Project Name. PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB2062 Bono de Desarrollo Humano Adaptable Lending 1st Phase Project

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB2062 Bono de Desarrollo Humano Adaptable Lending 1st Phase Project Region LATIN AMERICA AND CARIBBEAN Sector Other social services (60%);General education sector (20%);Health (20%) Project ID P Borrower(s) GOVERNMENT OF ECUADOR Implementing Agency Ministry of Social Welfare Environment Category [ ] A [ ] B [X] C [ ] FI [ ] TBD Date PID Prepared March 30, 2006 Date of Appraisal April 10, 2006 Authorization Date of Board Approval May 25, Country and Sector Background Country Context Macroeconomic context. Positive economic growth and welfare improvements in the early 1990s were replaced by slow growth and deterioration in economic performance during the second half of the decade. Slow GDP growth during this period was, to a large extent, the result of high GDP volatility generated mainly by external vulnerability and unstable domestic policy. A succession of external shocks and natural disasters, combined with poor economic management, led to macroeconomic imbalances and eventually to a severe economic crisis at the end of 1999 (Ecuador Poverty Assessment, World Bank 2004). The crisis and its dramatic effects on GDP and inflation triggered the adoption of the US dollar in This measure helped control inflation and stabilize the economy and, as a result, positive, yet still sluggish, economic growth resumed from 2001 onwards. The post-dollarization recovery was also fueled by a significant hike in the international price of oil and, in 2004, by the entry into operation of the new crude oil pipeline (Oleoducto de Crudos Pesados, OCP), which allowed for a substantial increase in oil exports. Overall the short-run macroeconomic outlook is broadly positive. However concerns remain about the weakening of the overall fiscal framework following recent policy and institutional changes, and the lack of progress in the implementation of structural reforms needed to address economic vulnerabilities, despite favorable external conditions. Consequently, the medium term macroeconomic projections remain vulnerable to policy. Poverty and inequality trends. Poverty increased from 1990 to 2001, mainly as a consequence of the 1999 crisis. National poverty figures for 1990 and 2001 point towards a deterioration in welfare over the decade, with the national poverty rate increasing from 40 percent to 45 percent

2 and the number of poor living on less than US$1.3 per capita per day increasing from 3.5 to 5.2 million during the period. After 2001, macroeconomic stabilization reversed the increasing trend in poverty. Between 2001 and 2004, the overall income poverty rate fell by almost 20 percent 1. Aggregate improvements in poverty was mirrored by declining poverty rates in both urban and rural areas, but significant differences between both remained. In 2004 rural poverty levels were more than double those in urban areas. The same can be said about extreme poverty. Inequality is also a major source of concern. Differences between the poorest and richest deciles are dramatic: the richest 10% of the population receives three times more income than the poorest 50% and sixty times more than the poorest 10%. As poverty indicators have worsened, inequality has increased. The Gini coefficient rose from 0.54 to 0.56 from 1995 to Sector Context Social expenditures. Social expenditure levels are low in Ecuador compared to other Latin America countries, both as a share of GDP and on a per-capita basis. Ecuador spends approximately 5-6 percent of GDP on health, education and social assistance, compared to a Latin America average of 12 percent. This figure increases to around 9 percent of GDP when social security benefits are included. However pensions are only paid to those retiring from jobs in the formal sector and mostly do not reach the poorer segments of society. However, social expenditure levels have experienced a significant recovery since 2000, especially in the health and education sectors, both in aggregate and per capita terms, although both still remain below levels reached in 1980s. Social Assistance. Ecuador has a plethora of social assistance programs, including a series of feeding and nutrition programs and a large conditional cash transfer program, the Bono de Desarrollo Humano (BDH). The country assigns a considerable amount of resources to these programs (approximately 0.9 percent of GDP), although the distribution of these resources is heavily skewed towards the BDH. Despite this the country performs poorly in terms of malnutrition indicators when compared to other countries in the region. Wasting and stunting are significantly higher than would have been predicted by Ecuador s level of development (proxied by GDP per capita levels). High prevalence of malnutrition is even more dramatic among children in the poorest welfare decile and in rural areas and indigenous children. Poor nutrition outcomes are result partly from the fact that feeding and nutrition programs have been highly politicized and sectoral policy has been poorly articulated, which translated into limited coverage and low effectiveness. In recent years, however, the Government has invested significant efforts in rationalizing and improving these programs with support from the World Bank s Programmatic Human Development Reform Loan (PHDRL) series. 1 Poverty figures for and are not comparable because the former are based on consumption data while the latter use income data. No consumption data is available for

3 The government has also experimented with various programs aimed at putting extra income in the hands of the poor, ranging from energy subsidies to direct monetary transfers. In 2003 the Government created the BDH in 2003, a well-targeted, conditional cash transfer program that pays a monthly transfer to the 40 percent poorest households in the population provided they adhere to certain education and health co-responsibilities. The Government of Ecuador s Social Sector Reform Agenda. Early in 2003, the social sectors in Ecuador confronted two important challenges: (i) high poverty and inequality levels, combined with (ii) low access to basic education and health services among the poor and indigenous groups. At that point the Government s designed an ambitious reform agenda for the social sectors structured around three main pillars: (i) improvement of program targeting towards poor households using a recently developed proxy-means test, SelBen; (ii) implementation of the BDH; and (iii) expansion of basic health and education service coverage. Thus the proposed strategy promoted a more efficient used of existing resources, while simultaneously tackling the constraints of insufficient demand and inadequate supply in the education and health sectors discussed above through a combination of demand and supply-side interventions. Support for this strategy has continued under the Palacios administration, as articulated in the recently published Agenda Social para el Desarrollo. The World Bank has accompanied these reforms since 2003 under the Programmatic Human Development Reform Loan series. The proposed project aims to further strengthened efforts to consolidate reforms under the second pillar, while also supporting improvements in the SelBen as the targeting instrument for the BDH. Two complementary World Bank projects are expected to support actions to increase access to education and health among the poor. A brief description of recent developments under all three pillars is provided below, while more detailed information on SelBen and BDH can be found in Annex 1B. 2. Objectives The broad objectives of the Bono de Desarrollo Humano program (BDH) are to reduce poverty and promote human capital investments among poor families through the provision of direct monetary transfers and incentives for households to invest in human capital. World Bank assistance under the proposed APL would aim to contribute to these ultimate objectives of poverty reduction and human capital development among poor families. Within that broader context, the development objective of the proposed APL is to consolidate the role of the BDH as a conditional cash transfer program and of SelBen as a targeting tool for social programs, while supporting the development of an effective country social protection strategy to reduce poverty and to foster investments in human capital among poor households. The program will help sustain and strengthen the well-established and reasonably successful BDH program and will help ensure protection of the fiscal space for the monetary transfers made under the BDH to poor families. Phase 1 of the APL would support the transformation of the BDH into an effective cash transfer program that protects the vulnerable and fosters investment by poor families in human capital. Effectiveness would be assessed in terms of: (i) the targeting and coverage of benefits; (ii)

4 efficacy of the transfer and co-responsibilities to foster investment by beneficiary families in human capital; and (iii) the capacities of involved institutions (including PPS staff, sectoral ministries, service providers, and beneficiary groups) to manage the program efficiently, to monitor results, and to evaluate impacts. 3. Rationale for Bank Involvement The proposed project will support the GoE efforts to overcome the challenges described above in order to consolidate the reform of the BDH. In doing this the project will contribute to the financing of Ecuador s development priorities while supporting the GoE strategy of increasing the impact and the quality of public social spending. The GoE has already expressed strong commitment to the proposed project by: (i) initiating the reforms as described above; (ii) officially requesting that the World Bank prepare the project through a letter addressed to the Country Manager in Ecuador, and (iii) establishing a counterpart team comprising representatives from PPS, STFS and MEF. The World Bank is uniquely positioned to support the GoE in this process given its significant involvement with the program in recent years and its overall strategy for the social sectors in Ecuador. 1. Previous involvement in the BDH reform. The PHDRL I and II (the latter currently under preparation) include actions related to the targeting of the BDH, the implementation and monitoring of the program s co-responsibilities, and the evaluation of its impact on poverty, education, and health outcomes. The proposed project strongly complements these loans by helping to eliminate institutional and technical bottlenecks and barriers that have significantly slowed down progress towards these goals. In doing so it will not only support the reform program reflected in the PHDRL policy matrix, but will also contribute to the sustainability of such reforms over time through technical capacity building. 2. Bank s strategy for the social sectors in Ecuador. The project is a key element of the World Bank s strategy for the social sectors in Ecuador. In particular the project is conceived as part of a four-loan package aimed at improving access to and the quality of social services for the Ecuadorian poor. To attain this goal the proposed project supports this demand-side intervention to increase access to education and health services among children in poor households, while another two projects support complementary supply-side interventions in the education and health sectors, with the PHDRL II providing the overarching framework within which these three programs will operate. 3. Finally the World Bank has acquired significant technical expertise around the world in strengthening targeting systems and developing and implementing conditional cash transfer programs. The World Bank team consists of specialists who bring considerable international experience in each of these areas.

5 4. Description The proposed APL will have two phases. The first phase for US$80 million in Bank financing will extend over three years. During this phase US$5 million will finance technical assistance and other institutional strengthening activities in component 1, while the remaining resources will be disbursed under component 2. Phase 2 of the APL would consolidate and deepen the reforms initiated during phase 1, and if possible would further improve the design of the BDH program based on knowledge and experience gathered under Phase 1. The project would support two components: Component 1: Institutional strengthening, consolidation of BDH reform and improved articulation of BDH within a comprehensive social protection strategy (US$5 million). This component seeks: (i) to strengthen the core institutional structure of the BDH; (ii) to support the consolidation of reforms in several of the program s key activities and processes; and (iii) to explore and pilot linkages with complementary programs to protect and provide opportunities for poor and vulnerable households in Ecuador. For this purpose the project will support activities in the following priority areas: a. Institutional strengthening: The objective of this subcomponent is to ensure that the technical, institutional and legal conditions necessary to guarantee a successful implementation of the BDH reform program are in place. b. Consolidation of BDH reforms. The objective of this subcomponent is to accompany and support the implementation of ongoing BDH reforms, while promoting access to program information and knowledge among BDH beneficiaries, administrators and others. c. Mechanisms for BDH beneficiary self-sufficiency and sustainable graduation and articulation of BDH within a social protection strategy. The objective of this subcomponent is to support the identification and evaluation of initiatives to improve program effectiveness and to help BDH beneficiaries gain access to complementary programs and services with the goal of promoting sustainable BDH graduation strategies. The subcomponent also contemplates actions to integrate the BDH and other programs within a broader social protection strategy whose implementation could be supported under the second phase APL. Component 2: Protection of cash transfers to the poor to foster investments in health, nutrition, and education. (US$75 million). Component 2 would support and protect the transfers themselves, while at the same time providing a performance-based incentive for achievement of results from the institutional strengthening activities. It also creates a strategic alliance between the two main agencies involved in the project, the PPS and the MoF, so that the latter has strong incentives to support the former in achieving or even exceeding program implementation goals. Specifically, this component would finance per transfer incentive payments, disbursing against BDH transfers to households with children ages 0-16 and subject to education and/or health coresponsibilities. The value of these disbursements would be tied to overall project performance:

6 as key Performance Milestones (supported by activities under component 1) are achieved, the amount of the per transfer incentive payments would increase. 5. Financing Source: ($m.) BORROWER 0 INTERNATIONAL BANK FOR RECONSTRUCTION AND 80 DEVELOPMENT Total Implementation The project (first phase APL) is expected to be implemented over a period of three years starting on July, Institutional and implementation arrangements The borrower will be the Government of Ecuador. The proposed project builds on existing institutions, adequately supported by technical specialists, to mainstream project activities into the overall BDH program. Specifically, various entities in the Ministry of Social Welfare, the Ministry of Finance (MoF), the Ministry of Health (MoH), and the Ministry of Education (MoE) are involved in the implementation of the BDH reforms. Executive Decree 486-A of June 7th, 2000, published in Registro Oficial 99 of June 15th, 2000, establishes the creation of PPS as a financially, technically, and administratively independent entity with national jurisdiction to coordinate the BDH activities and those of other social programs under the Ministry of Social Welfare (MSW). Under the general direction of the PPS National Coordinator, the Planning Management Unit (Gerencia de Planificación) is in charge of administering the BDH and other social programs. The planning management unit is supported with the funds, human resources, and equipment provided by the financial management, administrative, and information systems units. The financial management unit will administer and manage the project funds and will prepare the statements of expenditures required for the requests for disbursements to be sent to the World Bank. The Secretaría Técnica del Frente Social (STFS) and the Programa de Protección Social (PPS), both under the MSW, are responsible for the implementation of various aspects of the technical assistance component (component 1), while the Ministry of Finance (MOF) will execute the project component associated with the protection of cash transfers to the BDH beneficiaries (component 2), while Specifically, the STFS will be the main responsible party for the areas related to the SelBen and impact evaluations, which will be carried on in coordination with PPS and the MoF.

7 The supply of basic health and education services is the responsibility of the MoH and the MoE respectively, and is supported by two complementary World Bank loans currently under preparation (see Annex 2). In the context of this project, the improved monitoring of BDH conditionality will require close coordination across ministries at the policy and local levels. To this end, representatives of PPS, STFS, MoH, and MoE have constituted an inter-institutional committee chaired by the Ministry of Social Welfare (or delegate), and formal agreements are being developed prior to project negotiations. 7. Sustainability Financial/budgetary: The GoE has provided full financing for the BDH since its creation as the BS/BE and there has never been a debate about the need to reduce the program s budget. Applying the conditionality nationally is going to require additional resources in the form of a higher operating budget for PPS. PPS currently receives US$2mill for this purpose and it is likely to need about US$16mill once the conditionality is in place nationally. The budget for PPS in 2006 is the same as in previous years, so that no provision has been made for partial implementation of the conditionality so far. To solve this problem, the PPS has agreed to submit a new budget estimate for 2006 to MEF within the next fews weeks requesting additional resources. This request should reflect PPS s estimates on the cost of partial conditionality implementation. In addition, the GoE has agreed in the context of the PHDRL supported by the Bank, to (i) present evidence that PPS is fully funded in 2006 as a means of verification for the PHDRL II, and (iii) guarantee the necessary funds for the total implementation of the conditinality in 2007 for PHDRL III. (These assurances will be sought prior to negotiations of the BDH project. Political Support for the BDH and its reform (mainly full targeting through SelBen and implementation of the conditionality in education and health) is one of the four pillars for social protection within the new "Agenda de Desarrollo 2006" launched by the GoE on January 25, Integration of BDH reform within braoder plans to design and implement a social protection strategy for Ecuador. A first step in this direction is the decision to separate the elderly from the BDH during The project will also support activities to this effect (evaluation of assistance needs for vulnerable groups not subject to conditionality, piloting of initiatives to generates synergies across existing programs, such as Crédito Productivo). The GoE has committed to (i) continue and complete the implementation of the BDH conditionality, and (ii) create separate program for the elderly for the PHDRL III. Institutional Agreement on clear hiring/firing procedures within PPS based on pre-defined technical profiles for key positions, plus a certification process (i.e. ISO or similar) for PPS staff within project Capacity building for PPS within project Capacity building for STFS/SelBen within project

8 Changes in PPS administrative status (i.e. request from MBS to MEF to consider PPS a "unidad ejecutora") to guarantee adequate capacity for (supervised) decision making, and satisfactory levels of execution. 8. Lessons Learned from Past Operations in the Country/Sector The project will draw on the World Bank s extensive international experience with conditional cash transfer (CCT) programs to extract lessons that are pertinent to Ecuador s needs. These experiences highlight the importance of (i) strong ownership and leadership capacity, (ii) well developed, transparent and accurate targeting of beneficiaries, (iii) complementary supply-side interventions in health and education, and (iv) an effective monitoring and evaluation system. The project will also build on the lessons learned from PHDRL I and II, particularly lessons arising from the impact evaluation of the BDH to be completed in early 2006, as well as from the analysis of social programs presented in the Ecuador Poverty Assessment. In preparing the project the team benefited extensively from lessons learned under past operations in support of other CCTs, particularly the Bolsa Famila project in Brazil, as well as from social-sector operations in Ecuador, in particular the Programmatic Human Development Reform Loans I and II. A summary of key lessons is presented below: Use of APL. As demonstrated by the Bolsa Familia experience, the use of an Adjustable Program Loan (APL) allows the project to respond to the country s financial and financing needs (i.e. transfer components) while supporting a program of longer term, important investment actions required for program implementation and sustainability. The desired result of the combination of these two elements is a significant improvement in the quality of social expenditures measured both in terms of program management and impact. Importance of strong ownership, leadership, and institutional capacity. The GoE remains strongly committed to the implementation of the BDH and to the deepening of the reforms supported by this project. The experience of previous operations in the region and the country has shown that such commitment is a pre-condition for successful program implementation and for program sustainability. These operations also show that adequate institutional and technical capacity and high levels of coordination among all actors involved in operating the program are necessary to ensure that its has the desired impact on nutrition, health, and education. Both aspects will be strengthened further in the context of the proposed project. Importance of institutional and operational Aspects. Institutional and operational arrangements are particularly relevant in ensuring that the program can be managed in an agile and transparent manner. A comprehensive Operations Manual that is updated regularly to account for program improvements constitutes a key management and facilitates project supervision and evaluation. Similarly, experience from other CCTs shows that outsourcing of certain program processes, such as the monitoring of the co-responsibilities or the payment of benefits, to independent

9 contractors under contracts that specify clear service quality parameters can allow program management to focus on key processes and overall program oversight. Importance of accurate targeting of beneficiaries. Available empirical evidence shows that the impact of (conditional) cash transfer programs on poverty and inequality is significantly higher when effective and accurate targeting mechanisms are used. Developing such a mechanism requires that beneficiaries are identified and selected according to appropriate criteria. Updating the mechanism so that it adequately reflects changes in the country s welfares is a complex and, generally, costly process as shown by the recent beneficiary recertification process in Colombia. As explained above, social programs in Ecuador are targeted using SelBen, a proxy-means test. An evaluation of the SelBen s accuracy was conducted in This evaluation showed SelBen to be a reasonably effective instrument, but also identified several methodological and procedural elements that should be improved, including the selection of questions included in the survey s questionnaire, the aggregating logarithm for the scoring formula, and the data collection method. Given SelBen s importance for the BDH program and, more generally, for Ecuador s social policy, the proposed project will support key activities to strengthen the SelBen, in particular in preparation for the major recertification exercise scheduled for Impact on educational attainment, health, and nutrition. International experience provides strong evidence that CCTs have a significant impact on educational and health outcomes among the beneficiary population. An impact evaluation of the Bono Solidario, the unconditional predecessor of the BDH, showed that the program had a positive and statistically significant impact on children's nutritional status. Interestingly the magnitude of the impact was lower than that observed for other conditional cash transfer programs such as Oportunidades in Mexico, which suggests that the new system for monitoring conditionality may increase impact further. In addition a first impact evaluation of the BDH has been conducted during The evaluation has an education and a health component and focuses on the impact of the monetary transfer rather than on the co-responsibility, since this still has not been implemented. Preliminary results for the education component reveal significant effects on school enrollment and child labor, even without stringent monitoring of the BDH co-responsibilities. These effects are particularly important among students in upper grades, girls, poorest households, and households whose head has low or no education. In addition survey information suggests the observed impact can be attributed to a combination of the cash transfer and the belief among beneficiary households that school enrollment was actually being monitored. Given these results, it is expected that with the development of a new system for monitoring the education and health co-responsibilities, school attendance (and, possibly, attainment) and nutritional status of young children would further improve. Importance of complementary supply-side interventions in the health and education sectors. For the co-responsibility associated with CCTs to translate into real improvements in the education and health outcomes of the beneficiary population, it is necessary that the supply of education and health services is sufficient to meet the (additional) demand generated by the

10 program. For this reason some CCTs, such as the one in El Salvador currently under preparation, contemplate supply intervention as part of the program s design. Coverage of the education and health sectors in Ecuador is inadequate in certain areas, particularly remote areas, where the extreme poor are concentrated. A number of primary schools in these areas are closed due to the lack of teachers, and a number of health centers are inoperative due to the lack of personnel, equipment, and medication. While this project does not include direct supply interventions, as explained in section 1, two complementary operations for the education and health sectors will support these kinds of interventions. In particular the education-sector operation will help free up existing teaching certificates that will then be used to hire young, better-qualified teachers that will be posted in poor areas with low coverage. Similarly the health project will support the creation a of mechanism by which health care coverage will be provided for the uninsured poorest 40 percent of the population this is the same population serviced by the BDH. Notwithstanding expected improvements in education and health coverage, the BDH will allow for exceptions to the sanctions applied to households in cases where supply remains inadequate. 2 Importance of an effective M&E system. Programs are monitored to evaluate their targeting, assess beneficiary take-up rates, and measure program impact on selected outcomes. For this purpose the monitoring component of an M&E system tracks program caseloads and spending, estimates inclusion and exclusion targeting errors, and collects information on selected process and result indicators. The information generated by monitoring systems serves two critical functions: it allows program managers to assess program operations and monitor program targets, and it enables policy-makers, financiers, and the general public to hold programs and their managers accountable for performance. Consequently monitoring should be considered an integral process within the functioning of any program a process that should be continuous throughout the program life. In addition monitoring should be complemented with formal impact, process, and beneficiary evaluations. The findings generated by such evaluations constitute key inputs for fine-tuning and re-design to meet a program s main objectives. Monitoring systems are typically embedded in program operations and generate relatively low but recurrent costs, while evaluations are often one-time efforts required to answer a few key questions about program implementation, process, cost-effectiveness, and/or impact so that their costs tend to be higher per unit of time and concentrated in a given period. While the Secretaría Técnica del Frente Social and the World Bank have made considerable efforts to measure the impact of the BDH, as explained above, the M&E system for the BDH as well as for the other programs managed by the PPS remain in need of improvement. Some of the needed improvements have already been made during project preparation and further improvements will be supported under the project. 2 In preparation for the project, and in collaboration with the sector ministries, PPS is conducting an assessment of the supply capacity in areas where the co-responsibility verification system will be rolled out. Details on the methodological approach followed for this analysis and on the exception rules regarding inadequate supply are available in the project s Operations Manual.

11 Graduation strategies and bridging to complementary services and programs. International experience suggests that efforts to link beneficiaries of transfer programs to other complementary services and to help them develop graduation strategies can be an effective way to lift them out of poverty. 9. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [ ] [ ] Natural Habitats (OP/BP 4.04) [ ] [ ] Pest Management (OP 4.09) [ ] [ ] Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [ ] Involuntary Resettlement (OP/BP 4.12) [ ] [ ] Indigenous Peoples (OD 4.20, being revised as OP 4.10) [X] [ ] Forests (OP/BP 4.36) [ ] [ ] Safety of Dams (OP/BP 4.37) [ ] [ ] Projects in Disputed Areas (OP/BP/GP 7.60) * [ ] [ ] Projects on International Waterways (OP/BP/GP 7.50) [ ] [ ] 10. List of Factual Technical Documents BDH Program Evaluation BDH Impact Evaluation, BDH Beneficiary Evaluation, March 2006, Fundacion Esquel SelBen Evaluation, August HABITUS S.A. Project Design Operating Manual, April 2006, Programa de Protección Social (PPS) Implementation Plan, April 2006, PPS Procurement Plan, April 2006, PPS Indigenous People s Development Plan, April 2006, PPS Other Required operational documents (aide memoires, Meeting Minutes, PID, PAD, etc.) 11. Contact points Contact: Carolina Sanchez Title: Economist Tel: (202) csanchezparamo@worldbank.org * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas

12 Contact: David Warren Title: Sr. Social Protection Specialist Tel: (202) EM: 12. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: