, including cutting the cost o f medicines procured.
Efficiency and equity o f resource use
4.56 There has been an effort to increase the efficiency o f resource use in recent years
and these efforts should be intensified. The number o f ambulatory visits, major surgeries,
and hospital discharges has increased rapidly in recent years and hospital utilization rates
have been at acceptable levels. Also when comparing spending with outcomes, El
Salvador’s i s not among the most efficient countries in Latin America nor i s i t among the
most inefficient.
4.57 There i s a need to increase the outreach o f the public healthcare services.
Children in the poorest quintiles are three times more likely to be ill than are children in
the highest quintile. One in each three poor persons that get ill,do not trust the public
system and/or prefer to seek cure in alternative ways. Despite the progress in some
health indicators, substantial differences remain between the health outcomes for the
different income groups. Infant mortality i s almost twice as high for low-income families
as for higher income families, though in recent years the gap has been closing.
4.58 MSPAS should not subsidize ISSS. ISSS spends US$ 220 per beneficiary per
annum, while MSPAS’ annual budget corresponds to only U S $ 50 per person i t should
cover. Only 17 percent o f the population and 6 percent o f the poor are covered b y ISSS.
134
The renting of MSPAS facilities to ISSS, the use o f MSPAS facilities b y ISSS members
and beneficiaries raises equity concerns and should be thoroughly examined to ensure
that MSPAS does not subsidize ISSS.
4.59
Cost recovery policies should be rationalized and strengthened, and those that can
afford i t should pay for the hospital care they receive. A large proportion o f the better
o f f population use MSPAS facilities. While in primary care, MSPAS expenditures favor
the poorest quintiles; in hospital care they favor the middle quintiles. This calls for
strengthening the cost recovery policies in hospitals.
Recommendations
In sum, the following recommendations may be considered:
MSPAS allocation o f resources should give priority to the delivery o f costeffective primary healthcare services to the poor communities that have not been
reached b y the health system.
The functions and mission o f each component o f the SIBASI (hospital, health
centers, health, clinics, and providers) should be clearly defined to strengthen the
health network and referral system; performance agreements, contracts, and an
incentive scheme should be implemented to make health providers accountable to
both the MSPAS and the clients they serve.
The allocation o f resources between general hospitals and specialized hospitals
should also be reviewed; particularly because under the new STBASI financial
arrangements, the relative under-funding o f general hospitals may lead to
diversion o f resources from primary healthcare to hospital care.
As the majority o f those that use MSPAS hospitals are the better off, cost
recovery policies in hospitals should be rationalized and strengthened so that
those that can afford to pay for the attention received, do pay.
The use o f MSPAS facilities b y ISSS members and beneficiaries and the renting
o f MSPAS facilities to ISSS should be thoroughly examined to ensure that
MSPAS does not subsidize ISSS and that i t recovers the expenses incurred with
I SS S beneficiaries.
MSPAS management o f pharmaceutics products needs to improve to reduce the
cost o f medicines, which i s high b y international standards, and increase their
availability.
MSPAS human resource management systems should be strengthened.
135
CHAPTER V: Water Sutmlv and Sanitation
5.1.
The analysis of public expenditure on the water supply and sanitation sector
focuses on the National Administration o f Water Supply and Sewage Systems, ANDA,
the Social Investment Fund for Local Development, FISDL, and the Ministry o f Public
Health and Social Assistance, MSPAS. These institutions execute water and sanitation
projects in urban and rural areas. The chapter contains a review o f the sector organization
and the analysis o f the government’s strategic objectives and the process o f resource
allocation in the sector, the trend and structure o f expenditures and sector outcomes. I t
concludes w i t h the identification of the sector’s public expenditure principal challenges
and recommendations.
I.
Sector Organization
5.2.
The water supply and sanitation sector in El Salvador comprises ANDA, selfsupplied communities, municipalities, FISDL, MSPAS, non-governmental organizations,
licensed water systems, and private water-bottling companies. ANDA was created in
1961 to provide-in a centralized manner-water supply and sanitation on a national
level, having received through transfers the majority o f systems managed b y
municipalities. I t s roles comprise regulation, supervision, planning o f the sector, finance,
construction, operation, and maintenance o f aqueducts and sewers systems; water-quality,
supervision o f waters served; and exploration o f groundwater. B y mid 1960s, it delegated
management o f rural water supply and sanitation o f the entire country to the MSPAS’
Division o f Rural Aqueducts. This function was taken up during the period 1981-1995 b y
the National Basic Rural Sanitation Plan, PLANSABAR. In 1995, ANDA created the
Directorate o f Rural Systems (GSR) to co-administer some 700 rural water systems, o f
which 315 were built by PLANSABAR. F r o m 1999 onwards, ANDA began a
decentralization process, signing several 5-year licensing agreements for operating water
systems with private, not for profit entities, and municipalities.
Table 5.1: Water and Sanitation Coverage, by Institution,
2002
(% of population)
a/ Includes domestic or public connections.
b/ Includes domestic discharge in sewerage systems and latrines.
Source: ANDA
136
5.3.
ANDA i s the main water supplier. In 2002, i t attended through i t s water supply
systems 153 municipalities, 93 percent o f the urban population and 100 percent of the
rural population with these service (Table 5.1). Through i t s sanitation systems in 70
municipalities and latrines, i t attended 96 percent o f the urban population and 100 percent
o f the rural population with this service.
5.4.
Self-supplied communities - by means o f systems constructed b y land developers
- attended 4.9 percent and 4.1 percent o f the urban population with access to piped-water
supply and sanitation.’” Municipalities attended the remaining 2.3 percent o f population
with access to piped-water, by administering aqueducts in 72 municipalities.
Municipalities receive technical, financial, and planning assistance from the Salvadoran
Municipal Development Institute, ISDEM, and from the FISDL. From 1991, the F I S D L
support the expansion, rehabilitation and construction o f small water and sewage
systems, and latrines. Currently it i s executing two programs: Water for Rural Schools in
El Salvador (PRONAES), and Expansion o f Drinking-Water Coverage to the Rural Area
(PROAGUA). MSPAS i s charged with the program for integrated attention for
environmental health, which includes education in communal health, sanitary disposal o f
excrements and supervision o f quality o f water for human consumption. N o t for profit
organizations are also active in the sector.In6 In 1998, the National Association for
Defense, Development and Distribution o f Rural Water (ANDAR) was created,
integrating 28,491 associates organized through 102 water systems built b y
P L A N S A B A R in 62 municipalities in the country. These systems are administered b y the
communities, and receive subsidies from FINET for power supply for water pumping,
and their tariffs are adjusted to recover costs, in accordance with the economic capacity
o f users. Finally, b y the mid-l990s, private enterprises dedicated to bottling and
distributing drinking water sprung up, with five major firms sharing this growing
market.‘”
11.
Strategic Objectives and Resource Allocation Process
5.5.
At the beginning the 1990s, the sector faced major challenges: i)Fragmentation
and lack o f coordination o f the entities involved within the sector; ii)Serious operational
problems in ANDA, including lack o f maintenance o f equipment, leaks in o l d pipe lines
and incomplete system cadastre and l i s t o f users, problems with measuring valves and
large water losses (see paragraph 5.20); iii)Weak ANDA finances, because tariffs barely
covered operational costs which caused payment arrears to suppliers amounting to US$27
million (CEL, CAESS, ISSS, Government and international financial organizations); iv)
Major restrictions to availability o f water resources for supplying drinking water,
ln5
Main communities are: Comunidad Las Margaritas in Soyapango, ADESCO ROMA in Colonia Roma,
Urbanizacibn Altos de San Antonio in Cuscatancingo and Urbanizacidn Valle Verde I V in Apopa (San Salvador);
Urbanizacidn L a Cima I V and Residencial Cumbres de Cuscatlin in Antiguo Cuscatlin, Comunidades Vista Hermosa,
E l Rasto and UrbanizacidnBrisas de Zaragoza (La Libertad); as well as Comunidad Bosques de Perulapia (Cuscatlin).
‘06 T h e main non-governmental organizations building and operating the rural potable water supply and sanitation
systems with participation o f the communities are: Cooperativa Americana de Remesas al Exterior (CARE), Creative
Associates Intemational (CREA), Concern Intemational Project (PCI) and Plan International.
lo’
Industrias L a Constancia S.A. de C.V. (Agua Cristal), Inversiones Vida S.A. de C.V (Agua Alpha), Aquapura S.A.
de C.V, EnvasadoraAurora Limitada de C.V.( Agua Alaska, Agua Fresca and Agua Kasstle), Pure, Industrias Licteas
San JosC S.A. de C.V. (Agua Trbpico).
137
including high levels o f contamination o f underground water sources and conflicts with
other uses (electricity, agricultural irrigation, ecological, etc.), and users (municipalities,
enterprises, communities, etc.); v) L o w coverage and low quality o f water and sanitation
systems, particularly in rural areas; and, vi) Inadequate institutional and legal sector
framework.
5.6.
Successive administrations sought to address these problems. The strategic
objectives for the 1989-1994 period were108:i)T o re-establish minimum order in ANDA;
this included staff changes, strengthening o f the Board o f Directors to define up policies
and coordinate the other operators in the sector, adjusting tariffs, paying overdue debts
with suppliers, disconnecting service to clients with overdue bills, contracting private
sector enterprises for reading water meters and for control o f water quality; ii)To
complete investment projects being carried out by ANDA, o f which the most important
was Phase Iof AMSS water supply and sanitation system financed b y IDB; and, iii)T o
raise the coverage in rural areas through higher community participation (by granting
them planning, financing, building, and operating responsibilities in their water systems),
with donations from USAID and UNICEF, as well as constructing small water and
sanitation systems by the Social Investment Fund, with loans from IDB.
5.7.
The armed conflict produced serious damages in the water and sanitation sector,
estimated at US$58 million. Ninety percent o f damages resulted from non-received
income because o f the constant interruption o f water supply arising from power
stoppages. This reduction in financial resources caused the postponement in the
development o f projects geared toward expanding water coverage and providing normal
service, and finally caused a rise in ANDA tariffs. Damage to the water and sanitation
infrastructure amounted to US$6 million. The National Reconstruction Plan (PRN)
contemplated the execution o f small water and sanitation systems rehabilitation projects
in selected communities in an amount o f US$6.1 million, though the actual investment
turn out to be five-times the initial estimate.
5.8.
Signing o f the Peace Accords and execution o f the PRN greatly influenced the
strategic objectives for the 1994-1999 period, including: IO9 i)Rehabilitation o f existent
potable water and sewerage systems at the national level, within the framework of the
National Reconstruction Plan, with loans from IDB for the eastern, western and central
regions, and from Japan for the eastern region; ii)Increasing coverage and quality o f
potable water and sanitation service, focalizing on rural areas, with ANDA and FIS
resources; iii)Improving San Salvador Metropolitan Areas (AMSS) water and sanitation
systems with IDB and CABEI loans; and, iv) Starting the design for a reform o f the
sector with IDB support, which includes ANDA institutional modernization,
establishment o f a tariff policy, formulating a L a w for Water and i t s regulatory entity,
and designing proposals for decentralizing water and sanitation services (See B o x 5.1).
lo8
Public Investment Priorities and Needs for Technical Assistance Needs, 1989-1994. Ministry of
Planning and Coordination of Economic and Social Development.
lo9
“To Convert El Salvador into a Country of Opportunities: Government Plan for 1994-1999”.
Government of the Republic o f E l Salvador, 1994.
138
5.9.
During the period 1999-2004, the strategic goals were’”: i) To extend
coverage o f water supply and sanitation services to underserved rural and
peri-urban areas with community participation; ii)To improve the quality of
services; iii)To support the modernization o f the sector’s legal and regulatory
framework, including the allocation of water rights and concessions to the
private sector under government supervision; iv) To restructure ANDA for
operating in an open market; v) To begin a gradual process o f decentralization
o f production and distribution o f water and sanitation systems; and, vi) To
promote rational use of natural resources.
Box 5.1: Water and Sanitation Sector Reform Efforts
The various diagnostics made o f water and sanitation sector indicated that the key problems o f the sector
were: i)Absence o f a rational regulatory framework; i i ) Institutional weakness and dispersion; and iii)Lack
o f quantitative and qualitative information o f water resources. El Salvador water legislation was found to
be incoherent and contradictory. There i s no single entity responsible for the integrated management of
water resources, on the contrary, use i s unsustainable and conflicts arise among heavy users (ANDA for
human consumption, C E L for generating electric energy, and M A G for agricultural irrigation). In the
absence o f clear rules regarding rights and duties for the use o f water, the private sector has no incentives
for investments i n the sector. Intents at reform o f the sector date back to the 1970s. However, a more
concerted effort began in the mid- 1990s.
In 1995, a Coordinating Commission for Sector Reform o f Water Resources was created (COSERHI) that
in turn created the Coordinating Unit o f ANDA Modernization, and prepared the Plan for Modernizing the
Water Resources Sector. This plan proposed the creation o f a governing institution-the
National
Commission for Water Resources-that would regulate the sub sector water and sanitation; an institution
for the conservation o f water resources and attention to the rural area; and, enterprises for operating and
management o f water and Sanitation systems. In 1998, the IDB approved a loan to support the reform of
the sector. I t included the establishing o f a modern regulatory framework; reform o f ANDA; studies of
tariffs, subsidy policies, and updating technical norms; and designing the community administration model
of rural water and sanitation systems. The loan was not approved by the National Assembly at that time
and eventually was modified to support the sector reconstruction efforts after the 2001 earthquakes.
Although ANDA has already prepared a proposals for: i)a new General Water Law that would establish as
main mechanism for efficient water management, assigning rights for use o f water for 50 years; i i ) a
Potable Water and Sanitation Law that would be created by the Superintendence o f Water Resources as
governing entity, and by the Superintendence o f Potable Water and Sanitation as regulating entity; iii) a
Potable Water and Sewerage Tariff Law; and iv) a Potable Water and Sewerage Subsidies Law, they still
have not yet been presented to Congress for approval.
In 1999, ANDA started a decentralizing pilot plan, signing 12 licensing agreements for 5-year operation of
water systems. These included: 2 micro-regions (Tetralogia S E M in UsulutBn -Santiago de Maria, Alegria.
Berlin, TecapBn, Mercedes Umafia and California- and Juaylia i n Sonsonate -Juayda, SalcoatitBn.
Nahuizalco and Santa Catarina Masahuat-); an industrial zone (20 enterprises grouped in Asociacih de
Empresarios y Vecinos de l a Zona Industrial L a Laguna -ASEVILLA- situated in Antiguo CuscatlBn); and
an enterprise formed by ANDA employees to provide service to four rural aqueducts; and ter
municipalities (San JosC Villanueva, San Juan Opico, San Matias, San Pablo Tacachico, Tacuba, Ataco
Apaneca, Suchitoto, San Isidro and Caluco).
The results o f these decentralization experiences are mixed. First evaluations o f Tetralogia SEM (thai
receives subsidized electricity for pumping water), E M A S A and A S E V I L L A (See Table 5.2), yield positive
results, whilst other municipalities have returned the aqueducts to ANDA because o f the high cost 01
electricity for pumping water.
‘lo“The
1999.
New Alliance, Government Plan for 1999-2004”. Government o f the Republic o f El Salvador,
139
5.10. The earthquakes in year 2001 caused serious damage t o water and sanitation
systems. According to CEPAL, the damage amounted to US$23 million. In urban areas,
damage consisted o f cracks in water-storage and distribution tanks, damage to deep wells,
instability o f hillsides and localized landslides that caused ruptures o f water conducting
pipelines; in rural areas damage consisted in disconnection and rupture o f pipelines,
destruction of well walls, destruction o f entire sections o f conduction and distribution
lines, as well as water collecting sites. The alternate network o f Zona Norte project and
the systems that served the para-central region o f the country collapsed with the
earthquake in February, bringing about generalized water scarcity. This forced the
Central Government to redirect resources from loans that supported sector reform and the
decontaminating o f critical areas, toward rehabilitation o f the infrastructure damaged b y
the earthquakes.
111.
Expenditure Trends and Structure
Overall trends and Structure
5.11. Total public expenditure (current and capital) for water supply and sanitation
grew from 0.4 percent o f GDP in 1990 to 1 percent o f GDP in 2001, falling thereafter in
2003 to 1992-1995 levels (Table 5.3). Approximately 89 percent o f total expenditure for
period 1990-2003 belongs to ANDA, 6 percent to FISDL, and 5 percent to MSPAS.
Investment grew b y 0.1 percent o f GDP in 1990 to a maximum o f 0.4 percent o f GOP in
2001, falling in 2003 to 1990 levels. Seventy percent of investment was used for
rehabilitating, improving and building water systems (aqueducts and public water wells)
and the remaining 29 percent for sanitation (sewerage, septic tanks, and latrines). The rise
in total expenditure and investment in water and sanitation during the second half o f the
1990s, i s explained b y the improved creditworthiness o f public institutions after the
adjustments carried out during 1991-1994.
Table 5.2: Public expenditures on water supply and sanitation, 1990 - 2003
(US% m. and % of GDP)
Sanitation
2.4
8.5
5.4
Total Expenditure
0.4
0.6
0.7
Total Investment
0.1
0.3
0.4
AS Yo of GDP
140
10.5
12.1
0.9
1.o
1.o
0.9
0.6
0.4
0.4
0.2
0.1
9.3
Expenditure by Economic Function and Category
5.12. A review o f ANDA expenditures b y function during the period 1997-2003 (Chart
5.1) indicates that: i)Activities related to production, physic-chemical treatment o f water,
and maintenance o f distribution systems encompassed approximately 50 percent o f total
expenditure o f the period, after falling to a minimum 32 percent o f expenditures o f 2000,
and rising to 64 percent o f expenditures o f 2003; ii)Investments constitute the secondhighest most important expenditure, having reached a maximum of 39 percent o f
expenditure in 2000 and then drastically falling to 5 percent of expenditure in 2003;'"
iii)Administration represented an average 14 percent o f expenditures for the period,
participation for year 2003 being similar to 1996; iv) Resources destined for debt
payment grew threefold between 1996 and 2003, reaching a maximum o f 14 percent in
2000; and, v) Resources destined to preventive and corrective maintenance o f water
meters, mechanization o f reading water meters, facilities granted for payment of water
bills (ANDA's collection centers and credit card and banking collection fees) and
connecting water and sewerage, represented an average o f 5 percent o f total expenditure
for the period.
Chart 5.1: ANDA Expendituresby Function, 1997 - 2003
70
7
1
60
50
40
30
20
10
0
-
Adnunistration
1
Debt Service
165
175
114
122
99
30
31
66
120
142
1
149
152
162
105
113
106
Bilhng&Collection
79
85
12
69
46
21
28
39
-Production&Disuibution
48 1
543
496
41 7
323
41 1
580
640
-Investment
1
24.5
1
16.6
1
25.1
I
27.1
1
39.0
1
24.8
1
12.7
1
1
5.3
Source: ANDA and Ministry of Finance
5.13. A review o f ANDA expenditure b y economic category (Table 5.4) reveals that: i)
Approximately 45 percent o f resources for the period 1997-2003 were spent on the
purchase o f goods and services, o f which the total for 2003 i s lower than that o f 1997; ii)
Payment o f wages and salaries averaged 17 percent o f total expenditures during the
period, with a decreasing trend up to year 2002; iii)24 percent o f resources for the period
was allocated for purchase o f assets, having reached a maximum share in 2001 o f 33.5
percent, falling drastically thereafter to 4 percent in 2003 (see below); iv) Participation o f
' I 1This decline i s explained by discontinuation of projects affected by acts o f corruption b y the institutions'
ex president and ex- general manager, who are being prosecuted by the courts.
141
financial expenditures increased six-fold between 1997 and 2003, from 3 percent to 19
percent; and, v) Current and capital transfers remained constant at 0.1 percent o f
expenditures for the period.
Table 5.3: ANDA Expenditures, by Major Economic Category,
1997 - 2003
Source: Ministry of Finance
Water supply and sanitation in rural areas and urban marginal areas (Japan,
USAID, CARE, PCI, Luxemburg, UNICEF, Korea)
39
Water and sanitation (FANTEL)
19.6
Water and sanitation , FISDL (IDB, CABEI)
63.2
Basic sanitation, MSPAS (USAID, UNICEF)
57.9
4. Counterpart resources ANDA Government a/
69
5. Total
376.5
5.14. Investments in the water and sanitation sector for the period 1990-2003 amounted
to US$377 million (Table 5 . 9 , and were mainly geared toward: i)Increasing coverage o f
water and sanitation to rural areas and marginal urban areas through FISDL, MSPAS and
ANDA, with donations, FANTEL resources, and BID and KFW loans (US$195 million,
equivalent to 52 percent of investment o f the sector); ii)Increasing production capacity
and improving ANDA’s distribution network in the San Salvador Metropolitan Area, as
well as improving served-water quality with financing by BID, BCIE, France and Spain
142
(US$81 million, equivalent to 21 percent o f resources); iii)Counterpart resources to the
other programs with Central Government or own resources (US$69 million, equivalent to
18 percent of resources); and, iv) Rehabilitating or reconstructing water supply and
sewerage systems in municipalities most affected by the armed conflict o f the 1980s as
part o f the National Reconstruction Plan (US$31 million equivalent to 8 percent o f
resources). Finally, the sector benefited from an IDB's loan to support the reform o f the
sector for U S $ 4 4 million.
Chart 5.2: ANDA Investment by Financing Source, 1990 - 2002
A-
40
-'
i-Fmign
10 !
1 nanP
Donations
1
0.0
1
0.0
1
0.0
1
0.0
1
0.0
1
11.6
~
27.8
108 113 136 119 111 106 100
~
1
23.5
1
14.2
1
16.8
1
14.9
1
17.4
~
0.0
13 1 0 8 11061 1041 3 0 I 4 2
1
1
I
Source: ANDA and Ministry o f Finance
Source of Funds
5.15. ANDA investments in water and sanitation for the period 1990-2003 reached US$
267 million, o f which 93 percent were carried out in 1995-2002. Sub-periods with fewer
investments were 2003 with US$4.5 million, and 1990-1994 with US$14.0 million (Table
5.6). Average counterpart financing o f investment projects was 37 percent from ANDA
own resources and transfers from public institutions. External resources for the period
1990-1994 came from USAID donations, because o f overdue payments b y ANDA with
international agencies, while internal resources came f r o m an A N D A - F I S agreement and
the institutions own resources in equal amount. The main sources o f external providers
during 1995-2002, were: IDB, Spain, Japan, C A B E I and Germany (54 percent o f
investment, and 85 percent o f external resources); and o w n ANDA resources (21 percent
o f investment, and 58 percent o f local resources). An average of 48 percent o f ANDA
investment for the period 1990-2002 (Chart 5.2) was financed b y external loans. A N D A own resources financed 21 percent o f investment for the period, 15 percent with external
donations; and, 16 percent w i t h Central Government and FIS resources.
143
I
FIS Agreement
2.8
a/ Only project lending
b/ CARE, UNICEF, Korea, PCI and El Dorado
Source: ANDA, FISDL and M O H
IV.
FIS Agreement
1
2.8
I
Expenditure Outcomes
5.16. Investments carried out during the period 1990-2002 have improved coverage of
water supply and sanitation systems, particularly in underserved rural areas and in the
poorest communities. In spite o f this, El Salvador s t i l l lags behind in terms o f coverage
with respect to i t s neighbors; and parasites and diarrhea continue to be the main causes o f
morbidity, in cases treated b y MSPAS clinics. The following paragraphs analyze the
sector’s coverage and the efficiency, the quality of water supply and sanitation services,
and the incidence o f public expenditures.
Coverage
5.17. National coverage of piped-water service increased b y 18 percentage points
during 1990-2002: from 46 percent to 64 percent of total population (Table 5.7). This
outcome i s explained b y having incorporated more than 300,000 new residential
connections to ANDA’s distribution network. According to ANDA, coverage in rural
areas increased b y 19 percentage points during the same period, almost twice the increase
in coverage o f the urban area, through a similar expansion o f residential connections and
public connections (9.6 and 9.5 percentage points, respectively). In 2002, 96 percent o f
the urban population had access to water served by pipes, almost three times more than
the rural coverage, mainly through residential service (90 percent, compared to 6 percent
144
through public connections). O f 30 percent o f rural population with access to piped water
in 2002, 20 percent did so through residential connections, and 10 percent through public
connections.
Connections (#)
Water
312,834
400,731
539,579
612,917
300,083
Sanitation
244,784
310,277
401,786
450,073
205,289
5.18. Coverage o f sanitation at the national level increased b y 10.1 percentage points
between 1990 and 2002, from 61 percent to 71 percent o f total population, due mainly to
incorporating more than 200,000 connections to ANDA sewerage networks. Expansion in
the rural area was four times greater than that registered in the urban area (13 percentage
points, versus 3.4 percentage points). In spite o f this, coverage o f sanitation in 2002 in the
urban area was 1.8 times greater than in the rural area. H a l f the total population with
access to sanitation in 2002 has residential connections to the sewerage networks and the
other half has through latrines (35 percent and 36 percent respectively), with a relation o f
3 to 1 connections-latrines in urban areas, while the rural areas are 100 percent latrines.
Data for the household surveys show a similar trend to that reported b y ANDA.’12
112
Date for the household surveys show that the expansion i n piped water coverage at the national level
between 1991 and 2002 was 14.2 percentage points in terms of households. The increment in piped water
to rural households was twice that registered for urban households, equal to Charts reported by ANDA i n
terms of population. Nevertheless, piped water coverage by EHPM in terms of households in 2002 i s higher
than ANDA Charts in terms of population (75.9 percent versus 63.7 percent). When considering
households that have wells, water coverage in 2002 rises to 88.1 percent at the national level (versus 63.7
percent of population with access to piped water from ANDA), 96.5 percent for urban areas (similar to
ANDA’s 96.0 percent) and 73.7 percent in rural areas (compared to ANDA’s 30.1 percent), and 97.5
percent in the San Salvador Metropolitan Area. As for sanitation, the expansion o f drainage coverage at the
national level between 1991 and 2002 according to EHPM was 14.9 percentage points in terms of
households (higher than 10.1 percentage points in terms of ANDA’s Charts for population). The rise i n
coverage for rural regions was 9 times greater than i n urban areas (compared to 4 times ANDA’s Charts).
These differences can be explained because ANDA does not take into consideration latrines installed by
NGOs operating in the sector. Coverage of drainage in 2002, according to EHPM, was 93.0 percent of
homes at the national level (compared to 70.9 percent of population according to ANDA), 98.1 percent of
145
Latrine
Rural
Residential Connection
Latrine
Population miles
60.7
34.6
49.5
56
86.6
0.0
0.0
0.3
56.3
49.5
56.0
86.3
11,088
5,989
4,690
2,762
41.5
21.8
2.0
38.7
97.1
50.3
71.3
1.1
0.0
15
96.0
50.3
3,341
6,157
5.19. A comparison o f the regional coverage carried out b y W H O P A H O in 1999
(Table 5.Q reveals that El Salvador registered the lower national coverage of water
supply and sanitation. National coverage o f water supply in El Salvador was 3/5 that o f
Costa Rica (59.2 percent of total population, versus 95.0 percent); and o f sanitation
approximately 3/4 (68 percent versus 94 percent). At the urban level, water supply
coverage in El Salvador only exceeded Panama (92 percent versus 88 percent), while
rural coverage in El Salvador was only 1/4 that o f Costa Rica. Coverage of sanitation at
national and urban level in El Salvador i s 1.5 times higher than in Costa Rica.
Efficiency
5.20. Efficiency o f the water supply and sanitation systems can be evaluated through
the losses in water distribution and the price of service. There i s no public record o f
water losses in ANDA systems. However, there are indications that in the early-l99Os,
the losses were high but have subsequently diminished. For example, the survey of
urban homes (slightly higher to ANDA’s Charts 90.0 percent), 84.4 percent o f rural homes (as against 51.0
percent) and 98.7 percent o f homes in the San Salvador Metropolitan Area.
146
hydraulic balance o f the AMSS water supply system carried out in February 1993’”
indicated that water losses were 39 percent; on the other hand. A W H O R A H O
evaluation indicated that in 1999 there were 21 percent water losses in AMSS.’14 ANDA
estimated at 17.4 percent potable water losses at the national level in 2002. Estimates of
losses using ANDA systems reported production and consumption Charts at the national
level for period 1993-2002 shown in Table 5.9, indicate that water losses (operational and
commercial) rose from 16 percent in 1993 to a maximum 26 percent in 1996 and then
diminished to 9.6 percent in 2002. In this context, i t should be noted that the proportion
o f meters in operation declined from 72 percent in 1993 to 57 percent in 2002.
Table 5.9: ANDA’s Water Losses, 1993 - 2002
Source: World Bank based on ANDA data
Chart 5.3: Nominal and Real Price of Water Service as Measured in CPI
8
A
r
m
v
r
x
2
-8
I
I
250
225
200
175
150
125
100
75
50
25
0
t
Nominal
t
I
I
100
100
1
173
173
173
1
173
~
173
1
173
173
247
247
1
‘I3“Analysis of the Potable Water and Sanitation Sector in El Salvador”, USAID, IDB, CARE, CONADE,
WHOPAHO. 1994
‘14 Evaluation of Potable Water and Sanitation Services in the Americas, 2000, WHO/PAHO.
147
recovery o f operational expenses, maintenance and service o f current systems in use, an
new systems for enhancing coverage; ii)Recovering collection costs, treatment, and final
disposition of sewage; and, iii)Promoting rational use o f water for human consumption
and other household uses. During the period 1993-2003, the price o f ANDA water
service, measured by the Consumer Price Index has undergone two increments: in
December 1994, when the last tariff adjustment was implemented, and in December
2001, when a 50 percent subsidy was eliminated for the first 20 m3 o f water, irrespective
of monthly consumption, remaining valid only for marginal communities and for users
with monthly consumption up to 20 m3 (See Chart 5.3). These measures produced a 147
percent nominal increment in the price o f the service between 1993 and 2003; and a real
increment o f 24 percent.
Table 5.10: Average Water Price in Greater San Salvador, 2002
(US$/m3)
a/ (+)=subsidy in relation to the average price (-)=overprice relative to average price,
which has been estimated dividing total collections b y total water billed.
Source: World Bank with ANDA data
5.22. In spite o f the foregoing increments, the tariff structure in 2002 generated an
average charge o f US$O.3O/m3 o f water in the Greater San Salvador (GSS), '15 lower than
US$0.43 which i s the average cost for ANDA o f 1 per 1 m3 billed (Table 5.10). This
means that, in average, users in GSS s t i l l are being implicitly subsidized b y the tariffs
with 43 percent per 1 m3 o f water consumed. Sectors that as an average do not receive
implicit subsidies are the commercial sector, with a monthly consumption above 21 m3
and the industrial sector, with a monthly consumption above 41 m3. While the sectors
that receive relatively greater implicit subsidies are the marginal communities (330
percent), the municipal institutions with monthly consumption o f less than 23 m3 (291
percent), the residential area with a monthly consumption o f less than 20 m 3 (139
percent) and between 21 and 40 m3 (115 percent), the autonomous institutions with a
monthly consumption lower than 20 m 3 (126 percent) and greater than 41 m 3 (65
percent).
5.24. The tariff privilege for GSS residential clients o f ANDA becomes greater when
compared to prices paid for provision o f water through barrels (from US$2.86 to
'15 The Greater San Salvador includes 16 municipalities while the Metropolitan Area of San Salvador
includes 13 municipalities.
148
US$4.57/m3 in 2000), or truckloads (US$3.66/m3 in 2000). In the first case, the implicit
subsidy o f ANDA tariff moves between 535 percent (when monthly consumption i s
greater than 4 1 m3 and 5 barrels are purchased, equivalent to l m 3 o f water, at US$2.86),
and 2,440 percent (when monthly consumption i s lower than 23 and 1 m3 o f water in
barrels i s purchased at US$4.57). While in the second instance, implicit subsidy in
ANDA tariff moves between 713 percent (when monthly consumption exceeds 41 m3)
and 1932 percent (when monthly consumption i s lower than 20 m3).
5.25.
Establishing tariffs that reflect the real degree o f water scarcity i s important, in
order to promote i t s rational use. Residential per capita consumption for homes
connected to the network has increased by 20 percent between 1990 and 2002,
with a drop in consumption when prices increased in 1994 and 2001 (See Chart
5.4). The per capita consumption level in 2002 (161.4 liters/habitant/day) was 35
percent greater than in Belgium, Germany, and Portugal (120 liters/habitant/day),
countries with higher standard of living than El Salvador.
Chart 5.4: Per Capita Residential Consumption, 1990 - 2002
180
130
120
I-Consumption
90
1
91
I
92
I
93
1 94
1
95
96
1
97
1
98
99
I
00
1
01
1
02
134.2 1159.0 1162.3 1155.7 1176.8 1136.7 1138.3 1143.3 1142.3 1149.1 1150.8 1145.8 1161.4
Source: ANDA
Quality
5.26. Quality o f water supply and sanitation service can be evaluated by: i)Continuity
o f water service, measured b y the hours o f average supply; ii)Quality o f water supplied;
and, iii)Degree of treatment o f water discharges prior to final disposition. There are no
official registers of the population that receives continuous water service (24 hours daily).
Nevertheless, in 1994 ANDA’s Operations Management estimated that the average
period o f water supply for AMSS fluctuated between 16 to 18 hours daily, with critical
149
sectors, such as Soyapango, Ilopango and San Marcos, with 8 hours daily.
W H O P A H O estimates for 2000 indicated that 83 percent o f 213 urban water supply
systems analyzed, had intermittent service."'
The Diagnostic o f the Water and
Sanitation Network in El Salvador carried out in 2001, in 1,526 o f 2,319 districts o f the
country, revealed that approximately 62 percent o f households are supplied with water
more than 4 hours daily."' And the FESAL 2002 indicated that 18 percent o f those
polled in urban areas and 42 percent in the rural area declared they did not have water
supply for at least 4 hours daily during the 7-day week.l19
5.27. In view of the above service record, it should not come as a surprise that in 2002
ANDA was the most denounced institution in the Consumer Protection Directorate of the
Ministry o f Economy for making unlawful charges and the second most accused in 2003,
directly behind the power distributor enterprises (19 percent and 14 percent o f total
complaints presented in 2002 and 2003, respectively). The most frequent complaint o f
users o f ANDA i s that bills always arrive on time although service i s interrupted for long
periods o f time.
5.28. ANDA carries out quality control in water production sites and in distribution
networks, b y means o f physic-chemical treatment required to guarantee that water
supplied to the population i s apt for human consumption. O f 1,370 physic-chemical
analyses carried out in ANDA distribution networks at the national level, and 770 in the
GSS during 2002, 68 percent and 63 percent, respectively, met standards established b y
MSPAS and W H O P A H 0 (Chart 5.5). O f 5,760 bacteriological analyses carried out in
the distribution networks at the national level and 3,160 in GSS, 47 percent and 87
percent, respectively, met these standards. Whilst, o f 3,620 readings for chlorination in
the GSS distribution network, 59 percent met the established standards. There i s no
information available on water quality in wells in the rural area. These results explain the
proliferation o f private enterprises selling bottled drinking water, mainly to medium and
high income families, thought the cost o f bottled water is 21 more expansive per m 3 than
the water supplied b y ANDA.'"
'I6Analysis of the Potable Water and Sanitation Sector in El Salvador. USAID, BID, CARE, CONADE,
OPS-OMS. 1994
Evaluation of Potable Water and Sanitation Services in the Americas, 2000. WHO/PAHO.
'IsThe Diagnosis of the Water and Sanitation Network in El Salvador. RAE-ES, September 2001.
'I9Health survey carried out periodically b y the Demographic Association o f El Salvador with U S A I D
support.
120 This Chart results from a comparison o f the average price o f the water supplied by ANDA to residential
the equivalent price for bottled water
users-with consumption greater than 40 m3 (US$0.45/m3)-with
currently valid on the Salvadoran market, through purchase o f 5 gallon containers (US$96.7/m3 = US$1.83
x 52.8 containers).
150
bottom quintile (23 percentage points), 1.7 greater than the increment reported for higherincome households in the 5th quintile (14 percentage points).
Chart 5.6: Availability of Piped Water per Quintile, 1991 - 2002
'""
I
1991
I
I
I
-1995
1-2002
I
54.9
58.7
75.9
1
I
1
34.7
35.8
2
46.0
47.8
57.7
68.4
1
3
52.1
58.9
4
63.5
67.5
76.8
84.2
1
5
78.2
83.6
1
92.3
Quintile
5.31. On sanitation, household that registered a higher increment o f service availability
between 1991 and 2002 (Chart 5.7) were those in the poorest quintile (21 percentage
points), 3.5 times the increment experienced b y the households in the 5th quintile (6.5
percentage points).
Chart 5.7: Availability of Sanitation per Quintile, 1991 - 2002
100
95
90
85
80
75
6 5 E - =
70
60
55
4
1991
Total
1
78.1
60.4
+I995
87.9
74.0
+ZOO2
93.0
81.5
,
2
3
1
4
5
92.7
72.8
79.1
85.4
84.6
89.7
93.5
97.5
92.1
94.6
97.8
99.2
Source: Household Survey
152
Table 5.12: Distribution of W a t e r Sanitation Services, b y department 1990 - 2002
Source: ANDA
5.32. Geographical distribution o f new ANDA services for period 1990-2002, reveals
that 62 percent o f new aqueduct services and 74 percent o f sanitation services were
connected in the department o f San Salvador and L a Libertad (Table 5.12). The nextfollowing department with greater proportion o f newly connected services was Santa
Ana. These results are congruent with ANDA policies o f promoting a higher number o f
connections of service in those regions where there are already water supply and
sanitation systems. Payment facilities for these connections are offered, so as to reap the
benefits o f the local economies-or their density-located in these infrastructures. In the
case o f sanitation service, the high correlation coefficient between department per capita
income and new number o f new connections reflects more so the fact that departments
with higher incomes are also in possession o f existing networks.
5.33. A geographical analysis o f water supply and sanitation projects carried out b y
FISDL during 1991-2003, reveals that 60 percent o f investments in water supply were
done in the departments o f San Salvador, Cuscatlh, Usulutan, L a Libertad and
Sonsonate; while 71 percent o f investments in sanitation were done in the departments o f
San Salvador, San Miguel, Santa Ana, Sonsonate and L a Paz (Table 5.13). In both cases,
there i s high correlation between investments carried out and departmental per capita
incomes. Nonetheless, virtually all F I S D L investments benefit l o w income communities
within these departments.
153
Table 5.13: FISDL’s Distribution Water Sanitation Projects by Department
1991-2003
Source: FISDL
V.
Conclusions and Recommendations
5.34. Water supply and sanitation indicators for 1990-2003 reveal an increase in
coverage, mainly in rural areas.
The M D G - 7 under the general objective o f
environmental sustainability establishes the target o f reducing to half b y 2015, the
proportion o f population not having sustained access to safe water and basic drainage in
1990. The recent study o f the situation o f El Salvador in relation with the MDGs
indicates that El Salvador has already surpassed the MDG target for urban water and
sanitation and rural sanitation coverage and i t i s likely that b y year 2015 the target for
rural access to water w i l l be met.I2’ Nevertheless, there are s t i l l great challenges to be
met in the sector.
5.35. Strengthening the water supply and sanitation sector i s part o f the new President’s
Government Plan: Safe Country 2004-2009. I t stresses the need to increase coverage o f
water supply services, particularly to the poor households, and improve basic sanitation
with community participation; modernize the sector’s legal and institution framework;
and promote water conservation. Consistent with these objectives, the previous analysis
points out that the main sector challenge i s to implement a reform that includes the
establishment o f a new legal framework that eliminates ANDA’s double role as regulator
and operator, the creation of an independent regulatory entity, the restructuring o f ANDA
management to ensure the transparent use o f resources, and the definition o f water use
12’
“El Salvador: Avance de 10s Objetivos de Desarrollo del Milenio- Primer lnforme de Pais ”, 2004.
154
rights. In addition, there i s a need to meet the following specific challenges: i)continue
to raise water supply and sanitation coverage in the rural area; ii)reduce operational and
commercial water losses; iii)improve the quality o f water supplied; iv) improve service
continuity (at least raising the number o f days a year in which water i s supplied to critical
areas); and v) promote actions for the treatment o f water discharges in the main cities o f
the country.
Allocation of resources to the sector
5.36. The sector key challenge i s to achieve universal coverage o f water supply and
sanitation b y 2015. Coverage o f water and sanitation services increased significantly in
the last several years, particularly in rural areas. Nonetheless, El Salvador coverage
through piped water networks and sanitation i s s t i l l low compared to i t s neighbors.
Given the uncertainty about the nature and timing o f water and sanitation sector reforms
and about the most cost-effective and appropriate service delivery models, estimating
with precision the necessary increases in investments i s difficult. Nonetheless, recent
estimates suggest a possible range o f costs associated with attaining universal coverage in
water and sanitation.
Using international estimates o f efficiency prices and
differentiating between the costs o f investments in rural and urban areas, Yepes (2004)
estimates an average annual investment cost o f US$ 21 million between now and 2015,
or about 0.14 percent o f GDP per year. Because these calculations use estimates o f
efficiency costs, rather than actual costs, they may be interpreted as lower-bound
estimates. Following an analysis presented in the recent Human Development Report
(2004), and using unit cost estimates provided b y ANDA (although not differentiating
between the unit costs o f rural and urban areas), i t i s estimated that the additional
investment costs o f achieving universal water and sanitation coverage would range from
US$ 45 to U S $ 50 million between now and 2015, or as much as an additional about 0.3
percent o f GDP per year.'23
Intra-sectoral allocation of resources
5.37. N e w investment should not be in detriment o f the need to maintaining the existing
infrastructure and improving the quality o f services. The qualitative aspects, such as
improving water quality, continuity o f service, and promoting adequate use o f latrines
built, are as important as increasing the coverage o f the services. Thus, there i s a need to
balance the amount o f resources dedicated to extend the coverage o f service with the
need to maintain and improve existing infrastructure and provide quality services.
5.38. The sector w i l l benefit from more involvement f r o m the municipalities, NGOs
and communities, particularly in the execution o f high-impact projects with l o w
investment, to meet in the short term rural low-income household needs. These projects
could include sanitary education, programs for building wells, water storage tanks, septic
122 When considering wells and latrines built by institutions operating in the sector, water coverage at the
national level rises to 88 percent and drainage to 93 percent o f households in 2002.
I n the absence o f sector reforms and the identification o f a cost-effective service delivery model for rural
areas, the costs are likely to be closer to the upper- than the lower-bound estimate.
155
tanks and/or latrines, and campaigns for the treatment o f water emanating from wells,
rivers, creeks, and rainwater
5.39. ANDA needs to streamline further i t s operations and ensure that resources are
used in an efficient and transparent manner. The recent corruption scandals call for a
major restructuring o f ANDA management policies and procedures. As mentioned
A N D A ’ s mandate should be revised to eliminate i t s double role as regulator and operator
with i t s conflicting incentives. In this context, there i s also a need to establish a sustained
model o f decentralization o f services in the sector. In the last several years, pilot projects
have been initiated b y ANDA with mixed results. In several instances, the administration
o f the systems was returned to ANDA because o f the high cost o f electricity for pumping
water. In other cases, the service model appears to be working.
Efficiency and equity of resource use
5.40. The quality o f ANDA services needs to improve substantially. There i s large
disruption o f ANDA water service, the quality o f water at the national level i s poor, and
sewage i s dumped into rivers, creeks, and lakes without treatment. As mentioned, 18
percent o f those polled in urban areas and 42 percent o f the rural area did not have water
delivered at least during 4 hours daily. In 2002, only 68 percent o f physic-chemical
analysis and 47 percent o f bacteriological analysis carried out at the national level on
ANDA distribution networks met WHOPAH0 standards. On the other hand, less than 3
percent o f total sewage gets treated before final disposition into superficial water sources.
This means that the health benefits mainly to the urban population brought about b y
aqueducts and sewerage, in turn become environmental costs to the all population.
5.41. The pricing o f water and sanitation services i s inefficient and should be revised.
Despite the tariff adjustments in 1994 and the elimination o f subsidy for all consumers,
except those that consume up to 20 m3 o f water per month beginning January 2002, there
remains an implicit subsidy in the water tariff o f 43 percent. The cost for ANDA
residential users i s a fraction o f the cost for low-income households that must buy water
b y the barrel or b y truckloads. A new tariff policy should allow for: recuperating
operation and maintenance costs; financing expansion o f water and sanitation systems;
and promoting rational use o f water. This implies, eliminating excess privileges in the
hands o f current users o f ANDA with high monthly consumption. Because o f the
sacrifice that w i l l be demanded from consumers, tariff adjustments should be
accompanied by specific commitments from ANDA to raising coverage, quality of
service, operational and financial efficiency, and honesty and transparency o f
administration o f resources.
5.42. FISDL spending on the sector has been pro-poor and it should continue to support
low-income communities with cost-efficient water and sanitation systems. Between 1991
and 2002, lowest-income household (first three income quintiles), experienced an
increment in piped-water availability 1.6 times greater than richest household (fifth
quintile). This increase in water coverage in rural households was double the amount
experienced by urban households. During the same period, households in the first quintile
156
registered an increase in availability o f sanitation 3.5 times higher than the households in
the fifth quintile. Increases in sanitation coverage in rural areas between 1991 and 2002,
was 9 times higher than for urban areas.
Recommendations
5.43.
e
e
e
e
e
In sum, consideration may be given to the following:
Seek a broad consensus on the direction o f sector reform that should include the
approval o f a new legal framework that eliminates ANDA’s double role as
regulator and operator, the creation o f an independent regulatory entity, the
restructuring o f ANDA management, and the definition o f water use rights.
Balance the amount o f resources dedicated to extend the coverage o f service with
the need to maintain and improve existing infrastructure and increase service
quality .
Implement high-impact, low cost projects to meet in the short-term rural lowincome household needs. These projects could include: i)sanitary education to
promote adequate use and maintenance o f the drainage infrastructure built, water
conservation, final disposition o f waste, habits o f good hygiene, etc.; ii)programs
for building wells, water storage tanks, septic tanks and/or latrines in households
where i t s t i l l i s not socially worth expanding andor building aqueduct and
sewerage systems; and iii) campaigns for physic-chemical treatment o f water
emanating from wells, rivers, creeks, and rain-water.
Evaluate the conditions necessary for reaching a sustainable decentralization o f
water supply and sanitation systems to municipalities and communities.
Design and apply a tariff policy that allows for: i)recuperating operation and
maintenance costs o f current water supply and sanitation; ii)recuperating costs
for collection, treatment, and final disposition o f sewage; iii)financing expansion
o f systems, in order to raise coverage of services t o population currently not being
served; and iv) promoting rational use o f water for human consumption and other
household uses.
157
CHAPTER VI: Rural Roads
6.1
The evaluation o f public expenditure for rural roads focuses on the Ministry of
Public Works (MOP), on the Fund for Road Conservation (FOVIAL), and on the FISDL.
The chapter contains a review o f the sector organization and the government strategic
objectives and the process o f resources allocation in the sector, an analysis o f the public
expenditure trends and structure and i t s outcome, and concludes with the identification o f
the sector’s principal public expenditure challenges and recommendations.
I.
Sector Organization
6.2
Public institutions responsible for building and maintaining roads in El Salvador
are: MOP, FOVIAL, FISDL, as well as the municipalities. During the 199Os, MOP
administered the roads through the: i)General Administration of Road (DGC), that was
in charge o f planning, construction, roads signaling, and maintenance o f national roads,
including rural road; and ii)Administration o f Urban Planning and Architecture (DUA),
responsible for urban roads. Municipalities had the responsibility for the lowest traffic
rural road (caminos vecinales). Since 1999, the FISDL has financed road improvement
projects. Currently, i t carries out the Technical Assistance Program for Preventive
Maintenance of Municipal Road, in order to strengthen the municipal technical,
organizational, financial capacities for preventive maintenance and repairs o f their roads.
Table 6.1: El Salvador - Road Network, 2000
1
2. Rest of Non paved road network
3. Urban road network
I
47.3
65
6
Source: MOP
6.3
In 2000, M O P reclassified the roads network in the following manner: i)Priority
roads, made up b y 5,086 K m s o f high-traffic inter-urban roads connecting urban centers
158
in the country with the Central American c ~ u n t r i e s , ’ leading
~~
from municipality to
municipality, municipalities to paved highways, and to high-production agricultural
zones and tourist zones, (Table 6.1); ii)The remaining unpaved roadways, made up b y
5,150 Kms o f dirt-roads with very low traffic and, often not passable, and iii)Urban
roads, made up by 650 Kms o f city roads. M O P i s in charge o f road construction and
maintenance (until the creation o f FOVIAL, see below) o f priority roads, while
municipalities are in charge o f maintenance o f the remaining road network, unpaved and
urban, which was previously under DUA’s responsibility.
6.4
F O V I A L was created in late 2000 to be an autonomous institution in charge o f
roads maintenance and signaling. However, in 2001, i t s seed capital was re-oriented to
programs for removal o f landslides and debris caused b y the earthquakes o f January and
February. In October 2001, i t s founding-law was modified allowing i t to obtain funding
through a special tax (US$0.20 per gallon) extra or regular gasoline (excluding aviation
gasoline) and diesel oil. On M a y 2002, F O V I A L began the periodic maintenance
projects, and on June 2002, began all routine maintenance projects.
11.
Strategic Objectives and Resource Allocation Process
6.5
Due to the condition o f the road network in 1990-lack o f maintenance over the
1980s-the government’s strategic objectives during the period 1989-1994’25was to give
priority to maintenance and rehabilitation o f the Central American corridors (alternative
“A” and natural), as well as to rural roads, in order to support the export led
development-strategy with greater territorial integration. The investment strategy did not
contemplate any new road infrastructure.
6.6
Armed conflict produced damages in road infrastructure including the total or
partial destruction o f 63 bridges and building equipment. In 1991, i t was estimated that
the cost o f rebuilding damaged roads and bridges would be US$285 million. The
National Reconstruction Plan (PRN) considered only rehabilitating 3 10 Kms o f rural
roads and small municipal bridges, up to a total o f US$28.5 million, as the country did
not have the needed resources for rebuilding the bridges “Oro” and “Cuscatlan,” which
constitute part o f the Central American corridors (natural and alternative “A”) located on
the Lempa river.
6.7
T o avoid road infrastructure to become a bottleneck for economic development in
peacetime, the Government established as strategic objectives and goals for the period
1994-1999’? i)Rehabilitating, re-building, and enhancing 135 Kms o f major highways;
ii)Paving 37,236 m 2 o f urban road national network and 130 Kms o f regional roads; iii)
Reconstructing the “Cuscatl6n”, “Oro,” and 25 other bridges as well as repairing 33
124
Alternate corridor “A”or Pan-American highway (CA- 1) and natural corridor or coastal highway (CA-
2).
Public Investment Priorities and Needs for Technical Assistance 1989-1994. Ministry o f Planning and
Coordination o f Economic and Social Development.
lZ6
Converting El Salvador into a Land o f Opportunities. Government Plan, 1994-1999.
159
bridges; iii)Giving maintenance to 320 Kms o f paved special highways-primary
and
secondary-at the national level, and to more than 100 Kms o f tertiary roads and rural
roads, at the national level; iv) Signalizing horizontally and vertically 1,150 Kms o f
special highways and main arteries in 27 cities; v) Rehabilitation o f 790 Kms o f rural
roads and tertiary roads at the national level, and 3 10 Kms in PRN municipalities; and vi)
Building f i v e overpasses in the city o f San Salvador.
6.8
The government strategic objectives for the 1999-2004 period were: i)Improving
the road network to foment agricultural production and rural development, ii)Fostering
rehabilitation and maintenance o f rural sustainable roads, transferring resources to local
administrations and sustained by the community; iii) Supporting strategic regional
projects, such as the logistic Central American corridor, so as to advance in productive
and commercial integration together with the Region; y iv) Vigorously foster
construction, rehabilitation, and maintenance o f physical supportive infrastructure for
investment, production and export, in order to improve productivity and the economy, so
as to create more and better j0bs.l”
6.9
Earthquakes in 2001 caused damage the road infrastructure amounting to U S $ l 5 0
million, according to ECLA’s estimates (Table 6.2). 45 percent were direct damages
owing to total or partial destruction, mainly o f components o f primary roads including the
freeway San Salvador-Comalapa; and in 14 secondary roads; and in lesser degree, in
urban roads. The remaining 55 percent covered indirect causes, due to deviations of
passenger and commercial national and international traffic to alternative routes, mainly
at L a Leona curve and Los Chorros.
Table 6.2: Damage Caused by the 2001
Source: El Salvador: Evaluation o f the January 13 and
February 13 Earthquakes Damage. UN’s ECLA
6.10 The prioritization o f rehabilitation projects for F O V I A L i s based on the
Salvadoran Roads Management System (SIGESVIES), implemented at M O P with the
support o f an Israeli-Salvadoran consortium. The criteria used for prioritizing projects are
the relation benefitskost; given the available budget envelop, resources are assigned to
those sections that bring the higher benefits to for users. Economic benefits o f F O V I A L
projects are threefold: i)Savings in cost o f operating vehicles (COV); ii)Savings in travel
time; and iii)Reduced traffic accidents. According to government estimates, F O V I A L
’’’The New Alliance. Government Program 1999-2004.
~~
160
w i l l reduce monthly small vehicle C O V o f US$38.09, and monthly heavy vehicle C O V
o f US$181.71 (Table 6.3). Should 50 percent o f total vehicles of this type circulate on
FOVIAL-serviced roads, the country would save yearly COV o f US$174 million. In
addition, FOVIAL w i l l bring about a decrease in small- and large-vehicle users’ travel
time up to 40 percent; and up to a 65 percent decrease in traffic accidents.
Table 6.3: FOVIAL’s ExnectedBenefits
a/ Assuming that 50percent of the vehicles circulate b y roads that
receive
F O V I A L maintenance.
Source: MOP Presentation of F O V I A L to the National Assembly,
February.
111.
ExpendituresStructure and Trends
Expenditure Trends
6.11 Public expenditure for execution o f projects in construction, rehabilitation and
maintenance o f the road network (inter-urban and urban) for period 1997-2003 was
US$1,256 million, o f which 82 percent correspond to MOP, 11 percent to FOVIAL, and
the remaining 7 percent to FISDL. Resources destined for roads peaked at 1.7 percent o f
GDP in 2002, and then fell to 1.3 percent in 2003. (Table 6.4). While public expenditure
for rural roads for the period 1999-2003 rose to U S $ 184 million, equivalent to 27 percent
of total expenditures destined for road, during the same period. Fifty eighth percent of
public expenditures on rural roads were for rural maintenance and for sustainable rural
roads projects carried out b y MOP, 37 percent for projects for improvement o f roads
executed b y FISDL, and 5 percent for routine maintenance projects in unpaved roads,
carried out b y FOVIAL. M O P improved 779 kilometers o f sustainable roads during
1999-2003, distributed throughout 58 percent o f the central region, 30 percent o f the
eastern region, and 12 percent o f the western region.
161
Table 6.4: Public Expenditure in Road Network, 1990 - 2003
(US$ m. and % of GDP)
a/ Inter-urban and urban b/ Periodic maintenance in paved and unpaved roads
c/ Rural maintenance and Sustainable Rural Roads d/ Routine maintenance of unpaved
roads
e/ Rural (vecinal) road improvement
Fuente: MOP, FOVIAL and FISDL
6.12 MOP expenditures that include public works, transport, housing, and urban
development, rose from US$175 million in 1997 to US$240 million in 2002; equivalent
to a growth o f 37 percent (Table 6.5). Eighty six percent o f expenditures during 19972002 correspond to investments made by the Vice-Ministry o f Public Works and
FOVIAL on the total road network, the remaining 14 percent was allocated to
administration, geotechnical research, Vice-Ministry o f Urban Housing and
Development, Vice-Ministry o f Transport, and support to related units, other than
FOVIAL. Resources for rural roads represent 12.1 percent o f expenditures made by M O P
during 1999-2002; and 14.4 percent of resources for total road network in the same
period.
Table 6.5: Ministry of Public Works, Budget Execution, 1997 - 2002
($ million and %)
a/ Includes Vice Ministry o f Public Works, Transport, Housing and Urban
b/ Includes autonomous institutions (Railways, ANDA, FOVIAL, etc.)
c/ Includes Vice Ministry of Public Works and FOVIAL
Source: Ministry o f Finance
6.13 During the first year o f FOVIAL’s operations (2002), i t carried out periodic
maintenance o f paved-road with MOP resources, amounting to US$46.4 million (Table
162
6.6 and Box 6.1). In 2003, i t carried out periodic maintenance to 250 kilometers o f paved
roads, amounting to US$62.1 million, and supplied routine maintenance on the mainroads (paved and unpaved) amounting to US$29.8 million, in both instances with own
funds arising from the special tax on gasoline. For 2004, the forecast i s to carry out
periodic or routine management amounting to US$74.4 million.
Table 6.6; FOVIAL’s Expenditures, 2002 2004
($ million)
2004 a/
dministration
47.4
29.8
43.5
93.5
76.6
a/ Programmed bl In paved and unpaved roads
Source: FOVIAL
163
I
Box 6.1: Fund for Road Conservation
F O V I A L carries out three types o f projects: i)Periodic maintenance; ii)Routine maintenance; and iii)
Maintenance o f bridges and signalization. Periodic maintenance consists in treatment and renewal o f rollsurfaces and shoulders o f the roadways. This i s carried out every certain number o f years, avoiding
deterioration o f the original conditions (good or regular) brought about by natural causes and use. Routine
maintenance i s carried out yearly on all elements and structures o f paved roads, in order to maintain
conditions o f roadways and ensure their designed life-span. This implies, repairing roads, sealing fisures
and cracks, leveling unpaved surfaces, cleaning longitudinal drainage (curbs), and transversal drainage
(tubes), maintaining hillsides, cleaning shoulders and minor roadways, and focal repairs (retaining walls,
boxes, etc.). Maintenance o f bridges and signalization i s carried out every number o f years, in order to keep
bridges and drainage sites in optimum functioning condition, and at maximum hydraulic capacity. This
implies placing and/or replacing all vertical signalization elements (signs) and horizontal elements (division
lines, night indicators, etc.), aimed at increasing driver and pedestrian security.
F O V I A L activity on paved roadways, include: i)Overlaying roads in bad condition; ii)Repairing
superficial and deep patches; iii)Applying seals for waterproofing roadways; iv) Cleaning minor roadways
and drainages; and v) construction o f drainage and protection sites. On unpaved networks, activities
include: i)Re-conditioning roll-surfaces (conformation o f road); ii)Substitution o f selected material
(ballast or gravel); and iii)Building drainages and protection sites. Activity on bridges and crossways,
vertical and horizontal signalization, includes: i)Cleaning, repairing, and exchanging bridge elements or
comDonents. vaults and boxes: and ii’,Placinn and/or redacing roadwav signalization.
Source of Funds
6.14 Contrary to FOVIAL who finances road conservation programs with 100 percent
local funds, M O P finances i t s road-investment programs with external loans (5 1 percent)
and treasury funds (49 percent) (Table 6.7). The principal programs were: i)MultiPhase for Rural Sustainable Roads (US$58 million-BID in Phase Iand US$47 million
in Phase 11, and national counterpart resources o f US$31.72 for both phases) approved in
2001; ii)Roadways Rehabilitation and Improvement Program approved in 1994 (BID
US$225 million, OECF o f Japan US$106, B C I E US$19 million, and US$116 local
resources); iii)First Phase o f San Salvador Beltway approved in 1998 (CABEI US$62.7
million, US$46.4 million local resources, and US$l.5 other sources); and iv) Expansion
o f National Paved Road Rehabilitation Program ( C A B E I US$32.9 million, and US$4.7
million local resources) approved in 1996.
Table 6.7: Financing of MOP-FOVIAL Investment in Road
Network, 1998 - 2003
(US$ m.)
Source: Ministry o f Finance
164
I
IV.
Expenditure Outcomes
6.15 Investments in rural road have improved access o f rural communities to markets,
educational and health centers, water, and security, improving employment possibilities
and the quality o f life. In spite o f the good progress realized in recent years, there i s s t i l l
much to do. The following paragraphs analyze the outcomes o f coverage, efficiency and
quality o f the Salvadoran road network.
Coverage
6.16 Between 1991 and 2002, El Salvador’s inter-urban road network grew 7.8 percent
in length from 9,847 K m s to 10,618 Kms (Table 6.8 and Chart No 6.1). The proportion o f
rural roads (unpaved roads) decreased b y 80 percent o f total inter-urban road network in
1990, to 78.5 percent in 2002, as a result of carrying out o f the Program for Rural
Sustainable Roads. As from 2000, MOP selected 5,150 Kms o f low-vehicular traffic and
many impassable rural roads of the total inter-urban road network, converting these to
priority roads. Rural roads represented 57 percent o f the priority roadways administered
b y MOP and FOVIAL.
Chart 6.1: Priority Road Network
Source: MOP
165
a/ Data for 2000 and 2002 include 5150 k m s of non priority road network.
Source: MOP
6.17 The total vehicular count rose from 214,243 units in 1991 (4.1 vehicles per 100
inhabitants) to 609,485 units in 2002 (9.4 vehicles per 100 inhabitants), which represents
an increment o f 184 percent. This means that demand for road infrastructure in El
Salvador grew almost threefold between 1991 and 2002, from 21.8 vehicles per kilometer
of total inter-urban road network to 57.4. When considering only the priority roads,
vehicles per kilometer doubled in 2002 with respect to total inter-urban road network;
and when considering only the paved network they grew fivefold with respect to total
inter-urban road network.
Table 6.9: Rural Household Access Indicators
a/ 1997.
Source: Beneke de Sanfelid, M. “Dinimica de Ingresos Rurales en El Salvador”.
FUSADES, 2003
6.18 The investments carried out on rural roads have improved access o f rural
households to markets (paved road and bus stops), educational centers (primary schools
and educational centers), health clinics and communication technology (closer to
phones). The distance covered by rural household members to the closest phone was
reduced b y 52 percent between 1995 and 2001; to a paved road b y 37 percent; to a bus
stop by 25 percent; and to educational centers by 18-19 percent (Table 6.9). Travel times
have also been considerably reduced.
166
6.19 Studies based on FUSADES-Program Basis’28,revealed that access of households
to markets makes a positive impact on their income levels and, therefore, on their poverty
condition. This i s due to the fact that location o f the household determines access to
productive opportunities, which arise in dynamic markets. The closer the household i s to
urban centers, the greater its participation in the market and this increases household
income.
Efficiency
6.20 A recent World Bank
revealed that, in general, average cost o f the
Salvadoran road network rehabilitation carried out by various institutions (Sustainable
Rural Roads -CRS-, M O P and FOVIAL) are consistent with international standards.
Only rehabilitation carried out b y MOP, at a cost o f US$320 per kilometer, i s above the
average cost of a World Bank project basket (WBR), but lower than the average plus a
standard deviation (See Chart 6.2)
Chart 6.2 Paved Road Works Cost per Kilometer in Thousands of Dollars
MOP Renaod #tatton
WBR Rehabilitation
I
CRS Rehabilitation
i
WBR S r r u c t a Ovenays
dOP Overlay (Recarpeteo)
MOP Overlay (Periodic)
Average
CRS Overlay
Std.
Desv.
WBR Funcimal Overiays
MOP Earthquake Overlay
Source: WBR: “Road Works Cost per Km from World Bank Reports” Archondo, 2000. Earthquake - MOP, CRS, MOP y FOVIAL
12’ Beneke de Sanfelid, M “Dynamics of Rural Income in El Salvador”, FUSADES, 2003; Beneke de
Sanfelid, M. “Dyanics of Rural Family Income in El Salvador: Panel Study 1995-1997”, FUSADES, 2000;
Lard6 de Palomo, A. and Arguello de Morera “Integration to Markets of Rural Homes and Generation of
Income”, FUSADES, 2000; and Briones, C. and Andrade-Eekhoff “Participation in Labor Markets of
Rural Area Residents: Limitations and Challenges ”, FUSADES, 2000.
Yepes, Tito “Infrastructure and Poverty Reduction in Rural El Salvador” Processed, World Bank, 2004.
167
Quality
6.21 Quality of El Salvador’s road network i s evaluated b y their condition. In 2002, 35
percent of priority road network was in good condition, while 41 percent was in bad
condition (Table 6.10). Paved roads were in equal proportion of good, bad condition (42
percent); while 70 percent of unpaved roads were in bad condition, compared with a mere
2 percent in good condition.
Table 6.10: Situation of the priority Road
Network. 2002
e of road
Source: M O P
6.22 Departments that in 2002 were in possession of a greater proportion of priority
roads in good condition (Table 6-11), were: Cuscatlin (49 percent), Usulutin and
Cabaiias (46 percent), San Miguel (44 percent), L a Paz (43 percent), and L a Libertad (39
percent). While departments with a greater proportion of priority roads in bad condition,
were: L a Uni6n (67 percent), M o r a z h (57 percent), Ahuachapan (51 percent), San
Miguel (46 percent), Usulutin (42 percent), San Salvador (41 percent), San Vicente (41
percent), and L a Paz (41 percent).
Table 6.11: Situation of the Priority Road Network by
Source: MOP
168
Expenditure Incidence
6.23 The distribution o f Rural Sustainable Roads investments made by M O P during
1999-2003 (Table 6.12) reveals that the main departments benefited were: L a Libertad
(21 percent of total kilometers built and 8 percent o f total investment), Usulutan (13
percent and 9.8 percent), L a Paz (10 percent and 8.6 percent), and L a Uni6n (9 percent
and 7.2 percent). This explains why L a Libertad, Usulutan and L a Paz rank among the
first 6 departments with higher proportion o f priority roads in good condition. While L a
Uni6n, in spite o f efforts carried out, continues to be the department with the highest
proportion of priority roads in bad condition.
San Vicente
Usulutan
San Miguel
Morazan
La Union
Correlation Coefficient
66.2
66.0
80.1
56.5
60.2
5.00%
9.80%
0.50%
7.80%
7.20%
0.5
4.50%
13.10%
0.80%
7.20%
8.60%
0.4
6.24 A geographical analysis o f the projects for road improvement carried out b y
F I S D L during 1997-2003 (Table 6-13), reveals that 63 percent o f beneficiaries and 58
percent o f total investment went to the departments o f L a U n h , L a Libertad, San
Salvador, San Miguel, Chalatenango and Usulutan. In spite o f investments carried out, L a
Uni6n continues to be the department with highest proportion o f roads in bad condition.
While investments in L a Libertad, San Miguel, and Usulutan contributed to place them as
the leaders with higher proportion o f roads in good condition.
169
Beneficiaries
Per capita income (US$) Investment ($ million) (No.and YO)
Departamento
Total
83.0
4,504,185
Ahuachapan
47.8
5.80%
3.00%
Santa Ana
72.9
4.90%
6.60%
69.6
6.60%
3.50%
Sonsonete
61 .O
14.60%
9.30%
Chalatenango
La Libertad
125.3
8.00%
11.30%
San Salvador
140.9
7.30%
10.40%
79.3
3.70%
2.50%
Cuscatlan
7.1 0%
La Paz
68.1
7.10%
50.9
1.70%
1.10%
Cabafias
San Vicente
66.2
4.30%
5.40%
66.0
9.60%
7.80%
Usulutan
San Miguel
80.1
8.80%
9.70%
Morazan
56.5
8.1 0%
7.40%
La Union
60.2
9.40%
14.90%
Correlation Coefficient
0.1
0.4
6.25 L o w correlation coefficients between investments carried out by MOP’S Program
for Rural Sustainable Roads, and FISDL’s Improvement o f Roads, with respect o f percapita income o f each department (+OS and +0.1, respectively) and o f kilometers
improved (+0.4 in both instances), would indicate that departments did not receive
benefits according to their income level. The selection o f projects responded more to
conditions of roads that would maximize reduction o f general travel costs (operating cost
o f vehicles and travel time) and where there are areas with higher agricultural production
and tourist attractions.
6.26 When analyzing the evolution o f access o f rural households to markets by poverty
level, between 1995 and 2001, using as proxy variables the distance to a paved highway
and bus stop, i t can be seen in Table 6.14 that the mostly poor households and the no poor
households have benefited from the different rural road programs, by reducing 48 percent
and 38 percent, respectively, the distance to a paved highway. While n o poor households
and mostly poor households experienced the highest reductions in distance to a bus stop,
52 percent and 36 percent, respectively. Structural poor households have experienced
lesser-but important-reductions in distance to a paved road (26 percent) and a bus stop
(6 percent).
170
Table 6.14: Evolution of the Access to Markets, b y Poverty Level, 1995 -
2001
Source: Beneke de Sanfelid, M. “Dintimica de Ingresos Rurales en El Salvador”. FUSADES,
2003
V.
Conclusions and Recommendations
6.27
Improved rural roads during the 1990s has contributed to reducing poverty
incidence in rural areas, inasmuch as i t has given household members access to more
dynamic markets, educational and health centers, water and security. However, the actual
conditions o f the road network reveal that a great deal o f effort i s s t i l l required to obtain
an adequate level o f connection o f districts and settlements in the country.
6.28 The improvement in country’s road network i s part o f the new President Program.
H i s Plan: Safe Country 2004-2009, establishes as priority the support to the Rural
Sustainable Roads program that “will help fostering agricultural development and
broadening the chain of value. ” Consistent with these objectives, the previous analysis
points out that the main challenges of the sector, are to: i)improve 70 percent o f priority
unpaved road network which in 2002 was in bad condition; and ii)mobilize resources to
the municipalities in order to improve the state o f 5,150 kilometers o f rural roads that
M O P does not consider priority and to maintain the 650 k m s o f urban roads previously
under the responsibility o f DUA-MOP.
Allocation of resources to the sector
6.29 The importance o f rural roads for enabling the poor to increase their human
capital and take advantage o f economic opportunities cannot be overstated. Indeed, El
Salvador has understood the importance o f improving rural roads, within the strategy o f
reducing poverty, and has incorporated them into the country’s “extended” MDGs.’~’The
costs associated with program to continue expansion and improvement o f the rural road
network, as well as to develop a maintenance capacity for rural roads depends on the
specific goals and the timeframe set for achieving them. One possible set o f objectives
would be to consistent with the country’s goals to strengthen poverty reduction through
‘30
“El Salvador: Avance de 10s Objetivos de Desarrollo del Milenio- Primer Informe de Pais”, 2004
171
infrastructure development would be: (i)to pave or rehabilitate an additional 1,000
kilometers o f rural roads; and, (ii)to ensure annual maintenance o f 3,000 kilometers o f
rural (secondary and tertiary) roads. Analysis o f El Salvador’s road investments suggests
that the unit costs o f the country’s road development are in line with international norms
(Yepes 2004). Using recent average unit costs o f road paving, rehabilitation, and
maintenance as benchmarks, i t i s estimated that a 5-year program to pave and/or
rehabilitate an additional 1,000 kilometers o f rural roads would cost approximately, and
to initiate a rural road maintenance program would cost the Government o f El Salvador
roughly an additional U S $25 million per year over average 2003 spending levels. This
implies a spending level o f approximately 1.4-1.5 percent o f GDP per year, up from 1.3
percent o f GDP in 2003 (and on average between 1999-2003).
Intra-sectoral allocation of resources
6.30 There has been a strong improvement in sector management in recent years, and
this progress should continue. Priorities for public expenditure in road network for the
period 1990-2003, were to: i) transfer to municipal administrations, resources and
responsibility for maintenance o f urban roads; ii) create a modern self-financing
mechanism, to preserve the road network (FOVIAL); iii)rebuild damaged roadway
infrastructure (mainly bridges) caused b y the armed conflict in the 1980s and earthquakes
in year 2001; and iv) rehabilitate and give routine periodic maintenance to Central
American corridors and rural roads, in order to support the development strategy based
on an open markets and promotion o f exports.
6.31 In the last few years, an increasing share o f the sector’s resources was allocated to
road maintenance and rural roads, and this better-balanced resource allocation should
continue. F O V I A L began execution in 2002 spending U S $ 47 million (19 percent o f
total investment in roads); in 2003 it spent U S $ 9 4 million (49 percent o f total investment
in roads). In rural roads, investment increased from US$ 24 million in 1999 (20 percent
of total investment in roads) to U S $ 4 4 million in 2003 (23 percent o f total investment in
roads). A local and stable source o f funds i s financing road maintenance. F O V I A L roadconservation funding i s 100 percent local, stemming f r o m a special gasoline surcharge.
The rural roads that benefit from improvements under the Sustainable Rural Roads
program are maintained b y the F O V I A L , which has the responsibility for maintaining the
entire priority road network (paved and unpaved). The FISDL i s supporting the
municipalities to maintain/improve the 5,150 km o f road network that are not classified
b y MOP as priority.
Efficiency and equity of resource use
6.32 In general terms, the costs incurred with the road network rehabilitation through
the Rural Sustainable Roads, MOP and F O V I A L programs, are similar to international
standards. In other words, the sector i s relatively efficient in the use o f resources. On the
other hand, the costbenefit ratio o f road projects has been high, because the criterion for
project selection has been the state o f road network for the purpose o f maximizing
benefits in terms o f reducing general travel costs (cost o f operation o f vehicles and travel
172
time) in those areas with greater agricultural production and tourist attraction, rather than
level o f department income.
6.33
The investment in rural roads has improved the equity o f sector expenditure.
M O P and F I S D L investments on rural roads reduced between 1995 and 2001, the
distance covered by rural households to the nearest phone b y 52 percent, to a paved
highway b y 37 percent; to a bus stop b y 25 percent, and to a school b y 19 percent. Travel
times are also shorter in similar proportion. Rural households most favored by rural roads
programs, are among the poorest and no poor, by experiencing greater reductions i n
distances covered to reach a paved highway and a bus stop. Structurally poor households
also received benefits from rural roads programs, though reductions in distances covered
to a paved highway and a bus stop were lower.
Recommendations
6.34 T o continue to improve sector performance, consideration should be given to the
following:
0
Continue to support F O V I A L in order to count on a modern, self-sustaining
mechanism for road maintenance, which in the medium-term w i l l contribute to
incrementing the proportion o f roads network (paved and unpaved) in good
condition. Ensure that F O V I A L resources are allocated to periodic and routine
maintenance o f the road network that has been classified as priority b y MOP.
0
Consistent with the country’s goals to strengthen poverty reduction through
infrastructure development, continue the MOP’S Sustainable Rural Roads
program.
Review municipal pavement rates in order to allow for timely urban road maintenance in
all municipalities o f El Salvador; and when considering municipal tax reform, design a
mechanism, which w i l l allow attending roads that do not form part o f the priority roads
network.
173
CHAPTER VII: Rural Electrification
7.1
After the privatization o f most o f the electricity sector in 1996/98, rural
electrification remains one o f the main responsibilities o f the State in the sector. The
evaluation o f public expenditures in the electricity sector that follows focuses on the three
public institutions active in rural electrification, namely the R i o Lempa Hydroelectric
Executive Commission (CEL), the FISDL, and the Electricity and Telecommunication
Investment Fund (FINET). After a brief review o f the sector's current organization, the
analysis focuses on the process of resource allocation, trends and structure in public
expenditures, and sector outcomes. The chapter concludes with the identification the
sector's principal public expenditure challenges and recommendations.
I.
Sector Organization
7.2
The restructuring that begun in 1996 has changed drastically the organization of
the electricity sector. C E L lost i t s monopoly power, when the government decided to
separate and privatize the generation, transmission, distribution, and electricity sales
activities. C E L lost i t s regulatory and planning functions and retained only the
administration of the hydroelectric plants on the Lempa river. I t i s also responsible for
the construction o f thermal generating plants and the power line o f the regional
interconnection system, or the SIEPAC project (Sistema de Znterconexidn Ele'ctica de 10s
Paises de Ame'rica Central)." B y 2003, the number o f operators in the sector had
increased to sixteen.
7.3
Five enterprises are responsible for wholesale generation: C E L (hydraulic);
LAGEO-previously
G E S A L (geothermal); El Paso-previously
Nejapa Power, Duke
Energy International, Cement0 de El Salvador - CESSA, and Compaiiia Azucarera
Salvadoreiia - CASSA (thermal). Installed capacity in 2003 was 1,105.5 MW, o f which
46.5 percent correspond to thermal plants, 39 percent to hydroelectric plants, and 15
percent to geothermal plants. Net injection to the power system amounted to 4,402 Gwh,
o f which some 8 percent correspond to imports mainly from Guatemala, and the
remaining 92 percent to local generation (33 percent CEL, 23 percent LAGEO, 18
percent El Paso, and 18 percent Duke Energy).
7.4
The Transmission Enterprise o f El Salvador (ETESAL) i s responsible for the
maintenance o f the national transmission grid since 1999 and controls i t s expansion since
2003. The grid consists o f 36 transmission lines o f 115 kV. and 2 interconnection lines o f
230 kV. (Guatemala and Honduras), with a total length o f 1,129 K m s , that link 23 power
substations.
7.5
Distribution i s the responsibility o f five enterprises: Distribuidora de Electricidad
del Sur (DELSUR), CompaAia de Alumbrado Ele'ctrico de Sun Salvador (CAESS),
Distribuidora Ele'ctrica de Usulutdn Sociedad de Economi'a Mixta (DEUSEM),
Compaiiia de Luz Ele'ctrica de Santa Ana (CLESA), and Empresa Ele'ctrica de Oriente
174
(EEO) (Chart 7.1). As a result o f an international consolidating process, AES Corporation
owns the last four distributors, and Pennsylvania Power and Light Global (PP&LG) owns
DELSUR. Distribution i s carried out b y means o f 33,755 Kms o f low-tension and
medium-tension lines (120 V, 23 kV, 34.5 kV, and 46 kV). In 2003, power sales recorded
3,770,221 MWh (37 percent to the residential sector) to 1,218,455 subscribers (92
percent residential). There are five independent power marketer^.'^'
Chart 7.1; Areas of Influence of the Electricity Distribution Companies
Rural electrification was initially in the hands o f CEL, through the execution in
7.6
1962 o f the Olocuilta Pilot Plan for Rural Electrification that linked 1,200 users. During
the 1980s, a department of C E L (DISCEL) had the responsibility for rural electrification.
In 1990, C E L together with National Rural Electric Cooperative Association (NRECA)
implemented a rural electrification program financed b y USAID grants.
7.7
The entities currently involved in rural electrification are: Directorate o f
Electricity (DEE) in the Ministry of Economy; the General Superintendence o f Electricity
and Telecommunications (SIGET); the Technical Secretariat o f External Finances
Secretariat (SETEFE), FISDL, FINET, the municipalities, and the distribution
companies. DEE i s responsible for policy making and planning the expansion o f the
rural electrification grid, as well as for the subsidies policies on rural electrification
investment and electricity consumption. SIGET regulates the sector including the fees for
use o f transmission and distribution grid and tariffs to final consumers. SETEFE
administers the remnants o f the U S A I D donation to N R E C A made after hurricane Mitch.
F I S D L provides the necessary resources to the local government and communities to
FINET subsidizes the rural electrification
carry out rural electrification
131
Conexio'n Ele'ctrica de Centroame'rica, Excelergy, Mercados Elkctricos, Comercializadora Ele'ctrica de
Centroame'rica, and Origem.
13' As o f November 2002, FISDL executes the Rural Electrification Program for El Salvador (PROERES)
175
infrastructure expansion and rehabilitation in low-income areas; electricity consumption
by l o w income dwellers, schools and health units administered b y local communities, as
well as the use o f electricity for water pumping and distribution. The municipalities also
build distribution lines with their own funds. Finally, the distribution companies build
rural lines, supplying the resources not covered by subsidies from FINET and the
municipalities. Their building capacity i s low, as they are not under contractual obligation
to expand the rural distribution lines that are characterized b y the l o w density o f potential
customers. 33
’
11.
Strategic Objectives and Resource Allocation Process
7.8
The armed conflict produced serious damage to the Salvadoran electricity system.
According to CEL, there were close to 2,000 attacks on sub-stations and 3,800 attacks on
transmission lines during the 12 years o f conflict. Direct costs amounted to US$64
million and indirect costs to US$190 million. In 1992, the National Reconstruction Plan
estimated the cost o f rebuilding the national electricity system at US$3 10 million.
7.9
Rapid economic growth experienced after signing the Peace Accords, presented
great challenges to the system: i)To increase the installed generating capacity to meet
accelerated growth in electric power needs (an average o f 9.7 percent annually between
1992-1995); ii)T o rehabilitate the transmission system in order to reduce the frequency
and the duration o f power blackouts; iii)T o increase power coverage - mainly in rural
areas; and, iv) To improve quality o f the electricity service in order to reduce the damage
to end-users’ installations and equipment.
7.10 In order to meet these challenged, the Salvadoran authorities initiated a sector
reform and modernization program, which main events are reviewed in Box 7.1. Most of
the sector has been privatized but rural electrification remains as a State responsibility.
The criteria used b y DEE for deciding on rural electrification investments include several
factors: i)efficiency, which implies investments in areas where benefits w i l l be rapidly
achieved for a large number o f families; ii)technical evaluation indicating the feasibility
o f network expansion to determined areas maintaining rural power service quality within
the criteria defined b y SIGET; iii)synergy with other public expenditure such as rural
roads, education, etc; iv) contribution o f the Municipality, revealing the communities’
priorities for rural electrification; and v) support to donors investment in rural
electrification as for instance was the case when the French Government made a donation
for the benefit o f municipalities severely hit by tropical storm “Mitch” and the year-2001
earthquakes.
133 A t national level there are on average 88 clients per 2.5 1 Kms o f line (typical network end-branch) and
with less than 100 kWh/month o f consumption.
176
Box 7.1: Principal Measures Implemented to Modernize the Electricity Sector
Approving a new legal framework (electricity law, LGE) and establishment the sector
superintendence, SIGET, in 1996;
Restructuring CEL’s assets between 1996 and 1999;
Re-privatizing electric power distribution between 1997 and 1998, through sale o f CEL shares in
CLESA, CAESS-EEO and DELSUR to workers and strategic partners (USS.589 million);
Organizing the Wholesale Power Market (MME), and establishing the Transaction Unit (UT or
Unidad de Transacciones) in 1998, trusting i t with the operation o f the Transmission System,
quality of power supply, and the administration of MME;
Establishing FINET in 1998, trusting it with subsidies to the residential consumers and helping
homeowners in low-income rural areas to obtain power supply;
Selling shares of thermal plants to workers and strategic associates in 1999 (US$125 million);
Establishing GESAL as a CEL subsidiary, in 1999, dedicated to exploration and commercial
development o f geothermal resources;
Establishing ETESAL, in 1999, entrusted with management of the national transmission grid
including the interconnecting lines with Guatemala and Honduras;
Approving electricity sales on the retail markets and establishing the first independent power
marketers, in 2000, who would be in charge o f introducing competition in electricity sales to endusers in industry, commercial establishments and residences;
Establishing DEE o f the Ministry o f Economy, in 2001, entrusted with planning, formulating
policies, and setting up the laws and regulations for the development of the electric power sector;
Terminating the Power Purchase Agreement (PPA) between CEL and Coastal (currently El Paso
Energy), by means o f an international arbitrage, in March 2002, and an indemnity of US$90
million;
Selection o f a strategic partner (Enel Green Power Spa) of LAGEO -previously GESAL- in 2002,
to launch the capitalization process (US$4.6 million in cash and US$13.7 under the modality o f
risk investment);
Concluding the PPA between CEL and Duke Energy, in March 2003;
Commencing a contract between UT and Duke Energy, in March 2003 in which Duke places at
the market disposition thermal units (125 Mw) to maintain the system’s parameters of security and
stability. The cost i s about US$700,000 a month plus the cost of used electricity;
Approving reforms to the legal framework for amplifying SIGET’s faculties (fines, sanctions,
service quality, market surveillance, and anti-trust), and ETESAL (expansion of system as well as
of maintenance), in June 2003;
Establishing a fund for price stabilization in the wholesale market, in June 2003; and
Approving a loan from CABEI to CEL for US$48,5 million for building a thermal plant in Ateos,
2004.
7.1 1 Subsidies to construction and improvement o f rural electricity infrastructure, are
granted b y FINET through “fund contests” every six months to municipalities and
electricity distribution companies that offer the best matching counterpart. FINET i s
managed b y FISDL and i t s resources come from: i)Government contributions; ii)100
percent o f SIGET resources obtained through concessions for the exploitation o f
hydraulic and geothermal resources for generating power; and iii)100 percent o f the
resources obtained b y SIGET from fines to operators in the electricity sector.
177
Expenditures Trends and Structure
7.12 During the 1990-2004 period, CEL's resources were assigned to: i)carrying out
the second phase of the rural electrification project supported b y USAID (1990-1997); ii)
reconstructing and rehabilitating the transmission system (1993-2003); iii)building the
interconnection line between El Salvador and Honduras; iv) ensuring availability o f
power and related energy through Power Purchase Agreements (PPA) with Coastal currently El Paso- and Duke Energy (1995-2003); v) subsidizing power consumption for
residential consumers (January 1998-March 2001); vi) installing two units in geothermal
plant o f Berlin (1997-2000); vii) Increasing power o f the hydroelectric plants on the
Lempa river (1999-2007); and viii) Building a thermal plant o f 50 MW capacity in Ateos
(2004) (Table 7.1). During this period, C E L also negotiated the approval o f loans to
build the transmission line o f the project "Sistema de Interconexio'n Ele'ctrica de Zos
Paises de Ame'rica Central" (SIEPAC).
7.13 Between 1990 and 1997, C E L and N R E C A carried out the second phase o f the
rural electrification program with a US$12 million grant from USAID'34, with which
1,020 Kms o f power lines were built and 27000 users were connected. Maintenance was
secured through a framework agreement between the (ex) Ministry o f Planning, the
FISDL, and CEL.
7.14 Cost o f reconstruction and rehabilitation o f the power network amounted to
US$119 million and was carried out in two steps: i) the Emergency Transmission
Program between 1993 and 1997 (US$45.2 million); and ii)the Rehabilitation and
Expansion o f the Power System Project between 1997 and 2003 (US$74.0 million),
whose objective was to repair 961 transmission towers, 2,500 Kms o f cable network, total
reconstruction o f two substations and expansion o f 11 other substations. These projects
were financed b y JBIC within the framework o f the 11Electricity Development Program
o f the IDB.
7.15
The Interconnection El Salvador-Honduras was inaugurated on 21 August 2002.
I t cost US$18 million finance b y the Central American Bank for Economic Integration
(CABEI). The project consisted in building 93 Kms, o f transmission lines o f 230 kV, a
substation 23011 15/46 kV, expansion o f the existing substation to 115/46 kV in the 15
September Plant and a microwave relaying station. This project would enable power
interchange and related energy with Honduras, within the framework o f the Regional
Central American Power Market, which b y promoting better use o f existent resources
would reduce energy production costs.
7.16 In order to meet increased post-war power demand, C E L in 1994, subscribed a
Power Purchase Agreement (PPA) for 144 MW at 20 years with Coastal-currently El
Paso-equivalent to 18 percent o f the installed capacity, and in 2000, for 264 M W at 3
years with Duke Energy, equivalent to 26.5 percent o f the installed capacity. Prices paid
by C E L during the life o f these contracts were above the wholesale market prices b y
Estimated based on a cost for line o f US$11SO2 per Km, similar to the SETEFE's cost for the period
1999-2001.
134
178
US$255 m i l l i o n (US$142 million overpricing to Coastal, US$90 million as compensation
to Coastal for termination o f PPA ahead o f deadline, and US$23 million overpricing to
Table 7.1: CEL - PrinciDal Proiects Executed. 1990 - 2004
peneration
213.9
Installation of 2 units in geothermic Berlin (56.2 MW)
Retrofitting of hydroelectric centrals (61MW)
Thermal central Ateos (50 MW)
113.0
42.4
58.5
Total selected priorities
792.4
Memorandum:
Income from the privatization of generation and distribution cl
718.1
7.17 Between January 1998 and March 2001, CEL paid US$174 million in electricity
subsidies for electricity consumption (Table 7.2): US$15 1 million to residential users that
should have been paid b y law b y FINET; US$16 million to ANDA, so that increase in the
water consumption tariffs could be avoided; and, US$8 million to non-residential
consumers in 2000, in face o f the sharp rises in the wholesale prices.
La Prensa Grifica of February 23,2003 and to El Diario de Hoy o f March 23,2003.
I t must be noted that in order to determine if these contracts were onerous, i t would be necessary to
compare the price o f the contracts with the price of the wholesale market in absence o f this installed
capacity and the losses in production due to possible rationing of power if there were any.
135
136
179
Table 7.2: CEL’s Electricity Consumption Subsidies, January 1998 March 2001
Source: CEL
7.18 Construction o f the Berlin Geothermal Plant, with a capacity o f 55 M W (2 units
each o f 27.5 MW) was financed b y IDB within the framework o f the 11 Electricity
Development Program. Investment amounted to US$113 million, having installed 45
MW in 1999, and 11.2 MW in 2002. The World Bank as a part o f the Energy Sector
Modernization Project financed the US$42.4 million-project o f retrofitting hydroelectric
plants, And, the construction o f the Ateos 50 M W thermal plant should be concluded by
the end o f 2004 at a cost o f US$58.5 million. I t i s being financed by a C A B E I loan o f
US$48.5 million and the rest w i l l be covered b y CEL. The plant w i l l have three
generating units each o f 16.6 MW. In this second phase, plant capacity will be increased
b y an additional 50 MW. With this project CEL returns to thermal generating, which i t
had interrupted in 1999, after the sale o f the plants o f Soyapango and San Miguel to Duke
Energy.
7.19
0
0
0
a
CEL’s resource allocation implies that:
I t assigned for investment in generating, transmission and rural electrification 46
percent o f resources spent on these projects, equivalent o f 5 1 percent o f the
proceeds from the privatization;
Overpricing for power paid through Power Purchase Agreements with Coastal
and Duke was 19 percent more than the resources spent on increasing the
hydroelectric, thermal and geothermal installed capacity and equivalent to 36
percent o f the proceeds from the privatization.
Subsides to residential users represent 22 percent o f resources spent and near a
quarter o f the resources obtained from the privatization;
Subsidies correspond to almost 15 times the amount o f resources allocated for
rural electrification.
7.20 F I S D L and FINET resources were allocated toward: i)incrementing coverage o f
electricity service in rural areas; and ii)subsidizing energy consumption by residential
users. FISDL executed during the period 1994-2003, a total o f 1,375 electrification
projects (620 K m s o f rural power lines benefiting 905,992 people) valued at US$45
million (Table 7.3). The eastern part o f the country received the largest number o f
projects and the higher amount invested. Nonetheless, because o f their higher population
density, the departments o f San Salvador and L a Libertad, had the highest number o f
beneficiaries.
180
Box 7.2: Evolution of Electricity Subsidies
Up to December 1997, electricity consumers received an implicit subsidy by paying tariff rates below
marginal costs (Table 7.5). This generated large costs for CEL, which were financed by transfers from the
Central Government. This caused a (regressive) distribution o f income from all Salvadorans paying taxes
(including inflation taxes) to the large industrial, commercial and urban residential electricity consuming
sectors, who were the main beneficiaries o f these implicit subsidies.
Parallel to the creation o f FINET, direct subsidies were established: i ) for electricity consumption o f
residential users and educational, health and water-supply projects (pumping and distribution) administered
by the community; and ii) for construction and improvement o f infrastructure for the supply o f electricity to
low-income rural areas. I n January, 1998, residential users with monthly consumption below 500 kWh
started receiving subsidies, as established by Art. 122 of the General Electricity Law and Art. 128 o f its
Regulations. The subsidy was equal to 100 percent o f the positive spread (if any) between the tariffs for
electricity consumption and the use of the network and billing and collection fees charged by the
distribution companies and the maximum prices for electricity established by SIGET. I n January 1999,
subsidies were reduced to residential users with rates o f consumption o f less than 200 kWh. As of
September 2000, only consumers within the monthly range o f 1 to 99 kWh are being subsidized. I n
November 1999, subsidy decreased to 85 percent o f the positive spread (if any) between full tariffs rates
billed by distributors in respect of maximum prices established by SIGET (US$0.0640 for kWh for
monthly consumption o f 1 to 49 kWh and US$0.0671for monthly consumption o f 50 to 99 kWh).
CEL covered the cost with the electricity subsidy since January 1998 to March 2001. From April 2001,
these costs were directly absorbed by FINET, who i s administered by the FISDL.
From June 2003, the Government established an electricity price (PEN) o f US$66.34 x MWh, whereas in
the wholesale market the price from June to December 2003 was US$68.67. Electricity distributors
purchase energy from PEN in the Wholesale Power Market and transfer these to their tariffs. Generating
entities carrying out sales in the wholesale market perceive PEN, and the difference i s accumulated in a
price-compensation fund, which i s administered by UT. According to Fitch de Central America, this fund
accumulated a US$6 million deficit by year-end 2003, which constitutes an indirect subsidy from
generating entities to all final users of electricity.
DEE estimates that 60 percent of all residential users received subsidies in 2003. SIGET estimates that
subsidies represent an average o f 57 percent o f billings, which consumers should pay when falling in the
range of 0 to 49 kWh per month, and 43 percent of those users within the monthly range o f 50 to 99 kWh.
should subsidies not exist.
Subsidizing energy used in water pumping and distribution systems administered by rural communities
commenced in August 2000. This embraces 100 percent of the difference between the price for energy
consumed and the price invoiced to ANDA on 31 December 1999.
Subsidies to construction and improvement of rural electricity infrastructure, are granted through “func
contests” every six months to municipalities and electricity distribution and marketing companies that offei
the best matching counterpart. They are disbursed at the conclusion o f project works. The maximur
FINET subsidy granted in these projects i s that which enables obtaining a present net value o f zero
considering a useful l i f e o f 20 years and a rate o f real discount o f 10 percent per annum. Earnings are
derived from income from fixed and variable charges for use of the distribution network; whereas cost:
include the value o f distribution losses, compensation for non-delivered electricity to final users, and the
distribution network operational and maintenance costs.
181
7.21 Subsidies directly paid b y FINET between April 2001 and December 2003
amounted to $95 million, o f which 93 percent correspond to subsidies to residential
consumers (Box 7.2 and Table 7.4) In contrast, subsidies allocated for rural power
infrastructure amounted to US$6.2 million (78 percent o f total investment) and enabled
the connection o f 19,064 users.
Table 7.3: FINET - Electricitv Subsidies Granted, Ami1 2001 - December 2003
llnfrastructure Subsidy granted (% of total investment) b/
a/ Includes the grant from France of US$0.6 and US$ 1.2 millions
in 2002 and 2003.
b/ Includes FINET, France and municipalities
Source: FINET
- . --- - - _.
(US$ cents/ kWh)
6.9
Residential
9.1
Commercial
8.7
Industrial
Government ad Municipalities
5.7
Public Lighting
5.7
Total
7.6
I-----
83.9
I
72.6
I
~
182
11.2
10.6
10.1
10.6
10.6
10.6
(percent)
38.4
14.2
13.2
46.2
46.2
28.3
Million US$
39.2
6.4
10.9
20.9
2.3
79.7
77.7
I
-
Expansion of rural electrification (1990 2003)
CEL NRECA II
-
SETEFE b/
Subsidy to electricity consumption (1998 2003)
FINET c/
Compensation fund for wholesale prices d/
Memorandum:
Rural distribution lines build (kms) e/
Rural electrification/Subsidies to electricity consumption (%)
Rural electrification/lncome from privatization (%)
Subsidies to electricity consumption/lncome from privatization (%)
-
US$ million
78.3
11.7
9.4
268.8
262.8
6
Percent
4.207
29.1
10.9
37.4
7.22 In sum, during the period 1990-2003, public institutions allocated US$78 million
to expand rural electrification, and $269 million to subsidize electricity consumption
(Table 7.6). This means that for each $1 used for subsidizing electricity consumers, $0.29
were used for providing electricity to the Salvadorans that did not have access to this
service. Funds destined for rural electrification represented 11 percent o f resources
obtained from the privatization o f the electricity sector. On their part, the private
electricity companies (CAESS, DELSUR and EEO) made capital investments reaching
$94 million during 1998-2003 (Table 7.7), to improve the distribution network.
Table 7.6; Capital Investment by the Distribution
Source: Fitch Central America
183
111.
Expenditure Outcomes
7.23 Public expenditure has marked effect on the, results obtained in coverage,
efficiency and quality o f the sector during 1990-2003, inasmuch as i t has created a
scheme o f incentives for new private operators in the sector; has provided the country
with a greater rural electricity infrastructure; and has influenced the effective demand for
electricity o f low income rural households. These measures complemented investments
carried out b y private operators.
Electricity Coverage
7.24 During 1990-2002, El Salvador experienced important advances in terms of
electricity coverage. According to E C L A , the electricity coverage increased from 52
percent o f population in 1990 to 78 percent in 2002 (Table 7.8). El Salvador registered
the second-largest increment in electricity coverage in the Central American region (26
percent points), after Guatemala (48 percent points). Nonetheless, i t continues to be in
third-place in Central American, after Costa Rica (97 percent) and Guatemala (84
percent).
Table 7.7: Electricity Coverage in Central American Countries, 1990 - 2002
a/ percentage points
Source: UN’s Economic Commission for Latin America. ECLA.
7.25 This outcome i s mainly explained b y the increase in rural electrification.
According to household survey (EHPM), the proportion o f households in rural areas with
electricity increased b y 28 percentage points during 1991-2002 (Table 7.9), more than
seven times the increment in service coverage in urban areas. In spite o f this, in 2002,
close to 29 percent o f rural households s t i l l did not have electricity.
184
Table 7.8: El Salvador - Electricity Coverage,
1991 - 2002
(% of households)
43.5
MSS a/
51.2
98.2
a/ Metropolitan Area of San Salvador
Source: Household Survey (EHPM)
27.5
98.7
Sector Efficiency
7.26 Efficiency in electricity services may be approximated by the losses in the
transmission and distribution systems and b y the price o f electricity in the wholesale and
retail markets. Total electricity losses have diminished b y 5.4 percentage points between
1990 and 2003 (Table 7.10). This i s explained by a reduction o f transmission losses by an
end to the sabotage after signing of the Peace Accords, and by rehabilitation and
reconstruction activities carried out by CEL. Distribution losses (technical and nontechnical) have stayed within a range o f 10 percent during this period.
7.27
In spite o f damage caused by the armed conflict to the infrastructure o f the
electric power system, electricity losses in El Salvador were lower than in Panama,
Honduras and Nicaragua in 1990; and slightly higher than the Central American average
(Table 7.11). During the period 1990-2002, El Salvador, was the country in the region
that has been able to reduce to a larger extent electricity losses. El Salvador i s now the
second-placed country with less electricity losses in Central America.
Table 7.9: El Salvador - Transmission & Distribution Electricity
Losses (1990 - 2002)
a/ During 1980-1989 was 7.5 percent on average with a maximum of 8.9 percent in 1987
Source: CEL, UT y SIGET
7.28 Electricity prices paid b y consumers are influenced by the price in the electricity
wholesale market (see B o x 7.3), particularly b y the System Regulator Market ( M R S ) .
During 1998-2003, prices in M R S rose by 24 percent in nominal terms and by 13 percent
in real terms (Table 7.12). This i s mainly explained by the increment in the price o f fuel
used in thermal generation in 2003 that up to 2002 had risen only by 6.2 percent in real
terms with respect o f 1998. Monthly volatility o f prices has stayed within a range o f +20
percent, with exception o f 2000, when reportedly the abuse o f market power b y some
185
operators led to fluctuation in the range o f +60 percent and the real price, and an increase
o f 35 percent over the 1998 price.
Table 7.10: Central America - Transmission & Distribution Electricity
Losses (1990 - 2002)
a/ Percentage points
Source: CEL-UT-SIGET (El Salvador) and E C L A (UN)
\Real price index (1998 = 100) d/
I
100
I
99.5
I
123.3
I
168.8
I
158.6
I
160.4
a/ MRS- System Regulator Market or Mercado Regulador del Sistemar
b/ Deflated by the Consumer price index (CPI) excluding electricity
c/ Electricity service in the consumer price index (CPI)
d/ Average price without subsidy charged b y the distribution companies to their clients.
Source: Transaction Unit (UT) and SIGET
I
7.29 The price of electricity in the retail market measured b y the Consumer Price Index
(CPI) experienced an increment o f 75 percent in nominal terms between 1998 and 2003;
and o f 60 percent in real terms.137 The average electricity price paid b y the Salvadoran
residential users (without subsidy), has been higher than the price paid b y users in
Nicaragua (20 percent), Honduras (91 percent) and Costa Rica (118 percent) during the
2000-2002 period (Table 7.1 3). These differences can be explained through different
subsidizing policies applied in the selected countries, differences in the participation o f
installed hydroelectric capacity (71 percent in Costa Rica, 43 percent in Honduras, 37
percent in El Salvador, and 16 percent in Nicaragua), etc.
137 These changes reflect the invoice variations o f an average residential user who maintains the amount o f
electricity consumed after the elimination o f subsidies, variations in energy prices, the distribution and
authorized sale prices by SIGET to distribution companies, losses o f energy, and fluctuations in price of
energy in MRS or those regulated by Government.
186
Table 7.12: Central America - Average Prices Residential
Customers, 1998 - 2002 (US cents/KWh)
a/ Without subsidies. Price o f 1995 corresponds to July 1994
7.30 These results lead to conclude that elimination o f subsidies to residential users
with monthly consumption higher than 100 k w h and variations in the related charges in
the retail market explain to a great extent the increment in electricity price to final
consumers in El Salvador between 1998 and 2002. Factors related to the wholesale
market (reported abuse o f market power, price rises for fuels for thermal generation, etc.)
have been considerable in 2000 and 2003. This calls for increasing significantly the
competition in generation and distribution as a mechanism o f market discipline and for
lowering electricity prices.
Box 7.3: Wholesale Electricity M a r k e t
In the Wholesale Electricity Market buying and selling transactions take place b y the generation,
distribution, and power marketers and final users connected to the high-voltage grid (115 kV and 230 kV).
There are two markets for electricity: the contract market (CM), and the System Regulator Market ( M R S ) .
In both o f these markets, offers are submitted the day prior to delivery.
In the contract market, participants negotiate freely prices and conditions for power and related energy;
they inform la UT only the amounts o f power to be interchanged at hourly intervals each day and the
injection nodes and withdrawal o f power. Transactions are dispatched in accordance with declarations
made-unless UT determines that they affect quality and security conditions o f the system.
M R S i s a power auction market in which bids for the delivery o f energy the following day based on prices
per M W at each hour o f the day. Generation companies, who have power surpluses not under contract, are
allowed to present their offers for sales, and buyers who have power demands not covered b y contracts, can
put in their purchase bids. Generation companies are also able to present bids for purchases in order to
reduce their production and supply their contracts with lower-priced power obtainable through MRS; and
buyers o f power under contract can sell to M R S if prices are attractive. The equilibrium point between
M R S offer and demand fixes the hourly market price paid to all suppliers and charged to all buyers,
independently o f prices stipulated in their offers.
The retail market has participation of power marketers (independent or related to the distribution and
generation companies) and final users connected to the distribution system for low- and medium-tension
(120 V 23 kV, 3 4 3 kV and 46 kV). Although the law establishes free access to the distribution networks,
independent power marketers have only been able to carry out few transactions with medium and large
industrial and commercial users. Distribution companies continue to supply power to residential users and
the great majority o o f small-medium industrial and commercial users.
Energy prices in M R S depend on the structure of the installed capacity (hydroelectric, thermal and
geothermal, most expensive unit), the cost o f inputs used in generation (water and bunkers, diesel oil, gas,
etc.), on the consumption patterns o f hourly and daily final users (typical load curve), on the climate (rainy
or dry season, temperature variation), etc. The retail market price i s subject to energy losses (transmission,
distribution, and transformation), the M R S price or government-regulated price, competition among
suppliers, etc.
187
Service Quality
7.3 1 Among electricity service quality indicators are: frequency and duration o f
interruptions to energy supply; frequency o f deficits in reserve; percentage o f energy not
supplied w i t h respect to adjusted demand; quality o f distribution network tension;
flickering tension in the distribution grid; and indicators of quality of services (Box 7.4).
Box 7.4: Quality Norms for the Distribution of Electricity
On March 30, 2000, through Agreement N o 17-E-2000, SIGET approved the Manual o f Quality o f
Distribution Service defining a group of quality indicators. In March 2002, through Agreement N o 20-E2002, SIGET approved one Quality Norms for the Power Distribution Systems, whose goal i t i s to regulate
quality reference indicators and indexes for: i) Quality o f supply or technical service delivered
(interruptions in service); ii)Quality of the technical product supplied (level o f tension, variations i n the
voltage wave--flickering and disharmony tension-and user incidence in quality); and iii)client services
(attention to clients, means attention to users, and precision o f measuring equipment).
The implementation process o f these norms would be carried out i n four stages: i)Preliminary stage (up to
20 September 2002), when each o f the distribution companies should implement with SIGET, the
measuring and control methodology for indicators o f quality o f the energy distribution system; ii)
Probationary stage (October 2002 up to June 30, 2003), to obtain information and calculate total energy
service distribution indicators to be controlled during the transition stage, in order to diagnose clearly the
initial quality levels; iii)Transition stage (July 1-December 31, 2003), during which to control quality o f
distribution service supplied, by following up global and individual indicators, in order to demand
compliance with fixed values o f these norms; and, iv) Management stage, after which the distributor should
have purchase and information management systems that enable SIGET to carry out controls foreseen by
the norms.
In March 2003, through Agreement No 53-E-2003, approval was given to the final users’ claims and
complaints norms. In March 2004, SIGET approved the norms for compensation for damage to equipment,
tools, or installations o f final users through Agreement N o 44-E-2004.
7.32 Interruptions in power supply due to failure o f transmission lines and distribution
circuits have decreased b y 27 percent between 1998 and 2003 (Table 7.14). Investments
carried out for rehabilitating and reconstructing the transmission system have reduced the
power interruptions caused b y E T E S A L b y 21 percent. Investments o f distributing
entities and the approval and setting in motion o f quality norms for distribution service
have reduced interruptions b y 44 percent. This explains the 29 percent increment o f
interruptions due to grid maintenance. As a result, energy not served to final users fell
abruptly b y 8 percent o f adjusted demand in 1989 to 0.2 percent in 2003.
7.33 During 2003, the Salvadoran power system registered a deficit in i t s reserve
margin o f 528 hours or 6 percent o f power demand (Table 7.15).13* This reveals
deterioration in quality and security o f the power system with regard to required potency
138 The margin required for spinning reserve in El Salvador i s 7 percent o f power demand, which i s the
result of adding the amount o f reserve for Primary Frequency Regulation o f 3 percent (which allows instant
balancing between generating and demand, following the normal deviations o f flow and withdrawal), and
the amount o f reserve for Secondary Frequency Regulation under Automatic Control o f Generation 4
percent (used for correcting the accumulated error o f primary frequency regulation; and for maintaining
interchange between interconnection with Guatemala and Honduras within the programmed values).
188
for operation under normal conditions, This reflects a reduction in the margin between
bulk available capacity and maximum power demand o f 18 percent in December 2002 to
6.4 percent in December 2003 (Table 7.16), owing to removal o f 88.4 MW of Duke's
plants in Soyapango and San Miguel for their re-conversion and the unavailability o f 67.5
MW of the Cerr6n Grande Unit 2 for adjustments in generating power. This i s because
maximum demand has grown at an average annual pace o f 5.1 percent between 1990 and
2003, whilst installed capacity at a pace o f 4.2 percent. Other technical aspects related to
the quality o f distribution also require i m p r ~ v e m e n t . ' ~ ~
Table 7.13: El Salvador Energy Interruption and N o t Delivered (EIND), 1990 2002
a/ In transmission, lines, Guatemala and Honduras interconnection lines and distribution networks
b/ Interconnections, Generators, Final users and UT
Source: UT
7.34 Some indicators used b y SIGET for measuring the quality o f service to client by
the distribution companies are: percentage of errors in invoicing residential users
(IPE111); percentage o f claims (PRUC); average response time for claims received
(TPA); and average time for solving claims received (PRA). Year 2003 results (Table
7.17) indicate that all distributors reached required SIGET levels for IPEll1; CAESS and
D E U S E M did not comply with PRUC; CAESS and EEO did not comply with TPA; and
only EEO did not comply with PRA.
13'
SIGET measures tension quality in the distribution network through the equivalent frequency allowed for annual
l i m i t s &8 percent and +9 percent in low-tension lines <600 V in the urban and rural areas; and, +7 percent and +8
percent in medium-tensionlines 600 V <V<115kV) or FEB per index, which must be equal to or more than 97 percent.
Measurements taken in the transition stage yielded: DELSUR 96.51 percent, DEUSEM and EEO 94.55 percent,
CLESA 92.02 percent, and CAESS 91.54 percent. T h i s means that distributors must carry out investments in their
networks in order to improve power quality in order to comply with SIGET requirements. SIGET also carries out
campaigns geared to determine the presence of flickering and disharmony tension in the distribution networks. The
flickering percentageregisteredbeyond
the tolerance levels in the second semester 2003 for distributors was: CAESS 0.8 percent, CLESA 0.87 percent, and
DEUSEM 1.66 percent, EEO 2.60 percent and DELSUR 2.99 percent. W h i l s t the disharmony tension percentage
registered beyond tolerance levels for the same period was: DELSUR 2.14 percent, CAESS 21.40 percent,
CLESA28.87 percent, EEO 58.12 percent and DEUSEM 62.28 percent. T h i s indicates that disturbances due to
disharmony tension in the distribution networks are significant.
189
a/ Samples have a duration o f 30 minutes
bl The minimum reserve required i s 7 percent o f the power
demanded
Source: UT
a/ Charts for 1990-1998 estimated on the basis o f an availability factor o f 86.1 percent
bl After considering a 7 percent margin for reserve
Source: O w n estimates on the basis o f C E L and SIGET information.
Table 7.16: Electricity Companies - Indicators o f Quality Services to Clients,
2003
Note: IPE111- percentage o f billing errors on residential consumers bills; PRUC- claims made be
commercial clients o f distribution companies as percentage o f total number o f clients: TPA- average
time o f response to the claims received: PRA- claims resolved as percentage o f total claims received.
Source: SIGET
Expenditure Incidence
7.35 Although a large part o f the electricity sector i s now privatized, the geographic
distribution o f FISDL and FINET rural electrification expenditures and the change in
access o f lower income households to electricity help to evaluate whether public
expenditures in the sector have favor the poor. The household surveys indicate that
between 1991 and 2002, the households in the poorest bottom quintiles saw their access
to electricity increase by 21.4 percentage points against 8.8 percent points for the richest
190
households. Households in the second quintile were the major beneficiaries (22.8 percent
points) (Chart 7.2).
7.36 A geographic analysis o f FISDL investments during 94-2003 indicates that the
departments with the largest investment were UsulutBn, San Miguel and L a Libertad
(Table 7.18). The correlation analysis indicates that these investments were carried out
independent o f the per capita income o f the department (+0.33 denotes a low positive
correlation between variables). Thus i t may be concluded that the allocation o f resources
did not favor the richest departments. However, most beneficiaries are concentrated in
San Salvador and L a Libertad, these being the o departments most densely populated in
the country.
Chart 7.2: Access to Electricity b y Quintile
100
90
80
70
60
50
1
1+1gg1
1995
1
69.6
77.0
1
1
45.0
51.2
1
62.3
70.9
I
1
69.7
79.5
Quintiles
I
191
1
~
80.9
88.2
I
1
90.2
95.2
1
~
CabaRas
San Vicente
Usulutan
San Miguel
Morazan
La Union
Correlation Coefficient
50.9
66.2
66
80. I
56.5
60.2
5yo
5yo
15%
11%
4yo
6%
0.33
4%
3%
13%
9%
2%
3%
0.82
7.37 Geographic distribution of subsidies granted by FINET to residential users keeps
the same proportion of subscribers to the distributing entities (Table 7.19 and Chart No.
7.1). This reveals a 60 percent concentration of users with monthly consumption below
100 kWh in the central region of the country.
Table 7.18: FINET - Geographic Distribution of
\Easternc/
19%
Source: FINET
192
21%
IV.
Conclusions and Recommendations
7.38 Electricity indicators for the period 1990-2003 reveal improvement in coverage
and quality of service, mainly in rural areas. The main sector challenge i s to lower the
cost of service through greater generation with more efficient sources, and market
competition in the segments o f generation and distribution.
7.39
Strengthening the electricity sector i s part o f the new President Government
Plan- Safe Country, 2004-2009. I t calls for: “ i ) strengthening SZGET by giving it the
technical capacity and the tools to maintain its supervision in accord with the electricity
market developments and be on guard so that electricity prices do not depend on
manipulation nor inefliciencies; i i ) approving the Competition Law and the entity in
charge of enforcing it: and iii) eliminating trade barriers to increment competition and
thus stimulate reduction in prices of goods and services to consumers.’’ Consistent with
these goals, the previous analysis indicate that the specific challenges facing the sector
include: i)continue to increase coverage o f power service in rural areas; ii)reduce
electricity costs; and iii)continue to improve service quality, mainly at the distribution
level.
Allocation of resources to the sector
7.40 Although the MDGs do not include electricity coverage, in view o f the
importance o f rural electrification for income generation, access to technology, and
reduction o f poverty, the recent study on the situation o f El Salvador in relation to the
MDGs,I4’ incorporates as a national commitment, the goal o f reaching a rural
electrification rate o f 85 percent b y 2015 (from 71 percent in 2002). This implies raising
b y about one percentage point per year the rural electricity coverage. I t i s estimated that
this would cost (to public entities) about US$ 3 million a year or U S $ 40 million for
reaching the target in 2015.14’ During 1991-2002, rural electricity coverage increased
from 43.5 percent to 71.1 percent (Table 7.9) or b y about 28 percentage points. The
direct investment in rural electrification b y public entities (CEL, FINET, FISDL,
SETEFE) was about U S $ 78 millions, or U S $ 2.8 million for each percentage point
increase.
“El Salvador: Avance de 10s Objetivos de Desarrollo del Milenio- Primer Informe de Pais”, 2004.
The report “ Analysis o f the Cost to Meet the Requirements Established in the FINET Law” prepared by
Hagler Baily for the FISDLIUSAID in 1999, estimates that for meeting the needs o f 15,000 new rural
consumers annually (50 percent of total number of new users in rural areas) over the period 1999-2005 and
increase rural coverage by 17.7 percentage points, there would be a need to invest US$ 45.3 million,
assuming that there would be other contributions from the companies, municipalities, etc. This would be
equivalent to a cost of US$ 2.6 million per percentage point increase in 1999 prices, or US$ 2.9 million in
2003 prices.
14’
14’
193
Intra-sectoral allocation of resources
7.41 There i s a need to promote greater generation with more efficient resources to
lower the cost of service. Generation from renewable sources should be encouraged in
order to reduce the dependency on thermal plants and imported fuels, which increase
sharply the cost of electricity to consumers. At the same time, support should be given
for the construction and operation o f the SIEPAC line, so as to obtain cheaper power
from Guatemala, Costa Rica and Panama, as well as to give greater stability and security
to the national power system.
7.42 The sector’s resource allocation priorities should be reviewed in order to allocate
more resources to rural low-income population lacking service; and less resources for
subsidies to those that already enjoy the service. This requires addressing the priceregulation mechanism (PEN) current deficit; eliminating C E L subsidy to the water
company, ANDA: focalizing subsidies more on residential power consumers; and
facilitating the establishing o f more power marketers. During 1990-2003, C E L allocated
US$351 million to generation and transmission, equivalent to 49 percent o f the proceeds
from the sector’s privatizations. During this same period, CEL, FISDL, SETEFT and
FINET allocated US$78 million to expand rural electrification coverage; and US$269
million for subsidizing residential power. This indicates that, for each U S $ l used for
subsidizing households already with the services, US$0.29 were allocated for increasing
the coverage to those without the service. Resources destined for rural electrification
represented 11 percent o f the proceeds from the privatization, while resources for
subsidies o f electric consumption represent 26 percent.
Efficiency and equity of resource use
7.43 The sector needs more competition in the segments o f power generation and
distribution to increase i t s efficiency and lower costs to consumers. Electricity prices in
MRS increased b y 13 percent in real terms between 1998-2003. Nevertheless, the total
cost o f power service to the average consumer, which includes cost o f electricity, use o f
network, and billing and collection costs, increased by 60 percent in real terms. This
indicates that the elimination o f subsidies to residential users consuming more than 99
k w h and the increase in distribution charges (use o f network and bill collection costs)
explains to a great extent the rise in prices. However, reported abuse o f market power
and rises in fuel prices for thermal generating were important elements in price
developments in 2000 and 2003, respectively. In this connection, there i s a need to close
the legal and operational gaps that do not allow power marketers to compete with
distribution companies in supplying power to residential, commercial and industrial
users.
7.44 The quality o f service should continue to improve particularly at distribution
level. Quality o f service has improved inasmuch as: i)interruptions due to power failures
in the transmission lines and power distribution circuits have decreased b y 27 percent
between 1998 and 2003; and ii)power not served to final users decreased from 8 percent
194
o f adjusted demand in 1989 to 0.2 percent in 2003. Nevertheless, in 2003, there was a
decline in the system’s reserve margin.
7.45
The incidence analysis indicated that the access to electricity of the household in
the bottom quintiles of the distribution o f income increased faster than for the richest
households. The geographic distribution o f resources invested b y the F I S D L and FINET
in the sector do no appear to benefit the department with higher per capita income.
Recommendations
7.46
a
a
a
a
a
In sum, consideration should be given to the following:
Evaluate the residential consumers subsidy policy and the UT-managed price
mechanism, so as to liberate resources for the support o f rural electrification.
Encourage renewable sources generation in order to reduce the dependency on
thermal plants and imported fuels.
Continue implementing the service quality norms for the distribution companies.
Mobilize internal support for the construction and operation o f the SIEPAC line,
so as to obtain cheaper power from Guatemala, Costa Rica and Panama, as well as
to give greater stability and security to the national power system.
Introduce more competition in the segments of power generation and distribution,
create the incentives for investments in new installed capacity, and close the legal
and operational gaps that do not allow power marketers to compete with
distribution companies in supplying power to residential, commercial and
industrial users.
195
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