Docuezit of

The World Banlk

FOR OFFICAL USE ONLY

ReportNo.13125

PROJECT COMPLETION REPORT

ECUADOR

PUBLIC SECTOR MANAGEMENT PROJECT(LOAN 2516-EC)

JUNE 10, 1994

Public Sector Modernization DivisionTechnical DepartmentLatin America and the Caribbean Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir offcial duties. Its contents may not otherwvise be disclosed without World Banki authorization.

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LIST OF ACRONYMS

ARCOE Analisis Referencial del Contribuyente Ecuatoriano (Cross Reference System for theEcuadorian Tax-Payer)

BEDE Banco Ecuatoriano de Desarrollo (Ecuadorian Development Bank)BNF Banco Nacional de FomentoCB Banco Central (Central Bank)CEPE Corporaci6n Estatal Petrolera Ecuatoriana (Ecuadorian State Petroleum Corporation)

(now PETROECUADOR)CIAT-BID Centro Interamericano de Administradores Tributarios (Inter-American Center of Tax

Administrators)CISCEX Comite Interinstitucional de Seguimiento de Credito Externo (Interinstitutional

Committee for External Debt Monitoring)CONACYT Consejo Nacional de Ciencia y TecnologfaCONADE Consejo Nacional de Desarrollo (National Development Council)CONAM Comisi6n Nacional de Modernizacion del Estado (National Commission for the

Modernization of the State)CONUEP Consejo Nacional Universitario de Educaci6n Piblica (National Universitary Council

for Public Education)DEUDEX Sistema de Manejo de la Deuda Externa (External Debt Monitoring System)DGA Direcci6n General de Aduanas (General Directorate of Customs)DGR Direcci6n General de Renta (General Directorate of Taxation)EEC European Economic CommunityEMETEL Empresa Estatal de Telecomunicaciones (National Telecommunications Company)

(previously IETEL)FIRBA Fundaci6n para la Investigaci6n de Recursos BioacuAticos (Foundation for the

Investigation of Bio-Aquatic Resources)GEMA Spanish Customs Information SystemIESS Instituto Ecuatoriano del Seguro Social (Ecuadorian Social Security Institute)IETEL Instituto Ecuatoriano de Telecomunicaciones (Ecuadorian Telecommunications

Institute) (now EMETEL)IMF International Monetary FundINEC Instituto Nacional de Estadfstica y Censos (National Institute of Statistics and the

Census)INECEL Instituto Ecuatoriano de Electrificaci6n (Ecuadorian Institute of Electrification)INEMIN Instituto Ecuatoriano de Minerfa (Ecuadorian Institute of Mining)MICIP Ministerio de Industria, Comercio, Integraci6n y Pesca (Ministry of Industry,

Commerce, Integration, and Fisheries)MOF Ministerio de Finanzas y Cr6dito Publico (Ministry of Finance and Public Credit)MRE Ministerio de Relaciones Exteriores (Ministry of Foreign Relations)PBs Private BanksPEs Public EnterprisesPCU Project Coordinating UnitPETRO-

ECUADOR Empresa Estatal de Petr6leos del Ecuador (Ecuador's State Petroleum Enterprise)SENDA Secretarfa Nacional de Desarrollo Administrativo (National Secretariat of

Administrative Development)SIDUNEA UNCTAD Customs Information SystemSIGMA Sistema de Informaci6n para la Gesti6n Econ6mica (Information System for

Macroeconomic Management)UNCTAD United Nations Commission on Trade and DevelopmentUNDP United Nations Development Programme

FOR OFFICIAL USE ONLYTHE WORLD BANK

Washington, D.C. 20433U.S.A.

Office of Director-GeneralOperations Evaluation

June 10, 1994

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on EcuadorPublic Sector Management Project (Loan 2516-EC)

Attached is the Project Completion Report on Ecuador - Public Sector Management Project (Loan1516-EC) prepared by the Latin America and the Caribbean Regional Office. Part II contributed by theBorrower is comprehensive, thorough, and in agreement with the PCR assessment.

The Public Sector Management Project's objectives were to: (i) strengthen the Government's abilityto formulate and implement the medium-term policies through the development of informatic systems forbudgetary and macroeconomic management; (ii) improve the efficiency of public investment; and (iii)strengthen the organizational structure of key public enterprises.

This project, as most of its kind, includes a large number of components. On balance, and a slowstart in project implementation notwithstanding, the more important components, including the interventionsin the macroeconomic area and in two of the largest public enterprises in the country, Ecuador's StatePetroleum Enterprise and National Telecommunications Company, were successful. A major activityconcerning the restructuring of the Ecuadorian Institute of Electrification was cancelled because the entitywas not able to finalize the contract for consulting services required to implement the reform.

The PCR is of good quality and provides a thorough assessment of results. Based on its findings,the outcome of the project is rated as satisfactory, the institutional impact as substantial, and sustainabilityas likely.

An audit is planned.

Attachment

This document has a restricted distribution snd nay be uwed by recipients only in the performance of their official duties. Its contentsmay not otherwise be disclosed without World Bank authorization.

FOR OFFICIAL USE ONLY

PROJECT COMPLETION REPORT

ECUADOR

PUBLIC SECTOR MANAGEMENT PROJECT

(LOAN 2516-EC)

TABLE OF CONTENTS

PREFACE ................................................ i

EVALUATION SUMMARY ..................................... H

PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE. . 1A. Project Identity .1B. Background .1C. Project Objectives and Description. 2D. Project Design and Organization. 3E. Project Implementation. 4F. Results. 4G. Sustainability and Institutional Development .5H. Assessment by Component. 61. Bank and Borrower Performance .16J. Lessons to be Drawn for Future PSM Projects .17K. Project Relationships .18L. Consulting Services .19M. Project Documentation and Data .20

PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE .. 21A. Introduction .21B. Impact of the Loan .21C. The Bank's Role .26D. Project Coordinating Unit .27E. Relationship between the Government and the Bank .28F. UNDP and OPS Role .28G. Conclusions and Recommendations .29

PART m: STATISTICAL INFORMATION .. 32Table 1: Project Timetable .32Table 2: Loan Disbursements .33Table 3A: Project Financing .34Table 3B: Project Cost Breakdown by Component .35Table 4: Status of Loan Covenant .36Table 5A: Missions .37Table 5B: Staff-week Cost Summary .38Table 6: Related Projects .39Table 7: Studies ... 40

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization. l

i

PROJECT COMPLETION REPORT

ECUADOR

PUBLIC SECTOR MANAGEMENT PROJECT

(LOAN 2516-EC)

PREFACE

(i) This is the Project Completion Report (PCR) for the Public Sector ManagementProject in Ecuador, for which Loan 2516-EC in the amount of US$6.0 million was approvedon April 16, 1985, signed on January 15, 1986, and became effective on July 30, 1986. TheLoan was closed on March 31, 1993 (the original loan closing date was September 30,1989). The Loan was fully disbursed.

(ii) Parts I and III of this PCR were prepared by the Public Sector ModernizationDivision of the LAC Technical Department (on behalf of the LA4 Country Department).This report is based on an examination of the Loan Agreement, Supervision Reports, ProjectCorrespondence, Financial Statements, Audit Reports, and the studies and progress reports ofthe consultants contracted under the Project. In addition, interviews were conducted duringthe final supervision mission with personnel in the Project Coordinating Unit and personnelinvolved in the various components. Part II of the PCR was prepared by the Government ofEcuador.

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PROJECT COMPLETION REPORT

ECUADOR

PUBLIC SECTOR MANAGEMENT PROJECT

(LOAN 2516-EC!

EVALUATION SUMMARY

Introduction

1. The discovery of oil and the availability of foreign lending led to the growth ofEcuador's public sector at a rate which, between 1972 and 1982, was twice that of GDP.The negative external shocks of the eighties had strong repercussions on the economy ofEcuador, especially on the internal and external balances of the Government. The crisisrequired an efficient response and quick readjustment of public finances to realistic levels.The response, however, was hampered by weak public administration, lack of effectivecontrol mechanisms, and a highly complicated legal environment. The Government neededto strengthen its ability to control public policy and expenditures, to improve monitoring ofits investment projects, and to alleviate the burden imposed on the budget by publicenterprises. The latter required a comprehensive financial and organizational restructuringand an increase in private sector participation.

Objectives

2. The Public Sector Management Project was designed to enhance the Governmentcapacity to formulate and implement short- and medium-term policies through thedevelopment of informatic systems for budgetary and macroeconomic management, thestrengthening of personnel skills, improvement in the efficacy of public investment, and thestrengthening of the organizational and financial structure of key public enterprises.

Implementation Experience

3. The time necessary to organize and manage the initial stages of the Project weresubstantially underestimated. This was caused by a variety of factors. Given the economiccrisis of the mid-eighties, the attention of the Central Government was initially focussed onurgent short-term policy matters. Also, there was little Government commitment to and acertain lack of understanding of the objectives of the Project. With respect to theinstitutional and financial restructuring of the three public enterprises (PETROECUADOR,INECEL, and EMETEL), delays were due partially to difficulties in the process ofcontracting outside entities for consulting services and partially to bureaucratic inertia.While some activities were brought on stream before 1989, most components of the Projectwere developed after 1989. This was brought about by a change in Administration as well as

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a renewed effort from the Bank to implement and refocus the Project. This latter effort wascrucial to the eventual success of most components of the Project.

Sustainability

4. The Project had a strong impact on the two major public enterprises (EMETEL andPETROECUADOR), directly through the implementation of modem financial and accountingsystems, which have strengthened their ability to function efficiently, and, indirectly, throughthe legal changes which have awarded these enterprises a greater level of independence fromthe Central Government. The effect on the Central Government is harder to assess becausethe intervention involved a variety of areas of public sector management. Progress was madein improving communication between different Government offices and expanding the flowof information through the modernization of critical information systems. In addition, interms of the development of personnel skills, the funds allocated to technical training paid offas reflected in the high level of utilization of the equipment provided under the Project.

5. The Project has produced a large number of studies, which, by their very nature,must be measured in terms of their impact on formulation and evaluation of public sectorpolicies. The policy impact was significant since many of the studies were conducted inclose contact with the Ministry of Finance. The action plans and legal drafts developed byvarious studies has resulted in a number of new laws in the areas of trade, fiscal reform, andthe mining sector that replaced old laws that were inefficient and obsolete. Only in the caseof a few studies, particularly those developed at the beginning of the Project, has there beenlittle translation into action. This was either the result of recommendations deemedunsatisfactory by the Ministry of Finance or the result of changing Administrations that didnot have the same policy agenda.

6. The information systems developed under the Project have started the process ofintroducing a modern framework for financial and macroeconomic decision-making, andimproving accountability and efficiency. These systems are being used, but have not alwaysbeen sustainable. The most pressing problems in terms of the sustainability of theinformation systems is the lack of sufficiently skilled staff to operate the systems and updatethe software, and of adequate maintenance funds for equipment. Another concern is thatadditional effort is required to improve integration of informatics across different computerapplications to expand the access to information within the public (and private) sector. In thecase of the two public enterprises that succeeded in implementing modern financial andaccounting systems, the reforms in PETROECUADOR are being strengthened by the factthat the enterprise is expanding its system to include the computerization of inventorymovements, while EMETEL's reforms have recently stalled.

Findings and Lessons Learned

7. Numerous lessons are to be drawn from this Project. Close supervision and measuredintervention are necessary to avoid lengthy delays during the initial stages of implementation,particularly when loans have multiple components and when the responsibility for the variouscomponents of a loan is divided among multiple executing agencies, as was the case in this

iv

Project. Furthermore, the Project suggests that inter-institutional coordination, specificity ofthe objectives, and a smaller number of components pays off as far as implementation timeand component success are concerned. The importance of continuity in the Governmentofficers's responsible for coordination and management of the Project cannot be sufficientlystressed. The unusually large number of management changes in this Project created breaksin the flow of activity and loss of efficiency. Bank flexibility over the means to achieve thestated purposes of the loan without losing sight of objectives is necessary when delays in theimplementation cause the Project to be managed by different administrations with widelychanging policy agendas and base of support. Finally, more emphasis should be placed ondeveloping the internal skills of Government and implementing reforms of the publicemployment and wage structure to enhance the Government's ability to attract and retaintechnically skilled staff.

1

PROJECT COMPLETION REPORTECUADOR

PUBLIC SECTOR MANAGEMENT PROJECT(LOAN 2516-EC'

PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE

A. Project Identity

Project Name: Public Sector Management ProjectLoan Number: 2516-ECRegional Unit: Latin America and Caribbean RegionCountry: EcuadorSector: Public Sector Management

B. Background

1. At one time Ecuador had one of the best economic performances in Latin America,particularly after the discovery of oil in 1972, as well as a history of stable prices; however,the Government of Ecuador subsequently used the proceeds from oil to finance publicconsumption, and foreign debt to finance its deficits. Once the availability of foreign lendingwas severed in 1982 and Ecuador's terms of trade started to deteriorate in 1985, the debtburden rose to levels that forced the Govermnent to undertake several programs of economicadjustment. The adjustment program of 1983 centered on fiscal deficit reduction, some tradeliberalization, exchange rate adjustment, and rescheduling of the debt. The program wassuccessful in almost eliminating the public sector deficit by 1984, halving inflation, bringingthe balance of payment to equilibrium, and resuming growth. The administration of FebresCordero, which took office in 1984, stated its willingness to exert fiscal discipline and toimprove the efficiency of the public sector. However, fiscal discipline was underminedbecause the Central Government controlled only 30 to 40 percent of public expenditures.Many public entities, such as CEPE, fell outside the budgetary control of the CentralGovernment, while others, such as the Transport Ministry, had earmarked funds that couldnot be decreased without legislative intervention. Furthermore, weak public administration,complex laws, and weak controls on public investment limited the ability of Government tofunction efficiently.

2. The need for a Bank-financed project was identified during the August 1984 missionbased on discussions with the new Government. The Public Sector Management Project wasthen developed to: (a) strengthen financial management and introduce consistent accountingmethods; (b) improve the use of the scarce financial and human resources available to thepublic sector; (c) improve macroeconomic planning, including fiscal reform and debtmanagement; (d) develop modern information systems and personnel skills; and (e) supportstructural reform in several public sector enterprises. However, dramatic events, including asharp drop in oil prices in 1986 and an earthquake the following year that halted oilproduction, shattered fiscal resolve, worsened the balance of payments, and caused the

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Government to suspend debt servicing on commercial bank external debt. These shocks tothe economy were partly responsible for delaying the implementation of the Project until late1987. By the time the Borja Government took office in 1988, the fiscal deficit had increasedto 10 percent of GDP, inflation accelerated to an annual rate of 86 percent, foreign reserveswere nearly depleted, and the current account deficit stood at 12 percent of GDP. Duringthis period, the Project became critical in providing the Government with the technicalassistance in matters of macroeconomic planning necessary to implement stabilizationprogram of 1988.

C. Project Objectives and Description

3. The Project's principal objectives were to improve the Government systems forbudgetary and macroeconomic management; to improve the efficiency of public investments;to develop financial information systems; and to strengthen the organizational and financialstructures of selected public enterprises.

4. The Project, as originally designed, consisted of:'

PART A Improving the Borrower's management, planning, and budgetingsystems by: (a) strengthening the Ministry of Finance and the CentralBank's macroeconomic analytical capacity, including the developmentof a computerized database, and a program to analyze the impact ofdebt management alternatives; (b) establishing a computerized financialinformation system; (c) developing and implementing a programbudgeting system; (d) carrying out training programs for planning,accounting, and budget professionals in the public sector; and (e)carrying out a study leading to recommendations for actions needed toreduce budgetary earmarking.

PART B Establishing a computerized system within MOF for monitoring theexecution of public investment projects.

PART C Enhancing the efficiency of public enterprises by: (a) improving themanagement capabilities of CEPE (now PETROECUADOR); (b)strengthening INECEL's institutional and financial structure; (c)carrying out a diagnostic study on IETEL's (now EMETEL)organization and management to explore possible reforms; and (d)providing technical assistance to other public enterprises.

PART D Carrying out a study to define fiscal and other incentives for privatesector participation in the mining sector.

PART E (a) Establishing systems for setting performance objectives and forevaluating public enterprises and other decentralized entities; and (b)improving the Borrower's procurement regulations.

1. See Table 3B in Part III for cost breakdown.

3

5. Various components were added during the life of the Project. In 1988, to respond tothe new necessities of the Government, two activities were approved to enhance theinstitutional strength of (i) the Direcci6n General de Rentas (the agency for tax collection),and (ii) the Direcci6n General de Aduanas (the administration of customs). The componentdevoted to debt management was amplified to create mechanisms to coordinate the flow ofinformation between the Ministry of Finance, the Central Bank, BEDE, and CONADE. Thepurpose of this was to extend the benefits and efficiency gains of the debt managementsystem implemented in the Ministry of Finance to other related parts of Govemment. In1989, technical assistance was given to FIRBA for a study on bio-aquatic agriculturaldevelopment. This study was to complement the Government's attempts to developnontraditional exports. In 1992, the INECEL component was terminated under request bythe Government, and part of its funds allocated to other components. EMETEL's componentwas amplified to implement the recommendations of the diagnostic study. Some additionalsubcomponents were modified or discontinued.

D. Project Design and Organization

6. Given the importance of a top-quality professional as Project Coordinator and thenecessity for his/her full attention to the Project, the services of the Project Coordinator werefinanced by the Project. A three-member, high-level advisory group was intended to providepolicy direction and guidance to the Project Coordinator; however, no such body existedbeyond the preparation stage of the loan. Individual unit managers of MOF were responsiblefor the execution of activities within their undersecretariats. To facilitate procurement, theGovernment contracted UNDP/OPS to administer contracts to the individual consultants andfirms servicing the Central Government, and, on a selective basis, the public enterprises. Inthe public enterprises, counterparts were assigned by each enterprise to work full time withthe Project consultants.

7. The lack of institutional continuity in Project management, from the PCU and theGovernment to the Bank was an obstacle for the timely implementation of the Project. Twochanges in government and six different finance ministers resulted in the appointment of sixdifferent project coordinators over the life of the Project. The apparent lack ofcommunication between successive Project coordinators interfered with the efficient transferof management responsibility. However, the close relationship between most of thecoordinators and the Ministers of Finance expedited the implementation of some of theProject components.

8. The fact that the Project included components not directly under the control of MOF,but required the collaboration of the senior management in the PEs, also delayed theimplementation of the Project. It is clear that closer supervision by the Bank in the post-1988 period was critical in expediting the fulfillment of certain Project objectives. Inparticular, Bank interventions in the initial stage of each component and in some difficulttransitions were instrumental in facilitating -- and sometimes rescuing -- the implementationand the ultimate success of various component. Bank officials, for instance, seized theopportunity to initiate the mining study within INEMIN; this activity would not have beendeveloped otherwise. In the case of EMETEL, a conflict developed over the quality ofoutput proposed by their first contractor. This conflict stalled progress and had the potential

4

to be fatal to the subcomponent. Strategic intervention from the Bank was essential inmotivating EMETEL to reach a solution. EMETEL closed the contract and implemented itsreform by contracting another firm.

E. Project Implementation

9. The time necessary to organize and manage the initial stages of the Project weresubstantially underestimated, particularly with respect to the portions of the Project geared tothe institutional and financial restructuring of the three public enterprises(PETROECUADOR, INECEL, and EMETEL). The delays were due to difficulties faced bypublic enterprises when contracting outside entities for consulting services. This was theresult of Ecuador's restrictive laws over participation of foreign consultants and the terms ofreference for the bidding process issued by the enterprises themselves, which were found toodemanding by the potential bidding firms. Specifically, in the case of INECEL, seniormanagement's lack of commitment to reforms was the key factor responsible for INECEL'sfailure to comply with Government regulations and for its inability to proceed. Closermonitoring and focussed interventions by the Bank during the initial stages of the Projectmight have facilitated the resolution of some of these conflicts.

10. The Central Government portion of the Project moved slowly through the first twoyears, registering some successes, in particular, the installation of the debt managementsystem, the study on earmarked revenues, and the development of the macroeconomic policycomponent. The slow pace of implementation was due to weak commitment on the part ofthe Government, a failure to understand the broader purposes of the Project, and bureaucraticinertia. In 1989 the Project started to develop in its entirety. The new Government wasfacing a large budget deficit, high inflation, and a worsening foreign position. TheGovernment responded with a stabilization program that increased petroleum prices, devaluedthe currency, decreased fiscal expenditures and initiated tax reform. The components of theProject dealing with macroeconomic, fiscal, and trade policies became a key tool of theFinance Minister for the design and implementation of policy. In addition, the financialinformation systems enhanced the Government's ability to respond to economic conditions ina timely manner. By the end of 1989, when some of the destabilizing pressures hadsubsided, the Government began to pay increased attention to the medium-term goals ofstructural reform. Finally, the Duran Administration, whose political platform includes anaggressive reform platform and an ambitious approach to economic management of thecountry, was inaugurated in August 1992. The objectives of the Project, in terms of publicmanagement, coincided with those of the Government. In particular, the Project wasinstrumental in assisting Government to promote reforms in the areas of the budget, taxation,tariff structure, and trade. The Government has already engaged in a 35 percent devaluationof the sucre and moved toward a flexible exchange rate, a 100 percent adjustment indomestic petroleum prices, and reduced the 1992 budget deficit from a projected 7 percent ofGDP to 2.5 percent.

F. Results

11. The Project has produced a large number of studies, (a list of these studies, its costand their relevance/impact is presented in Table 7), some of which have had far reachinglegislative consequences; introduced initial measures toward a modern framework

5

for financial and macroeconomic decision making; improved the accountability and efficiencyof one major public enterprise (PETROECUADOR) and the accounting system of EMETEL;and improved the skills and technical capacity of both the Government and the above publicenterprises. The more focussed components, such as PETROECUADOR and EMETEL, metProject objectives. The major exception was rationalizing INECEL, which failed to beginthe reform process due to contracting difficulties and weak institutional commitment thatultimately brought about the termination of this component. SIGMA, DEUDEX, and (ingeneral) the installation of equipment and training of professionals improved skills, capacity,and efficiency of Government. The direct impact of the studies is less measurable. However,many of the studies were conducted in close contact with the Ministry of Finance and havegenerated action plans and recommendations instrumental in the design of the new laws ontrade, fiscal reform, and the mining sector. Some studies produced little action. In thesecases, either the recommendations were considered unsatisfactory by MOF or they were metwith considerable political opposition. The studies of the rationalization of Ecuatoriana deAviaci6n, for example, provided concrete action plans that were ignored by Government atthe time. In other cases, the implementation of study recommendations have been caught inthe trauma of intense political transition in Administrations. For example, the developmentof a system for budget projections was carried out during the first years of the Project;however, when the Administration changed it was not implemented.

G. Sustainability and Institutional Development

12. The policy impact of the studies was substantial, particularly as measured by theextent of legal changes resulting from legislative drafts prepared under a number of studies.This has had a visible effect on, among others, trade policy and fiscal reform, and haspermanently changed the policy framework, as manifest in the new Government applicationto GATT, for example.

13. The informatics developed under the Project, mainly SIGMA, DEUDEX, andinstallment of equipment across MOF, are being utilized. The integration of themacroeconomic information network across different public entities (SIGMA) has yieldedpositive results, although to date several key undersecretariats in MOF and other publicentities are not connected, while the existing connection are not fully operational. The debtmanagement system was used for debt renegotiations but now has become obsolete (see para.22). The open architecture of the equipment installed in MOF (basically modernmicrocomputers and software) provides a sound platform for increasing capacity andautomatization. The most pressing problems in terms of the sustainability of the informationsystems is the lack of sufficiently skilled staff to operate the systems and update the software,and of adequate maintenance funds for equipment. Another concern is that additional effortis required to improve integration across different applications to expand the access toinformation generated in various offices of the MOF and the CB.

14. Part C of the Project has been basically successful with the exception of INECEL. Inthe case of PETROECUADOR, the fact that its accounts have been satisfactorily audited fortwo years lends some degree of credibility to the sustainability of the reform measures. Thedecision to move toward a more open architectural design of the information system hasslowed progress in the short run, but augurs well for the increased efficiency in the not too

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distant future. The success of the restructuring of EMETEL, as recent developmentssuggest, has not translated into sustainable reform. Both EMETEL and PETROECUADORnow have modem, commercially oriented accounting, financial, and management informationsystems. In the case of PETROECUADOR, financed from the company's own cash flow,the system is being expanded to include the computerization of inventory movements. It alsohas ongoing training programs for its accounting personnel, which will provide a cadre ofhighly trained accountants to handle the expected expansion of activities. In the case ofEMETEL, the strengthening and expansion of the system was to be financed under Loan3052-EC, which however has been cancelled. The successful mining sector study, whichresulted in the recent Mining Law, gave rise to a new TA loan that has recently been signed.

15. The Project had a strong impact on the institutional development of one major publicenterprise and partially of another, directly, through the implementation of modem financialand accounting systems, and indirectly, through the legal changes that have awarded theseenterprises a greater level of independence from the Central Government. The effect on theCentral Government is harder to assess because the intervention was less focussed. Whilesubstantial progress was made in improving communication between different Governmentoffices and expanding the flow of information, yet more must be done to maximize the gainsfrom the implementation of the systems. The completion of the efforts started under theProject to comply with the new Budget Law will have permanent effects on the transparencyof the Government accounts (see para. 31).

16. The new Government Reform Program suggests that the reforms initiated under theProject will not only be sustained but expanded. While debate on the reform program isintense, the Ecuadorian Congress has recently passed both a Customs Law and the Law forthe Modernization of the State, the drafts of which were assisted by the Bank. The Law ofthe Modernization of the State is a blueprint for a major restructuring of the public sector. Itsmain tenets are the rationalization of State functions and public employment, thedecentralization of government functions, and the privatization of public enterprises. Evenwith new legislative mandates, the Government still lacks sufficient internal expertise toimplement such a program and will need further assistance to design and coordinate theexecution of its projected reform agenda.

H. Assessment by Component

17. Components and Subcomponents under Part A: Improving the Borrower'sManagement. Planning, and Budgeting Systems.

18. Aal: Macroeconomic Policy Studies (US$255.030.00). This subcomponent wasdesigned to assist the Government in the formulation of timely macroeconomic measures. Itresulted in eight studies that provided the Government with: (i) macroeconomic analysis forformulating policies and strategies for internal and external financing; (ii) analysis of theeconomic environment of the country and of stabilization policies; (iii) an historical overviewof the recent changes in the principal economic indicators; (iv) a study analyzing non-oil taxrevenues, with policy recommendations for fiscal reform; and (v) a study on monetarypolicy.

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19. The major expenditures under this component were for the development of a series ofreports on macroeconomic policy. A firm was contracted to study several areas including thepreparation of a budget to implement the program for maintaining minimum standards ofliving, the development and execution of a system to improve the administration of theTreasury, the development of a strategic plan for increasing tax-collection, the installment ofa system for estimating budget projections, and an analysis of macroeconomic policies forinternal and external financing strategies. In particular, the budget projection portion wasintended to have an impact on Government ability to design fiscal policy. Prior to theProject, many problems vexed the budget preparation process. These included the fact thatrevenue projections were developed separately from expenditure projections, and no effortwas made to reconcile the two sides of the budget. It was not possible to analyze the deficit,debt formation, and investment opportunities. Also, fixed expenditures were notdisaggregated between wages and other expenditures making it impossible to design policy onsalaries or to determine the impact of salary policy on the medium term; price level changeswere not included in the projections making those projections irrelevant and obsolete; andfinally, no system was in place to prioritize investment projects. The budget study proposedreforms to the system by developing a Lotus 1-2-3 program that, while easy to use, offered asufficiently complex projection system able to calculate alternative scenarios, make inflationrate adjustments, and assure consistency of revenue and expenditure projections. Trainingand user manuals were also provided as part of the study. None of this material, however,was implemented due to a change in Administration. Further, it would appear that much ofthe information did not mirror the realities of Ecuador, and, thus, would not have beenreadily implementable.

20. Several other consultants provided services to the MOF. One consultant developed ananalysis of the macroeconomic system, particularly in the areas of stabilization, the exchangerate system, macroeconomic models, anti-inflationary policy, and trade policy. The contractwas suspended by the MOF due to dissatisfaction with the outputs. Another study wasdeveloped on the macroeconomic changes in the principal economic indicators in the previous10 years. The aim was to evaluate historically macroeconomic policy and the program ofeconomic reform, to serve as a guide for future policies. The level of analysis andsuggestions were considered acceptable by the MOF. To enhance the Governmentindependence from oil revenues, a study analyzed non-oil revenues of the CentralGovernment, in particular, the level of non-oil revenues during the period 1970-88 in thelarger context of the financial sector. In addition, the study reviewed the proposal of theGovernment concerning direct and indirect taxation. The study identified various aspects andproblems, analyzed the options faced by Government to increase its revenues, offeredquantitative estimates, and recommended future actions. These recommendations wereimportant in the preparation of the plan for fiscal reform. In particular Decreet No. 1732 of1990 includes specific recommendations such as compulsory periodical reporting of publicentities, and the establishment of utility payments by public entities. Finally, the Projectmade available to the Minister of Finance a short-term personal advisor whose functionswere to assist in the development and execution of the recommendations made by theexternal consultants and to coordinate with the Central Bank and MOF the realization ofspecial studies.

21. Aa2: Information System for Macroeconomic Management (US$74.413.76. Theinformation system, SIGMA, was designed to improve the flow and availability of economic

8

and financial information to various public entities, including MOF, MRE, CB, CONADE,SENDA, CONACYT, CONUEP, and MICIP. The system connects these institutionsthrough cable and allows access to information originated in CB. Only a few of theseinstitutions (CONADE, INEC, MRE and partially MOF), however, have developed anintrainstitutional network to use the system. The office of the President of the Republic isconnected to the system by a modem. CB was given assistance to collect and organizeinformation on the domestic and international economy. The software permits thesystematization of textual information such as legislation and policy announcements as wellas numerical statistics, particularly macroeconomic series such as production, prices, importsand exports, consumption, and employment. The numerical statistics are on a daily,monthly, or yearly basis and include approximately 8,000 economic variables. Thesevariables can be easily manipulated within the program to obtain graphs, depict trends, andprovide regression estimates, or be extracted for use with other statistical packages. Thesystem thus provides internally consistent information necessary to analyze the public sectorin its financial and monetary aspects, the real economy, and the external position of thecountry so that the Government can effectively formulate, monitor, and evaluate short-runeconomic policies.

Since August 1992, when the Government established an incentive plan for voluntaryretirement, to the present, the staff of the SIGMA office has halved. This requiredestablishing priorities in terms of series updating. The CB is awaiting a decision by the VicePresidency that would allow the CB to sell data services to meet the growing demand fromboth the private sector and other public entities for access to the data in SIGMA. Thiscommercial activity would further the purpose of the system and assure long-termsustainability.

22. Aa3: Studies on Fiscal Reform (US$307.274.00). In 1990 and 1991, efforts wereconcentrated in the following principal areas: (i) reform of foreign trade policy; (ii) planningand control of the financial evolution of the public sector; and (iii) structural reform of thepublic sector. Following the plan announced by the Government for foreign trade reform, atechnical group, including the consultant financed by the Project, was established toformulate the new tariff structure, a new regime for custom taxes based on the cost ofcustoms services and the simplification of the custom procedures for importers and exporters.As a result of a proposal by the same consultant, the process for the elimination ofquantitative restrictions of imports and exports began on January 1, 1991. Additionally,efforts were made to integrate with the Grupo de Cartagena by working on the definition of aCommon Minimum External Tariff at the Lima meeting in November 1990.

23. To improve the planning and control stage of the financing of the public sector, atrimestrial financial program was developed for the consolidated public sector whichestablishes criteria for projection and planning. To reduce public sector expenditures byapproximately 10 percent, a complete revision of the National Plan for Expenditures wasannounced. Also, the public entities were targeted to terminate the interinstitutional practicesfor common deficit financing that were used to hide the deficits of public entities. Proposalswere advanced for the structural reform of the public sector. The Project produced apreliminary analysis of public entities and the legal basis for their establishment with theultimate purpose of reevaluating their raison d'etre. The result was a set of generalrecommendations for the rationalization of the public sector. While, at the time, these

9

recommendations were not acted upon, they served as a framework for further discussion.Furthermore, a successful attempt was made to solve some of the deficiencies in theavailability of fiscal information by requiring compulsory and periodic fiscal reporting by allpublic entities to the MOF.

24. Aa4: Public Debt Monitoring System. System for the Analysis of Tax-Payers. andEvaluation of Automatized Custom Systems (US$699.382.45). The system for monitoringthe public debt, DEUDEX, was an early success. DEUDEX was developed, implemented,and operational by August 1988. The activity included a preparation study on the operationsand requirements of the Subsecretariat of Public Credit to recommend improvements onpublic debt management; to evaluate personnel and their training needs; to evaluate theprovisional list of proposed equipment; and to describe mechanisms to coordinate informationbetween the Central Bank and the Subsecretariat of Public Credit. The study was followedby the design of a debt management system that facilitates studying alternative debtmanagement options; its installment; the training of personnel; and the preparation ofnecessary program documentation, user manuals, and maintenance instructions. The Projectalso provided the necessary equipment. A firm was contracted to install the equipmenttogether with the necessary electrical support, and to provide maintenance. Between 1989and 1990, CISCEX was formed with the purpose of standardizing procedures and integratingthe informatics network. This resulted in the extension of DEUDEX to the CISCEX systemto service the Central Bank, CONADE, BEDE, and MOF. The system was key to providingthe Government with the tools and the necessary information for refinancing the public debt.Debt management requires substantial coordination between internal and externalinformation. The modern approach is to develop homogeneous systems (such asUNCTAD's) across countries. This forces a reevaluation of DEUDEX in a larger context.Furthermore, the system is beginning to suffer from obsolescence: policy-makers havecomplained that the system is slow, that information is not sufficiently updated, that there arenumerical inconsistencies between data in DEUDEX/CISCEX and other available data;moreover, partial information cannot be extracted. Other problems are the lack ofsufficiently powerful equipment to run the system and personnel to keep it updated; in MOF,for instance, the function of the equipment devoted to DEUDEX/CISCEX is limited to datainput. These problems have caused CB to consider the purchase of an alternative debtmanagement system.

25. During the latter stages of the Project a decision was made to assist an ongoing (BID-financed) program to implement an information system to improve tax collection, and toenhance the administrative structure of the Direcci6n General de Rentas within MOF (seepara. 5). The Project provided four months of interim financial assistance for consultantpayments to CIAT-BID between the first and second stages of the BID programs to assurecontinuity. ARCOE is a pilot plan for the development of a system to store information oncommercial taxpayers for use by the tax administration as a cross-check on taxpayerdeclarations. Because of limited resources, efficiency called for maintaining information ona select group of taxpayers. Two thousand firms representing 95 percent of tax revenues areincluded in the data base. Information is stored for a period of five years and includes taxdeclarations, prepayments, value-added tax payments, specific tax payments, and incomestatements. Inferences can be drawn on firms' purchases and sales, and the data can then bereconciled to determine whether tax declarations are consistent with the rest of theinformation. Any compatible computer with sufficient memory and a hard-disk can operate

10

the system. The interim financing is intended to finance activities in several areas,including: (i) a study and assistance in preparation of legal reforms; (ii) strengthening theorganizational reform of the DGR, particularly in the decentralization of the system and intraining; (iii) the development of a national fiscalization plan for 1993/94 and strengtheningof sanctions; and (iv) further improvements in ARCOE's system of capturing and verifyingtaxpayer information at the decentralized level. While the ARCOE system has developed asophisticated mechanism for verifying commercial taxpayer information and for providingimproved reporting and revenue capture procedures, there is little evidence of technologicaltransfer to counterparts within DGR. The interim financing is, in part, aimed at trainingsome 350 officials in the use of the system and in strengthening the identification and auditof individual taxpayers based on compliance profiles.

26. For the last part of this subcomponent, a group of consultants was hired to visitColombia and Spain to evaluate each country's automated customs system, respectivelySIDUNEA (which was developed by UNCTAD) and GEMA, as to their applicability toEcuador. The systems were evaluated following several criteria including satisfaction ofcountries that have implemented the systems, difficulty of installation with respect toEcuador's specific needs, level of automation, technical characteristics (such as electricityrequirements and interfacing options), architecture, and software and hardware necessary.The consultants' recommendation to adapt SIDUNEA to the Ecuadorian context, however,was not accepted.

27. Aa5: Equipment to Facilitate Foreign Trade and to Modernize Customs(US$72,957.50a. To address the problem of airport traffic and tariff evasion, theinternational airports of Quito and of Guayaquil were equipped with an electronic system forthe random selection of passengers for inspection. While the system has been in place andoperational since December 1992, customs officers have not used the system on a regularbasis. It would appear that the reason for non-use lies in the desire of customs officials toretain discretionary control over inspection.

28. To monitor the activity and increase the effectiveness of customs, equipment waspurchased and delivered to customs posts across the country. Equipment provided under theProject, which includes safes, typewriters, registers, and calculators for use by the customsofficers, should facilitate the collection of import and export duties and facilitate themonitoring of the flow of goods into and outside the country.

29. Aa6: Studies for the Reform of Commercial Policy (US$158,463.40). Reform ofcommercial policy is fundamental for successful economic policy. Several consultants werehired to study policy options and prepare legislative drafts. The objective of one of thestudies was to evaluate alternative paths to reduce the level of tariffs through exchange ratepolicy, fiscal and monetary policies, and the policy on capital mobility. The results of thestudy became the conceptual framework for the Reform of Tariffs. A Special TechnicalCommission for the Reform of Tariffs was established to review the studies; organizemeetings and discussions; and execute the steps necessary to gain the legal approval of theReform plan. The consultant hired to head the Commission was not able to complete hisassignment as Secretary of the Commission. Another policy aspect, which was discussedduring the negotiation stages of the Project, was the eventual joining of GATr by Ecuador.A consultant provided a study that considered the impact of such a decision on the country,

11

including recommendations for negotiations and joining GATT. At the time of thepreparation of the study little action occurred and the recommendations and the study werenot acted on. While the current Government has applied for membership, there is noevidence that this particular study prepared under the Project has had any impact on currentnegotiations. In fact, there appears to be no awareness of its existence. Clearly, otheractivities under the Project related to tariff reform did have a positive impact on Ecuador'sability to negotiate membership in GATT. These include the elimination of non-tariffrestrictions on trade, the simplification of the tariff structure, the reduction of tariff rates,and the simplification of custom procedures.

30. Ab: Establishment of a Computerized Financial Information System within theMinistry of Finance (US$511.452.17). The goal of this component was to integrate financialinformation and management decision within the MOF. While this component had a latestart, between June 1991 and December 1992 several LANs were installed in differentundersecretariats with the help of specialists. Equipment, including personal computers, dotmatrix and laser printers, and software (mainly WP, Lotus and utilities), was installed inmost sections of the MOF and in the provincial offices of the Government. Computertraining was provided by the seller of the equipment at no additional cost. The effect ofcomputerization has been immediate in terms of the efficiency gains and the timelyavailability of budget execution data to MOF officials. Some of the equipment has been inplace and utilized for over three years. Officials have expressed their satisfaction andexpressed the need for more equipment. However, a serious issue of equipment maintenanceis evident. While there have been few breakdowns to date, an insufficient amount of fundshas been allocated to maintenance and provision of supplementary materials (toners, ribbons,paper, and diskettes). The absence of funding may hamper efficient use of the equipment.Further technological integration in the budgeting and accounting procedures of the publicsector, which is required by the new Budget Law approved in December 1992, shouldenhance the usefulness of installed equipment.

31. Ac: Development and Implementation of a Program Budgeting System(US$159,172.33). The original purpose of this subcomponent was to create an integratedsystem for budget management. Due to contractual arrangements between the Governmentof Ecuador and the Spanish Government to develop the above, this subcomponent wasinitially suspended. However, contractual difficulties with the Spanish contractor, includingdisagreement over the type of computerized system to be implemented, caused theGovernment of Ecuador to seek another solution and restore this component. In June 1993,the Project began to finance the initial stages of an open-architecture decentralized budgetingsystem. The system will register public sector transaction and automatically create balanceof operations through a comprehensive classification of expenditures and operations. Theconsultancy included an assessment of the current technical capacity of the Subsecretariat ofthe Budget at MOF and the initial development of the system for accounts record keepingand elaboration of the budget in accordance with the Budget Law. The Project also financedthe development of the key technical norms necessary for the implementation of this law.The consultant involved in this latter activity held a series of seminars to acquaint relevantpersonnel in public institutions with the requirements of the law. This subcomponent, whichwas completed at the very end of the Project, is of critical importance given the impendinglegal requirements of the Budget Law and the fundamental necessity for transparency andcontrol in the government budget process. One of the tasks of the PPF of the TA for the

12

Modernization of the State is to assist the Government in the installation of the newcomputerized public sector budget system, which has been initiated under this subcomponent.

32. Ad: Develop Public Sector Professionals' Skills in the Areas of Planning. Accounting.and Budgeting (US$67,083.55). Seminars and training were offered in the areas of publicfinance control to personnel in the Direcci6n de Auditoria Petrolera in the Budget Office.Computational equipment was also provided for use in that office. Officers of theEcuadorian Government attended seminars on matters of procurement, accounting, andbudgeting that were found useful.

33. Ae: Studies to Recommend Actions Needed for the Reduction in Budget Earmarking.(US$63.226.0O) Both the Government and the Bank stressed the importance of thiscomponent, which was designed to study ways to reduce the earmarked portion of thebudget. In the beginning of the Project, earmarked revenues represented approximately 60percent of total revenues. As a result, Government discretionary control over the budgetallocation process was severely limited. The study was to analyze the legal instruments usedto establish earmarking and propose reforms to modify existing legal provisions while takinginto account the political difficulty associated with such a reform. The MOF approved of thecontents of the study and its level of analysis. A substantial decrease in earmarking (fromabout 60 to 40 percent of the budget) has already occurred. Any new proposal is nowconstrained by the new Budget Law.

34. The same consultant was contracted to study the finances of local government. Thisincluded an analysis of the fiscal environment in the Provincial Governments andMunicipalities, local revenues and their remittance to the Central Government, and themethods of local debt financing. It also examined the assignment of functions to the differentlevels of government and possible associated changes, and offered recommendations for thereform of revenues and expenditures. The study resulted in the development of a programcalled "Finances of Local Government" which was designed to improve the financial anddebt situation of the municipalities and is linked to the ongoing Bank Municipal Developmentand Urban Infrastructure Project (Ln. 3285).

35. B: Install a Computerized System within MOF for Monitoring the Execution of theBorrower's Investment Projects (US$0). By unilateral decision of the Government, noactivities were initiated to meet this goal.

36. Components under Part C.

37. Ca: Improving the Management Capabilities of PETROECUADOR through theInstallation of a Modern Commercially-Oriented Accounting System (US$1.749.437.57).PETROECUADOR is the most important public corporation of the country, given that it isresponsible for all exploration, extraction, transport, processing, and distribution ofpetroleum and natural gas. It provides more than half of all Government revenues andrepresents 8.6 percent of GDP. PETROECUADOR (then CEPE) used an outmoded andinefficient management system, had inadequate data processing capacities, and internalaccounting practices that did not conform to generally accepted principles. This componentwas designed to increase the efficiency of this entity by streamlining the organization,improving the financial and production management, designing and implementing a

13

computerized management information system, and improving the skills of mid-levelmanagement. The component was highly successful in assisting a fundamental managerialreform of the company. The design and attribution of responsibilities for the activities underthis component of the loan were conventional: PETROECUADOR establish'ed institutionalcounterparts, and an ad hoc commission was created to guide and supervise the execution ofthe Project. There was stability and continuity in the staff of both PETROECUADOR andthe consultants with whom a contract was signed in 1989. This resulted in the installation ofthe new financial and accounting system that, coupled with the inventory and revaluation offixed assets, enabled PETROECUADOR, for the first time since independent audits werebegun in 1985, to obtain an auditor's opinion (albeit qualified). It is expected that theaccounting anomalies revealed by the audit of the 1991 accounts will have been corrected for1992, and the next audit will result in a "clean" opinion on PETROECUADOR's accountsfor the first time ever.

38. Through the assistance of a major consultancy, PETROECUADOR has been able todevelop an integrated system of financial accounting. Lately, management has opted for amore decentralized system of integrated accountability and a more open architecturalframework for the information system in an effort to encourage management responsibility atthe decentralized level, and to reduce operating costs of the system. PETROSIP, thedecentralized system, is an effort to create financial accountability within "cost centers."The system, which is expected to be completed by November 1993, is fundamental inassuring the sustainability of the reforms and testifies to the willingness of management tomaintain an efficient and modem system.

39. Cb: Strengthen INECEL's Institutional Capabilities and Rationalize its Structure(US$0). INECEL was an original candidate for rationalization and reform. However, theentity was unable to finalize the contract for consulting services required to implement thereform. Among the reasons for this failure, one can identify the perceived complexity of theProject by the senior management of INECEL, the senior management confusion over theraison d'etre of the reform, and the resulting unwillingness of management to implement theProject, administrative changes (changes in Government resulting in changes inmanagement), and the Law for National Consultancies. The law defines strict rules over theownership and location of firms that can obtain contracts. Under this ruling, after one yearof work, the first version of the terms of reference for the bidding procedure was approvedby INECEL in March 1987. The document was then revised repeatedly until a date for thebidding process was established in 1991. The firms that were invited to bid for the contractopenly complained over the binding rules and conditions of the document. The bid wassingularly unsuccessful: of the approximately 10 firms that were expected to bid, only onefirm made an offer. The offer, which was judged technically acceptable, was excessiverelative to the available funds. Finally, after five years and numerous attempts, theGovernment decided to terminate this component and, with the approval of the Bank, toreallocate the funds to other components. This seems to have been the only reasonabledecision, given INECEL's history of noncompliance (a major loan was extended by the Bankto INECEL in 1982 and then canceled) and the delays in the implementation of Loan 2713-EC for the improvement of the power sector (4th closing date extension). More recently, thelatter has acquired momentum, and management has been more willing to implement reformmeasures.

14

40. Cc: EMETEL's Organization and Management (US$1.029,926.00). The initialpurpose of this component was to develop a diagnostic study of IETEL (currently EMETEL).The intent was expanded to include a restructuring of the firm's financial and accountingpractices. This was very important, since IETEL provides all telephone services. From thebeginning, IETEL was the most committed to the program among the public enterprises.Indeed, IETEL was the first to sign a contract to implement its component. However, afterthe contract was signed with a special consortium in November 1988, relations betweenIETEL and the consortium deteriorated rapidly, and work was suspended in February 1989.The reasons for the conflict were the difficulties encountered by the consultant with the localpartners it took on in agreement with local public consultancy laws, and the nature of thepreliminary report prepared by the consultants on the status of IETEL. The assessment ofIETEL implied by the report was not accepted by IETEL's senior management who movedto dismiss the contract. The contract was formally canceled in March 1991 by the mutualconsent of all parties involved. IETEL's management and Project team remained in place,but it took another year of discussions between the Bank and MOF to move IETEL towardscontracting both the design and implementation of a financial and accounting managementsystem. The suspension of Loan 3052-EC in 1991 provided an additional incentive forIETEL to proceed with the reform.

41. In April 1992, a new contract was signed with the same firm that had productivelycompleted the PETROECUADOR component. This contract was successful. It resulted inthe installation of a commercially-oriented, modem computerized accounting and financialsystem that took into account the information and control needs of the firm. The new systemincludes procedures to deal with invoicing, investment, and fixed asset assessment. Theconsultants provided training to accounting personnel in computers, system use, andaccounting methods; seminars to senior management to familiarize them with all aspects ofthe new system; and full documentation. Moreover, a complete inventory and fixed assetsrevaluation was undertaken. For the first time in the history of the company, an opinion wasissued by an independent audit company on IETEL's accounts for 1992. While the opinionwas qualified, this was an improvement over the 1990 and 1991 accounts audit when theauditors declined to issue an opinion. As of 1993, however, a preliminary report identifiesmany accounting errors and inconsistencies, suggesting that continued effort is required totake full advantage of the system developed on the basis of this assistance. The consultants'work included an inventory and revaluation of IETEL's fixed assets, which had not beendone since the company was formed 20 years ago, in 1973. The new accounting systemallows for a constant revaluation of fixed assets and thus results in a more realistic balancesheet. While the company still faces serious problems, this component was effective inimproving EMETEL's financial management. The success of the contract, however, did nottranslate in a permanent commitment from the part of EMETEL's management as the needfor cancellation of loan 3052 has shown.

42. During 1992, the Congress of Ecuador passed the new Telecommunications Law thatseparated the regulation of the industry from operations, which was assigned to EMETEL.This enhanced the company's administrative, operating, economic, and financial authority aswell as independence.

43. Cd: Provision of Technical Assistance in Other Public Enterprises (US$103.148.60)±Today, Ecuador's main exports include petroleum, cacao, coffee, bananas and shrimp. The

15

fishing sector, important for its export potential, and for the level of domestic provision offood, has become the primary source of foreign exchange after petroleum. While individualproducers have been mainly responsible for developing the fishing sector, an effort was madewithin the Project to integrate individual efforts in the areas of bio-aquatic research andtechnology by offering some institutional assistance through FIRBA. Complementary to theresearch activities financed by EEC, FIRBA completed a study to analyze the economic,technical, financial, and organizational aspects of investment projects selected by MICIP withthe ultimate objective of further developing the fishing sector, strengthening FIRBA'sinstitutional capacity, and delegating from MICIP to FIRBA an extended operational andmanaging role in that sector. This activity was not directly related to the objectives of theProject and was approved by the Bank as an exception given the keen interest demonstratedby the Minister of Finance and the President of Ecuador.

44. A consultant was contracted to provide a diagnostic and recommendations for therestructuring of Ecuatoriana de Aviaci6n. The study consisted of two parts. The firstanalyzes the organizational structure; evaluates the most important financial data; identifiesthe largest deficits by operative and geographic area; evaluates the accounting system; weighsthe opinions of the managers of the firm; examines the budget process and commercialstrategy; and, finally, analyzes operational aspects such as routes, number of passengers, andmaintenance investment. This study, together with an international market situation reportand accounting support, is the base for the development of the strategic plan of action whichincludes annual cost trimming by a total of $11 million, the modemization of the company'sfleet, and the identification of business opportunities. The study's recommendations,however, were ignored; in fact, the study was handed over to the Advisor of the Ministerand remains unavailable. While the recommendations of the study provided sound specificactions to be taken, a political decision was made to ignore them. The recommendationsincluded immediate reorganization of flights and offices in the exterior, a more timely reviewof financial information on the company's status, renovations of the antiquated fleet, full costrecovery, reductions of expenditures including personnel costs, merging of Ecuatoriana withTAME, and strengthening of other services provided by the company as revenue generators.Ironically, while these studies were shelved in 1989, together with recommendationsconcerning fleet renovation and restructuring, by 1993, the company's fleet has been reducedto one government-owned cargo airplane and one commercial airplane, two idle airplanes,and leased airplanes. Insolvency had become increasingly evident, and, by 1994, thecompany stopped flying.

45. The same consultant also developed a study on the situation of PEs that includes aquantitative assessment of their financial standing, the level of financial independence, theirdebt, pricing behavior, employment levels, and cost structure. This study resulted in aproposal to create a holding company of the PEs. Instead, the Government created withinMOF the Direcci6n de Empresas PuIblicas which became an effective tool for monitoring andreviewing the budgets of the major PEs. This was critical for improving fiscal policycontrol.

46. D: Study for the Involvement of the Private Sector in the Development of the MiningSector (US$131.063.00). This component was successfully implemented. The consultantsengaged in the Project for the new Mining Law were found completely satisfactory, and theirrecommendations were key in drafting the new Law of Mining. The extent of this law is far

16

reaching and defines the mining industry as a priority sector both for investment and for itspotential as a source of employment and economic development for the country as a whole.The Law provides for: a restructuring of the mining sector to improve transparency andaccountability; developing mechanisms to evaluate the performance of the mining sector andthe efficiency of its development; and for the mineral extraction from new ores to increasenational production, government revenues, and the number of jobs in the economy. Progressmade in this sector gave rise to the new project on mining development (MiningDevelopment and Environmental Control).

47. Ea: Establishing Systems for Setting Performance Objectives and EvaluatingPerformance of Public Enterprises and Other Decentralized Entities (US$33.000.O). Thissubcomponent provided assistance to analyze the legal framework of the public sector and toprepare a proposal for its reform and deregulation.

48. Eb: Improving the Borrower's Procurement Regulations (US$3.100). The reform ofthe Law of Public Contracts, which has regulated public procurement since 1974, was one ofthe important components of the Project. The law, which was designed to formalize thecontracting of public construction and purchase of goods and services, was not able to adaptto the changing and expanding needs of Government. In addition, the procedural normsestablished by the law are excessively cumbersome and impede prompt and efficientcontracting. The lack of clarity of legal dispositions makes the interpretation of the codesand agreement of the contracting elements difficult. Often the contract is awarded not to themost competitive bidder but to the one that is judged by the Committee of Contracts ascompliant; this introduces an undesirable level of discretion in the selection process. TheProject financed a study to analyze the problems with the current law and to proposerecommendations for the draft of a new procurement law. While this is a very small effortand far short of what is needed, the hope is that it will provide the Government with astimulus for further activity in this critical area.

1. Bank and Borrower Performance

49. A major problem initially was the lack of commitment by the Borrower with was dueto two factors: (a) the economic crisis of 1986 which stirred attention toward pressing policyissues, and (b) to the withdrawal of the CONADE component as envisioned in thePresident's Memorandum. This lack of commitment is evidenced by the following facts: ittook a year and a quarter for the Project to become effective after receiving Bank approval;no progress was made for the first two years; and the closing date of the loan had to beextended three times for the Project to be completed. Closely related to this problem was theinsufficient level of understanding of the Project objectives. This fact, which may havearisen from the lack of clarity and specificity in the legal documents', and the numerouschanges in ministers of finance and Project coordinators, implied that the Bank had to briefrepeatedly the Borrower to keep the Project on track. At some junctures, the MOF did not

1. While the legal documents should provide a sufficiently flexible framework for project implementation, it should alsoclearly identify the main objectives of each component. In the case of the public enterprises components, the main objectiveof modernization of the financial and accounting system was not clearly articulated.

17

realize the opportunities offered by the Project and failed to use them under the pressure ofday-to-day tasks.

50. The Project became effective in June 1986. This corresponded to a very difficultperiod on the economic front. The prices of Ecuador's main export, oil, plunged causing a20 percent decrease in export earnings. The sudden shortage of Government revenues andforeign exchange created a fiscal and external crisis. In this critical period, the Bank shouldhave offered increased attention and supervision. The lack of a specific effort in this regardcontributed to the stalling of progress toward Project execution. During this period theProject was given low priority and not allotted sufficient time.A trend started to develop on the part of the Borrower to use the loan as a means to financeactivities not clearly related to the original Project objectives. This was the case, forexample, with FIRBA, which the Bank cleared as an exception given the export potentialimplied by the activity. The danger, however, of this approach is the fragmentation of theloan concept.

51. Starting in mid 1989, substantial effort was needed to revive the Project and adapt itto the changing needs of the Government. The extent of the reorganization of the Project isreflected by the number of staff weeks put into the Project in 1989, which jumped from anaverage of 7.5 weeks per year during the previous three years to 20.7 weeks, comparable tothe time spent in the year of the design of the Project'. Intervention was managed on acomponent-by-component basis and numerous efforts were made to facilitate developmentand resolve conflicts. In the case of EMETEL, the Bank was instrumental in motivating thefirm to close the contract with the consortium that had come under litigation over the qualityof its output. This intervention was essential for the eventual success of EMETEL'scomponent. Similarly, the Bank encouraged the Government to stop the implementation ofan outdated, closed architecture, and expensive mainframe program budgeting system, andinstead consider the adoption of a modern open system. In other cases, such as the miningstudy and procurement regulations, Bank officials took the initiative where the Governmenthad not.

52. Effective progress toward full implementation was made by agreement between theBank and the Government through Work Programs on clear and specific targets thateventually allowed the Project to reach -- and in some cases exceed -- some of its statedobjectives.

J. Lessons to be Drawn for Future PSM Projects

53. Several lessons can be drawn from this Project. The first is the need for closesupervision and measured intervention. Loans that have multiple components and somecomponents that do not fall directly under the responsibility of the main executing agencynecessitate close monitoring. This was the case for this Project, where responsibility wasspread among various sections of the Ministry of Finance and three major public enterprises.Often, delays were caused by management inertia; this needs to be identified and promptlycorrected. This suggests the need for greater inter-institutional coordination, as well as that

1. See Table 5B in Part Ill.

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specificity of the objectives and a smaller number of components pays off in betterimplementation, adherence to schedules, and ultimate achievements of objectives.

54. The importance of continuity should also be stressed. There were six differentProject Coordinators during the life of the Project. This created breaks in the flow ofactivity and efficiency loss. Longer-term commitments for the position of ProjectCoordinator should be required of the Borrower.

55. The necessity for adaptability on the part of the Bank to adjust to changing conditionsand needs is paramount. This was particularly evident during this Project, which evolvedthrough three different administrations with varying ideologies, different economic programs,as well as a changing political base of support. Prompt and adaptable response from theBank in the second period greatly increased Project policy impact. Furthermore, beingperceived as somewhat flexible will draw the Borrower to be more open about difficultiesencountered and will therefore permit the Bank greater access and influence. Naturally,flexibility must be contained within the framework and purpose of the loan. This entailsadaptability of inputs and activities to reach more effectively the stated objectives of theProject. Enhancing the Government ability to formulate macroeconomic policy, for instance,can be achieved by developing studies on a variety of issues; it is indispensable to work withthe Govemment to both meet the urgent needs of policy-making as well as the need todevelop longer-term economic stability. The fact that the loan agreement did not specify theinputs required to reach its stated objectives facilitated the implementation of this Project.

56. Finally, the lack of internal expertise and the danger that, once external expertise isremoved, reforms will come to a halt is a constant problem. Attention should be given tothis during the design stage of the loan to apportion sufficient resources to minimize theproblem. In this loan, substantial funds were allocated to technical training. This investmenthas paid off as the utilization of equipment shows. More emphasis should be given to theGovemment's ability to attract expertise and retain it on a permanent basis. In the case ofEcuador, as of other Latin American countries, wages of public officials are too low to becompetitive with the private sector. This problem can be tackled by supporting programs torationalize public wages and employment. Rationalization of public employment and wageswill make the Government more competitive in attracting expert professionals to its ranks.

K. Project Relationships

57. The relationship between the Government and the Bank was greatly improved by theProject, which gave rise to a number of initiatives that increased collaboration between theBank and the Government. These include the Mining Development and EnvironmentalControl Project, the Telecommunications Project (EMETEL), the Municipal Developmentand Urban Infrastructure Project, and the project on the Modernization of the State, forwhich a Project Preparation Facility Advance was approved. The development of the debtmanagement system was also very relevant to the Bank's concerns, particularly in view ofthe very high debt to GDP ratio of the country (104 percent in 1992).

58. The Minister of Finance acted as the National Director of the Project and was alwaysdirectly involved in the Project execution. For this reason, the Project became a very

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effective means for the Bank to engage in a broader dialogue over important policy andinstitutional issues linked to Project output. Furthermore, the Project Coordinator generallyalso served as a personal advisor to the Minister. This implied that while sometimes theattention of the Coordinator was concentrated on urgent policy issues and away from thedevelopment of the Project, most often the arrangement facilitated greater influence ofProject activities on current policies.

59. The administrative role of UNDP/OPS was not completely satisfactory, particularly inthe beginning. A source of complaint was the delays and the bureaucratic proceduresassociated with the approval of contracts submitted by the Government and cleared by theBank. In the case equipment purchases, price guaranties had sometimes expired by the timeprocurement was approved. In some cases, this required reprocessing. Administrative feeswere also deemed excessive by the Government, which expressed its unwillingness tocontract with UNDP in future. This was the first experience of the UNDP ResidentRepresentative Office in Quito with a Management Services Agreement. As a result, thereappears to have been some trial and error in the developing relationship. In particular, thedecision-making process within UNDP required that most authorizations be approved fromNew York. This in turn led to substantial delays in procurement and contracts. Part of thedelay, however, also resides in poor advanced planning on the part of the PCU, resulting inrequests for approval at the last minute. The delays and the changing interpretation ofUNDP's role as facilitator, administrator, and executor led to substantial disagreementbetween MOF and UNDP at several stages in the Project. Changes in the delegation ofauthority within UNDP now permits a greater reliance on the local office for some decisions,which will have an effect (in future projects) in eliminating delays as well as lowering thecost of services (lower overhead, especially a result of national hiring). Under the Project,UNDP fees were approximately 7 percent, while under more recent contracts that ratebecame approximately 3.5 percent.

L. Consulting Services

60. Most consultants hired under the loan performed satisfactorily. More importantly,many were able to have a far reaching policy and legislative impact both in the short-runpolicy design and execution, and in the design of medium-term structural changes. Some ofthe consultants were advising the Finance Minister and had direct access to the decisionmaking-process. The lack of internal expertise made this function even more important,particularly in the areas of macroeconomic, financial, and debt management.

61. Concerning the public enterprise components, after EMEIEL broke relations with itsfirst consulting company, it signed a contract with the consultants employed byPETROECUADOR. These consultants proved to be very competent on both occasions,producing first-class work, on time, and within budget. Relations between the consultantsand the clients were business-like and efficient.

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M. Project Documentation and Data

62. The documentation for the Project is detailed and comprehensive. The financialinformation, invoices, and contracts were judiciously kept. Most studies and progressreports were also available to the Bank. The few exceptions correspond to cases where theMinister of Finance considered the content of the study politically sensitive and treated thedocument as confidential. In those cases, however, detailed assessments of the studies weremade available by the Minister.

63. The main documents for Project execution were the Loan Agreement and thePresident's Report. The Supervision Report of December 1986 contains an Attachmentamending the allocation of funds to the various components to reflect the withdrawal ofCONADE from the original contemplated loan of $8 million to the $6 million stated in theLoan Agreement. A Staff Appraisal Report, which was not available for this Project, wouldhave been helpful for measuring results against their set target.

64. The preparation of the PCR gained from the quality of the supervision reports andfrom the progress reports prepared by the PCU, particularly the extensive reports by one ofthe Project Coordinators. Assistance from the PCU during the PCR mission greatlyincreased access to relevant materials and facilitated the preparation of this PCR.

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PROJECT COMPLETION REPORTECUADOR

PUBLIC SECTOR MANAGEMENT PROJECT(LOAN 2516-EC)

PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE

A. Introduction

65. Loan 2516-EC, signed between the Government of Ecuador and the Bank in 1986 fora technical assistance project in the area of Public Sector Management, was considered apositive and fruitful effort by the Government to make the public sector more modem andefficient.

66. The various components and activities carried out during the life of the Projectcovered sensitive areas of the public sector that demanded urgent structural changes.

67. This chapter analyzes, from the borrower's perspective, the significance of the Projectfor the development of the country and corresponds to Part II of the Project CompletionReport required by the Bank. It provides an overall assessment of the impact of the project,the Bank's role and the borrower's management, and summarizes general conclusions andrecommendations for future projects.

68. The report has been prepared following the Bank's guidelines for the preparation ofPCRs.

B. Impact of the Loan

69. At present, it is not possible to have an exact account of the concrete results of all theProject components. The diversity of sub-components, the short time elapsed since thecompletion of the Project, and factors inherent to the internal situation of the country duringthe life of the Project make an overall assessment difficult. It is feasible, though, to make ageneral diagnostic evaluation of the substantial contributions of the Project in various areas.

70. The institutional reforms implemented greatly contributed to the efficiency of severalpublic sector enterprises. Reforms included administrative rationalization, and installment ofmodern computer equipment and information networks. Furthermore, the modernization ofthe State was promoted through reforms in the areas of budget, customs and tax. Thesupport received by the Project in the design of legal measures to complement the reformsresulted in the drafting of several laws. In particular, the Budget Law, which has beenapproved, and both the Law for the Modernization of the State and the Customs Law, whichare now under Congressioral consideration, are fundamental for the renewal of the publicsector.

71. The Project tackled strategic areas that needed to be updated and renewed. Thenational counterpart lacked the necessary analytical capacity to carry out the structural

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diagnostics, and to design policies to reform the public sector as a whole. The same lack ofcapacity hampers the prospects for long-term sustainability of the structural reforms and theirconsolidation. Funds that are available to the Government and could be used to consolidatethe gains achieved by the Project, are not always efficiently allocated towards those ends.

72. There is not always an appropriate target audience in developing countries to benefiteffectively from technical aid provided by the multilateral organizations. In the case ofEcuador, the lack of integrated training at all levels of the bureaucracy and an obsoletetechnological environment result in poor and inefficient services. Modern computertechnology and training are required to improve public services. Given the criticalimportance of technical assistance and technology transfer from the internationalorganizations for the future of the public sector, it is imperative to complement the assistancewith the technical training necessary to develop a cadre of professionals able to understandand optimally utilize the available technology.

73. The Project provided the tools needed by the Government to adapt and respond to thechanging economic environment. Key areas of fiscal and macroeconomic planning wereidentified, and tools developed to formulate modern economic policies. Particularly duringthe final stage of the Project, the national counterpart tried to make the best possible use ofthe Project in this direction.

74. Project's design and selection of the components responded to the need forstrengthening the capacity for policy-making and improving the available technology.Implementation did face, however, various obstacles, and the prescribed goals were notalways met. Among the information services developed under the Project, few have thecapacity to effectively share information, and are still in the process of being perfected andcoordinated. The agencies involved need to develop a plan to better coordinate theirservices. This should consolidate the fragmented information into a solid and reliableinformation flow that could be accessed by a large number of people.

75. Some components, such as INECEL's, were never implemented, while others(particularly some macroeconomic background studies), even tough implemented, did nothave the expected impact. These imposed costs that should be avoided in future projects,through enhanced monitoring and selection mechanisms.

76. Remaining components, however, were successfully implemented. Close monitoringwas required to insure success and reinforce the gains. Some essential aspects of the Project,with regard to budget analysis and implementation by the treasurer's office, tax collections,public investments and planning need to be unified under an adequate institutional frameworkto improve policy formulation and coordination among the various executing agencies.

77. The contributions have been valuable. The changes introduced in the beneficiaryinstitutions have been positive and have effectively met some of the reforms'