Annex 1:

Background:

Continuous political difficulties in policy implementation, a series of adverse exogenous shocks (including the earthquake of 1987, the El Niño effects, and the war with Peru in 1995), the extreme volatility of petroleum prices and derivatives, continuous macroeconomic imbalances, unstable tax revenues coupled with an inflexible level of current expenditure, a heavy debt burden, and a lack of planning capacity resulted in a highly unstable fiscal situation in Ecuador throughout the 1990s. Resource inadequacy and instability, and lack of strategic decision-making based on the limited resources of the country, have resulted in an extremely heavy debt service burden and more importantly a halt on significant structural adjustment and development efforts in the country. Furthermore, over-reliance on oil revenues and rising double-digit inflation coupled with the country’s inability to manage public expenditure within their resource constraint in the last 9 years, and the enormous instability in economic authorities (e.g. ten different Finance Ministers since August 1992) prompted to a significant deterioration of public finances.

In 1992 the level of integrated financial information across the public sector was non-consistent, the ability of the Ministry of Finance and Public Credit to plan, coordinate and evaluate government programs throughout the sectors was limited, and the need for an integrated and well-performing budget system was eminent. It was also accepted that a restructuring or re-thinking of the role of the state (and in particular state enterprises) should be taking place and changes in the administrative apparatus of the state were eminent. In 1992, the Durán Ballén government, under the guidance of the Vice-President Dahik, made the modernization of the state agenda a priority of their 4-year program. The Budgets Law was approved in 1992, CONAM (Commission for the Modernization of the State) was created in 1992 and the Law on “Modernization of the State, Privatization and Private Enterprises Provision of Public Services” was approved in 1993. The momentum was then created to initiate a thorough administrative change process throughout the public sector while reducing its size. However, the weight of the modernization effort was monopolized by the government’s intention to privatize major state enterprises fast and reduce the size of the public sector. The lack of continuity in authorities in the period 1992 to 1998, and the frequent accusations of corruption (especially during the Bucaram presidency) caused significant shifts in the modernization of the state plan. Each new Presidency and the removal or withdrawal of the Finance Minister or the President and Executive Directors of CONAM shifted the emphasis of the country’s modernization efforts. Given the enormous responsibility and discretionary power that each Minister of Finance has, there was little continuity in the work plan that had to be followed and the priorities that the change or modernization process implied.

The Economy:

The mid-1980s were characterized by sharp deteriorations in public finances. By 1990, however, the nonfinancial public sector had moved from a deficit of nearly 6% of GDP in 1988 to a surplus of 0.6% under the Borja government. This was achieved through cuts in current expenditure, adjustments in public sector prices, some improvements in tax administration, but more importantly due to a rebound in oil revenue following repairs of the oil pipeline as well as a sharp rise in world oil prices associated with the Middle East crisis in the latter part of 1990. The nonfinancial public sector shifted again to a deficit of 2% of GDP in 1991 as a sizable decline in petroleum revenue more than offset increases in public sector prices and lower non-wage current expenditure of the central government.

Limiting the fiscal deficit and addressing the debt crisis which had reached have been on the forefront of the government’s agenda, nevertheless, without the necessary emphasis on achieving fundamental, structural changes. The Durán Ballén government that took office in September or 1992 tried to lower the public sector deficit to around 3.25% of GDP from a level of 7% and introduced the Public Budgets Bill that was approved in December of 1992.

Political situation:

Since its transition from military rule in 1978, Ecuador has been defining and developing a modern party system for the first time. The country has developed an extreme multiparty system, that is, a party system that revolves around competition among at least five or more parties. Twenty-three political parties acquired legal status in the period from 1978 to 1992. This extreme multipartism continues to play a destabilizing role in the frequent clashes between the executive and the legislative branches. The lack of strong ties between business groups and party lines, and the apparent lack of consistent party lines, have resulted in a disability in building solid coalitions thus resulting in highly unpredictable electoral outcomes. Voters continue to punish parties for their association with the economic crises of the country and politicians throughout the spectrum seek to distance themselves from government policy, even when that policy closely approximates many of their own views. This results in a highly “oppositional atmosphere” fostering a highly aggressive political style among politicians. The New Constitution adopted in June 1998 states that the budget will be presented by September 1 to Congress for its approval. Congress has until November 30 to make any adjustments or approve the proforma by revenue and expenditure groups. If the budget is not approved by this date then by default the proforma presented by the Executive is considered approved. Congress cannot make any increases in the estimated amount of revenue and expenditure of the proforma. Moreover, during budget execution, the executive needs to count on a previous approval from Congress for any increases in the amount of expenditure above the budget. Article 259 of the Constitution also states the at the budget will contain all revenue and expenditure of the non-financial public sector except from the autonomous regional entities and public enterprises. It also states that earmarked funds may only be used for the national defense budget.

The approval of each year’s budget in the Congress as well as the approval of new legal framework goes through an excruciating process of “discussion,” or rather imposition of political conditionalities on behalf of party-lines, political maneuvering, and balancing of various interests based on the parties’ perceived voter confidence. (Last February the removal of the Finance Minister Fidel Jaramillo from his post was one of the five conditions that the Social Christian Party (PSC) forced before the President in order to approve the country’s 1999 budget). The country thus has the combination of a congress with relatively strong constitutional powers over budgetary matters and a fragmented party system with very weak internal discipline, leading to individual legislators running for political posturing.

Technical evaluations of investment projects to be included in the annual budget are demanded under the 1992 Budgets Law and, in principle, should be imbedded in the country’s sectoral planning framework, as developed by the Office of Planning of the Presidency. However, despite the planning that takes place in the formulation of the budget and the development of strategies, once the budget proforma reaches Congress a considerable level of maneuvering takes place to fulfill regional and/or political interests. “There are no ideologies, ideas diminish and personal aspirations prevail.”[1], Rodrigo Paz was quoted saying on the role of political parties in Ecuador.

Annex 2:

General description and analysis of the Mosta Project

The technical annex of the Mosta[2] project describes all the components designed to support the implementation of the budgetary reforms envisioned in the 1992 Budgets Law and the public sector modernization/reform of the state process that was conceived in the 1993 Modernization of the State Law.

The first component (Public Financial Management and Control) aimed to address the following areas:

  1. Budget and treasury system: (a) Strengthen the public budget and treasury system, b) Design and implement the medium term budgetary process, c) Create capacity and formulate program budget and cash programming, d) Reform the process of budget execution and e) Design the implementation of control and evaluation activities.
  2. Public and credit/debt management. Improve planning for public sector debt contracting and its relation to the debt planning and cash management functions.
  3. Government accounting system. Decentralizing it to the central government entities
  4. Auditing of the public resources. Shifting the operational policy of controlling and auditing.
  5. Public sector contracting. Modernizing the legal framework and operating practices for public sector contracting.

6.  Payroll and personnel system. Integrating the human resources management throughout the public sector with the rest of the financial management.

  1. Integration of the information system. Implementation of an integrated financial information system.

The second component (Public Sector Modernization) aimed to a) enhance the quantity and quality of specific public services provided through central government agencies and b) to create an institutional framework to expand modernization. It includes three important sub components:

  1. Strengthening of the planning framework (to improve the relation between budgeting and planning function)
  2. Restructuring and management strengthening (decentralization, census and restructuring of public entities)
  3. Coordination of public sector training

The third component (Coordination of the Reform Program) was aimed at ensuring the sustainability, transparency and efficiency in carrying out the public sector reform activities supported by the project. The sub components described are: definition of the role of the state, decentralization policy, dissemination, project account and project management.

The Mosta project incorporated all the most important elements for carrying out the reform process in Ecuador. A presentation by Salvador Delgado [3] at a Budgetary Reform Symposium in Ecuador [4] stated that “the scope of the modernization must be holistic, meaning it needs to take into consideration the majority of the institutions of the public and the private sector and also design and carry out an important political project nation-wide”

The project aimed to integrate the activities under the above three components, implement the respective laws and initiate a public sector administrative modernization process. In other words, a “holistic approach for modernization” was thought-out and present in the design of the project as agreed to by the local authorities and the Bank.

However, the description of the first component of the project (Public Financial Management and Control) is much more extensive than components two and three (Public Sector Modernization and Coordination of the Reform Program). We also can take note that the assigned budget to the first component is almost a 78% of the total budget of the Mosta and only a 22% for the modernization component and coordination.

Even though the approach undertaken was an integral one, in that it took into consideration the legal framework of the two reform laws, and the state’s need to decentralize its power, the emphasis of the technical and costing aspects of the project appeared to be placed heavily on the financial management side, in line with what was then considered as a policy priority but also an area where a lot of expertise was present at the time and could provide clear results. The project documents provide detailed descriptions of the process of restructuring that entities had to follow in order to make the changes in administration happen. The Guidelines of the Institutional Restructuring Agreements developed under the Mosta project[5] contain step-by-step all the important elements needed to develop a change program with the objectives to reduce the costs and enhance the performance of public entities within the central government “by rewarding individual public entities that reduce unnecessary personnel on a selective basis with enhanced salaries, greater direct control over the execution of their budget decisions, and strengthened capacity to plan and manage their own resources, in exchange for their providing greater financial and service delivery accountability, reducing personnel costs by discharging unnecessary personnel, divesting unproductive assets and undertaking steps to ensure that these changes are sustained beyond the life of the restructuring process.”[6] The Guidelines of the Institutional Restructuring Agreements defined an administrative objective, a human resource objective and a financing objective. The restructuring strategy involved the preparation of a restructuring proposal as a joint exercise between Senda, the Ministry of Finance, Conam and the public entity itself. The short-term and Conade integral program were later on changed to the Guidelines for Institutional Strengthening momentum in which the process of modernization. despite the regardless the characteristics of the implementation process.

[1] Quoted from Rodrigo Paz’s interview with ‘Hoy’ (a center-left local newspaper) on February 27, 1992.

[2] World Bank loan for Modernization of the State

[3] Salvador Delgado participated actively in the preparation of the 1992 Public Budgets Law, the design of the Mosta project and became the project’s first technical coordinator.

[4] Quito, 1994

[5] Guía para la suscripción de convenios de fortalecimiento institucional, was produced by Senda-Mosta and edited in 1996 to help entities carry out the modernization process, in order to incorporate SIGEF (Sistema integrado de gestion financiera)

[6] Institutional Restructuring Guidelines, Technical Annex of the Mosta