Pl C.....U .. t4 4 44 ExpenitureRevie Agric tur Uøl2 1 Puk Ahi JIV N*earagua Agriculture Public Expenditure Review June 2013 THE WORLD BANK IBRD*) IDA I WORLD BANKGROUP Standard Disclaimer This volume is a product of staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Copyright Statement The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/ The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, http://www.copyright.com/. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@ worldbank.org Photo credit: World Bank, 2013 Contents ACKNOWLEDGMENTS ....................................................... ix ABBREVIATIONS ............................................................. xi EXECUTIVE SUMMARY 1 ....................................................... 1. Context.........................5..... ................... 5 1.1. Introduction...........................................5 1.2. Economic performance of the agricultural sector........ ...... 6 1.3. Agriculture and poverty alleviation ........................ 10 1.4. Agricultural public sector ................................ 16 2. Evolution, Composition, and Sources of Support to Agriculture ............. 26 2.1. Overall public support to the agriculture sector.... ............ 26 2.2. Analysis of PRORURAL spending ..................... 29 2.3. Evolution of source of financing for the agricultural sector....... 42 2.4. Conclusions and recommendations ................... ..... 44 3. Targeting, efficiency and distributive impactsof agricultural public spending ........................... 48 3.1. Geographical targeting of agricultural spending .. ............ 49 3.2. Poverty and productivity outcomes ................... ..... 58 3.3. Distributive effects...................................... 60 3.4. Conclusions and recommendations ................... ..... 64 4. Special Focus: Forestry and Food Security Public Spending ............... 67 4.1. Aligning incentives in the forestry sector .................... 67 4.2. Tackling food security and nutrition........................79 5. Institutional Assessment of Public Spending in the Agriculture Sector ................................ ..... 102 5.1. Budget systems. ................................ ....... 103 5.2. Financial management information systems. ................... 113 5.3. Conclusions and recommendations ................... ..... 118 REFERENCES. ............................................................... 123 ANNEXES ................................................................ 129 Annex 1: Figures, tables and maps ............................... 129 Annex 2: Quality of agricultural exports ....................... 137 Annex 3: Productivity Constraints in Key Export Sectors.. .............. 140 Annex 4: Geographic analysis tool for prioritizing interventions ............... 144 Annex 5: Brief Technical Note: Efficiency Analysis of PRORURAL Public Spending .......................... ...... 149 Boxes Box 1.1: The establishment of Citizen's Empowerment Cabinets ............ 23 Box 1.2: PRORURAL Mid-Term Evaluation .......................... 25 Box 4.1: Budget allocations for forestry across Latin America ................ 71 Box 4.2: Innovations in beneficiary selection for public transfers in agriculture ............................... 99 Box 5.1: The Medium-Term Budgeting Framework .................... 104 Box 5.2: Regional best practice-a case study from Guatemala on results budgeting ....................... 109 Box 5.3: Case study from INTA on proper accounting and unitary cost estimations .................................. 112 Box 5.4: Case study from Chile on program reviews. ................. 113 Figures Figure 1 .1 Labor Productivity by Sectors ............ 9...........9 Figure 1 .2: Employment trends by sector, % of total employment, 2000-1 1............................... 11 Figure 1.3: Decomposition of Changes in Rural Poverty 2005-09............. 13 Figure 1.4: Changes in rural household income, 2005-09 .. ........... 14 Figure 1.5: income Growth Incidence Curve, 2005-09.. ............... 14 Figure 1.6: Index of labor productivity by sectors .................... 16 Figure 1.7: Average Real Wages (2002=100) ...................... 16 Figure 1.8: Public spending institutions in Nicaragua's agriculture sector.......................................... 21 Figure 2.1: Trends in overall public spending to the agriculture sector (C$2005 millions) ....................... 27 Figure 2.2: Public spending on agriculture by use, 2002-11, C$2005 million............................. 28 Figure 2.3: Agriculture Orientation Index of Public Spending, 2002-11 ................................. 29 Figure 2.4: Trends in PRORURAL spending as share of GDP, agricultural GDP and total budget, 2002-11...................... 30 Figure 2.5: Public spending in PRORURAL programs, C$2005 millions, 2002-1 1 ................................... 32 Figure 2.6: Public spending by PRORURAL entities, C$2005 millions, 2002-1 1 ................................... 32 Figure 2.7: Budget execution by PRORURAL and central government, C$2005 million, 2002-1 1 ................ 33 Figure 2.8: Public spending on agriculture by public and private goods, C$2005 million, 2002-11 .................... 36 Figure 2.9: Trends in share (%) of PRORURAL spending on public goods by institution, 2002-1 1 ................... ...... 36 Figure 2.10: Change in functional composition of agricultural public spending (PRORURAL) ................................. 38 Figure 2.11: Distribution of PRORURAL spending by source of financing. ................................ ....... 43 Figure 2.12: PRORURAL spending by source of financing (2005 C$ million) ............................... .43 Figure 2.13: Official development aid to agriculture by source of funds and recipient (public/private sector), 2007-11 (2005 C$ million) ................................ 44 Figure 2.14: Official development aid to the agriculture sector by source of financing (bilateral and multilateral) to the public and private sectors, 2007-1 1 average ............... 45 Figure 3.1: PRORUAL Incluyente spending per producer and per hectare, average over 2009-11 ................... ..... 52 Figure 3.2: Increases in spending per producer and adoption of technologies by department, 2001-2011............................. 59 Figure 3.3: Benefits incidence of the agriculture and livestock programs, frequency of rural households, 2005....................... 61 Figure 3.4: Benefits incidence of the Bono Productivo Alimentario, frequency of rural households, 2009.................... 61 Figure 3.5: Distribution of beneficiary households by land ownership and welfare quintiles, 2009 .... .............. 62 Figure 4.1: Agriculture Orientation Index for Forestry, 2002-11................72 Figure 4.2: Sources of funds, INAFOR, 2006-11 (left) and 2005-09 (right) ....................................... 72 Figure 4.3: Distribution of forestry sector revenues by type... .......... 73 Figure 4.4: Expenditures in forest management and conservation/restoration and reforestation in relation to the respective approved areas/accomplished and burned................76 Figure 4.5: Annual expenditure by forest area and forest district, 2007-201 1................................ 77 Figure 4.6: Prevalence of hunger or undernourishment in Latin America and the Caribbean (%) ..................... 80 Figure 4.7: Simulated effects of the food price crisis on poverty in Nicaragua (% increase in poverty) ....................... 81 Figure 4.8: Food insecurity for by municipality 2007 (left) 2012 (right), darker red =more insecure ................... ...... 82 Figure 4.9: Public spending in food security by ministries, annual averages, 2005 C$ million.......................... 87 Figure 4.10: Food security in key ministries (% of ministry spending) 2002-11 ............................. 87 Figure 4.11: PRORURAL public spending on food security, constant 2005 C$ million............................... 88 Figure 4.12: Share of external financing in PNA budgets (%), 2002-1 1 ....................................... 89 Figure 4.13: Distribution of benefits of BPA recipients by land ownership and consumption, 2009.......... ............ 94 Figure 5.1: The agriculture sector's budget cycle......................... 103 Figure 5.2: PRORURAL and MHCP structures ....................... 113 Maps Map 3.1: Territories of PRORURAL Incluyente, 2010-14 .............. 50 Map 3.2: Four key areas and types of public investment suggested for Nicaragua .......................................... ..... 57 Map 2.2: Micro-regions by poverty, by farmers' profit potential, and efficiency..................................... 145 Map 2.3: Categories of micro-regions for Nicaragua ................. 146 Map 2.4: Four key areas and types of public investment needed for Nicaragua ................................ ...... 148 Tables Table 1.1: Macroeconomic indicators and evolution of the primary sector, 2002-1 1............................... 7 Table 1.2: Sectoral growth, 2006-11 ............................. 8 Table 1.3: TFP Growth in Agriculture, 1961-2007 ................... 9 Table 1.4: Shares of household income source by rural welfare quintile, in percentages. ................................ 12 Table 1.5: Growth Elasticities of poverty, 2001-09 ................. 13 Table 1.6: Poverty Headcounts by Main Source of Labor Income of Household Head, 2005-2009 .................. 14 Table 2.1: Agricultural policy tools and characteristics ................ 35 Table 2.2: Functional composition of PRORURAL programs, 2002, 2007, 2011 .......................... ...... 39 Table 2.3: Economic Composition of PRORURAL Spending by Institution, 2006-1 1 (% of budget) ....................... 40 Table 2.4: PRORURAL expenditure ratios (%).................. 41 Table 3.1: Territorial approach of PRORURAL Incluyente, 2010-14...........50 Table 3.2: Farm level technical efficiency by department, 2009................ 53 Table 3.3: Correlation between per capita PRORURAL expenditures (2008-09) and farm-level technical efficiency (2009) ........ 55 Table 3.4: Correlation between poverty and per capita spending in 2005 and 2009 ................................. 55 Table 3.5: Correlation of poverty change 2005-09 with average per capita spending 2005-09 ...................... 58 Table 3.6: Different programs show different gender effects....... ..... 64 Table 4.1: User Fees and Fiscal Incentives for forest activities under Law 462 .............................. 69 Table 4.2: Functional composition of PNF, 2002, 2007, 2011.................74 Table 4.3: Economic Composition of INAFOR Spending, 2006-1 1 (% of budget) ............................. 74 Table 4.4: Nicaragua's strengths and weaknesses on the Global Food Security Index................ ............. 82 Table 4.5: Food and Nutrition Security and Sovereignty Programs ............ 84 Table 4.6: Objectives and Results for PNA ......................... 86 Table 4.7: Functional composition of PNA subprogram (% of subprogram spending) .................................. 88 Table 4.8: Functional composition of MAGFOR and INTA spending 2007, 2011 ............... ............... 90 Table 4.9: Cost-transfer ratios of food security programs, 2010-11 .......... 91 Table 4.10: Coverage and targeting of food security programs in 2009, by poverty situation and consumption quintiles (%)............. 91 Table 4.11: Coverage and targeting of food security programs in 2009, by location and region (%)......... .............. 93 Table 5.1: PRORURAL changes of program structure, 2002-1 1 (%)........ 1 10 Table 5.2: Number of times that the budget is modified and number of budget lines that are involved in internal budget modifications by entity.... ............................ 11 1.. Jfg 1A- 4k , ýa Acknowledg ments A the request of the Ministry of Agriculture and Forests (MAGFOR) and t the group of donors of the Plan Sectorial de Desarrollo Rural Incluyente (or PRORURAL Incluyente), the World Bank has produced this Agriculture Public Expenditure Review. This report is the product of a close collaboration and constant consultative process with, on one hand, the four PRORURAL Incluyente entities-MAGFOR, the Nicaraguan Institute of Agricultural Technology, the Rural Development Institute, and the National Forestry Institute-and, on the other, the Ministry of Finance and Public Credit (MHCP), the Central Bank of Nicaragua, and the Nicaraguan Institute of Statistics. The team would like to thank the representatives of these institutions for the information and inputs provided and for always having received the Bank teams and consultants with open doors. Special thanks go to Silvio Palacio, Director General of MAGFOR, and Nancy Alvarado, Director of MHCP, for their leadership in this exercise. The team would also like to thank the three donors that financed this report-the Canadian International Development Agency, the Embassy of Finland, and the International Fund for Agricultural Development-and for the guidance and comments their representatives provided during the entire process. This report was produced by a team from the World Bank, led by Eli Weiss (Rural Development Economist and Task Team Leader), with John Nash (Lead Economist) and Augusto Garcia (Senior Operations Officer). The data were compiled by Jos6 Ram6n Laguna (Consultant), while the technical background papers for the report were prepared by Professor Gustavo Anriquez (Consultant, Pontificia Universidad Cat6lica de Chile), Jos6 Eduardo Gutierrez Ossio (Senior Public Sector Specialist), Hans Thiel (Senior Forestry Officer, Food and Agriculture Organization of the United Nations [FAO]), Jorge Ortega (Consultant, FAO), Ra6l Fajardo (Consultant), and Alejandro Ara6z (Consultant). An additional paper, financed by the Inter-American Development Bank, was written by Julio Castillo Vargas, Hector Pena, and Miguel Gomez of RUTA (a think tank). Madhur Gautam (Lead Economist), Yuri Tanimichi Hoberg (Senior Economist), and Robert Townsend (Senior Economist) from the World Bank, and John Scott (Professor, Centro de Investigaci6n y Docencia Econ6micas, CIDE) suggested improvements through peer review comments at various stages of preparation of this report. Ethel Sennhauser, Laurent Msellati (Sector Manager, LCSAR), Ayat Soliman (Sector Leader, LCSSD), C. Felipe Jaramillo (Country Director, LCC2C), and Camille Lampart Nuamah (Country Manager, LCCNI) provided oversight for the work, while Diego Arias, Willem Janssen, Svetlana Edmeades, Javier Baez, and Stefano Pagiola provided further guidance. Logistical support was provided by Erika Salamanca in Washington, DC, and by Linda Castillo in Managua. Abbreviations AOl Agricultural orientation index AOP Annual operational plan ATP Agricultural Technology Project BCN Central Bank of Nicaragua BPA Bono Productivo Alimentario ECLAC United Nations Economic Commission for Latin America and the Caribbean ENABAS National Food Trading Enterprise FMIS Financial management information system FOMAV Road Maintenance Fund FUNIDES Nicaraguan Foundation of Economic and Social Development IADB Inter-American Development Bank IDR Rural Development Institute IFPRI International Food Policy Research Institute IMF International Monetary Fund INAFOR National Forestry Institute INIDE Nicaraguan Institute of Statistics INTA Nicaraguan Institute of Agricultural Technology LSMS Living Standards Measurement Study M&E Monitoring and evaluation MAGFOR Ministry of Agriculture and Forests MARENA Ministry of Environment and Natural Resources MEFCCA Ministry of Family Economy, Communities, Cooperatives and Associations MEM Ministry of Energy and Mines MHCP Ministry of Finance and Public Credit MIFAM Ministry of Family, Youth and Children MINSA Ministry of Health MIT Ministry of Transport and Infrastructure MTBF Medium-Term Budgeting Framework Nitlapan Institute of Applied Research and Local Development Promotion OECD Organisation for Economic Co-operation and Development PAS Agro-seed Program PFM Public financial management PNA National Food Program PNAIR National Rural Agro-Industry Program PNF National Forest Program PMSAF Financial System Administration Modernization Project PNDH National Plan for Human Development PPA Programa Productivo Agroalimentario PRORURAL Sector-wide rural development program RAAN Northern Atlantic Autonomous Region RAAS Southern Atlantic Autonomous Region RUTA Think tank on Sustainable Rural Development in Central America SIGFA Financial Management Administration and Audit System of MHCP SINAPRED National System for Prevention, Mitigation and Alertness to Disasters TE Technical efficiency TFP Total factor productivity Executive Summary 1. Context. Agriculture remains fundamental for Nicaragua from both a macroeconomic and social view. It is the largest sector of the Nicaraguan economy, and it remains the single biggest employer with around 30 percent of the labor force and including processed foods, like meat and sugar, agriculture accounts for around 40 percent of total exports value. Nicaragua appears to be gradually losing competitive edge of some of its key agricultural exports within the most important export markets. Agricultural total factor productivity of certain basic goods has been falling, which could be attributed to some extent for the limited use of improved technologies and the gaps in terms of the quality of its infrastructure and logistics services even though there have been some progress in this regard. In spite of these trends, Nicaragua has the potential to expand production sustainably, on both the extensive and the intensive margins. 2. PRORURAL is the sector-wide approach implemented by four government agencies, established in 2005. Its launch coincided with important public financial management reforms that improved budget processes. In 2008, the policy framework shifted from a value-chain, export-oriented focus to a more pro-poor and food security approach. PRORURAL is financed by a combination of general public revenues, a Common Fund from development partners, and other aligned donor-financed projects. Just under two-thirds of the budget has been financed with external resources. 3. Trends in public spending. Nicaragua has comparatively and historically low public spending on agriculture, but spending on rural development is higher, and it has been rising. This phenomenon appears to be parallel with the acceleration in rural poverty reduction during 2005-09, which was primarily based on pro-poor agricultural growth. The policy shift toward food security during the last five years is fully reflected in spending patterns, which also indicate a strong, albeit more tacit, policy shift toward public spending on private goods. This has also been mirrored by the rise of official development assistance (ODA) directly to the agricultural private sector. There is relatively little detail data available about these programs in the public sector, suggesting that they are not included as part of the overall public spending planning process. Therefore, efforts should be made to ensure that ODA programs channeled off-budget to the private sector can be coordinated better with the public sector, align with country and sector strategies and publicly report their development results. On the other hand, Nicaragua has seen a smaller share of agricultural expenditures going to public goods like R&D, natural resource management, animal and plant health. Renewed attention to the delivery of these and other public goods would generally benefit a broader swathe of producers and could help to reverse the declining productivity in some agricultural products. 4. Budget execution by PRORURAL institutions is lower than that of general government, and particularly weak in the smaller institutions. Meanwhile administrative costs, in particular personnel costs are high and rising across all agencies. Therefore, it is recommended that future capacity building in PRORURAL is carefully planned in each institution on the basis of a sound human resource strategy, and in the aggregate with attention to fiscal constraints. In general, the government should closely monitor the functional and economic composition of the public spending in agriculture as another lens to improving the efficiency of expenditures. 5. Targeting. Ideally, a well-targeted spending program should be biased in favor of those regions that have agricultural benefit potential, but are lagging in efficiency and productivity. The territorial approach of PRORURAL is focused at a variety of different geographic levels, but outcomes and outputs are not tracked in a systematic way across geographic divisions. Notwithstanding these limitations, we find that PRORURAL spending tends to be higher where technical efficiency is lower. The returns on improvements to extension are likely to be especially high, given the findings of this report that many farmers are far from the technological frontier. A geographic analysis and targeting methodology developed by IFPRI and applied recently to Nicaragua may prove useful in refining the territorial approach of PRORURAL down to the municipal level. In terms of distributive impacts, the review finds an increasing poverty focus of agriculture programs over time but with each program showing large leakages to wealthier households. It would be best practice, if explicit targeting strategies would be put in place. It is recommendable that remaining tariff and non-tariff trade barriers that increase domestic food prices should be re-evaluated. Several countries have substituted price supports by decoupled payments that do not affect prices and support certain public policy goals, such as environmental sustainability. 6. Forestry. Public spending on the forestry sector remains low in Nicaragua in comparison to other countries in the region and in relation to the sector's economic importance and environmental risks. The growing economic potential from Nicaragua's tropical hardwoods will further raise these risks if forest management is not improved rapidly. In this context, it is recommended to (i) improve both levels and quality of spending on the sector; but also to (ii) rationalize the incentive structure. The Government should continue to mobilize external resources for forest management (including from emerging climate funds) in the short term and consider increasing general revenue funds over the medium term. This type of neutral financing will be critical to support the improvements in enforcement and producer services while the impact of user fees and other incentives gradually take force. 7. Food security. Nicaragua has made progress on reducing malnutrition and establishing the main elements for food security. In 2009, the Government reinforced its efforts by passing a law and establishing an umbrella program for food security (SSAN), and added the objective of food sovereignty aimed at promoting import substitution. PRORURAL food security programs represented approximately 42 percent spending of this spending and a very broad range of programs across several ministries and agencies was established. Within PRORURAL, the main programming lines have been governance and capacity building, food security, and food safety. However, all the other program lines show large volatility from one period with some programs disappearing and reappearing over time. For areas such as crop management, seed production and product development which are likely to see their structural impact only in the medium to long term, such large fluctuations in available resources would limit their impact. Building a national consensus on the direction some of these smaller, but crucial, programs may help to maintain the strategic focus across political administrations and ensure a steady flow of resources over longer periods of time 8. Expenditure systems. The government's introduction of the Medium-Term Expenditure Framework was a big step toward performance budgeting- and away from program budgeting. But budget preparation has no common guidelines for setting budget ceilings in advance, and most resources are communicated to PRORURAL entities close to the annual deadline. Budget revisions are not generally based on technical program reviews that are virtually absent. It would be best practice, if MHCP and sectoral entities tighten the link between planning and budgeting. For the financial management information system, it is recommended that policy makers use only one single information solution for public financial management and ensure integration between M&E and budgeting systems. Off-budget funding is hard to account for it in overall sectoral planning and all types of ODA, including programs channeled off-budget to the private sector, should report openly their development results. 1 . Context 1.1. Introduction 1.1. This review analyzes public spending in Nicaragua's agriculture sector (which also includes livestock and forestry). It suggests options for getting the most from each c6rdoba (C$) spent, for aligning expenditures with the strategies and policies, and for improving planning and budgeting processes. 1.2. The Government of Nicaragua and its development partners in the sector-wide Plan Sectorial de Desarrollo Rural Incluyente- PRORURAL Incluyente (hereafter referred to as PRORURAL)- asked the World Bank to conduct the review. The aim was that its results and recommendations could inform the new programming cycle and improve strategic decision making on sector policies and financing. A core group of the Ministry of Finance and Public Credit (MHCP), the public entities from the agriculture sector, and the PRORURAL donor agencies, contributed to the review's conceptualization, preparation, and discussion as part of a capacity-building process. 1.3. The results and recommendations drawn from and complement other pieces of analysis. The Government is updating the National Plan for Human Development; the second mid-term evaluation of PRORURAL has been carried out and the fourth National Agricultural Census has been completed. 1.4. The review focuses primarily on the expenditures of Nicaragua's PRORURAL's sector-wide program and its four main implementing agencies: the Ministry of Agriculture and Forests (MAGFOR); the National Forestry Institute (INAFOR); the Nicaraguan Institute of Agricultural Technology (INTA); and the Rural Development Institute (IDR). 1 The review looks at public spending under PRORURAL during 1 The IDR was absorbed by the new Ministry of Family Economy, Communities, Cooperatives and Associations in July 2012. Since this review analyzes 2002-11, the ministry has not been included. 2002-201 1, but also reviews to some extend the broader context of rural development spending, tax expenditures, non-budgetary price support, and donor cooperation to the private sector in agriculture. Although a database on public spending in the agriculture sector was established for 2002-11, it was not possible to obtain a complete data series for the first four years. Nicaragua's Financial Management Administration and Audit System (SIGFA) of MHCP has been registering the central government's financial operations in a transactional manner since 2002. But for the autonomous and decentralized entities (that is, INAFOR, INTA, and IDR), which receive budget transfers from the central government, the database exists only since 2006. All figures in the review are in 2005 Nicaraguan c6rdobas (2005 C$), unless otherwise indicated. 1.5. This review has five parts. The first presents the context, including the economic performance of the agriculture sector and its link to poverty reduction, as well as the agricultural public sector, including its policies, programs, projects, and institutions and the sources of funding. The second part is mostly descriptive analysis, looking at the evolution and sources of public spending, classifying programs in various ways to provide an overview of the scope and composition of spending. The third assesses the targeting of agriculture public spending, both geographically and by household to assess its distributional effects. The forth looks at two areas of special focus: public spending in forestry and food security; and finally the fifth looks into the institutional aspects of public spending, sector planning, budgeting processes, and PRORURAL's monitoring and evaluation systems. All chapters, except the first, offer recommendations and options for moving forward. 1.2. Economic performance of the agricutural sector 1.6. Agriculture remains fundamental for Nicaragua from both a macroeconomic view and a social view. It has accounted for around 17 percent of national value added over the past decade (Table 1.1). It is the largest sector of the Nicaraguan economy in a standard nine- sector classification, followed closely by manufacturing and by trade and hospitality. It remains the single biggest employer with around 30 percent of the labor force and generates 20 percent of exports. Including processed foods, like meat and sugar, agriculture then accounts for around 40 percent of total exports. Table 1.1: Macroeconomic indicators and evolution of the primary sector, 2002-1 1 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 %of GDP 11.1 Agriculture value added as 16.3 16.6 16.8 15.8 15.9 16.0 16.1 11.1 16.9 Growth inagriculture sector value -0.3 1.9 5.1 4.6 2.5 5.5 4.4 -1.4 9.8 4.3 added, % Share of agriculture inexports, % 29.1 21.2 26.2 23.9 25.2 23.5 25.6 23.1 21.1 19.4 Share of agriculture and processed 41.1 44.6 43.2 40.7 42.8 43.4 45.0 45.3 44.4 41.1 food inexports,% Ruralpopulation as %of total 44.8 44.6 44.3 44.1 43.8 43.5 43.3 43.0 42.1 - population Share of agriculture inemployment, - 29.3 29.0 21.7 28.8 26.6 26.9 27.6 31.4 30.8 Agricultural value added per worker, 30.2 31.9 33.3 31.4 35.0 35.7 35.5 21.6 27.2 constant 2000 $'000s Source: Central Bank of Nicaragua, Nicaraguan Institute of Statistics, World Development Indicators, and FAOSTAT. - = not available; PPP = purchasing power parity. 1.7. Nicaragua's agriculture sector is particularly vulnerable to external shocks and natural disasters. Being a small open economy, Nicaragua's agriculture sector has been buffeted in the last decade by volatility in commodity prices in some key products. However, the sector is also particularly vulnerable to climate events, owing in part to the frequency of hurricanes and prolonged droughts, but also to poor infrastructure. Only 1 .6 percent of agricultural land is irrigated 2, and 13 percent of the roads are paved. Changes to agricultural GDP (value added) during the last decade show these inherent risks of the sector, with annual growth varying widely. 1.8. Despite these vulnerabilities, the agriculture sector was Nicaragua's second- largest contributor to overall growth behind manufacturing. Real GDP grew on average 3.5 percent during 2006-11, while agricultural value added grew at 3.9 percent.3 Agriculture contributed around one fifth of national growth rates, in line with its share of value added. 2 Approximately 99,000 Ha, according to the IV CENAGRO database (2012) 3 Reflects recent GDP revisions published in September 2012. Table 1.2: Sectoral growth, 2006-11 () Share of GDP Average growthe Contribution to growth' Agriculture, livestock, &forestry 17.5 3.9 0.68 Mining 1.0 1.9 0.08 Manufacturing 15.2 3.4 0.52 Public utilities 1.6 12.1 0.20 Construction 5.4 -0.1 0.00 Trade and hospitality 14.9 2.1 0.39 Transportation &telecoms 6.8 8.3 0.56 Financial services 5.4 -4.6 -0.25 estate Real 9.2 1.1 0.10 Personal services 13.0 3.3 0.43 Total private sector value added 89.8 3.2 2.90 Government services 10.2 4.9 0.50 Total 100.0 3.4 3.40 Source: Anriquez (2012) using data from the Central Bank of Nicaragua. a. Calculated as compound average growth: ([(3)/(2)]A(1/10)-1)*100. b. (1)*(4)/100. 1.9. However, this growth is not sustainable with the past circumstances. High export commodity prices, the availability of unoccupied land, and the reactivation of economy after a period of armed conflict were the main forces for growth over the last two decades, but they cannot be expected to deliver a sustained growth impulse indefinitely. 1.10. Meanwhile, Nicaragua appears to be gradually losing competitive edge of its agricultural exports in selected list of products and markets. The main agricultural export is coffee, but peanuts, beans, and livestock are also important. Although these exports have grown dramatically in the last decade, this growth has been driven more by exogenous, demand side and environmental factors than competitiveness. A sustained surge in a few non-traditional manufactured and service exports has reduced agricultural exports from 59 percent of the export basket in 1996-98 to 41 percent in 2010. In the same decade, their relative quality levels (as measured by unit sales prices) of Nicaragua's traditional exports to the U.S. markets was stagnant, with no a major upgrades (except for lobsters), while most vegetables exported to Europe lost relative quality and market share in the past decade. Annex 2 shows the relatively stable position of Nicaragua on the quality ladders for a variety of agricultural exports between 2000-02 and 2006-08, while Annex 3 showcases the productivity constraints that the three key export sectors of beef, coffee and shrimp face. 1.11. ...and agricultural productivity measured as total factor productivity has been falling. During 2000-07, Nicaragua saw agricultural productivity decline in contrast to its regional benchmarks (Table 1.3). Labor productivity saw a small increase through 2009, but fell sharply in the last two years (Figure 1 .1). Deininger and others (201 1) estimated the average productivity in various countries as a percentage of potential yield, and concluded that Nicaragua has one of the lowest in the region-above only Haiti and Honduras, and about the same as Bolivia. Table 1.3: TFP Growth in Figure 1.1 Labor Productivity by Sectors Agriculture, 2000-2007 25.00 Country 2000-07 Nicaragua -0.7 Honduras 4.1 15.00 Salvador El 1.2 Costa Rica 3.0 Guatemala 2.2 5.00 Ecuador 4.4 2000 200 2002 2003 2004 2005 2006 2001 2008 2009 2010 2011 Source Lude102010 Mexico 2.9 m Total Agriculture and fishing Peru 3.7 0 Manufaturing U Commerce F Construction Source: Staff calculations for forthcoming World Bank Nicaragua Country Economic Memorandum, 1.12. The use of improved technologies in agriculture production is still limited even though there have been government efforts to reverse this trend. In 2011, only 5 percent of Nicaragua's producers used certified seeds, 7 percent organic fertilizers, and 36 percent fertilizers, while 15 percent of producers had access to credit, and 18 percent received some kind of technical assistance, while there are large differences among department (Table A. 1.1 in Annex 1). 1.13. ... and Nicaragua still faces a large gap in terms of the quality of its infrastructure and logistics services that raise costs for its agricultural producers, despite improvements in recent years. Nicaragua ranks lowest in the region on the logistics performance index. Although Nicaragua has the largest density of roadway per inhabitant in 2 the region, only 13 percent of roads (or 23 meters per km of roads) are paved, which is lower than other countries in the regions. According to the Ministry of Transportation and Infrastructure (MTI) estimated that less than 40 percent of the road network in 2011 was in good or very good condition, and over 30 percent of roads become unusable during the six-month long rainy season (May to October). Weaknesses in logistics services, including trucking and customs also exacerbate the cost to agricultural producers of getting their products to market or to export. Chaherli and Nash (2012) estimate that Nicaraguan exports of agricultural products would increase by almost 200 percent if the soft infrastructure improved to OECD levels. They estimate that if just the "time to export" was reduced from 37 to 10 days, agricultural exports would grow by nearly half. 1.14. Nevertheless, Nicaragua has the potential to expand production sustainably, on both the extensive and the intensive margins (Deininger and others 2011). Among Latin American countries, it has a ratio of cultivated land to suitable land (with good agricultural potential not in forests or protected areas) that is the eighth lowest in the region, similar to Brazil. It also has the third largest "yield gap" (between actual and potential production) in the region. 1.3. Agriculture and poverty alleviation 1.15. Agriculture's socioeconomic importance in Nicaragua is larger than its direct contribution to national income. The sector is the single biggest employer, with more than 30 percent of the labor force, much larger than the 15 percent average for the Latin America and the Caribbean region. Agriculture is the main source of livelihood for roughly 8 in 10 rural households compared with 11 percent of urban households. About 42 percent of the population lives in rural areas, and are highly dependent on agricultural activities for subsistence and income generation. Figure 1.2: Employment trends by sector, % of total employment, 2000-1 1 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 " Agriculture Manufaturing * Construction U Commerce Source: World Bank (2012) 1.16. Poverty in Nicaragua has a largely rural face and malnutrition remains one of Nicaragua's key human development challenges. The rural poverty headcount at 63 percent in 2009 has generally been more than twice that over urban poverty (26 percent in 2009). The gap is even more for extreme poverty - one in six rural households are extremely poor compared with one in twenty for urban areas (). Although Nicaragua has seen undernourishment fall in the last two decades from 55 percent in 1990-92 to 20 percent in 2010-12 (FAO), these levels remain some of the highest in the region. 1.17. Agricultural income is vital for poor households and poverty alleviation. Rural households receive 60 percent of their income from agriculture, 27 percent from nonfarm activities, and 13 percent from transfers. Agriculture has been a main source of job creation, helping to keep Nicaragua's employment rates stable. But these jobs have been mainly informal, low-skilled and low income. In 2010, 77 percent of persons working in the sector were informal, higher than the national average of 71 percent (World Bank, 2013). 1.18. However, agricultural wage laborers were overrepresented among the rural poor. Households whose main source of income comes from agriculture (either employment or self-employment) have significantly higher levels of poverty and extreme poverty. General poverty rates among household with heads working in agriculture are almost three times higher than households with heads working in non-agricultural activities. Table 1.4 shows that according to 2009 LSMS data, the poorest 20 percent of rural households had 74 percent of their income from farm income (45 percent by own agricultural income and 29 percent by agricultural wages), while they earned 14 percent from non-farm activities and 12 percent from transfers. Table 1.4: Shares of household income source by rural welfare quintile, in percentages Own agricultural Agricultumal Fomicm ofr no e Tases Total household income wages income (1) (2) (1)+ (2) (3) (4) (1+(2)+(3)+(4) 1 44.9 29.3 74.2 14.2 11.6 100 2 42.5 25.4 61.9 20.3 11.7 100 3 41.9 18.1 60.1 26.9 13.0 100 R 4 37.6 18.1 55.7 32.2 12.1 100 5 31.4 11.2 42.6 44.2 13.2 100 Source: Anriquez (2012) using LSMS 2009. Note: The first quintile represents the poorest 20 percent of the rural households, and the fifth quin- tile the richest 20 percent. 1.19. During 2005-09, there was an acceleration in rural poverty reduction, both on account of economic growth and higher growth elasticities of poverty reduction. Rural poverty headcount fell 7 percentage during 1993-98, but then stabilized remained essentially constant from 2001 to 2005. Then during 2005-09, the country saw another reduction in the rural poverty headcount of drop of 7 percent points'. In fact, the decline in national poverty headcount during 2005-09 was largely driven by the reduction of rural poverty. 1.20. Decomposing rural poverty reduction during this period confirms that consumption (or income) growth has been the main engine behind poverty reduction in rural areas (see Figure 1.3). Assuming the 2009 poverty line and income distribution were fixed at 2005 levels, the increase of rural income would have reduced poverty by 10.5 percentage points. This effect is five times higher than the fall in poverty from the distributional changes in rural incomes (2.1 percentage 4 In this note, poverty estimates are considered significant at the 10 percent level or lower. points) and more than twice the "growth" effect experienced in urban Nicaragua (4.8 percentage points). Income growth is also the main factor driving the reduction in extreme poverty in rural Nicaragua. Finally, in the latter period, both the growth elasticity of national poverty and the agricultural growth elasticity of rural poverty increased sharply to levels over 1.5 (see Table 1.5). An agricultural growth elasticity of rural poverty of -1.645 means that when the agricultural sector grew by 1 percent, rural poverty fell drops by 1.645 percent). Figure 1.3: Decomposition of Changes Table 1.5: Growth Elasticities of poverty, 2001-09 in Rural Poverty 2005-09 6 Redis ribution -2,10 Growth elasticity of national poveqt 045 011 -. 4 -10,50 Agcutura growth elostkity of -0.066 0.025 -1.645 rrlpovert Pov rty Line Effect 5,60 Source: Worl Bank 2008; Anrpquez 2012. 7,00 15,00 -10,00 -5,00 0,00 5,00 10,00 1.21. The consumption growth experienced in rural areas is matched by an increase in agricultural incomes mainly by poor households. Figure 1.4 illustrates the total changes in the different types of rural income between 2005 and 2009, with on average higher increases in agriculture self-employed income and agricultural wages than non-agricultural incomes. There was a 12.6 percent increase in per capita real wages for the rural poor. In addition, we can see from Figure 1 .5, that growth in incomes (above the horizontal lines) is concentrated in the lower to middle quintiles of the income distribution indicating that poor households were the main beneficiaries of this growth. 5 To identify the key driving force of the changes in poverty between 2005 and 2009, we decomposed the data into three main components: (i)income growth, (ii) redistributional changes, and (iii) the effect of adjusting the poverty line to reflect changes in prices and consumption patterns (Table 5.4). Figure 1.4: Changes in rural household income, Figure 1.5: income Growth Incidence Curve, 2005-09 2005-09 INCOME TOTAL CHANGE 1 10 2009) (years 2005 and Total 10 Ttl(er020 n 09 Agricultural Self- mployed 07 AgricultunlI Wages Non-Agricultural Self- mployed Non Agricultun|I Wages Renittances - Other Income 5 -200 0 200 400 600 800 1 10 20 30 40 50 60 10 80 90 100 m Growth-incidence U95% confidence bouns a Growth at median Growth inmean * Mean growth rate 1.22. Poorer households with income from agriculture experienced higher growth in their incomes between 2005 and 2009. During this period, poorer households experienced higher income growth than richer ones, which means that the economic growth was decidedly pro-poor at national level. This is also true for rural areas, but the difference between the expansion of the welfare level of poorer and wealthier households was not as marked. Although households with main source of labor income in agriculture (employed or self-employed) had poverty levels that are much higher than households with income in non-agriculture activities, these households experienced a larger drop in poverty between 2005 and 2009. Table 1.6: Poverty Headcounts by Main Source of Labor Income of Household Head, 2005-2009 Main source of labor income Employed inagriculture 16.3 68.2 -8.1 38.3 28.] -10.3 Self-employed inagriculture 12.2 63.7 -8.6 30.2 28.] -2.1 Employed innon-agriculture 30.5 25.4 -5.2 5.9 2.6 -3.4 Self-employed innon-agriculture 30.] 21.5 -2.6 5.8 1.3 1.5 Source: Author's calculations based on EMNV 2005 and 2009. 1.23. Poverty is more severe in the center of the country and on the Caribbean coast, despite their high economic potential, particularly for agricultural and forest activities. But these areas, especially the Northern Atlantic Autonomous Region (RAAN) and Nueva Segovia, had some of the biggest percentage drops in poverty from 2005 to 2009 (Table A.1.2 in Annex 1). Other departments showing big drops are Chinandega and Rivas, on the Pacific side. The worst performer was Rio San Juan, which went firmly against the national trend. 1.24. Differences in poverty by gender are not large. Poverty rates of female- and male-headed households are close, certainly within the margin of error of the Living Standard Measurement Study (LSMS) household survey (table Al.3 in Annex 1). This is peculiar to Nicaragua, as many Latin American countries have female- headed households with lower poverty rates, while in Sub-Saharan Africa it is common for such households to have higher poverty rates (Vald6s and others 2010). The larger drop in poverty among men could be driven by differential employment gains between men and women in 2005-09. 1.25. Since 2009, there has been increase in agricultural employment has been accompanied by a decline in labor productivity and an eventual decline in real wages even though there has been an increase in nominal wages during the period 2009-20126. After declining gradually in the first part of the millennium, the share of employment in agriculture rose rapidly so during the global financial crisis in 2008-09 and has remained higher. Agriculture exhibited relatively less volatility, contributing positively to GDP throughout the crisis. For both men and women, the agriculture sector accounted for roughly 46 percent of net job creation in this period. Relatedly, labor productivity which was stagnant during 2000-09 has fallen dramatically since then, owing mainly to the expansion of the labor force in agriculture. Average real wages in agriculture, albeit the lowest wages among the economic sectors also stagnated and began to fall. 6 Source: Web page from the Labor Ministry of Nicaragua. In 2009, the minimum wage for agriculture was C$ 1,573 while in the 2012, it was C$ 2273. Figure 1.6: Index of labor productivity by sectors Figure 1.7: Average Real Wages (2002=100) 25.00 105 20.00 100 95 90\V 15.00 85 80 10.00 5.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 60 2002 2003 2004 2005 2006 200) 2008 2009 2010 201] " Total Agriculture and fishing * General Average " Manufacturing U Comnmerce 0 Agriculture * Conlstruction Source: Author's calculation using Central Bank data Source: Ministry of Labor 1.26. The important role that the agricultural sector has played both in economic growth and social welfare in Nicaragua has been critical in shaping agricultural policy and public expenditures over the last decade. Indeed, the fact that the sector provides a socio- economic contribution that is larger than its direct contribution to national 09 explicitly advocates for a decided participation of the public sector in the development of the sector - to accrue social returns which are larger than private ones. Moreover, income profiles in Nicaragua highlight agriculture's importance for the poor and stress its key role in any poverty alleviation strategy. The next chapter looks at how the broad national policies for agriculture have evolved and taken shape in the institutional framework. 1.4.Agricultural publi sector 1.27. The Nicaraguan government set its key plans for economic development and poverty reduction in its National Plan for Human Development (Plan Nacionall de Desarrollo Humano, or PNDH). The Plan, officially approved in 2008, was updated in 2009 to adjust for the global crisis and its expected effects on the national economy. Now being updated again, it will guide the second term of the current government for 2012-16. The main strategic themes of the PNDH revolve around: * Promoting economic growth through implementing good macroeconomic policies, increasing public and private investment, and implementing strategies that improve access to international markets; * Improving the quality of life and equity through the expansion of education and health services and social protection programs; * Improving transparency and governance in public institutions, including strengthening control mechanisms and audits; * Promoting environmental sustainability; * Reducing intraregional disparities by developing the autonomous regions of the Caribbean coast. 1.28. Public spending in agriculture has been delivered mainly through the sector-wide approach PRORURAL, established in 2005 and led by MAGFOR. Prepared in the context of the first National Development Plan for 2005-09, PRORURAL pursued three objectives: higher incomes and reduced poverty, higher and better employment, and increased investment and exports. It was also intended to improve aid coordination and to complement assistance from international agencies in sustainable agriculture and forestry. 1.29. PRORURAL coincided with important public financial management (PFM) reforms that improved budget processes, including spending in agricultural programs. These reforms reached a high point with the approval of the PFM Law 550 in August 2005, which set up a new regulatory framework for the PFM core systems of budget, treasury, accounting, and public debt-and for the noncore systems of procurement, human resources, public assets, and public investment. And in accordance with international best practice, the introduction of a Medium-Term Budgeting Framework was a good step in transitioning from program budgeting to performance budgeting. (Further institutional aspects of public spending are analyzed in chapter 5) 1.30. In 2008, the policy framework shifted from a value-chain, export-oriented focus to a more pro-poor and food security approach. Renamed PRORURAL Incluyente, the sector-wide program was updated in 2008 to improve its targeting and alignment with the new PNDH. It now comprises three major programs: the National Food Program (PNA), the National Rural Agro-Industry Program (PNAIR), and the National Forest Program. It also coordinates several donor roundtables on specific themes, manages a monitoring and evaluation system (SISEVA), and supports capacity building. It is linked to several commissions and committees, which are the spaces for public-private dialogue with producer organizations. 1.31. The development objective of PRORURAL is now to contribute to the human development and human capital of rural families, while using natural resources in a sustainable way. Specific objectives are to: increase agricultural productivity of basic grains (maize, beans, rice, and sorghum) and beef and dairy products; increase the value added of primary agricultural production; ensure production, consumption, and export of healthful food; promote conservation and sustainable use of natural resources, as a way to mitigate climate change; improve the access of rural women, youth, and indigenous and ethnic communities to agricultural technology and services; promote income generation, as well as the employment of rural families and indigenous and ethnic communities; and improve access to rural finance, technical services, and agricultural inputs. 1.32. The strategic pillars of PRORURAL Incluyente are focusing on small and medium scale farmers. The sector-wide program defined 10 strategic pillars to guide and organize the services provided by sector institutions to producers in general, but prioritizing small and medium farmers. They are: capacity development-public and private sector; governance-policies and strategies; access to equipment, inputs, and financial services; technological services-technical assistance, research and extension services, local markets for technology; plant and animal health services; agricultural and forest information services; support to sustainable forest management; support to associations-groups of producers, cooperatives, and communities; investments in conservation and restoration of forest ecosystems; and promoting linkages with markets and agroindustry processes. 1.33. Evolution of the territorial approach in PRORURAL. The first version of PRORURAL (2005) used biophysical and socioeconomic criteria to define the target territories of the program. To reflect the new strategic priorities, PRORURAL Incluyente (2008) introduced additional criteria to improve territorial targeting with the aim of harmonizing sector policies and focusing national programs in accord with particular characteristics of the territories. The new criteria to characterize the territories include: biophysical characteristics; infrastructure available to support productive activities; * distribution of population and accessibility to basic services; traditional productive activities in the area; distribution of productive activities in the area; territorial distribution and typology of producers, as well as their concentration; and distribution of extreme poverty per municipality. 1.34. Based on these criteria, PRORURAL Incluyente defined four strategic zones (table 3.1 and map 3.1 in Chapter 3) and proposed a whole set of development actions that would be supported by public spending to help producers realize the potential of their land, natural resources, technological base, and production knowledge. The territorial approach also included actions to promote environmental management as part of productive activities. Beyond agriculture and forest institutions, PRORURAL Incluyente proposed the social protection and infrastructure development activities necessary to support productive activities becoming a driver of economic dynamism and territorial development, although this cross-sectoral approach would require greater coordination and public investment with other line ministries outside PRORURAL. 1.35. PRORURAL is implemented by four main agencies whose responsibilities are described under Law 290. These include the Ministry of Agriculture and Forestry (MAGFOR), which is the governing institution of PRORURAL and three autonomous and decentralized agencies: INTA, IDR and INAFOR. INTA and INAFOR were originally decentralized under MAGFOR, and IDR was an independent entity under the Presidency. In 2012, the Government created a new Ministry of Family, Cooperative, Community, and Associative Economy (MEFCCA) which has absorbed IDR, and will play a main role in PRORURAL. The institutions have the following functions: * The Ministry of Agriculture and Forestry (MAGFOR) formulates public policies, plans, and strategies for sector development; identifies and prioritizes the credit as well as the technology technical assistance demands of agricultural and forestry activities; formulates rural land policies and use of state-owned rural land; formulates and leads agricultural sanitary system plans and manages quarantine systems; proposes and coordinates with the Ministry of Environment policies and programs to protect the ecological system, focusing on water and soil conservation; proposes the delimitation of areas where agriculture, forestry, and other related activities can be established, working with the Ministry of Environment; and issues phytosanitary certificates and permits. Nicaragua Institute of Agricultural Technology (INTA) is a decentralized agency under MAGFOR. It was established to research, develop, adapt and transfer new agricultural technologies to agricultural producers. In addition to housing the main public R&D functions in agriculture, INTA provides the majority of extension services in the sector. In terms of governance, the Minister of Agriculture proposes, to the President of the Republic, candidates for the INTA Council as well as its Director. " National Forestry Institute (INAFOR) is also a decentralized agency under MAGFOR. It was established to promote, manage, and regulate forest resources and to encourage reforestation. The main flagship program of INAFOR is community forestry management program mainly concentrated in indigenous territories. In terms of governance, the President also appoints the INAFOR Director based on a short list proposed by the Minister of Agriculture. INAFOR policies are approved by the National Forestry Commission (CONAFOR), which is also integrated with representatives of the autonomous regions of the Atlantic Coast (RAAN and RAAS) and one member from an environmental nongovernmental organization. " Institute for Rural Development (IDR) was created by Decree No. 41-94 of 1994, ratified by Law 290 of 1998, as a formal entity under the Presidency with autonomous technical and administrative prerogatives. Originally established to promote rural development through rural and agricultural infrastructure, under PRORURAL Incluyente, IDR evolved to focus more on the development of small and medium producers through promotion of agribusiness cooperatives and post-harvest facilities. In 2012, a reform to the Law 290 created the MEFCCA, which absorbed IDR and other functions to promote the development of cooperatives and small and medium-size enterprises. MEFCCA is currently defining its operational roles and strategies, and will be one of the institutions of PRORURAL, leading implementation of programs formerly led by IDR. 1.36. Other institutions that have been involved in the implementation of PRORURAL, but are not included in Law 290 include Banco Produzcamos, (to assume formerly FNI and Rural Credit Fund) which was created through In Law 684 in May 2009 and the National Food Trading Enterprise (ENABAS). 1.37. For some analysis the report uses "agriculture-related" public expenditures, which include rural roads by the Ministry of Transport (MIT), the Road Maintenance Fund (FOMAV), and municipalities; rural electrification by the Ministry of Energy and Mines (MEM) and municipalities; agriculture faculties by public universities, among others. Figure 1 .8 helps understand the setup of the relevant institutions in sectoral public spending and the terminology used in this review, where off-public budget dialogue mechanisms are in forced in order to discuss issues related to economic development. (See Box Table 1.1) Figure 1.8: Public spending institutions in Nicaragua's agriculture sector Ministry of Finance and Public Credit (MHCP) Ministry of Agriculture and National Forestry Institute Nicaraguan Institute of Forests (MAGFOR) (INAFOR) Agrkultural Technology (INTA) PRORURAL Rural Development Institute Incluyente (IDR) Agricultural Faculties of Ministry of Infrastructure Rural Public Universities and Transport (MIT) infrustrudure General Directorates of Road Maintenance Fund expenditures Taxes and Customs (FOMAV) Land Administration Ministry of Energy and Institutions Mines (MEM) Banco Produzcamos Municipalities MARENA Other agriculture ENABAS related public expenditures 1.38.PRORURAL comprises three major programs. The National Food Program (PNA) (63 percent of total PRORURAL funding during 2006-1 1) aims to increase primary production of food, improve food security, and ensure the access of the rural population to healthy food. This program is implemented by MAGFOR and INTA and has four constituent parts, (i) Programa Productivo Alimentario (PPA), (ii) Nutrition and Food Security Program (Programa de Seguridad Alimentaria y Nutrition, PSAN) and (iii) the Agro-Food Seed Program (Programa Agroalimentario de Semilla, PAS), and (iv) the National Seed Program. The PPA is one of the major programs of the Zero-Hunger Program (Hambre Cero), the government's flagship program aimed at the most vulnerable rural population, which also comprises education (to promote preschool attendance and a school snack program) and health (to increase vaccination, as follow-up to pregnant women, breast-feeding, and nutrition) programs run by both the Ministry of Education and the Ministry of Health. The PPA has been led by MAGFOR but in 2012 it was transferred to the newly created Ministry of Family Economy. The main programmatic instrument of PPA is the Bono Productivo Alimentario (BPA), a combination of repayable in- kind transfers of agricultural inputs (seeds, fertilizers, urea, cows, pigs, hens, and materials, among others), which between 2008 and 2012 has worked with 100,000 women and their families. To complement the transfers of BPA, the program also provides technical assistance and training, supports value-added activities, promotes associativity among women's groups, and trains them on financial management of their small investments, credits, and savings for further capitalization The National Rural Agro-Industry Program (PNAIR) (30 percent of total PRORURAL funding during 2006-11) supports the generation of value added through post-harvest management, processing, and commercialization in value chains. It is implemented mainly by IDR, and partly by INTA. Originally this program included a large allocation for rural roads and a smaller one for rural electrification, but this was later transferred to the Ministry of Transport and Infrastructure, and is analyzed below under the category of rural infrastructure. Some of the main subprograms under PNAIR include: * Rural Production Revitalization Program (2003-10), financed investments in mainly rural roads and productive capital of producer organizations and rural roads with resources from IADB, and the Government of Taiwan, China and the Government of Nicaragua. * Production of Basic Grains Promotion Program (ongoing) finances technology transfer for producer organizations and infrastructure (mainly rural roads) and was funded by Japan. Agricultural Development Fund (FONDEAGRO) (2001-11) was a rural development program run by MAGFOR that provided integrated financial and nonfinancial agricultural services to around 20,000 families benefited, or around 60 percent of the producer families in seven targeted municipalities of Matagalpa and Jinotega. The National Forest Program (PNF) (6 percent of total PRORURAL funding during 2006-11) aims to promote sustainable forest management among indigenous communities and small producers while reducing deforestation and increasing forest exports and forestry's share of GDP. Box 1. 1: The establishment of Citizen's Empowerment Cabinets In November 2007, the Government of Nicaragua issued the "Presidential Decree No. 112-2007" with the purpose of organizing and promoting an empowerment space to guarantee the active involvement of citizens in the development and execution of plans, policies, and governmental programs. In this regard, a Rural Development Cabinet was created. Throughout the years it has been transformed from a Production Cabinet to a Production, Trade, and Export Cabinet. Discussion tables are organized by economic subsectors, such as, dairy goods, basic grains, coffee, poultry, horticulture products, meat, among others. They are structured at national, departmental, and municipal level and have periodic meetings during the year to discuss several issues, such as, prices, production plans, and trade barriers. Currently, different actors of the value chain are involved, such as producers, processors, service providers, government entities, and in the future also consumers' representatives will be represented. The main achievements of this dialogue mechanism according to the Government, has been the following: i) building consensus, ii) establishing a dynamic and evolving communication channel between the private sector and the government, and iii) including territorial stakeholders in the discussion and execution of governmental plans. 1.39.PRORURAL is financed by a combination of general public revenues, a Common Fund from development partners, and other aligned donor- financed projects. Just under two-thirds of the budget has been financed with external resources. The evolution and composition of the source of PRORURAL funds will be analyzed in chapter 2. 1.40. In 2005, the Common Fund was established as tool to harmonizing donors and aligning cooperation resources to PRORURAL. 7 Since 2005, it has been supported by various cooperation agencies, including those of Austria, Canada, Denmark, Finland, Norway, Spain, Sweden, and Switzerland. The Fund operates as budget support which the Government uses to provide complementary funding for the PRORURAL programs and is executed solely according to Nicaragua's systems and law. It has also provided a technical forum for broad policy dialogue and sector planning between development partners and Government for the agriculture sector. The Common Fund has been instrumental in maintaining commitment of more than 20 different donor agencies to PRORURAL programs, both donors who finance the Fund and others that finance separate but aligned projects. 1.41. This high dependence on external funding is a major source of vulnerability for public services in agriculture. Since 2008, around the time of the global financial crisis, several bilateral donors have withdrawn from Nicaragua. The decline in donor financing for agricultural public expenditures has been accompanied by a rise in donor financing directly to the agricultural private sector. This volume and different types of off-budget funding has complicated overall sectoral planning. 7 The PRORURAL Common Fund was set up in March 2006 and, in addition to a group of donor agencies, it consists of the Ministry of Foreign Relations, MHCP, the Technical Secretariat of the Presidency, MAGFOR, and its attached institutions. Box 1.2: PRORURAL Mid-Term Evaluation A Mid-Term Evaluation of PRORURAL Incluyente (2010-14) was undertaken in 2012 and rated implementation progress satisfactory. It recognized that throughout strategic changes, PRORURAL has been aligned with the PNDH; after six years of PRORURAL, Nicaragua is one of the few countries committed to implement a sector-wide approach. PRORURAL has learned from experiences and developed a good sector strategy with clear value added. The report confirmed that the three main programs of PRORURAL Incluyente are progressing toward its goals, especially outputs, and that it has made important achievements on improving conditions of the most vulnerable groups (poor rural families, women, indigenous peoples, and ethnic groups) and on promoting participation at territorial level. The Mid-Term Evaluation made four recommendations: to improve general understanding on the details of PRORURAL Incluyente among the many stakeholders; to present evidence-based connections for PRORURAL's outputs with higher level objectives and sector goals that contribute to the PNDH in transforming the economy and improving living standards of rural families; to put in place effective inter-institutional programmatic structures, budgets, and annual operational plans; and to update the budget and financial gaps of PRORURAL Incluyente for 2010-14, while reviewing whether the budget thresholds for institutions are enough for the expected results and goals, as well as preparing a robust strategy to close the PRORURAL's financial gap. 2. Evolution, Composition, and Sources of Support to Agriculture 2.1. Overall public support to the agriculture sector 2.1. Broadly speaking, Nicaragua has four types of public expenditures that support the agricultural sector: i). PRORURAL which finances goods and services in food security and sovereignty,8 agri-business, and forestry; ii). agriculture-related spending which are expenditures on rural infrastructure (roads and electrification) spread over a number of ministries9 and spending on agricultural universities; A broader definition of agriculture-related spending would include public expenditures on Nicaragua's land titling program, net expenditures on rural credit provided by the state-owned Banco Produzcamos and its predecessors, and public spending for ENABAS, the National Food Trading Enterprise. However, these are not included in this review owing to data limitations. iii). development cooperation (ODA) for the agricultural private sector (mostly off-budget); and iv). implicit expenditures including tax incentives and exemptions in various subsectors. 2.2. Public spending related to agriculture has been rising rapidly in real terms over the past decade, but this increase has been due to spending on rural infrastructure, while spending on agriculture has been slightly decreasing (Figure 2.1). In fact, pure public spending on the agriculture sector has been slowly decreasing in real terms with the exception of 2007-08 when spending peaked due to Hurricane Felix recovery and the introduction of the PPA (see para 2.9). 8 PRORURAL only finances the productivity and production side of food security. Chapter 4 will have a more holistic approach on public spending in food security, including education, health and social protection. 9 For rural roads, the entities included are the Ministry of Transport (MIT), the Road Maintenance Fund (FOMAV), and municipalities, while the entities for rural electrification are the Ministry of Energy and Mines (MEM) and municipalities. Figure 2.1: Trends in overall public spending to the agriculture sector (C$2005 millions) 2000 1500 1000 500 0 2002 2003 2004 2005 2006 2001 2008 2009 2010 2011 m PRORURAL 0 Agriculture related spending Source: MHCP; authors' elaboration. Note: Earlier IDR expenditures on rural roads and electrification have been subtracted from PRORU- RAL totals in order to have a consistent series over time. 2.3. Meanwhile, both spending on agricultural universities and tax expenditures are on the rise. (These data are only available since 2007.) Agricultural faculties of public universities have received gradually increasing allocations over the last three years in line with Nicaragua's constitutional mandate to provide 6 percent of public sector budget for to public universities in general. Meanwhile, tax expenditures in agriculture - mainly tax exemptions and import duty exonerations - have been rising in real terms. These including exemptions from tariffs for certain imports are a growing part of public spending in the sector (Figure 2.2). In 2011, tax expenditures reached over C$300 million in nominal terms an increase of 86 percent since 2009. This rise has been mainly due to an increase in imports favored by greater availability of external financing from commercial banks to input suppliers, as well as by a recovery in remittances and foreign investment since the global financial crisis. The sector has also faced higher prices of imported fertilizers, chemicals, and petroleum, as well as more imports of agricultural machinery, during this period. Figure 2.2: Public spending on agriculture by use, 2002-11, C$2005 million 1200,0 1000,0 800,0 600,0 4000 200,0 0,0 PRORURAL Rural to private ODA Agriculture Implicit Infraestructure sector universities expenditure U 2002 m 2003 U 2004 2005 i 2006 M 2007 m 2008 2009 2010 2011 Source: MHCP; authors' elaboration. Note: Earlier IDR expenditures on rural roads and electrification have been subtracted from PRORURAL totals in order to have a consistent series over time. ODA to agricultural private sector is only available since 2007, agriculture university spending is only available since 2004, and tax expenditures are only available since 2009. 2.4. The contribution of agriculture to the economy is around seven times the sector's budget allocation. One way to evaluate the levels of public sector support to look at the agricultural orientation index (AOl), which measures the ratio of agricultural spending in public budgets, to share of agricultural GDP in national value added. A measure greater than 1 indicates that the country spends proportionately more on agriculture than its importance in the economy, and vice versa.r0 It is important to mention that the AOl only analyzes the importance of agriculture in the economy and in total spending but does not say anything on whether the countries spend efficiently, achieve higher productivity, or reduce poverty. 2.5. Historically, Nicaragua's AOl for rural spending was on par with the Latin American average, while the AOl for agriculture spending was much lower and was falling over time. Two databases can help benchmark Nicaragua's AOl against that of other countries in Latin America and the Caribbean: the FAO database on rural public spending in Latin America, with data for 1985-2001, and the ECLAC database on agricultural public spending in Central American 10 Agriculture Spending as % of Total Public Spending Agriculture GDP as % of Total GDP. countries, the Dominican Republic, and Mexico, with data for 1980-2006. Table A1.4 in Annex 1 shows the AOIs of these two above mentioned databases. 2.6. However, in the last decade, AOI has tracked expenditure levels, rising for rural development spending but have continued to fall for agriculture-specific spending as measured by PRORURAL only. In 2011, the AOl was 0.62 for rural public spending, and was 0.21 for agriculture (PRORURAL). Figure 2.3: Agriculture Orientation Index of Public Spending, 2002-11 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0,0 2002 2003 2004 2005 2006 2001 2008 2009 2010 2011 E PRORURAL spending 0 Rura Source: MHCP; authors' elaboration. Note: Earlier IDR expenditures on rural roads and electrification have been subtracted from PRORU- RAL totals in order to have a consistent series over time. Rural spending includes PRORURAL, rural infrastructure and agricultural universities. 2.2. Analysis of PRORURAL spending 2.7. Over the last decade PRORURAL spending has declined in real terms and also lost share in the total budget, GDP, and agricultural GDP partly explained by a reduction in external funding by some development partners (Figure 2.4). It is also notable that during 2009, when the country was hit by the financial crisis, an economic contraction and necessary fiscal adjustments, the budget for agriculture sector fell disproportionately. Figure 2.4: Trends in PRORURAL spending as share of GDP, agricultural GDP and total budget, 2002-11 7% 6% 5% 4% 3% 2% 1% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 spending as share of PRORURAL a GDP * Agriculture GDP * Total Budgest Source: MHCP and INAFOR; authors' elaboration. Note: Earlier IDR expenditures on rural roads and electrification have been subtracted from PRORU- RAL totals in order to have a consistent series over time. 2.8. The first PRORURAL 2005-09 was meant to provide a significant boost to agricultural public spending, but ultimately spending continued along at the historical levels. The estimated cost of this first stage of PRORURAL in 2005-09 was $41 1.5 million. Average annual spending was to be $82.3 million-almost twice the historical average budget. Ultimately, actual spending was $41.3 million a year, that is, similar to previous trends. Problems in execution included lack of a clear and prioritized rural strategy to guide public investments-and inadequate donor coordination (Budinich 2004; Wiggins and others 2007; World Bank 2008a). 2.9. Then PRORURAL spending peaked in 2007-08 owing mainly to Hurricane Felix recovery and the introduction of the Programa Productivo Atimentario (PPA). In September 2007, Nicaragua was hit by Hurricane Felix, a Category 5 storm, which affecting nearly 200,000 people. Agriculture and fisheries - the primary income for coastal communities in the affected region - were heavily impacted. Subsequent donor support and reconstruction efforts were directed primarily to the rural sector to help farmers recover production, yielding a spike in agriculture spending. In 2007, the Government launched the PPA with the start of exceptionally large flows of bilateral support from Venezuela oil cooperation. These off-budget flows were complemented by a significant increase in public expenditures from MAGFOR's budget primarily and then by flows from a range of development partners.'' (This program is discussed further in Chapter 4). 2.10. Since 2009, PRORURAL spending has returned to historical levels, but continued to decline as a share of agricultural and national GDP. Combined with the improvements in sector performance both in terms of economic growth and export levels, and with the acceleration in rural poverty reduction, this may suggest an increasing efficiency of agricultural public expenditure. However, it must be evaluated in conjunction with the overall spending on rural development including infrastructure and ODA to the private sector, as well as on sector outcome in terms of production and productivity. On the social side, it will be important to disaggregate rural poverty reduction into the growth and redistributive elements, but also look at rural labor market outcomes to evaluate the contribution of agriculture public spending (see chapters 3 and 4). 2.11. As noted above, PRORURAL has three main programs aimed at food security and sovereignty (PNA), agro-industrial development (PNAIR) and forestry (PNF). Although each of these programs have some elements that are executed by several of the four main institutions MAGFOR, IDR, INTA and INAFOR, the levels of expenditure for MAGFOR, IDR, and INAFOR generally track those for PNA, PNAIR and PNF, respectively (see Figure 2.5 and Figure 2.6 below). However, there are some notable differences which we will outline below. 2.12. Reflecting the policy shift towards food security and sovereignty in 2007, PNA now represents the largest (73 percent) share of PRORURAL and has been gradually rising over time. Historically, the government had allocated similar levels of funding to PNA and PNAIR. But after 2006, more emphasis was given to the PNA, which rose from around 50 percent to almost three-quarters of PRORURAL in 2011 (Figure 2.5). The PNA saw a large increase in 2006- 11 European Union, InterAmerican Development Bank, FIDA, and the Governments of Austria and Tawian, China. 08 was due to the greater availability of external resources in response to Hurricane Felix. MAGFOR also saw its spending grow from around C$300 million in 2002 to C$400 million in 2011, with a spike to nearly C$650 million between those years representing the Hurricane Felix recovery and the introduction of the PPA. INTA, the other implementing agency of the PNA saw its expenditure fall slightly over the period, due mainly to a decrease in external funds. 2.13. Meanwhile, PNAIR spending has fallen dramatically from around half of PRORURAL spending in 2002-06, to 22 percent in 2011. The decline is due in part to a refocus on agro-industry and reassignment of rural infrastructure and rural credit spending to other ministries and institutions, but also to a decline in external resources. IDR is the PRORURAL institution most dependent on external resources, averaging 85 percent of its budget. 2.14. PNF has remained low in terms of spending priorities, but somewhat more stable. INAFOR however, has seen a steady decline in its external funding and consequently is overall spending since 2007. (See Chapter 4 for a fuller discussion on forestry spending). Figure 2.5: Public spending in PRORURAL Figure 2.6: Public spending by PRORURAL entities, programs, C$2005 millions, 2002-11 C$2005 millions, 2002-11 " PNA U MAFGOR INTA " PNAIR 0 IDR U INAFOR * PNF 1.000 700 600 800 500 600 400 300 400 200 200 100 c~CD CD -z Suc CMHCP; I= CD C:o C: auts eD c:: la C0 b I= CD C 0 C0 CD CD 0 c0: C0 - - - - - - - - - - Source: MHCP; authors' elaboration. 2.15. PRORURAL budget execution12 has been generally lower at 77 percent than the 96 percent average for the government as whole. On average, the government entities increased their execution over the last decade, reaching 96 percent in 2011 (Figure 2.7). The agricultural entities, which were below the government average since 2002, gradually improved their execution, reaching 90 percent in 2008. However, a sharp drop to 70 percent in 2009 was only partially recovered, reaching 77 percent in 2011. While MAGFOR and INAFOR have good execution rates at around 90 percent, INTA and IDR spent less than 60 percent of their modified budget in 2011. The stronger implementing agencies are INAFOR, which had 100 percent execution in 2006-10, and MAGFOR, which recovered from its 2009 drop to 92 percent execution in 2011. INTA with an execution rate of 56 percent and IDR with 59 percent have struggled to achieve a good rhythm of implementation. Figure 2.7: Budget execution by PRORURAL and central government, C$2005 million, 2002-1 1 Central Government PRORURAL 25.000 1.600 1.400 20.000 1.2 00 15.000 1.000 800 10.000 600 5.000 400 200 " Approved U Approved " Modified 0 Modified * Executed U Executed Source: MHCP; authors' elaboration. 12 This analysis presents results reported from the individual SIGFA systems run by the individual agencies as opposed to those presented in the national SIGFA. Discrepancies between the two generally result from end of year transfers and reallocations used to balance the general central government accounts. As such, whereas overall central government execution rates as reported by the national SIGFA are high, the individual SIGFAs describe more accurately the execution performance of the individual agencies. These parallel systems are expected to be consolidated under the ongoing public financial management reforms and upgrade of the FMIS. 2.16. Agriculture public spending can be classified in three types of support- general services, direct support and price interventions. General services benefit the sector in a collective manner and can be classified as public goods; they can be agricultural public services, such as agricultural research or plant and animal health, or rural infrastructure. Direct support is essentially the provision of private goods to individuals, mostly as subsidies or payments, but also extension services among others. Tax exemptions would be included in direct support, as they benefit individual producers. Price interventions are not generally a part of public spending because it is financed by consumers who pay the difference between domestic and border prices, while producers benefit from the artificially higher prices. Direct support and general services are public spending through central and regional governments paid by taxpayers whereas price supports are generally paid by the final consumers. 2.17. Spending on public goods is generally a more cost-effective way of supporting sector development. Table 2.1 outlines the different characteristics of each spending policy tool. General services have the least distortion, high coverage and economic impact owing to the non- excludable and non-rival nature of goods and services provided. Moreover these are goods and services which tend to be underprovided when left to private agents. Direct support, on the other hand, has mixed results, with low coverage, medium to high distortion, and medium impacts. However, in almost all countries worldwide, agriculture public expenditures also include spending on private goods. In Latin America higher agricultural public spending on private goods has been seen to weaken rural development and agricultural growth (Anriquez 2007; L6pez and Galinato 2007). Table 2.1: Agricultural policy tools and characteristics Caegr Geea edfrens e betweenSureDstrin oeag rdutv Price support GeeaedfeecsbtenConsumers High low Low domestic and border prices * Payments for production per Indviduol, with unit/orea < Direct support * Subsidies for inputs direct impact Direct support * Capital formation: irrigation, inthe gross credit producer income Medium / high low Medium (private goods) * Form services: pest control, agricultural extension * Tax exemptions Taxpayers through central and Agriculture public services regional * Plant and animal health government * Agricultural research General services * Information systems (public goods) * Land titling Collective None High High public infrastructure Rural * Rural roads * Rural electrification Source: author's elaboration, partially drawn from IADB (2012). 2.18. During 2002-11, Nicaragua has seen a dramatic increase in pure agriculture public spending on private goods, which is in some measure aligned with the government's new approach. Figure 2.8 shows spending on private goods tripling between 2002 and 2011. Although spending on public goods has seen a commensurate rise, this reflects increases in rural infrastructure as opposed to spending on agriculture-specific public goods. The latter has remained very small in relation to spending on private goods. 2.19. The spending in public goods within PRORURAL, has been quite low, less than 20 percent on average over the last decade. Figure 2.9 illustrates that spending in public goods in MAGFOR has dropped significantly over the latter years, while public goods spending in the IDR, INTA and INAFOR increased. These low and relatively stable shares in public goods spending appear as a result of two diverging trends. The drop in public goods spending in the MAGFOR happens at the same time as the budget gets dominated by the growing PPA which we discuss in further detail below. Figure 2.8: Public spending on agriculture by public and private goods, C$2005 million, 2002-1 1 2500 2000 1500 1000 500 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 " Private goods " Public goods * Public goods, excluding rural infra Figure 2.9: Trends in share (%) of PRORURAL spending on public goods by institution, 2002-1 1 45 40 35 30 25 20 15 10 5 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m IMAGFOR m INTA INAFOR IDR * PRORURAL Source: Anriquez, 2011 2.20. International experience generally has shown that the larger the share of the public budget spent on public goods, the greater the positive impact of a given amount of spending (L6pez 2004 and Anriquez 2006) Anriquez (2012) carried out original research on the impact of public spending on total factor productivity (TFP), using a sample of 16 Latin America and Caribbean countries, from 1985 to 2001. The technical details and the results are in the background study (The important findings of this analysis are that public spending generally has a positive impact on TFP; but consistent with other studies cited, a higher share of this spending on private goods means lower effectiveness in increasing TFP). 1 1 2.21. Since 2006 and mostly from 2009 on, progress has been made in PRORURAL's budget classification system, but weaknesses in tracking expenditures and outputs continues to limit Government's ability to monitor efficiency. Until 2006, widespread misclassification of expenditures according to functional categories makes it difficult to track and analyze trends in functional composition. Nevertheless, with the ongoing budget and public financial management reforms government-wide, it makes it easier to look at more recent trends and current compositions. Figure 2.10 illustrates how difficult it was to classify some program spending that fell into multiple categories,' 4 which is why the largest part (46 percent) of spending was allocated to "other expenditures" in 2002-04. In 2009-11, however, only 5 percent remained in this category. The large increase of administrative costs is due mainly to this process, representing 35 percent in the second period. Nevertheless, given the already low levels of public spending in agriculture, a strong effort to reduce these over time could yield more effective and efficient spending all around. 2.22. Research spending remains very low and agricultural inputs have risen sharply, the latter mainly due to the much greater importance given to BPA and the Agro-seed Program (PAS). In 2009-11, spending on inputs was eight times those for research. Given the evidence on the high rate of return of research and extension, it is recommended to give more importance to them. The productive development category's decrease is due to large cuts in the IDR budget. 13 The analysis also indicated that this effect of spending on TFP differs across countries in the sample, and Nicaragua in this period had a below average response of TFP to spending. However, this says nothing about the effectiveness of spending in years past 2001. 14 Definition of functional composition is described in Table A. 1.7. in Annex 1. Figure 2. 10: Change in functional composition of agricultural public spending (PRORURAL) 2002-04 2009-11 5%3%2% 1% 3% 9 7% 14% 7% 11% 7 135% 3 46% 20% H Administration U Extension Services U Inputs Animal and Plant Health i Natural Ressource Management 0 Other expenditures a Productive Development Research Institutional Strengthening Source: MHCP; authors elaboration. 2.23. The policy shift in PRORURAL from production toward food security is evident in spending patterns both at the aggregate and program levels. Table 2.2 shows the distribution of each program spending across subprograms and functions for three years 2002, 2007 and 2011. In PNA, the shift from capacity building and production toward food security is evident starting in 2007. In PNAIR, the majority of the program has shifted from "productive" in 2002, to value chains in 2007 to governance in 2011. Similarly, PNF has experienced a large shift between "reforestation and restoration" toward "governance and institution building" and back again. Such large shifts in a relatively short space of time call into question the policy stability under which these programs are operating and their subsequent effectiveness in delivering on medium and long term goals. * Table 2.2: Functional composition of PRORURAL programs, 2002, 2007, 2011 (%of program spending) 2002 2001 2011 Governance and capacity building 55.1 28.3 29.6 Integrated crop management 2.4 12.8 1.7 Production monitoring - - 1.3 Production Seed 0.6 5.7 1.1 Productive Development 9.6 - - Food Safety 17.8 14.1 11.0 Security Food 13.9 38.5 40.6 Value chains 16.4 72.2 21.0 Governance 0.8 0.5 60.8 E Productive Development 77.4 27.3 15.1 Commercial promotion 5.4 - - Human talent 3.0 Development of industry and trade . 2.6 - Knowledge generation and management 4.0 6.8 Governance and institutionalization 1.8 54.8 45.6 Forest management and conservation 23.2 33.1 21.4 Reforestation and forest restoration 75.0 5.6 26.2 Source: MHCP; authors' elaboration. 2.24. In 2011, 30 percent of PRORURAL spending was capital, 70 percent current. There were large differences among institutions, ranging from 4 percent for INAFOR, 10 percent for INTA, 30 percent for MAGFOR, and 49 percent for IDR. The accounting data indicate a substantial increase in the current expenditures of the autonomous institutions - IDR, INTA, and INAFOR-and a shift toward capital expenditures for MAGFOR. While initial changes may have stemmed from a reclassification of resources under the Government budget reforms, the latter values are more robust. MAGFOR's spike is a result of redirecting almost half its budget to PPA under which the transferred assets (mostly livestock) are considered durable and therefore are classified as capital spending. Table 2.3: Economic Composition of PRORURAL Spending by Institution, 2006-1 1 (% of budget) 2006 2001 2008 2009 2010 2011 IDR Capital 56% 65% 60% 68% 68% 49% Current 44% 35% 40% 32% 32% 51% INAFOR Capital 18% 18% 17% 13% 1% 4% Current 82% 82% 83% 87% 99% 96% INTA Capital 4% 4% 13% 8% 1% 10% Current 96% 96% 81% 92% 99% 90% MAFGOR Capital 30% 61% 48% 23% 33% 30% Current 10% 39% 52% Il% 67% 70% Capital 39% 54% 45% 33% 36% 30% Current 61% 46% 55% 67% 64% 10% 2.25. There is no unique optimal balance between the two in agriculture. The balance varies across countries and depends on sectoral priorities and institutional and programmatic objectives. A general interpretation of capital spending is that it represents investments-and current expenditures the costs of delivering them. In this light, low capital spending would be seen as inefficient underinvestment. On the other hand, Devarajan, Swaroop, and Zou (1996) argue that capital expenditures normally considered productive could become relatively unproductive, if there is an excess due to decreasing marginal return on capital invested. Table 2.4: PRORURAL expenditure ratios (%) Recurrent 28.0 41.0 Development 12.0 59.0 Current 40.2 10.4 Capital 59.8 29.6 Wages 13.9 33.5 Operations &Maintenance 1.1 8.9 Source: Gutierrez y Laguna 2012 (Annex 1) 2.26. Personnel costs which have risen from 14 to 20 percent of PRORURAL budgets during 2002-11 (see Table 2.4) and should be closely monitored alongside the efforts to build institutional capacity in PRORURAL. MAGFOR has seen its personnel costs rise from 18 to 26 percent of its total spending, while IDR has seen an increase from 15 to 20 percent. INTA and INAFOR which, given their mandates have traditionally had a higher share of spending on personnel, have also seen a rapid increase from 44 to 58 percent and from 58 to 64 percent respectively. These costs can also explain a good part of the high administrative costs discussed in para 2.21. The increases in personnel costs should be closely monitored as part of a broader effort to ensure efficiency in PRORURAL spending. The demands for further capacity building in PRORURAL needs to be carefully planned in each institution on the basis of a sound human resource strategy, and in the aggregate with attention to fiscal constraints. 2.27. Operations and maintenance costs have increased from 2 to 9 percent (see Table 2.4). Meanwhile, the increase in maintenance costs suggests closer attention to ensuring good returns on the investment spending incurred during the earlier years. 2.28. Capital spending saw lower execution than the approved or modified budget, a problem that various countries experience. Once expenditures were accrued, they were considered executed. Two main factors affected the execution of capital more than current expenditure: (i) the need to prepare the procurement documents (for instance, the bidding documents) and to fit in the legal time that the different steps should fulfill; and (ii) the need to deal with the procurement processes that multilateral organizations require, even when agencies lack institutional capacity. This situation became more complicated when budget modifications were approved mid-year because of the tighter calendar to complete the processes. 2.29. PRORURALentities focused on preparing currentexpenditures to keep the entities running, leaving capital expenditures for the next budget modification. This led to a disconnect between current and capital budget preparation. Within the agriculture sector, each entity is responsible for preparing its budget-capital and current. On the capital budget, entities include external funds when the multilateral organizations and bilateral cooperation financial agreements are signed off. In budget terms this comes up through the budget modifications, usually every August, though 2009 had two due to the global financial crisis. For PRORURAL entities, the Common Fund has been financing the capital budget as well as some current spending. 2.30. Since capital spending depends heavily on donors and external funds, incorporating it into the budget takes time. But before entities can include external funds in the capital budget, they have to follow the regulations in Law 550 and the public investment system. The regulations are to ensure macro stability and to maximize the economic and social returns of public investments. This mostly becomes an issue when a new credit/loan needs to be included into the budget that has already been approved. For instance if a credit/loan is approved by a board of a multilateral in March, the executing agency needs to wait until the Ministry of Finance (MOF) can modify the budget to start executing. To prevent this, the MOF is alerting entities, which are negotiating credits, that as soon as they can provide strong evidence that the credit will proceed, they should include an indicative figure into the proposed budget for the next fiscal year. 2.3. Evolution of source of financing for the agricultural sector 2.31. PRORURAL is highly, but decreasingly dependent on external funds. As described in chapter 1, PRORURAL is financed by a combination of general public revenues, a Common Fund from development partners, and other aligned donor-financed projects. The budget financed by external resources has declined gradually from 75 percent in 2004 to 59 percent in 2011 (Figure 2.11). Meanwhile, the share of national funds in sector budget increased from 25 percent to 41 percent in the same period. The different institutions have varying levels of dependency on external funds ranging from 76 percent for IDR (in 2011), to 61 percent for INAFOR, 60 percent for MAGFOR, and 32 percent for INTA. Their evaluations are illustrated more in detail in figure Al .8 in Annex 1 . During 2006-11, the Common Fund accounted for an average of 22 percent of external funding and for 15 percent of total funding (Figure 2.12). Figure 2.11: Distribution of PRORURAL Figure 2. 12: PRORURAL spending by source of spending by source of financing financing (2005 C$ million) 100% - - 1.200 80% _1.000 800 60% 600 40 - -- - 400- 20& 2001 0% 0 0 - - - - - - - - 0 - 0 - a External Funding a Domestic Funds a Domestic Funding a Other External Funds a Common Fund Source: MHCP Source: MHCP and MAGFOR; Ara6z 2012 2.32. The structure of official development assistance (ODA) to the agriculture sector has changed in recent years (Figure 2.13). The historically largest ODA category-from bilateral donors to the public sector-has decreased, while that to the private sector has increased its share. The sector has seen some traditional bilateral donors phasing out in recent years. In 2010 and 2011, bilateral ODA to the private sector was the largest category on average (37 percent), followed by bilateral ODA to the public sector (35 percent) and multilateral aid to the public sector (26 percent). Multilateral funds to the private sector in agriculture accounted for just 2 percent. Figure 2.13: Official development aid to agriculture by source of funds and recipient (public/private sector), 2007-1 1 (2005 C$ million) 1.200 1.600 1.000 1.400 1.200 800 1.000 600 800 600 400 400 200 200 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 m Public Sector U / Multilateral Private S. n Public / Multilateral S. m Private Sector / Bilateral a Private S. / Bilateral Public S. Source: Central Bank of Nicaragua, MINREX, MAGFOR; Arauz 2012. 2.33. Off-budget funding is a problem because it is hard to account for it in overall sectoral planning. Figure 2.14 showcases the most important bilateral and multilateral donors to the agricultural public sector and the bilateral agencies that channeled funds off-budget through the private sector. These flows represent not only the Venezuela oil cooperation, but also the US Millennium Challenge Account, and lines of credit for microfinance. The volume and different types of off-budget funding has complicated overall sectoral planning, monitoring and evaluation. 2.34. Almost half of the funds of the PPA came from treasury, and the rest of a mixture of external funds, led by Venezuela and IADB. Table A.1 .9 in Annex 1 illustrates the detailed source of funds for PRORURAL's flagship program. 2.4. Conclusions and recommendations 2.35. Nicaragua has comparatively and historically low public spending on agriculture but spending on rural development more broadly is high and has been rising. Although the first PRORURAL was meant to provide a significant boost to agricultural spending, over time PRORURAL spending has been generally stable in real terms, and lately declining as a share of agricultural GDP and the central government budget. Given the sector's relatively positive performance in terms of growth and exports, this could suggest either an increasing efficiency or Figure 2.14: Official development aid to the agriculture sector by source of financing (bilateral and multilateral) to the public and private sectors, 2007-1 1 average Public sector, average ($740 million ayear Private sector, average C$326 million ayear 2% U USA 2%2% 1%1% 2% 8% ID1DB 2% 1 1z 2 20% U Finland 6% Venezuela Sweden 40% 0 USA 3% 3 U IFAD 10% EU 4% N Japan Sweden N Switzerland Holand 6%I 14% 0WB/IFC U Spain % 4Norway I5% 0 Norway 11 Denmark Austria 8% 0 FAO Italy 10% 0 Austria 21% Canada EU Others Source: Central Bank of Nicaragua, MINREX, MAGFOR; Arauz 2012. a declining relevancy of public agricultural spending to sector outcomes. However, in the face of declining labor productivity and competitiveness of Nicaragua's agricultural exports in some goods within key markets, it argues demonstrably for more attention to the quality of public spending. 2.36. The stated policy shift toward food security and away from agro-industry/exports during the last five years is fully reflected in spending patterns. In 2007, the adoption of PRORURAL Incluyente was matched by strong shift in spending from activities focused on agro-industrial development toward those on food security. While this appears to have supported the progress in food security and against malnutrition (which will be discussed further in Chapter 0.), there was also a demonstrable change in the orientation of public agriculture spending. 2.37. Spending patterns also indicate a strong, albeit more tacit, policy shift toward public spending on private goods. These private goods include inputs and services provided directly to smaller producers as part of the main food security program. (However, as we shall see in Chapter 3 and 4, some of these resources end up in the hands of larger and higher income producers). In turn, Nicaragua has seen a smaller share of agricultural expenditures going to public goods like R&D, natural resource management, animal and plant health. Renewed attention to the delivery of these and other public goods would generally benefit a broader swathe of producers and could help to reverse the declining productivity in the sector. 2.38. The shift of public spending toward private goods has also been mirrored by the rise of official development assistance (ODA) directly to the agricultural private sector. These programs range from Venezuela cooperation through ALBA-CARUNA, to the US Millennium Challenge Corporation programs to a rise in International Financial Corporation investments in agribusiness. There is relatively little detail available about these programs in the public sector, suggesting that they are not included as part of the overall public spending planning process. Efforts should be made to ensure that ODA programs channeled off-budget to the private sector coordinate their development work better with the public sector, align with country and sector strategies and publicly report their development results. 2.39. The increased orientation of spending on direct support for private producers (of all sizes) has been somewhat compensated by the rise of public spending on rural infrastructure. The rapid increase in rural infrastructure spending appears to coincide with the acceleration in rural poverty reduction during 2005-09, which was primarily based on pro-poor agricultural growth. During this period, there was an acceleration in rural poverty reduction, both on account of economic growth and higher growth elasticities of poverty reduction. Agricultural growth was able to over proportionally decrease rural poverty. 2.40. The balances between public and private goods provision, agriculture versus rural spending more generally and rise of official development assistance directly to the private sector call for much greater coordination both on a strategic and policy front, in the territories and across agricultural products. Chapter 3 will discuss targeting of public expenditures and review outcomes by territory and by producer welfare and propose some refinements that can help to lay a basis for more effective coordination. 2.41. The high dependence on external resources is reflected in the large fluctuations in subprogram budgets over relatively short periods of time. This suggests that a kind of instability in the policy and program environment that makes it difficult for individual programs to achieve medium and long term goals. Chapter 4 will look at the evolution and results of the specific programs in forestry and food security. 2.42. Finally, sector entities should reduce administrative costs and increase their budget execution rates as a first step to advocating for more resources. Budget execution by PRORURAL institutions is lower than that of general government, and particularly weak in the smaller institutions. Meanwhile administrative costs, in particular personnel costs are high and rising across all agencies. In particular, future capacity building in PRORURAL needs to be carefully planned in each institution on the basis of a sound human resource strategy, and in the aggregate with attention to fiscal constraints. In general, it is recommended that the government closely monitors the functional and economic composition of the public spending in agriculture as another lens to improving the efficiency and expenditures. 3. Targeting, efficiency and distributive impacts of agricu tural public spending 3.1. This chapter looks at the some measures of the effectiveness of agricultural spending in Nicaragua. In general, the role of agricultural public expenditures is to solve those market failures that hinder the optimal use of agricultural resources (natural and otherwise) for production and income generation. Nicaragua today has no state-owned agricultural producers, however the state is involved in research and development, some post-harvest processing, marketing and distribution services, and credit. As such, the main focus of public spending on agriculture is to help the lagging private sector, from patio producers to large exporters, improve their productivity, increase value added and incomes. 3.2. Empirical research across countries has confirmed the intuitive expectation that higher public expenditure in rural areas is strongly associated with higher rural growth (Anriquez 2006).1 But the volume of spending is not all that matters. The impact on growth and poverty reduction of a given amount of public spending is very much determined by how, on what, and where it is spent-in short, on the quality of spending decisions (L6pez 2004; Gordillo, Ortega, and Wagner 2004). 3.3. However, the emphasis given to strategy formulation and planning in Nicaragua is not matched by an equal ability to track spending outcomes. Any robust evaluation of the effectiveness of public spending should be able to link expenditures with outputs and outcomes. However, this review has found that, although institutions in Nicaragua's agricultural sector regularly monitor their outputs, e.g. numbers of beneficiaries, volume of in-kind transfers or technical assistance delivered, systematic tracking of expenditures against outcomes is very limited. The result is that PRORURAL decision-makers are limited in their ability to monitor programs and make adjustments on a regular basis, as 15 Much of the analysis in this chapter is based on a background paper by Professor Gustavo Anriquez of the Pontificia Universidad Cat6lica de Chile. Information on the forestry sector is drawn from the background paper by Hans Thiel of the FAO, and information on food security comes from a paper by Jorge Ortega of FAO. per the sector strategic priorities in terms of beneficiaries, target population, priority areas, and strategic options to help materialize the economic potential of those territories. Chapter 5 goes into more detail on the budget practices and how these can be improved over time to ensure a more robust monitoring of public expenditures in this sector. 3.4. Given these limitations in the data, this chapter focuses on the geographic targeting, sector outcomes, and distributional aspects of agriculture public spending. First, the chapter assesses how the territorial approach of PRORURAL materializes in actual spending patterns. Second it will relate this spending to poverty reduction and productivity outcomes. Finally, the chapter looks at the distributional aspects of agriculture and rural development programs, that is, whether the benefits reach more needy producers and households. 3.1. Geographical targeting of agricultural spending 3.5. Evolution of the territorial approach in PRORURAL. The first version of PRORURAL (2005) used biophysical and socioeconomic criteria to define the target territories. PRORURAL Incluyente (2008) introduced additional criteria to improve territorial targeting with the aim of harmonizing sector policies and focusing national programs in accord with particular characteristics of the territories. The expanded criteria include: biophysical characteristics; infrastructure available to support productive activities; distribution of population and accessibility to basic services; traditional productive activities in the area; distribution of productive activities in the area; territorial distribution and typology of producers, as well as their concentration; and distribution of extreme poverty per municipality. Based on these criteria, PRORURAL Incluyente defined four strategic zones (Table 3.1) and proposed a set of development actions for each zone. Map 3.1: Territories of PRORURAL Incluyente, 2010-14 ZONAS,T-5 TEOICAS Source: MAGFOR 2009 Table 3.1: Territorial approach of PRORURAL Incluyente, 2010-14 Characteristics of territory Location Main development acions proposed by PRO RURAL Incluyente Productive activities Environmental protection Social protection High economic dynamism Leon Promote associotivity of small Preserve the quality of soils, Provide torgeted social and high impact on territorial Quezalguaque producers forests, and water resources protection programs development Chinandego Stimulate intensification end Regulate the use of pesticides Provide hasic services Posoltega diversification of agriculture Promote crop rotation, Promote literacy programs and Chichigalpa Develop agroindustry hosed on reforestation, collection of rain housing programs ElViejo products with high demand in water for irrigation Masaya markets Granada Promote technical education Carazo oriented toward local needs of Parts of Managua and Rivas agriculture and Jalapa, Esteli, Sebaco High economic dynamism Nueva Segovia Promote value chains of Regulate the agricultural Provide targeted social and low impact interritorial Madriz grains, dairy products, hasic frontier, promote agro forestry protection programs development Esteli vegetahles, fruits, cocoa, roots systems, reforestation, high- Provide hasic services Matagalpa tuers, and and coffee value forest plantations Prmtgtrcyporm n Promote literacy programs and BPA Provide for capitalization of Improve processing techniques housing programs RAAN small farmers of dairy products, coffee forms, de Provide BonoPatio for rural Boaco Promote alternative craps with slaughterhouses and workers Chontales market potential (exotic fruits, RoS species, flowers) RioSon Juan Improve rural roads networks Nueva Guinea and milk collecting and San Miguelito processing facilities San Carlos ElCastillo Characteristics of territory Location Main development actions proposed by PRORUIRAL Incluyente Productive activitfies Environmental protedion Social protection Low economic dynamism Dry areas of Esteli, Madriz, Develop agricultural programs Promote reforestation and Provide targeted social with natural restrictions Nueva Segovia, Leon, adopted to the conditions and natural regeneration of forest protection programs to agricultural and forest Chinandego, Motagalpa focased on the potential of the areas Provide basic services activities Jinotego dry corridor, combined with Promote literacy programs and Somotillo small irrigation systems hoasing programs Villanueva Promote agroforestry, soil Provide Bono do Patio for rural San Francisco Libre improvement workers Tipitapa Promotion of plantations of fruits with market potential (avocado, citrus fruits, tamarind, mango) Promote nonfarm economic activities low economic dynamism Protected areas Promote agricalture Promote territorial planning Provide targeted social and high potential for Areas ander forest management diversification with local species incoordination with regional protection programs conservation of nataral and Coastal areas of RAAN Rehabilitate forest coverage autonomous governments Provide basic services resources and forest RAAS Enhance indigenoas commanity Sapport sustainable forest Literacy and education development Alto Coca and Bocay forestry management programs inlocal languages Develop small scale fisheries Implement carbon sequestration Hoasing programs Promote caltivation and Implement payment for Sapport to improve food industrialization of oil palm environmental services production for the families, and rubber inharmony with local forest ecosystems 3.6. Despite the detailed territorial targeting of PRORURAL, outcomes are not tracked at the municipal level. Ideally we would like to compare spending in each municipality, and compare it with productivity and welfare indicators at the municipality level. Unfortunately none of these indicators can be reconstructed with a suitable level of precision at the municipality level -the spending database reveals that spending is not accurately tracked over the beneficiary municipalities. As such, the analysis below of correlations between spending, technical efficiency, poverty levels and poverty reduction is limited to the departmental level 6 .r 3.7. Similarly, welfare indicators, like poverty and per capita spending, cannot be calculated with precision for individual municipalities. The LSMS household survey was designed to be representative at the department level in 2005, but in 2009, the survey sampling framework is not representative at the department level, only at 16 The review computed per capita spending by MAGOR; and PRORURAL spending all four ,by institutions covered in this study) for oil departments ond separately for the sample excluding Managua, since the spending there is artificially inflated by the administrative budget of the heodquarters of the rural institutions. the macro regions (Managua, Atlantic, Pacific, and Center) and urban- rural area level (INEC 2006; INIDE 2011). This means that the precision of an estimator like poverty at the department level is less than +/- 5 percent in 2009. Acknowledging this very large caveat, we still calculate welfare indicators at the department level, but note that small differences in poverty levels between departments should not be considered significant. A new poverty map computed using the 2009 data has recently become available and should eventually be used to reexamine these results. Figure 3.1: PRORUAL Incluyente spending per producer and per hectare, average over 2009-1 1 4.000 350 3.500 300 3.000 250 - 2.500 200 E 2.000 150 2 - 1.500 1.000 1 500 50 0 0 H Spending per ag area (per mnz) H Spending per produaer Source: MHCP and INIDE (IVCENAGRO). 3.8. There are very large variations in spending per producer and hectare across departments. Half of PRORURAL's spending is multi- departmental, one quarter goes to the central level in Managua, and one quarter is spent across departments, but with large diferences among them. Spending per producer went from C$437 (in constant 2005 cordlobas) per producer in Rio San uan, the department with he hghest poverty rates to C$3,675 in Chontales. Spending by hectare of agricultural land ranged from C$19 per hectare in Rio San Juan to C$310 in Estel (see Figure 3.1). 3.9. First, this review investigated whether spending is targeted to areas where technical efficiency is low.17 The department averages are shown in Table 3.2 for all producing households, and for those classified as farms (not including the very small "patio producers"). Ideally, a well- targeted spending program should be biased in favor of those regions that are lagging in efficiency and productivity, in which case the correlation between spending and technical efficiency should be negative. 3.10. There is wide variability in efficiency, and a low average technical efficiency-36 percent for all farming households, and 54 percent for larger farms. This would suggest that large improvements in productivity may not require creation of new technologies and practices. Rather, they can likely be obtained by helping farmers adopt best practices, by making widely available the production frontier available today through extension, training, and technology dissemination. Below we look at how spending may be correlated with the adoption of some of these techniques by department (see para 3.15). Table 3.2: Farm level technical efficiency by department, 2009 Department TE of all households of forms TE Mean Rank Mean Rank Nueva Segovia 0.514 13 0.548 7 Jinotega 0.567 16 0.570 12 Madriz 0.507 12 0.560 8 Esteli 0.503 11 0.570 9 Chinandega 0.386 4 0.471 4 Le6n 0.416 7 0.544 6 Matagalpa 0.493 10 0.570 11 Boaco 0.489 9 0.583 14 Managua 0.246 1 0.454 1 17 This was done by estimating a measure of farm-level technical efficiency (TE) using data from the 2009 LSMS household survey; calculating average technical efficiency of producers in each department; and then testing for correlations between average TE and public spending across departments. Two measures of correlation are calculated-the Pearson correlation (most appropriate if there is a specific functional relationship between variables) and the Spearman rank order correlation (a more appropriate statistic to indicate a relationship between two variables if their relationship does not have a functional form). Department of allhouseholds TE of forms TE Mean Rank Mean Rank Masaya 0.291 2 0.460 3 Chontales 0.340 3 0.633 17 Grnada 0.399 5 0.505 5 Carazo 0.411 6 0.458 2 Rivas 0.410 8 0.570 10 Son Juan Rio 0.547 15 0.598 15 RAAN 0.512 11 0.580 13 RAAS 0.542 14 0.605 16 Source: Anriquez 2012, based on LSMS 2009. Note: Per capita spending as total over 2008 and 2009 per rural inhabitant, expressed in 2005 C$. TE refers to average individual farm efficiency by department. 3.11. PRORURAL spending tends to be higher where technical efficiency is lower, but the correlations are not statistically significant. Table 3.3 reports two simple correlations between per capita PRORURAL spending by department (using population as the denominator) and the average technical efficiency of farms, and larger farms. These estimates are presented including and excluding Managua, which is an outlier due to the fact that much of the spending classified for Managua as a department is for administrative expenses in the capitol. They are also presented for MAGFOR which largely represents the PNA program that embodies most of the producer supports like extension, technical assistance, input transfers and subsidies, and for PRORURAL as a whole which includes programs aimed at agro-industrial development and forestry management. The correlation estimates are negative in most cases, but only statistically significant for all farms when we include Managua, suggesting a weak targeting of spending to those departments were technical efficiency is lower. Table 3.3: Correlation between per capita PRORURAL expenditures (2008-09) and farm-level technical efficiency (2009) Correlation Per capita rural public spending Including Managua Excluding Managua Estimates (2008-09) TE all forms TE larger forms TE all forms TE large forms pc Exp. MAGFOR -0.553** -0.427* -0.062 0.055 Pearson PRORURAL pc Exp. -0.581** -0.393 -0.239 0.148 pc MAGFOR Exp. -0.333 -0.240 -0.200 -0.088 Spearman rank pc Exp. PRORURAL -0.351 -0.083 -0.221 0.100 Source: Anriquez 2012. Note: Significance, * p < 0.10, ** p < 0.05, *** p < 0.01. PRORURAL spending includes budgets of MAGFOR, INAFOR, IDR, and INTA. 3.12. Per capita spending by MAGFOR was positively coordinated with poverty levels in 2005, while PRORURAL spending was negatively correlated with poverty levels in 2009. Table 3.4 presents similar correlations indicators between per capita spending and poverty levels in order to assess whether PRORURAL spending was targeted to those regions with higher poverty rates. Per capita spending during 2004-05 is related to poverty levels in 2005, and again for expenditures during 2008-09 and poverty levels in 2009. As before, we also calculate these statistics excluding Managua. Per capita spending in 2004-05 by MAGFOR was positively and significantly correlated with poverty/ extreme poverty levels in 2005 when Managua is excluded. Conversely, the correlation coefficients in 2009 are generally negative and with higher significance for PRORURAL spending than for MAGFOR only. Table 3.4: Correlation between poverty and per capita spending in 2005 and 2009 regions (2005) Al| Managua (2005) Excl. Correlation Per capita rural public spending Poverty Extreme poverty Poverty Extreme poveqt Estimates (2004-05) pc Exp. MAGFOR -0.369 -0.059 0.458* 0.641*** Pearson pcExp. PRORURAL -0.323 -0.051 0.092 0.234 pc Exp. MAGFOR 0.213 0.424* 0.456* 0.641*** Spearman rank pc Exp. PRORURAL -0.115 0.159 0.062 0.306 regions (2009) Al| Managua (2009) Excl. Correlation Per capita rural public spending Poverty Extreme pove"t Poverty Extreme poverty Estimates (2008-09) p(Exp. MAGFOR -0.479* -0.310 -0.026 0.221 Pearson pcExp. PRORURAL -0.575** -0.421* -0.585** -0.561* p(Exp. MAGFOR -0.309 0.003 -0.171 0.177 Spearman rank PRORURAL pcExp. -0.439* -0.525** -0.321 -0.462* Source: Anriquez 2012. Note: Significance, * p < 0.10, ** p < 0.05, *** p < 0.01. PRORURAL spending includes budgets of MAGFOR, INAFOR, IDR, and INTA. 3.13. A geographic analysis and targeting methodology developed by IFPRI and applied recently to Nicaragua 18 may prove useful in refining the territorial approach of PRORURAL. This analysis characterizes micro-regions along four dimensions: poverty, agricultural potential, average farm efficiency, and market access. This tool, which uses an econometrically rigorous stochastic profit frontier estimation approach, also allows policy makers to prioritize investments in agriculture and rural areas and to target intervention-agricultural extension, for example-to optimize agricultural potential in a given territory or municipality, as part of a broader optimization of overall agricultural public spending. This tool can be particularly useful to help refine the current territorial plan of PRORURAL investments, based on four large areas, to a lower level of planning and monitoring based on similar variables. Annex 4 describes this tool more into detail. 18 (IFPRI; Torero and Haven 2012) Map 3.2: Four key areas and types of public investment suggested for Nicaragua m Areas of high poverty with low potential for agriculture and Areas of high poverty but with high potential for agriculture. significant number of microclimates. Mostly basic staples Key policies in these areas should focus in identifying and subsistence agriculture. Key policies should focus on short resolving major bottlenecks to better use the quality of the term targeted assistance as the use of conditional cash land and optimize its potential. transfers, school feeding, and so on. Areas of low poverty rates with significant potential and Areas with moderate poverty rates and low potential and high efficiency. Given their high performance these regions medium and high efficiency. Despite high efficiency, agri- could be used to learn and replicate from them. cultural potential is low, resulting in high poverty. Policies in these areas should focus on nonfarm activities as a way to increase household income. Source: Torero and Haven 2012. 3.2. Poverty and productivity outcomes 3.14. The review also examined the correlation between per capita spending during 2005-09 by and poverty reduction or the change in poverty levels. Beyond targeting, this review seeks to examine whether those departments which received greater spending levels between 2005-09, also say higher poverty reduction. Table 3.5 presents similar correlation indicators for the same groupings as above. Note that while none of the estimates are statistically significant, all but one are negative, suggesting a weak relationship between more spending and deeper poverty reduction over time. Table 3.5: Correlation of poverty change 2005-09 with average per capita spending 2005-09 All regions Excl. Managua Correlation Per capita rural public Poverty Extreme poverty Poverty Extreme poveot Estimates spending pc Exp. MAGFOR 0.027 -0.082 -0.179 -0.195 Pearson pc Exp. PRORURAL -0.099 -0.158 -0.425 -0.287 pc Exp. MAGFOR -0.248 -0.151 -0.327 -0.165 Spearman rank pc Exp. PRORURAL -0.189 -0.289 -0.285 -0.306 Source: Anriquez 2012 using LSMS 2005 and 2009. Note: Significance, * p < 0.10, ** p < 0.05, *** p < 0.01. 3.15. Relationship between improvements in spending per capita and the adoption of technologies appears to be weakly positive, except for use of fertilizers. Figure 3.2 presents some simple scatter plots of increases in spending per producer between 2002 and 2011, and the improvements in adoption of certain technologies by department as measured by the change in the percentage of producers using a given technology between the agricultural censuses of 2001 and 2011. Points in the upper-right quadrant indicate departments in which there was an increase in both spending per producer and as well in the use of technologies. The relationships are quite weak but generally positive (as indicated by the trend lines) suggesting an association between higher spending and higher adoption. However, in the case of fertilizer it is negative, albeit also quite weak. In general this suggests again that the * efficiency of the spending in terms of long term impact can be improved significantly. Figure 3.2: Increases in spending per producer and adoption of technologies by department, 2001-201 1 Agricultural training &/ tech. assistance (a) Improved seeds (b) 1.500 1.500 *0 * 1.000 0 1 1.000 * 500 * 500 -0 0 0 -500 -500 *0 * . 0e -1.000 * -1.000 -1.500 -1.500 -2.000 -2.000 *-2.500 e-2.500 -3.000 -3.000 -80 -60 -40 -20 0 20 40 60 -15 -10 -5 0 5 10 15 (c)Fertilizer (d)Irrigation 1.500 1.500 ge ** * 0 1.000 0* 1.000 * 500 0 500 _ _ _A 0 0 0 * 0 -500 -500 0 -1.000 0 0 -1.000 0 -1.500 0 -1.500 -2.000 -2.000 -2.500 0 -2.500 -3.000 -3.000 -80 -60 -40 -20 0 20 40 60 -10 -5 0 5 10 Source: Laguna, 2013. Note: The x-axis measures change in percentage of farmers in each department using the stated technology between 2001 and 2011 using data from the both Agricultural Censuses. The y-axis measures the increase/decrease in spending per producer for each department between 2002 and 2011 in constant 2005 cordobas. 3.16. The above analysis suggests that while the territorial approach of PRORURAL has allowed focusing individual programs to specific types of regions, there is significant room for improvement. A cursory review of the various programs inside PRORURAL show clear territorial focus in their design, but when aggregated the spending analysis above shows only weak targeting according to different needs, low productivity, high poverty etc. Better classification of expenditures both by department, or even better municipality, and for the various programming lines of the territorial approach will be needed to have more definitive results. Such classification would allow for better monitoring of the direction of expenditures, their impact and the relative efficiency of the programs. 3.3. Distributive effects 3.17. This section of the review examines household level targeting of the agriculture programs as measured in 2009 using results of LSMS household surveys. The LSMS surveyed households about the benefits they received from specific government programs, and the analysis below tabulates the proportion of beneficiaries in each quintile of the population, with quintiles measured by various indicators of well-being, viz, land holdings, consumption levels, and gender. 3.18. Agriculture and livestock programs19 in 2005 tended to favor larger landowners, but were evenly distributed across rural welfare quintiles. Figure 3.3 shows the frequency of rural households that reported receiving benefits by land ownership and rural income. Benefits are fairly evenly distributed by size of landholdings (with the exception of households with no land) and per capita consumption, suggesting that these programs are not targeted to either poorer households nor to those with less land. For the land ownership, quintiles 2 and 3 are merged as they are all patio producers with an undeclared amount of land less than a quarter of a manzona (0.18 ha). 3.19. In 2009, the Bono Productivo Alimentario participation was dominated by landless households but with larger leakages to larger landowners, and wealthier households. Figure 3.4 shows the distribution of BPA program participants by land ownership and welfare (consumption) quintiles and the distribution of rural BPA participants by welfare. The numbers show that the majority of the participants were from landless households, but there was substantial leakage to the larger landholders. 19 In the 2005 LSMS, households were asked about their participation in programs that promote agriculture, namely land titling assistance programs, agricultural and livestock support programs, and MAGFOR rural credit programs. The prevalence of titling programs in rural areas was very low, and for credit programs was almost negligible, making it hard to derive any robust correlations with socioeconomic characteristics. Figure 3.3: Benefits incidence of the agriculture and livestock programs, frequency of rural households, 2005 Frequency (HHs) Frequency (HHs) 5000 4000 4000 30 3000 20000 20 1 2 3 4 5 1 2 3 4 5 AgriculturalLand Owned Quintiles Rural Welfare Quintiles " Agricultural and Livestock Programs 0 Agricultural and Livestock Programs " erhi/erlo a erhi/erlo Source: Anriquez (2012), based on LSMS 2005 data. Note: Red lines indicate 95 percent confidence interval for each bar. Average land owned by each quintile was 0, 0.18, 4.7, and 77.9 hectares, respectively. For rural welfare, average annual per capita consumption for each quintile in current c6rdobas was: C$3,376, C$5,694, C$8,171, C$12,089, and C$26,418. Figure 3.4: Benefits incidence of the Bono Productivo Alimentario, frequency of rural households, 2009 Frequency (Hs) Frequency (HHs) 20000 12000 ____0000___________ T00 6000 500 4000 2000- 1 2 3 4 5 1 2 3 4 5 Agricultural Land Owned Quintiles Rural Welfare Quintiles a Bono Productivo Alimentario a Bono Productiva Alimentario a erhi/erlo * erhi/erlo Source: Anriquez (2012), based on LSMS 2009 data. Note: Red lines indicate 95 percent confidence interval for each bar. Average land owned by each quintile was 0, 0.18, 4.7, and 77.9 hectares, respectively. For rural welfare, average annual per capita consumption for each quintile in current c6rdobas was: C$3,376, C$5,694, C$8,171, C$12,089, and C$26,418. 0 Figure 3.5: Distribution of beneficiary households by land ownership and welfare quintiles, 2009 Rural credit Sales by ENABAS Land titling Frequency (HHs) Frequency (HHs) Frequency (HHs) 4000 20000 4000 3000 T t 25000 3000 2000 2000 1000 1 1000 t 0 500-0 -1000 0 - -1000 - 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 AgriculturalLand Owned Quintiles Agricultural land Owned Quintiles Agricultural Land Owned Quintiles a Rural Credit a Sales inENABAS m land Titling " erhi/erlo * erhi/erlo * erhi/erlo Frequency (HHs) Frequency (HHs) Frequency (HHs) 4000 5000 8000 T 3000 4000 6000 2000 3000 4000 0 2000 2000 -1000 - 1000 0 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 Welfare Quintiles Welfare Quintiles Welfare Quintiles a Rural Credit a Sales inENABAS m land Titling H erhi/erlo U erhi/erlo U erhi/erlo Frequency (HHs) Frequency (HHs) Frequency (HHs) 4000 2000 4000 T 3000 1500 3000 2000 2000 1000 1000 0- 500 0 -1000 - 0 -1000 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 Rural Welfare Quintiles Rural Welfare Quintiles Rural Welfare Quintiles a Rural Credit a Sales inENABAS m land Titling H erhi/erlo * erhi/erlo * erhi/erlo Source: Anriquez (2012), based on LSMS 2009 data. Note: For agricultural land holdings, only rural households are considered. Average land owned by quintile was 0, 0.59, 1.97, 6.9, and 54.6 hectares. For welfare quintiles, all households are considered and average annual per capita consumption for each quintile in current c6rdobas was: C$5,784, C$9,460, C$13,209, C$18,483, and C$37,623. For rural welfare quintiles, only rural households are considered and average annual per capita consumption for each quintile in current c6rdobas was: C$4,673, C$7,298, C$9,673, C$12,925, and C$22,345. Red caps indicate 95 percent confidence interval for each bar. 0 3.20. The 2009 LSMS covered participation a wider range of programs, including ENABAS sales, government-provided rural credit and land titling programs which are analyzed here (see Figure 3.5). Rural credit programs were clearly targeted to households with larger, but not the largest, land holdings. This resonates with the collateral requirements that apply for prudential reasons. However, it does suggest that these rural credit programs were supplementing access in more traditional, albeit underserved market segments, rather than creating new avenues for poor families to access credit. Land titling programs on the other hand were available to all land holders except those with the largest holdings. Meanwhile ENABAS appears to be targeted toward landless but in general wealthier households. 3.21. Finally we look at the gender incidence of PRORURAL and other rural programs. The analysis of technical efficiency uncovered some important gender differences. Farms led by women are less productive; and among larger farms, farms led by women are less technically efficient on average. Various reasons could explain this gap, including that technologies are generally better adapted to male farmers, or that male farmers may receive more and better extension and education. The gender literature highlights that time constraints, which are gender specific, can explain these productivity differentials: women may have a double or triple burden of farming, household tending, and childbearing. These constraints might explain both less effective time in the field and difficulties in accessing extension and other public services. These results call the attention of policy makers and practitioners in the way they deal and interact with women farmers. 3.22. In 2009, land titling programs and ENABAS sales had a positive gender bias among the poor, which was not found in rural credit programs nor the Bono Productivo Alimentario. To analyze potential gender effects of spending, the review used the household survey data to calculate the benefits received by male- and by female-headed households, and to compare this with the distribution of households in the population. If the percentage of female-headed households among program beneficiaries is larger than in the population we would conclude that the program is biased toward such households, that is, it has a positive gender bias. This analysis was done for both poor and non-poor households. Table 3.6 shows that in 2009, female-headed households were underrepresented among non-poor beneficiaries of the Bono Productivo Alimentario. By contrast, among poor households, there was a strong positive gender bias towards female-headed households in the land titling program and among ENABAS users. However, it appears that credit programs showed a strong bias against women. Table 3.6: Different programs show different gender effects Poor households Non-poor households (1) (2) (2)-(1) (1) (2) (2)- (1) Female % FHH within Female % FHH within beneficiaries headed % Difference beneficiaries Difference headed % Bono Productivo Alimentario 29.9 27.3 -2.60 36.6 21.3 -9.30** Sales to ENABAS 29.9 40.9 11.00*** 36.6 38.8 2.24* Property titling 29.9 54.0 24.11*** 36.6 35.1 -1.45 Rural credit 29.9 13.4 -16.4* 36.6 32.8 -3.82 Source: Anriquez (2012), based on LSMS 2009 data. Note: Significance, * p < 0.10, ** p < 0.05, *** p < 0.01. FHH = female-headed households. 3.4. Conclusions and recommendations 3.23. Ideally, a well-targeted spending program should be biased in favor of those regions that are lagging in efficiency and productivity. Nicaragua has both large variations in technical efficiency across producers, as well as large variations in spending per producer and hectare across departments. While this may reflect the detailed territorial targeting of PRORURAL, it is not clear that these variations are in fact deliberate. For one, the territorial approach of PRORURAL is focused at a variety of different geographic levels. Then, outcomes and even outputs are not tracked in a systematic way across geographic divisions. Similarly, welfare indicators, like poverty and per capita spending, cannot be calculated with precision at the municipal level, nor in 2009 at the department level. 3.24. Notwithstanding these limitations, we find that PRORURAL spending tends to be higher where technical efficiency is lower, but the correlations are not statistically significant. Low average technical efficiency suggests that large improvements in productivity may not require creation of new technologies and practices, but rather the effective dissemination and adoption of existing best practices. The returns on improvements to extension are likely to be especially high, given the findings of this report that so many farmers are so far from the technological frontier. Indeed, we find a positive relationship between spending, poverty reduction and the adoption of new technologies at the departmental. However, these relationships are very weak and point to the need for more explicit targets in terms of spending outcomes across Nicaragua. 3.25. A geographic analysis and targeting methodology developed by IFPRI and applied recently to Nicaragua 20 and a new poverty map for 2009 may prove useful in refining the territorial approach of PRORURAL down to the municipal level. However, this should be accompanied by reforms to ensure that all administrative data for the various programs and programming lines are collected in a uniform way at the municipal level to allow for in time monitoring of spending outputs. Meanwhile survey data such as the next editions of the LSMS and the recent Agricultural Census provide an independent view on spending outcomes. Both these sources of data would combine with new expenditure reports from SIGFA and its forthcoming upgrade to allow a robust monitoring and evaluation. 3.26. In terms of distributive impacts, the review finds an increasing poverty focus of agriculture programs over time but with each program showing large leakages to wealthier households. Agriculture and livestock programs2 1 in 2005 tended to favor larger landowners whereas in 2009, the Bono Productivo Alimentario participation was dominated by landless households but with large leakages to wealthier households. Rural credit programs were clearly targeted to households with larger holdings whereas land titling programs were available to all land holders except those with the largest holdings. ENABAS appears to be targeted toward landless but in general wealthier households. Gender incidence was mixed. In 2009, land titling programs and ENABAS sales had a positive gender bias among the poor, which was not found in rural credit programs nor the Bono Productivo Alimentorio. 20 (IFPRI; Torero and Haven 2012) 21 In the 2005 LSMS, households were asked about their participation in programs that promote agriculture, namely land titling assistance programs, agricultural and livestock support programs, and MAGFOR rural credit programs. The prevalence of titling programs in rural areas was very low, and for credit programs was almost negligible, making it hard to derive any robust correlations with socioeconomic characteristics. 3.27. However, these varied results on beneficiary incidence suggest that there is scope for major improvements in the targeting of agriculture and rural development programs. It is recommended that explicit targeting strategies are put in place that take into account trade-offs between delivery costs and leakages for each program and between programs that focus on similar beneficiary groups. Clear eligibility criteria, which target those most in need and which are in line with the objective of the programs, are crucial, but also continuous monitoring to minimize leakages to ineligible beneficiaries. Strengthening and harmonizing the administrative data collected on beneficiaries across the various programs will help PRORURAL decision makers find ways to achieve greater efficiency. Finally, the government should ensure continuity in the use of the periodic LSMS to monitor program participation as an independent source of information on beneficiary incidence. ** 4. Specia Focus: Forestry and Food Security Pub ic Spending 4.1. This chapter includes two areas of special focus, which were requested by the Government of Nicaragua and the group of donors of PRORURAL: public spending on forestry and on food security. 4.1. Aligning incentives inthe forestry sector 4.2. Approximately 30 percent of Nicaragua's area is covered by forests. Of that share, 98 percent are natural forests and only 2 percent are forest plantations. A third of the natural forests are within protected areas, and 80 percent are on the Caribbean coast within the management of the Autonomous Regions. Almost half the forests are in the possession of indigenous communities, while 35 percent are held by private owners. 4.3. ... yet the forestry sector contributes only 1 percent of GDP. Silviculture has occupied 1.2 percent of GDP in 2006 and has remained relatively stable since. However, wood products have been declining as a share of industrial production from 3.8 percent in 2006 to 2.1 percent in 2012. 4.4. The economic potential for the forestry sector is expanding rapidly. After declining steadily from US$1 8 million in 2002 to US$5 million in 2009, exports of wood products (including sawed wood) have increased sharply through 2011 to reach US$12 million. In 2012, this increase was moderated a bit with exports of US$1 1 million. Meanwhile, Foreign Direct Investments (FDI) in the forestry sector has grown almost seven-fold during 2008-10, albeit from a low base. Global consumption of tropical hardwood products is expected to remain stable, while the supply of tropical hardwoods has been declining over time and it is estimate that current plantation establishment efforts will only partly meet demand in the future. 4.5. Deforestation and forest degradation represent the leading environmental problem in Nicaragua. Annual deforestation rate is calculated around 76,000 Ha/year2 2 . The country has lost more than 20 percent of its forest cover since 1990, mainly the result of (i) clearing for agriculture and cattle grazing, (ii) forestfires, (iii) environmental emergencies due to natural disasters (hurricanes, mud slides, flooding, drought, forest plagues), and (iv) logging, both legal and illegal. The continued expansion of low-productivity, slash-and-burn systems across the agricultural frontier eastward the country - the place of the largest forests and protected areas - is increased by social pressure over natural resources by poor families without land, and settlers' invasions of indigenous territories and protected areas. Nearly two million hectares are being overused by farming activities across the country. In terms of potential use or land use change, it is estimated that agriculture has seized approximately 40 percent of forest soils. 4.6. In addition, Nicaragua has high costs of legally produced wood compared to other Latin American countries. There is a large variance among the administration of user rights and the levels of forest fees in Latin America. However, the cost of a legally produced cubic meter of wood in Nicaragua is about $20 (Del Gatto and others 2006) compared with $13-16 in Ecuador, Guatemala, Mexico, and Peru. The combination of lower economic returns caused by competition from illegal exploitation, privately administered users rights (that diverge from public policy) and high transaction costs for licensing and forest approval processes creates high opportunity cost of sustainable forest management, and in turn contributes to deforestation and forest degradation. 4.7. The National Forest Program (PNF) was established to promote sustainable forest management among indigenous communities and small producers while reducing deforestation and increasing forest exports and forestry's share of GDP. The Forestry Law 462 of 2003 established INAFOR with responsibility for forest resource management outside protected areas, and the Ministry of Environment and Natural Resources (MARENA) for forests within protected areas. Forest regulation and sustainable forest management activities in the two Autonomous Regions of the Caribbean Coast (RAAN and RAAS) are undertaken by INAFOR and MARENA in close coordination with the Offices for Natural Resource Management 22 Nicaragua (Reduced Emissions from Deforestation and Forest Degradation): REDD Readiness Preparation Proposal prepared by the Ministry of Environment and Natural Resources (MARENA, a *March 2013). at both Regional Autonomous Governments. INAFOR also manages the National Forest Development Fund (FONADEFO), an autonomous body created to manage incentives and assign financial resources to small projects. FONADEFO is funded by a portion of fees and fines collected by INAFOR out of forest activities in areas other than the Autonomous Regions, as well as by donor projects. Also, INAFOR established and supervises a national system of forest regency that is run by certified regents (independent foresters) who are responsible for preparing and overseeing sustainable forest management plans. The Forestry Law also established the various fiscal incentives for the sector including tax exemptions for individuals and companies that invest in forest plantations or public institutions that buy goods made with certified wood. Law 585 establishes rules for the commercial use, including exports, of certain wood species and different requirement for processing. 4.8. As shown in Table 4.1 below, there is a broad set of fiscal incentives to forest activities, especially in the field of forest plantations. Their effectiveness, however, is questioned by the fact that, between 2003-2009, only US$160,000 in exemptions were approved, and only 14,000 Ha of reforested lands benefited from this fiscal framework under Law 46523. Several sources in the forest sector point at low institutional capacity to enforce this aspects of the Law, and a number of bureaucratic measures that prevent forest investors to take advantage of the incentives. Also, it is recommended to reconsider the validity of incentives (10 year after the Law was approved) and count the period starting from the first year of investment. Table 4.1: Fiscal Incentives for forest activities under Law 462 Type Description Fiscal incentive or Exemption of 50 percent of the Municipal lax on soles, and 50 percent of the Income lax exemption over forest plantations established during the first 10 years of the Law Fiscal incentive or Exemption of the property tax of the areas with forest plantations or under forest exemption management, during the first 10 years of the Law Fiscal incentive or Recognize as an expense inthe Financial Report subject to Income lax calculations, the 50 exemption percent of the total amount invested inestablishing forest plantations 23 Thiel, Hans (September, 2012): Public spending in the forest sector of Nicaragua 6 Type Description Fiscal incentive or Exemption of payments for introduction to the country of any imported machinery, exemption equipment, and accessories required to improve technologies intimber processing, excluding saw mills. Price incentive Public institutions to prioritize intheir procurement, acquisition of goods that were elaborated with Wood that holds forest certification by INAFOR. Overpricing of up to 5percent isallowed ifcompared with other bidders. Fiscal incentive or Exemption of up to 100 percent of Income lax for persons or firms when the amount is exemption allocated to promote reforestation or creation of forest plantations. Note that fiscal incentives established in the Forestry Law 462 will expire in October, 2013 4.9. There is little evidence to suggest that the logging ban law (Law 585, June 2006) has reduced the high deforestation rate or the illegal use of forestry resources. In 2006, the Government established the ban for 10 years on new permits for logging mahogany, royal cedar, bombox (pochote), pine, ceiba, and mangrove, which are all considered endangered. The military have been engaged to enforce the ban and police known smuggling routes, however, there is little evidence about its success. Enforcement and monitoring of government approved logging is weak and it is estimated that about half the timber trade is illegal. 4.10. The Community Forestry Program, the National Reforestation Crusade, and the prevention of forest fires are the best- performing components of the PNF, according to the Mid-term Evaluation of PRORURAL incluyente. INAFOR reports approximately 80,000 Ha of reforested areas since 2010; more than 23,000 Ha are under Forest Management Plans, and some 35,000 Ha are being managed under Forest Use Plans (for areas affected by recent Hurricanes). In close collaboration with private producers, INAFOR has collected some 6,000 kg of certified forest seeds and has helped produce more than 30 million of saplings for the National Reforestation Crusade which mobilized some 477,000 students. In addition to this, approximately 37,000 families participate in the Community Forestry Program. A noticeable outcome of INAFOR's approach to involve as many institutional and local players in its activities is the sharp reduction in forest fires which decreased from 13,000 Ha in 2010, to 2,200 Ha in 2012. 4.11. Public spending in the forestry sector is lower per unit of forested area in Nicaragua than in other Central American countries. According to FAO's Global Forest Resources Assessment 2010, for Central America the average is $7.31 per hectare of forest, against Nicaragua's $1 .10. Costa Rica, with more than a decade of payments for environmental services to forest owners, reports the highest value ($14.60 per hectare) followed by Guatemala which also operates a major program of forestry incentives at $4.10 per hectare. Other countries in Latin America have adopted different means of ensuring adequate public resources for this sector (see Box 4.1). Box 4.1: Budget allocations for forestry across Latin America In Honduras, the national forest authority, National Institute of Forest Conservation and Development, Protected Areas, and Wildlife, was created in 2008 an independent, decentralized entity with broad technical, administrative, and financial powers. The institute has two major sources of funding: the Forest Reinvestment and Plantation Development Fund which must equal 1 percent of general budget revenues; and the Fund for Protected Area Management and Wildlife, established through an initial public contribution of about $3 million. In Argentina, Law 26.33 1 created the National Program for Protection of Native Forests, with an annual budget of no less than 0.3 percent of the national budget and fed by 2 percent of the total export tax of primary and secondary products from agriculture, livestock and forestry. In Costa Rica, Law 7575 established financial and institutional mechanisms to make possible the payment for environmental services for forest conservation. Since the law was enacted in 1997, the Ministry of Finance has channeled $133 million through FONAFIFO, 86 percent of it for protecting natural forests. Almost 60 percent of these resources were generated nationally through payments of environmental services and excise taxes of hydrocarbons), while the other 40 percent was contributed by external donors. 4.12. In Nicaragua, forestry's share of total public spending has fallen in the last 10 years from 1.3 percent to 1.0 percent. Through 2005, INAFOR spending depended mainly on the Treasury. An increase in public spending in 2007-08 reflects large donations received in response to Hurricane Felix in September 2007. From 2009, INAFOR spending declined, mostly caused by decreased treasury resources. The AOl for the forestry sector average 0.25 for 2006-1 1 and compares with 0.28 for agriculture during that period. Figure 4.1: Agriculture Orientation Index for Forestry, 2002-1 1 0,10 0,60 0,50 0,40 0,30 0,20 0,10 0,00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 " PRORURAL H Ruralspending * Forestry Source: BCN and author's calcuations. Figure 4.2: Sources of funds, INAFOR, 2006-1 1 (left) and 2005-09 (right) 100% 100% 80% 80% 60% 60% 40% 40 20% 20& 0%- 0% 2006 2001 2008 2009 2010 2011 0 CD C g; " Forest revenues a External donations " External loans Transfers from Treasury U External Funding H Domestic Funding Source: Statistical newsletter INAFOR 2009; Thiel 2012. 4.13. Nicaragua has seen a significant shift in the sources of public funding for the forestry sector from neutral to non- neutral financing. External cooperation has averaged around 60 of sector financing since 2002 but with large fluctuations. Donations peaked in 2008 in response to Hurricane Felix in 2007 but returned to more stable values thereafter. Meanwhile, INAFOR's allocations from the treasury declined over 2006-1 1 but have been partly replaced by forest revenues which rose from zero to 15 percent over the same period. 4.14. The larger share of resources raised from user fees and charges versus general revenues and donor cooperation has important implications for sector expenditure management. User fees and charges are meant to influence producer behavior, but if the associated public services (enforcement, certification services, R&D, and technical assistance) are not adequately financed, the result may be perverse incentives for producers and forest outcomes. Figure 4.3 shows the distribution of forestry sector revenues. Given the high share of illegal logging in Nicaragua, the small share of fines to user rights and auction fees suggests that enforcement is relatively weak. As stated above, competition in the marketplace from illegally-extracted wood products further raises the opportunity cost for those producers that are complying with the law and paying the required fees and charges. 4.15. A weakly enforced ban combined with increasing user fees and charges may simple be raising rather than lowering the incentive for producers to remain in the black market. Thiel (2012) suggests that the collection of user fees and other costs for legally producing timber affects mainly small landowners, communities and operators. More broadly, users cite cumbersome procedures and very long waiting times for permits as a larger disincentive to be legal than their costs. Figure 4.3: Distribution of forestry sector revenues by type 11% 4% 41: Fines 12% 4 Others S User rights Auctions 73% Source: INAFOR; Thiel 2012 4.16. Over the last decade, INAFOR has concentrated spending primarily on conservation and reforestation, but in the last five years it has shifted significant resources to "governance and institution building". Table 4.2 shows a shift from less than 2 percent of spending on the latter in 2002, to around 46 percent in 2011. This could suggest that enforcement is receiving more attention but without precise and improved accounting for the various functions of INAFOR it is difficult to draw such a conclusion firmly. Table 4.2: Functional composition of PNF, 2002, 2007, 2011 (%of program spending) 2002 2001 2011 Forestry industry and trade development - 2.6 - Forestry knowledge generation and mtg 4.0 6.8 Governance and institutional strengthening 1.8 54.8 45.6 Forest management and conservation 23.2 33.1 21.4 Reforestation and forest restoration 15.0 5.6 26.2 Source: MHCP and INAFOR; Thiel 2012. 4.17. Meanwhile, INAFOR has also experienced a significant reduction in capital spending similar to PRORURAL in general, partly due to changes in accounting practices. Table 4.3 shows the decline in capital spending from 18 percent to 4 percent of INAFOR spending from 2006-1 1. Personnel costs continue to dominate spending and have risen from 44 to 58 percent of INAFOR's budget during 200611. Table 4.3: Economic Composition of INAFOR Spending, 2006-1 1 (% of budget) 2006 2007 2008 2009 2010 2011 Capital 18% 18% 1l% 13% 1% 4% Current 82% 82% 83% 87% 99% 96% 4.18. Despite suffering from a lack of resources, the Nicaraguan Forest Institute (INAFOR) continues coordination with other institutions and stakeholders to improve program implementation, transparency and reduce corruption. INAFOR activities are improving forest governance in the territories, bringing many key stakeholders to the newly created Groups of Forest Governance (GOFOs) where the main issues are discussed and public programs are presented. These local platforms have proven an effective means to improve coordination with local authorities and other local players. Although many challenges remain, it is worth mentioning the first step towards a custody chain of the wood that is extracted under forest management plans and the tracking of illegal logging in coordination with municipal, indigenous, police and military authorities. Regarding local dialogue on promoting sustainable forest management practices, the GOFOs platforms, such as the RAAN Consultative Forest Committee, are an effective channel used by INAFOR. As demonstrated in the case of community forestry, reduction of forest fires, and the National Reforestation Crusade, the broader engagement of a number of local players has been a key element and a success factor of INAFOR's work in a context of limited resources. With the end of the legal period for forest incentives under the Law 465 in October 2013, the sector will have the opportunity to review and adjust the administrative burden of the current incentives regime. Also, a review and adjustment of the forest ban should be considered on the basis of different socio-economic studies per territories and types of forest species. In addition to this, MARENA and INAFOR are currently leading a country level effort to prepare a National Strategy on Avoided Deforestation (ENDE) which would include the particular country strategy on reduced emissions from deforestation and forest degradation (REDD+). The ENDE will be based on a sound analysis of the causes of deforestation and of the strategic options to reduce it based on past lessons and a review of the public policies and productive models that are influencing the deforestation rate. 4.19. The impact to date of spending on sector conservation/ reforestation outcomes seems marginal. While the share to reforestation has been rising, in the last few years, the rate of reforestation has remained static at around 15,000 ha per year. Meanwhile, the government has granted only US$163,000 in exemptions and incentives during 2007- 11 resulting in the reforestation of only 13,000 ha and around 20,000 ha of certified plantations and natural forests. Likewise, public spending on forest management for conservation has been on the rise since 2008, but the areas under forest management plants has generally been declining. Figure 4.4: Expenditures in forest management and conservation/restoration and reforestation in relation to the respective approved areas/accomplished and burned -bars (Thousands of USD) ha 1.600 50000 1.400 45000 40000 1.200 35000 1.000 30000 800 -25000 600 -20000 15000 400 - 10000 5000 2008 2009 2010 2011 0 2007 m Spending inForest Management Conservation under Forest Management Plans Area " Expenditure inReforestation Reforested U Area * FONADEF spending Source: INAFOR Annual Report 2011, FONADEFO; Thiel 2012. 4.20. Payments for extraction are distributed among communities and the treasury. MAGFOR periodically sets the payment per cubic meter of extracted round wood from natural forests. The current payment is 6 percent of the selling price, of which 35 percent goes directly to the municipalities where the wood is extracted, 50 percent to the FONADEFO, and the remaining 15 percent to the Treasury. In the Autonomous Regions, these payments are evenly divided between the indigenous community where the resource is extracted, the municipality, the regional council or regional government, and the national treasury. While this distribution appears equitable and in line with decentralization principles, because the resources are so small it may also be diluting potential impact overall if coordination is not effective and if each stakeholder group has to invest a minimum in fixed costs. 4.21. In terms of territorial distribution however, per ha spending appears relatively equal across regions except for the smallest districts (in terms of forest cover) where fixed costs dominate (see Figure 4.5). Eighty percent of forestry spending cannot be assigned to a geographic forestry district, while the other 20 percent analyzed by spending per forested hectare are relatively similar across forest districts. Figure 4.5: Annual expenditure by forest area and forest district, 2007-201 1 1.600 4,0 1.400 3,5 1.200 3,0 S1.000 2,5 800 2,0 - 6001, 400 1,0 200 0,5 0 U -- 0,0 Distritos IyII Distrito IX Distrito VIII Distrito X Distrito III Distrito V Distrito IV Distrito VII (RAAN) (RAAS) (Matagalpa, (Rio San Juan) (Nueva (Rivas, Carazo, (Chinandega, (Chontales, Jinotega) Segovia, Esteli, Granada) Leon) Boaco) Madriz) a Forest area (inthousands ha) * Annual spending (USD/ha) Source: INAFOR; Thiel 2012. 4.1.. nuinsadrcmmnain 4.22. Public spending on the forestry sector remains comparatively low in Nicaragua, both in comparison to other countries in the region, but also in relation to the sector's economic importance, and to the environmental risks. The growing economic potential from Nicaragua's tropical hardwoods (rightly called precious woods) will further raise these risks if forest management is not improved rapidly. These risks are also amplified by the fact that much of these hardwoods are located in regions of the country with the highest levels of poverty and that are on its productive frontier for other agricultural activities like cattle farming. Finally, Nicaragua's extraction regime is relatively costly both in terms of user fees and bureaucracy. These combine to create a perfect storm that has yielded deforestations rates of around 76,000 Ha per year and a timber extraction sector that is estimated to be half illegal. 4.23. In this context, it is recommended to (i) improve both levels and quality of spending on the sector; but also to (ii) rationalize the incentive structure. Public spending on forestry has been heavily dependent on general revenues and donor financing in the past. In recent years, the move toward more own revenues is positive. Still, the revenues collected for user rights looks to be too low relative to the resource requirements and skills needed to promote sustainable forest management. However, if these public services (enforcement, certification etc) are not provided effectively in tandem, the incentive for legal extraction will continue to deteriorate. Higher fees combined weak enforcement, and cumbersome bureaucracy will continue to increase the incentives for illegal logging rather than deter it. In addition, it appears that forest user fees are distributed too thinly across the required stakeholders to maximize impact on forest management, particularly in the Autonomous Regions where there are four levels of government each with its own share. 4.24. INAFOR has increased its share of spending on governance and institution building in recent years. However, current accounting practices do not allow to fully disaggregate into resources for administration, enforcement, etc. INAFOR has also increased spending on conservation and restoration, but the impact to date is small and uncorrelated with levels of spending. 4.25.The following are some recommendations to improve the quality of public spending on forestry sector. 4.26. Improve the current accounting practices in line with SIGFA so that efficiency of expenditures can be monitored more carefully. To do this the planning processes for INAFOR and forestry institutions needs to be aligned with budget practices in SIGFA. This is particularly critical to evaluate the costs of delivering effective enforcement and public services in forest management. For example, until the accounting practices are improved it will be impossible to tell whether the distributions of forest user fees are in fact being distributed too thinly and to propose more efficient methods for coordination and consolidation. 4.27. Consider increasing general revenue funds and continue to mobilize external resources for forest management. This type of neutral financing will be critical to support the improvements in enforcement and producer services while the impact of user fees and other incentives 0 gradually take force. Nicaragua has the opportunity to access several emerging international climate funds. These can help to supplement scarce general revenue resources in the short to medium term. However, given the economic and social potential of the forestry sector, Nicaragua should also consider increasing the share of public resources to this forest management over the medium term. 4.28. Concentrate public spending in the short run on improving the effectiveness of enforcement tools, better trained people, enhanced territorial governance, and severely punish predatory and illegal exploitation. Weak enforcement creates a whole host of perverse incentives in the sector and reduces the effectiveness of all other public interventions to promote sustainable management - for the private sector and at the community levels. Ensuring adequate spending on enforcement, and monitoring the impact should be a first priority for future expenditure policy decisions in this sector. 4.29. Evaluate and rationalize the incentive structure. The complex- and at times internally inconsistent-incentive structure for private investors needs to be holistically evaluated and rationalized. The negative incentives of charges, auctions, and fines should be reviewed to ensure that public resources are put to their highest-value use through a transparent system of pricing, and fines openly administered to reflect the degree of violation. Incentives should be designed to encourage activities that produce positive environmental or economic externalities in the most efficient way possible (which as a general principle argues against ad hoc exemptions and exonerations) and should impose a minimal bureaucratic burden. 4.30. Increase public capacity to accompany incentives. The law establishes a wide range of incentives and tax exemptions for forestry, but they are not supported by the needed skills and resources of public management. Public institutions should have additional resources and capacities to make these incentives more viable in a framework that produces an attractive investment climate. 4.2. Tackling food security and nutrition 4.31. In 2006, Nicaragua shifted the focus of its agricultural spending toward food security and sovereignty. This shift involved three main emphases - (i) food production, (ii) food distribution to vulnerable groups; and (iii) market interventions to foster import substitution and reduce price volatility. It also included improvements to food security and safety services, and a broader program of nutrition education. The shift was epitomized by the introduction of a new flagship program PPA aimed to "capitalize" poor households to improve subsistence agriculture, a large school-feeding program, and new food aid and food for work programs. 4.32. From 1995-2006, Nicaragua had halved its levels of hunger or undernourishment (Figure 4.6) with the sharpest drop (19 percentage points) in Latin American, but it still suffered more than three times the regional average. In addition, there remained however large disparities across regions from Rivas and Managua at just over 10 percent, to Jinotega at just under 40 percent. Figure 4.6: Prevalence of hunger or undernourishment in Latin America and the Caribbean (0) 60 50 40 30 20 10 0 m 1995-1991 0 2006-2008 Source: FAO; Ortega 2012. 4.33. Then, between early 2006 and 2008 global food prices increased dramatically, by an annual average of 23 percent. After the second half of 2008, Nicaragua continued to experience amongst the highest food price increases in the Latin American region. Global trends in food prices were compounded by natural disasters in Nicaragua that dramatically affected domestic food production. 4.34. The food price crisis affected the poor disproportionately and is estimated to have slowed poverty reduction over the period. In Nicaragua's rural areas, two-thirds of the poor's income is devoted to food (Cranfield and others, 2007), while the urban extreme poor have limited alternative food sources. It is estimated that without the food price crises in 2008-09, rural poverty in Nicaragua could have declined by a further 1 to 4 percentage points. Figure 4.7 reports the results of simulations of three different price increases including a 10 percent rise in the price of basic foods, actual changes between 2005-07 and between first quarter 2006 and first quarter 2008. In Nicaragua, 90 percent of households (in 2009) were net consumers of food. As a result 91 percent were worse off as a result of the increase in food prices, and only 9 percent could have been said to have benefited from the higher prices (Robles and Torero, 2010). Figure 4.7: Simulated effects of the food price crisis on poverty in Nicaragua (% increase in poverty). 12 -105 10. 10 - 8 1.7 6 - 5.5 4.2 4.2 4- 2.5 2 2.2 4 14 0 -- Simulation 1 Simulation 2 Simulation 3 m Rural m Urban a Total Note: "Simulation 1" = 10 percent increases in the prices of wheat, rice, dairy products, maize, sugar, beef and poultry; "Simulation 2" = actual changes between 2005 and 2007 in the prices of wheat, rice, dairy products, maize and poultry; "Simulation 3" = real change between the first quarter 2006 and the first quarter of 2008 in observed consumer prices of rice, corn, bread, wheat-based items, and other grains, beans, roots, vegetables and fruits; meat, fish, and dairy; and other food. Source: Ivanic and Martin, 2008 (simulations 1 and 2); Robles and Torero, 2010 (simulation 3) 4.35. Nevertheless, between 2007 and 2012, Nicaragua appears to have continued to make progress on improving its food security. Figure 4.8 shows the distribution of food security as measured * by the World Food Program across municipalities for 2007 and 2012. A generally lighter map indicates improvements mainly in the Central and Pacific regions, but also in selected municipalities in the Autonomous regions. Figure 4.8: Food insecurity for by municipality 2007 (left) 2012 (right), darker red =more insecure LEGEN Caribbea,n 540 Source: World Food Program (Nicaragua Country Program 2008-12, 2013-18) 4.36. Then in 2012, Nicaragua was rated as a "moderate performer," on the Economist Intelligence Unit's Global Food Security Index, 6 9th among 105 countries globally and the lowest in in Latin America. Nicaragua scored well on nutritional standards, food safety, import tariffs, stability of production and access to financing. The main weaknesses are reported in in agricultural infrastructure, micronutrient availability and public expenditure on agricultural R&D (Tab e 4.4). Table 4.4: Nicaragua's strengths and weaknesses on the Global Food Security Index Stren reater than 5) Nutritional standards 100.0 Food safety 90.1 Agricultural import tariffs 85.0 Volatility of agricultural production 18.0 Access to financing for farmers 75.0 Moderate (25-75) Proportion of population under globol poverty line 66.1 Diet diversification 50.9 Food consumption as a share of household expenditure 41.2 Sufficiency of supply 39.8 Political stability risk 27.8 Protein quality 27.3 Presence of food safety net programs 25.0 Weaknesses (less than 25) Agricultural infrastructure 20.4 Micronutrient availability 17.0 Public expenditure on agricultural R&D 12.5 Gross domestic product per capita 4.8 Source: Economist Intelligence Unit 2012. 4.37. In 2009, a new Food and Nutrition Security and Sovereignty Law (SSAN 693) was approved. The law embodied a number of objectives on food security, nutrition and food sovereignty, at different levels of specificity: (i) improve domestic food production with an emphasis on promoting small enterprises; (ii) alleviate poverty and hunger by improving access to employment and productive resources; (iii) raise access to safe, healthy and culturally acceptable food; (iv) establish education in good nutritional and environmental practices; (v) reduce micronutrient and protein-energy deficiencies; (vi) guarantee food safety and standards; (vii) promote inter-sectoral and inter-institutional coordination. 4.38. The Government introduced a very wide range of programs and institutional arrangements, which also created some challenges for coordination. The Law 693 provided the Government with a strong mandate, making it easier to channel budgetary resources to these objectives. It also raised the importance of food and nutrition security in international cooperation. This program was to be implemented by MAGFOR, the Ministry of Health (MINSA), the Ministry of Education (MIDED), and MARENA. 2 4. However, the wide number of program and institutions involved in implementing different aspects of the program brought deep challenges in terms of coordination, monitoring of outputs, and evaluation of impact. Table 4.5: Food and Nutrition Security and Sovereignty Programs Public institution Programs (MAGFOR, PRORURAL, of PROIRURAL: PNA strategic pillar of food security, which includes the following programs: INAFOR) IR,INTA, Productivo Alimentario * Progranma * Programa Alimento Semilla (PAS) (now called Cristiano Solidiario orCRISSOL) * Food and Nutrition Security Program (PSAN) productive pillar that aims to increase production of PAS PNAIR: beneficiaries. MINED * Integral School Nutrition Program (PINE) and Nutritional Programs (different actions) * Food MARENA * Actions of protection and management of natural resources (particularly water resources) MINSA * Health and Nutrition Community Action Program (PROCOSAN) * Integrated Support Systems inLocal Health Care (SIiAI) * Health and Nutrition Primary Care(PMSS) * Vaccines and other Promotion, Prevention, Education and Communication inHealth Programs MIFAMILIA Care * Comprehensive Child Program(PAININ) SINAPRED * Planning, coordination, prevention and repair oriented to food and nutrition security PRESIDENCIA * Executive Secretariat of SESSAN Source: Ortega 2012. 4.39. Within PRORURAL, the Programa Nacional de Alimentos (PNA) was established with three subprograms: Productive Food Program (Programa Productivo Alimentario, PPA), the Government's flagship food security program which is also referred to as the "Bono Productivo", provided an initial set of productive assets to around 100,000 households during 2007-1 1. Earlier iterations of the package of assets included livestock, which were later expanded to an offering of a larger number of different packages. 24 The Ministry of Family, Youth and Children (MIFAM), the National System for Prevention, Mitigation and Alertness to Disasters (SINAPRED) and the Executive Secretariat of SESSAN, under the Presidency of the Republic, are not explicitly mentioned in the Law but are included in this review. * Food Security and Nutrition Program (PSAN) includes program of food aimed to help poor households that depend on degraded natural resources for their food security to shift to more sustainable livelihoods. Under the WFP program 2008-12, food aid was provided to around 30,000 people per year in the form of food for work and food for training to stimulate reforestation, soil and water conservation in areas of extreme vulnerability Nueva Segovia and Madriz. In the new iteration, beneficiaries are selected on criteria developed with the local partners and committees and are intended to be mainly food- insecure households, landless families, families headed by women and subsistence farmers with less than 1 ha of land. 2 5 * The Agro-Seeds Program (Programa Alimento Semilla, PAS) was established in 2007, to distribute certified seeds to small farmers in targeted areas. The program distributes a technological package of certified seeds, fertilizers, and training and technical assistance to qualified beneficiaries as credit from a revolving fund. The inputs are valued at market-prices and are reimbursed with in-kind or in cash at the end of the agricultural cycle. This program has been implemented both by MAGFOR and IDR (as part of the PNAIR). 4.40. Some progress has been made on most of the targets set out in the PNA, but these fall far short of the goals that were set in 2008. Table 4.6 lays out the very ambitious objectives of PNA that were set out quantitatively in terms of employment, production, family benefits and poverty in general. While there has been progress in terms of most of the stated goals, it has been much more tempered than originally anticipated. Agriculture value added and exports have grown somewhat faster during 2006-12 than 2002-05. But value added for domestic production has fallen and food imports (whose decline could be used to measure import substitution broadly) have grown. In terms of production volumes, basic grains and poultry have grown a bit faster in 2006-12 than in the previous period, while volumes of meat slaughtered has declined faster. The most dramatic increase in production was in eggs. Relatedly, job growth and poverty reduction have improved but also at more modest pace than was intended. 25 From WFP, community organizations, local governments and non-governmental organizations will provide tools, seeds, fertilizers and technical assistance. Participants will receive a family ration of cereals, beans and vegetable oil for 60 days that will provide 65 percent of the average daily wage. Table 4.6: Objectives and Results for PNA Targets included inPNA 2008 2002-05 2006-12 300,000 more direct, new and permanent employees Changes inmethodology in2010 do not allow aconsistent series 300,000 more indirect employees 2001-09 18,900 new jobs 2010-1150,500 new jobs 80% in Growth in Increase production by (2002-05) (2006-12) value or US$500-600 million/yr * Agri value added * 4.4% per year or 14% intotal * 2.1% per year or 17% intotal invalue added * o/w for dom cons * 2.0% per year, or 6.2% intotal * -0.5% per year, or -2.8% intotal 80% in Increase production by Growth involumes of: volume * basic grains * 2.7% per year or 14.0% intotal * 2.5% per year or 16.0% intotal * meat slaughtered * -0.2% peryear or -0.6% intotal * -0.7% per year or -4.4% intotal * poultry * 5.7% per year or 24.9% intotal * 4.1% per year or 27.3% intotal * eggs * -5.6% per year or -1.4% intotal * 2.9% per year or 18.8% intotal Export growth: US$400m/yr Growth inagricultural exports Average $52 million per year Average $73 million per year ($208 million total) ($440 million total) Increase inefficient import Growth of food imports Average $36 million per year substitution of US$200m/yr ($181 million total) At least 1 million people lifted out of poverty Marginal increase inpoverty between 2001-05 230,000 people moved out of poverty between 2005-09. At least 350,000 beneficiary households per year data available. No Onaverage 115,000 per year, excluding emergency benefit recipients of PSAN Source: PRORURAL PNA (2008), BCN 4.2.3..Puli sedn infood seuiy 4.41. In line with the shift in strategy, public spending on food security increased significantly during the 2008-09 food price crises and has remained relatively high since (Figure 4.9). Between 2002-05, and 2006-09, spending on food security across the public sector increased by around 43 percent. That amount has declined only slightly in recent years. The main increases are due to an expansion both in PRORURAL and in school feeding programs in MINED and MIFAN. It should be noted that these spending aggregates do not include the operations of the National Food Trading Company, ENABAS. * ** Figure 4.9: Public spending in food security by Figure 4. 10: Food security in key ministries ministries, annual averages, 2005 C$ million (% of ministry spending) 2002-11 600 40 500 30 300 20 200 10 100 S0- 0 2002-2005 2006-2009 2010-2011 MIFAMILIA PRORURAL MINEDMINSA SINAPRED " SESSAN MIFAM U 2002-2005 " SINAPRED E PRORURAL 0 2006-2009 * MINSA E MINED U 2010-2011 Source: MHCP; Ortega 2012 4.42. PRORURAL has implemented approximately 42 percent of total public spending on food security. The remainder was increasingly dominated by the MINED and MIFAM programs in the education sector which combined account for 55 percent of the food security spending. 26 For these ministries, food security spending also represents an increasing share of budgets. In particular, MIFAN moved from spending 8 percent of its budget on food security in 2002-05 to almost 40 percent in 2010-11. While PRORURAL food security rose to around 32 percent of total spending (see Figure 4.10). 4.43. PRORURAL spending on food security spiked during 2006- 09 but has fallen significantly in real terms since then. The introduction of the PPA in 2007 and 2008 was accompanied by a surge in the seeds program under PNAIR which has since closed. 26 For MARENA, it was not possible to identify the activities related to food security in the information on public spending. For two of the identified programs of MINSA, only portions of it were considered related to food security: comprehensive support to SILAI and vaccinations. For SINAPRED, only some of the expenditure categories were included. Figure 4.1 1: PRORURAL public spending on food security, constant 2005 C$ million 350 300 250 200 150 100 - 50 0 2002-2005 2006-2009 2010-2011 " PAS-PNAIR U PAS H PSAN PPA Source: MHCP and MAGFOR; Ortega 2012. 4.44. Large fluctuations in the resources allocated to the various PNA programming lines may have limited the impact of individual programs over time. The share of spending on "governance and capacity building" declined from 58 to 30 percent during 2002-11, and while that on "food security" increased from 20 to 42 percent. The only programming line that has seen a stable share of financing has been "food safety" at around 17 percent. Table 4.7: Functional composition of PNA subprogram (% of subprogram spending) 2002-05 2006-09 2010-11 Cattle farming 0.0 - 2.0 Governance and capacity building 58.1 28.3 30.6 Integrated crop management 0.6 13.6 6.6 Production monitoring - - 0.6 2 Production planning - 0.1 - Seed production 0.9 5.0 1.8 Product development 4.0 - - safety Food 16.2 18.1 16.8 security Food 20.2 34.9 41.5 * * 8 0 4.45. Whether these shift owe to changes in national strategic direction or changes in the focus of donor financing, they are likely to be limiting the long term impact of the smaller program lines over time. Figure 4.12 below shows that MAGFOR has maintained a steady 60 percent share of its financing from external funds, while INTA has seen more volatility over time. The share of external financing in INTA's budget has fallen from an average of around 50 percent during 2002-08 to just over 30 percent in 2011. Meanwhile, apart from the gradual increase in food security which has been the explicit policy direction of the PRORURAL Incluyente, all the other program lines show large volatility from one period to the next (see Table 2.2). Such areas as crop management, seed production and product development are likely to have an impact only in the medium to long term but if the programs are cut short from one year to the next, such large fluctuations would limit overall outcomes over time. Building a national consensus on the direction some of these smaller, but crucial, programs may help to maintain the strategic focus across political administrations and budget periods. Figure 4.12: Share of external financing in PNA budgets (%), 2002-1 1 MAGFOR INTA 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% - - 0% - C) C ) C) ) C) C C) 1C C CD C:) C) c z C) :.- C ) C :)C DC D (=1C) ) C) C CD CD CD C) C) CD CD C): C): C)1 " External Funding U External Funding H Domestic Funding a Domestic Funding 4.46. The economic composition of PNA spending across MAGFOR and INTA stayed relatively stable during 2006-11. MAGFOR spent approximately 70 percent on current spending and INTA 90 percent. However, while the structure of spending in INTA has remained relatively stable, MAGFOR has seen a significant increase in personnel costs from 18 to 26 percent of its budget and in current transfers from 1 to 11 percent, during 2007-2011. * Table 4.8: Functional composition of MAGFOR and INTA spending 2007, 2011 INTA 2001 2011 DE BIENES USO 4% 3% YSUMINISTROS MATERIALES 15% 11% SERVICIOS NOPERSONALES 22% 13% PERSONALES SERVICIOS 58% 64% CORRIENTES TRANSFERENCIAS 1% 2% CAPITAL DE TRANSFERENCIAS 0% 7% DE BIENES US0 2% 2% YSUMINISTROS MATERIALES 12% 9% NOPERSONALES SERVICIOS 9% 24% PERSONALES SERVICIOS 18% 26% CORRIENTES TRANSFERENCIAS 1% 11% CAPITAL DE TRANSFERENCIAS 59% 28% 4.47.... and the cost of delivering transfers to food security beneficiaries has improved over time. Table 4.9 shows the ratio of delivery costs to actual transfers to beneficiaries in the three PRORURAL food security programs and PINE. These delivery costs are estimated from operational and administrative costs specific to delivering transfers to individual beneficiaries.27 It is interesting to note that PINE, PSAN and PAS have all achieved less than 10 centavos costs per cordoba of delivery, while the transfers of the flagship program remains much more expensive to deliver. One consideration for the future would be to measure the relative efficiency in not just delivering transfers, but in achieving the outcomes of freeing households from food security over time. (For more detail see Annex 5). 27 The computation includes both direct transfers, as well as goods and services provided to individual beneficiaries. Although the ratio is simple to compute, the construction of the costs requires a detailed examination of expenditure lines to assign these expenditures. Annex includes a detailed list of how each expenditure line was assigned to costs or transfers. Table 4.9: Cost-transfer ratios of food security programs, 2010-11 2002-2005 2006-2009 2010-2011 Food security 0.34 0.16 0.14 PPA - 0.21 0.23 PSAN - 0.11 0.08 PAS 0.02 0.20 0.05 PINE 0.23 0.18 0.09 Source: Laguna 2012. 4.48. Coverage and targeting measure how food security programs that targeted specific beneficiary groups have contributed to poverty reduction. We present two measures - coverage which is the percentage of the target population that benefits from a program at a given time; and targeting refers to the proportion of beneficiaries of any program that belong to the target population. The analysis uses the household survey from the LSMS in 2009, which included questions on whether a household participated in a given program, in this case the PPA (described in para 4.40), the School Lunch Program (PINE), and the Comprehensive Child Care Program (PAININ) which was only at the stage of a pilot in 2009. 4.49. PPA had low coverage and was only loosely targeted toward the extreme poor, while PINE had much better coverage but was less well targeted. We do not report coverage for the PAININ since it was only a one-year pilot at the time of the survey. In 2009, PPA reached only 7 percent of the extreme poor households and 5 percent of the non-poor households with benefits (see Table 4.10). Leakages to more well off families were high with a significant number of the actual beneficiaries (38.3 percent) being in the non-poor households, and just over one fifth (21 .1 percent) in the top two consumption quintiles. The Integrated School Nutrition Program (PINE) had high coverage, with around one-third of the poor and one-third of extremely poor households reporting receiving benefits. 4.50.The PAININ pilot was even less progressive than the other two programs with 44 percent of the beneficiaries in non-poor households, and around 32 percent in the top two consumption quintiles. Table 4.10: Coverage and targeting of food security programs in 2009, by poverty situation and consumption quintiles (%) PPA PINE Pilot PAININ Population groups Coverage Targeting Coverage Targeting Targeting Poverty situation Extreme poor 6.6 25.1 35.5 17.8 28.6 Poor 5.1 36.6 37.4 35.1 26.7 Not poor 2.6 38.3 23.6 46.5 44.1 capita expenditure quintile Per 1 (poorest quintile) 6.6 34.5 31.3 25.6 28.6 2 4.1 24.6 36.9 25.2 26.1 3 3.8 19.8 35.5 24.3 11.9 4 3.3 17.0 23.8 16.3 15.8 5 (richest quintile) 0.8 4.1 12.5 8.6 17.0 Source: Ortega (2012), based on LSMS 2009 Note: Coverage is the percentage of each poverty group or income quintile that receives benefits from the program; targeting (focus) is the percentage of overall program beneficiary households that belong to the poverty group or fall into the numbered consumption quintiles. 4.51. Hypothetically, PPA could have reached more than a quarter (26 percent) of the extreme poor or just under one fifth (19 percent) of the first quintile with similar resources if it had achieved perfect targeting. As a hypothetical exercise, we compute what the coverage of extremely poor households would have been if all the beneficiaries in this category, i.e. 100 percent targeting i.e. all of the beneficiaries being either extremely poor or in the first quintile. However, in the case of PPA the benefits were conditioned on having access to some agricultural land. If we proposed perfect targeting of the poor households (i.e. neither extreme poor, nor the non-poor), then with perfect targeting, coverage could have been increased to just under 13 percent with similar resources. Recall that there are more poor (27 percent), than extreme poor households (14.6 percent of all households) in Nicaragua. 4.52. PINE achieved good coverage due to its large size, but with less focused targeting. In 2009 PINE appears to have had more than 1.5 million beneficiaries, compared with the estimated 841 ,000 extreme poor and 1.6 million poor.28 By design, coverage was high since the program targeted public schools only and in poor areas, but the design also allowed for large leakages to non-poor households because school lunches are provided to all the students in the school regardless of means. For example, if one had perfect targeting in the PINE program theoretically it would be possible to cover all percent of the extreme poor in Nicaragua and non-trivial share of poor households as well. However, the trade- off between the cost of selecting which students in a given school (some students and not others) and reaching more schools, versus the could be quite high compared to the leakages to less poor households. Recall that PINE remains a quite efficient program in terms of costs of delivering transfers to the beneficiaries (para 4.48). Table 4. 11: Coverage and targeting of food security programs in 2009, by location and region (%) PPA PINE Pilot PAININ Population groups Coverage Targeting Coverage Targeting Targeting Urban 0.5 7.3 21.5 41.9 49.9 Rural 8.3 92.7 39.4 58.1 50.1 Managua 1.0 6.6 18.8 15.6 11.9 Pacific-Urban 0.4 1.8 20.5 12.3 8.7 Pacific-Rural 1.7 23.2 34.1 13.1 9.0 Central-Urban 0.0 0.0 23.4 10.0 7.9 Central-Rural 8.9 44.1 40.5 26.9 19.9 Atl6ntic-Urban 1.9 2.4 36.1 6.0 16.6 Atl6ntic-Rural 8.3 21.2 45.7 15.5 20.0 Source: Ortega (2012), based on LSMS 2009 Note: Coverage is the percentage of each poverty group or income quintile that receives benefits from the program; targeting (focus) is the percentage of overall program beneficiary households that belong to the poverty group or fall into the numbered consumption quintiles. 4.53. Targeting the PPA by land ownership is associated with more resources in absolute terms being spent on households 28 This is also a reminder that when considering targeting figures they should be evaluated in comparison to the underlying population distribution, e.g, in Nicaragua there were estimated 14.6, 27.9 and 57.5 percent households that were extremely poor, (just) poor, and non-poor in 2009. in the richest quintile. Until now we have considered distribution of beneficiaries without considering how much value each received. Since the 2009 LSMS survey asked households to evaluate the benefits of BPA, we can plot the distribution of benefit values. Figure 4.13 shows average benefits received by households in different population groups. By size of land holdings (a), the program was focused on the bottom three quintiles. When we look at welfare quintiles, however, both for all households (b) and for rural households only (c), the average benefits received were largely the same regardless of the levels of consumption of the households. However, when we look at total benefits, the result shows that a much higher share of the aggregate expenditures on PPA benefits reaching the fifth richest quintile. In other words, the largest share of expenditures on PPA benefits appears to be provided to the richest households. Figure 4.13: Distribution of benefits of BPA recipients by land ownership and consumption, 2009 per HH Average Benefits of the BPA (C$) per HH Average Benefits of the BPA (CS) 2000 2500 2000T 1500 1500 1000 100 500 -500 1 2 3 4 5 1 2 3 4 5 AgriculturalLand Owned Quintiles Welfare Quintiles a Value of Benefits a Value of Benefits N erhi/erlo 0 erhi/erlo per HH Average Benefits of the BPA (CS) within the Quintiles (Mill. C$) Total Benefits of HH 1500 90 80 1000 10 60- 500 50 0 40 1 2 3 4 5 1 2 3 4 5 Rural Welfare Quintiles Rural Welfare Quintiles " Value of Benefits " erhi/erlo Source: Anriquez (2012), based on LSMS 2009 data. 4.54. Explicit targeting strategies that take into account trade-offs between delivery costs and leakages, and between programs that could reach similar beneficiaries, should be put in place and monitored and evaluated more frequently. The above analysis suggests that there is a lot of scope for increasing the impact of food security spending by strengthening targeting methods, especially given the strong emphasis on direct transfers as part of Nicaragua's food security strategy. All of these main programs have had substantial adjustments since 2009 so it is likely that these results have changed. A recent update of the municipal level poverty map (last one is in 2005) is now available for the 2009 data and could help to refine these results, match them more closely against actual expenditures. In addition, future editions of household surveys should continue to measure the benefits incidence and impact of these flagship food security programs. In additional they can help to evaluate the tradeoffs between spending on the different programs, such as the PINE and PPA, and help the authorities to see where to allocate the marginal dollar of public expenditure. Over time, a continuous monitoring and evaluation will help reduce the cost of the ideal targeting: means-based targeting that would assure more precision in the selection of the most needy households. 4.55. The third prong of Nicaragua's SSAN program are a range of market interventions market interventions to reduce price volatility and foster import substitution. These include the operations of the National Food Trading Enterprise (ENABAS), a variety of price supports implemented mainly through product specific tariffs and interventions by the Ministry of Development, Industry and Commerce (MIFIC). The objective of ENABAS is the creation of an alternative distribution network to "prevent the domestic market from raising prices above the cost of production" and to increase production of basic food stuffs by small holders 29. With its 3,817 trading posts across 103 municipalities, and broad range of post-harvest services to micro and small producers, ENABAS represents an important policy intervention in the area of food security and sovereignty. However, data is not readily available on its expenditures."o Interventions by MIFIC are generally ad hoc and have 29 http://www.enabas.gob.ni/ 30 The last monthly report available on the ENABAS website is dated July 2010, and the last investment plan was for 2008 generally been used during times of exceptional price volatility. However, there is also little information readily available on the precise scope of these policy interventions. As such, the following analysis compares results from various studies undertaken for evaluating price supports and looking at the impact of international food price trends in Nicaragua. 4.56. Price wedges as a means of support for producers appear to be much more important than public expenditures on direct transfers of goods and services in Nicaragua. Castillo Vargas, Gomez, and Peha (2012), using an OECD methodology,31 compute an estimate agricultural producer support which combines public expenditures on goods and services which are provided directly to producers, and an estimate of price supports based on the differential between domestic and international prices on specific products. They argue that the price differential represents the impact of explicit tariff and non-tariff barriers that insulate domestic producers from competition from imports, and can also create disincentives for exporting. Their report estimates that these "price supports" - which they find concentrated in rice, pork, corn, sugar and chicken - amount to around 9 times the level of support provided to producers through agricultural public expenditure. 4.57. However, an alternative view suggests that the same price differentials may be caused by the very weak competition in the domestic market structure of most the agriculture supply chains. Berthelon, Kruger and Saavedra (2007) 32 review similar price differentials between domestic wholesale prices and border prices on various agricultural products during 1991-2004. For the main tradables, maize and rice NRAs were positive while sorghum and soyabean had negative rates. In several products they relate these NRAs to explicit trade policies, market power held by domestic processors, and/or international price volatility. Later, in study that examined international food price transmission to domestic markets in Nicaragua and Honduras, Arias, De 31 RUTA/IADB study of the support/taxation of agricultural producers and food consumers in Nicaragua looks at all the support given to producers in various ways, including direct support from the government budget, implicit support from trade policies (import tariffs and nontariff barriers) that insulate producers from competition from imports, or export taxes and controls, as well as general support measures, including provision of public goods. It did this using a standard methodology, which the OECD applies to each member country every year. (The results are published in the annual publication Agricultural Policy Monitoring and Evaluation.) 32 Berthelon M., Kruger D. and D. Saavedra, Distortions to Agricultural Incentives in Nicaragua, World Bank Agricultural Distortions Working Paper 18, December 2007. Franco and (2011) 1 find that in the short term (one month) the price transmission from international to domestic prices was low or nonexistent in most food products in Nicaragua. Not even after 45 months was price transmission complete. For beans, in particular, high price transmission was only observed over the long term. The only product that presented rapid price transmission was coffee. Their analysis also suggests that such differentials may be caused by very weak competition in the domestic market structure of most the agriculture supply chains. With the notable exception of beans, a few companies appeared to own the majority share of most food markets, both to purchase and export agricultural products and to import and sell food domestically. 4.58. Whether caused by trade policies or lack of domestic competition along agricultural value chains, these price differentials when positive (i.e. higher local prices) are paid by consumers. Often, there are explicit trade-offs between food sovereignty and food security. While price supports benefit producers and stimulate production of selected products, they cost consumers and disproportionately the poor. Nicaraguan consumers, including the poor who are not captured under some transfer programs, pay higher domestic prices of staples such as rice, pork, corn, sugar, and chicken that are available in international markets. For poorer households that spend more of their income on food, this is critical. In addition, price supports benefit producers in a regressive way - bigger producers benefit more. 4.59. Price distortions can also lead to inefficient allocations of private and public investment. Because these policies artificially raise prices of low-value products in which Nicaragua may not have comparative advantage (that is, in which it cannot produce as efficiently as other countries), they encourage producers to use land and resources to produce items that would be cheaper to import, rather than items of greater economic value. In addition, to the extent that decisions on public investments (e.g., infrastructure and research priorities) reflect demands of producers, these decisions will be biased in favor of these products as well. 33 Arias D. and De Franco, M. Integrating Central America and International Food Markets; An Analysis of Food Price Transmission in Honduras and Nicaragua, World Bank, LCSSD Occasional Paper Series on Food Prices, #75643 (201 1) 4.60. Nicaragua has made progress on reducing malnutrition and establishing the main elements for food security. In 2009, the Government reinforced its efforts by passing a law and establishing an umbrella program for food security (SSAN), and added the objective of food sovereignty aimed at promoting import substitution. The three main prongs of the SSAN strategy are (i) food production, (ii) food distribution to vulnerable groups; and (iii) market interventions to foster import substitution and reduce price volatility. A very broad range of programs across several ministries and agencies was established, with very ambitious objectives ranging from production and value added to employment, poverty reduction. Some progress has been made on most of the targets set, but these fall far short of the goals earlier. 4.61. Public spending on food security increased significantly during the 2008-09 food price crises with an expansion both in PRORURAL and in school feeding programs, and has remained relatively high since. PRORURAL food security programs represented approximately 42 percent spending of this spending - it also spiked during 2006-09 but has fallen significantly in real terms since then. 4.62. Within PRORURAL, the main programming lines have been governance and capacity building, food security, and food safety. However, all the other program lines show large volatility from one period with some programs disappearing and reappearing over time. For areas such as crop management, seed production and product development which are likely to see their structural impact only in the medium to long term, such large fluctuations in available resources would limit their impact. Building a national consensus on the direction some of these smaller, but crucial, programs may help to maintain the strategic focus across political administrations and ensure a steady flow of resources over longer periods of time. 4.63. The predominance of direct transfers (of food or productive assets) in Nicaragua's food security programs means that effective targeting is an important element of expenditure efficiency. There were on average over 1 million beneficiaries during 2007-1 1, if one includes school feed programs and around 150,000 for PRORURAL. Despite significant increases in personnel costs in MAGFOR *0 and INTA, the unit costs of delivering food security transfers appears to have improved over time as the number of beneficiaries has grown (suggesting some economies of scale) but there remains much scope for improvement in targeting. 4.64. Explicit targeting strategies should be put in place that take into account trade-offs between delivery costs and leakages for each program and between programs that focus on similar beneficiary groups. Clear eligibility criteria, which target those most in need and which are in line with the objective of the programs, are crucial, but also continuous monitoring to minimize leakages to ineligible beneficiaries. Box 4.2 illustrates two methods - random and competitive selection of beneficiaries - which may be used. The implementation of these targeting strategies should monitored and evaluated more frequently. The recently completed agricultural census and 2009 municipal-level poverty map and the upcoming new LSMS provide good opportunities for evaluating not only the adjustments in targeting made in recent years, but also the impact that long term impact that the transfers have had on their beneficiaries. Box 4.2: Innovations in beneficiary selection for public transfers in agriculture The Agricultural Technology Transfer Project (PACTA) in the Dominican Republic used random selection of beneficiaries from the pool of applicants to promote transparency and demonstrate equal opportunity. The applicants themselves choose to participate in the "lottery." Such random selection of beneficiaries, in the face of limited resources, has been implemented in Nicaragua under the Atencion Pilot in 2006. The Small Farmer Vulnerability Reduction Project in Grenada selects beneficiaries on a competitive basis. It applies transparent eligibility and selection criteria. If the applicant meets the eligibility criteria (for example, must be registered at the Ministry of Agriculture, between half an acre and 12 acres of cultivated land; owner of land or long term lease), a selection committee-confirmed by representatives of the Ministry of Agriculture, the producer organizations and an independent farmer-ranks the beneficiaries by strictly following the selection criteria (farm investments undertaken in last few years; attended training on regular basis; female and youth). 66 4.65. Nicaragua also implements several market interventions under the rubric of "food sovereignty" aimed at reducing price volatility and fostering import substitution. Large differentials between domestic and international food prices suggest some intervention or market power -either public or private - that could be negatively impacting consumers and creating perverse production incentives. There is little information readily available on the main activities to allow for a careful analysis of expenditures. To guide the expenditure policy choices in a world where high price volatility is the "new norm", a more explicit review of the trade-offs between food sovereignty and food security interventions, including those of ENABAS and MIFIC, is needed. 4.66. Food security can be enhanced through increased rural non- agricultural incomes by fostering the private sector. An example would be to replace in-kind benefits of subsidies with vouchers redeemable at input distributors through normal market channels. Input providers would be certified by the Project and programs should constantly be opened for new businesses to participate. 4.67. The authorities should re-evaluate the remaining tariff and non-tariff trade barriers that increase domestic food prices. Internationally, there is a trend toward decoupled payments, which do not influence prices but allow producers and consumers to base their decisions on market price signals. They also avoid the implicit food tax on the poor. Such programs in Mexico and Turkey have multiplier effects- farmer incomes increased by multiples of the payments. Even so, decoupled payments should be only a transition measure, to be later eliminated, as they benefits disproportionately large producers. 4.68. Several countries have substituted price supports by decoupled payments that do not affect prices and support certain public policy goals, such as environmental sustainability. For example, Nicaragua is already facing the changes in its agricultural production frontier as a result of climate change. The two programs outline in Box X illustrate methods already combine food security transfers with promotion of environmental services, environmentally friendly farming practices and climate smart agriculture by supporting farmers to modernize water and irrigation techniques; zero grazing; pasture conservation; introduction of new tree species; improved and organic inputs; water- catchment systems; rustic greenhouses; and post-harvest management techniques. In the European Union and the United States, certain programs require beneficiaries to adopt good environmental practices as a condition of participation. 4.69. Another model aiming directly at agricultural producers is the payment scheme to encourage silvopastoral cattle production in Colombia. This program has been in place for several years, and an evaluation found it to be effective in encouraging forestation-with the collateral benefits that brings with it-while increasing carrying capacity of pastures and raising producers' profits. Beyond encouraging production of public goods, like environmental protection, programs on payments for environmental services have a fiscal advantage over traditional subsidies: they can be used temporarily to cover farmers' initial investment costs and opportunity costs (while trees mature, for example), then phased out as farmers begin to realize higher profitability. 4.70. Finally, there is a need to strengthen the general strategy formulation and coordination within the SSAN to ensure synergies across the wide range of programs and institutions. The Executive Secretariat could become a more proactive coordinating actor and help to rationalize overlaps and competition between programs. 5. Institutiona Assessment of Public Spending in the Agriculture Sector 5.1. The performance of public financial management (PFM) systems is critical to ensuring public policy effectiveness. PFM systems seek to fulfill strategic objectives through the interactions of systems, institutions, and practices, with three main objectives: to promote strategic priorities; to ensure fiscal discipline; and to deliver value for money. Sound PFM systems help countries manage their public resources to achieve key strategic goals. The political process determines how resources are allocated within the overall budget and how ministries and agencies decide to spend them, subject to control and accountability mechanisms. For Nicaragua's agriculture sector, the institutional context in which the PFM systems operate influences the quality of the public expenditures. The existing public policies, regulations, institutional capabilities, information systems, and practices determine the way the budget is prepared and executed in the sector. 5.2. This chapter analyzes institutional aspects. It highlights recent progress, the reforms undertaken, and how PFM Law No. 550 and the establishment of PRORURAL helped move planning and budgeting processes from parallel planning to a standard process for all PRORURAL entities. After looking at how PFM works in Nicaragua, it analyzes the disconnect between planning and budgeting processes; how the agriculture sector could advance toward results-based budgeting and improve the quality of program budgeting; how to enhance budget program structures; and the performance of systems for financial management information, as well as program M&E. 5.3. The review looked so far mainly at the execution of funds in the budget cycle. This chapter focuses on the other four steps: preparation, formulation, approval, and, to some extent, auditing (Figure 5.1). Figure 5.1: The agriculture sector's budget cycle Source: Authors. 5.1. Budget systems 5.4. Over the past decade the government has undertaken important reforms in PFM. With support from donors-the World Bank among them-these reforms have led to the passage of a modern legal framework, which includes a Medium-Term Budgeting Framework (MTBF) and a results-based management approach; rollout of an information system for improving PFM system performance, the Integrated Financial Management, Administration and Audit System (SIGFA); introduction of the single-till principle, compared with the single treasury account; introduction of Technical Standards Internal Control for the public sector, in line with international practice; passage of the Access to Information Act; formulation of the Financial System Administration Modernization Project (PMSAF); improvement of the State Administrative Contracting System; passage of a new Procurement and Contracting Act; and passage of the General Public Debt Act, which eliminated the discretion that public institutions formerly had to gain access to financing. 5.5. Nicaragua's recent PFM reforms culminated with the approval of PFM Law No. 550 in August 2005. This law set up a new regulatory framework for the PFM core systems of budget, treasury, accounting, and public debt and for the noncore systems of procurement, human resources, public assets, and public investment. The roles of core and noncore systems are to improve links between strategic development goals and budget processes. 5.6. The MTBF is a planning instrument that seeks to improve the links among government policies, priorities, and actions on the availability and use of public resources looking toward a medium-term horizon. Today, more than 70 public entities use the MTBF as a reference framework when preparing their budgets, for the coming year and three years after that, with indicators for institutional and-in some cases-sectoral outputs and results. The MTBF was picked up from the PFM reform agenda as a focus area for donors' technical assistance. Recognized as good regional practice, it has motivated neighboring countries to request that Nicaragua share it (Box 5.1). Box 5.1: The Medium-Term Budgeting Framework The Medium-Term Budgeting Framework (MTBF) was introduced by the Public Financial Management Law No. 550 of August 2005. This law establishes that the MTBF should frame budget preparation by including nonbinding income and expenditure projections for the three following years. Adoption of the MTBF is mandatory for all public sector entities. Three ministries of the central government kicked off implementation in 2006 (the education, infrastructure, and health ministries). Also, the MHCP information technology office rolled out the MTBF module as part of SIGFA, enabling more than 67 public entities to use the MTBF today. MTBF implementation forms part of continuous PFM modernization from the mid-1990s. The majority of stakeholders supported the MTBF as a means of fostering expenditure discipline and getting better results from priority programs. But in practice, the MTBF represented a huge challenge to public entities lacking knowledge in preparing the budget with medium-term budget outcomes and constraints.. The MTBF covers four years, including the budget year, and is updated annually. Out-year ceilings are not binding and can be adjusted as macroeconomic assumptions and perspectives change. Although the presentation of categories of spending is fairly aggregated, no categories of spending are excluded from the review and adjustment under the MTBF. There is also consistency between the MTBF and the public investment program: SIGFA enables sectors and MHCP to review progress on budget execution and to monitor results measured by a set of indicators. Thus, the MTBF can be modified in parallel to mid-year budget modifications. Since the MTBF is fairly new, MHCP has been playing the lead role in its preparation. This involves a series of meetings where MHCP informs spending agencies about macroeconomic and fiscal constraints for upcoming years and about ceilings. MHCP's Economic Affairs Analysis Office is responsible for revenue forecasting, which is fully consistent with International Monetary Fund projections as well as with those of the Central Bank of Nicaragua. The same office prepares the macro-fiscal framework, which forms part of the MTBF official documentation that is submitted to the National Assembly and that accompanies the draft annual budget law. Once the National Assembly approves the budget law, MHCP publishes the budget, including the medium-term macro-fiscal targets. This information is available to the general public through the MHCP website. The MTBF has been effective in enabling sectors to work under medium-term macro-fiscal constraints, and it has helped MHCP in moderating sectors' expectations about future resource availability. Further consolidation of the MTBF will require that sectors plan better and adjust their program structure to their priorities and program results. Three public expenditure reviews were carried out in 2006-08-on the education, health, and infrastructure sectors-to vet the implementation quality of the General Budget of the Republic in the framework of the MTBF. The reviews highlighted the weak ownership of the MTBF on the sectors' side as the main cause for not improving the quality of planning and review of programs and priorities. The learning-by-doing approach to the MTBF rollout has enabled sectors to gradually improve the quality of their MTBFs. Nevertheless-and according to independent evaluations- sectors' planning capabilities remain the main issue in linking planning and budgeting more effectively. For instance, decisions on MTBF indicators were difficult because some strategic plans include indicators that cannot be picked up for the MTBF preparation. The lack of information on factors that affect program and services costs prevents public entities from costing their programs in unitary cost terms, thus affecting the links between budget preparation and expected results measured by critical indicators. 5.7. A standard planning process for PRORURAL entities supports MTBF implementation and consolidation. Until a few years ago there were parallel planning processes, in which each institution had its own system, but progress has been made and PRORURAL Incluyente has achieved a standard planning process. Used at the four PRORURAL entities, it covers all activities and results of its three national programs. The Nicaraguan agriculture sector began to use the MTBF through MAGFOR in 2007 and the autonomous entities a year later. Likewise, in formulating the MTBF for the agriculture sector, the Medium-Term Budget Framework establishes spending limits for the medium term. However, according to Law No. 550, the budget ceilings for the three years following any given year are only referential, and thus not binding. Based on the MTBF, the agriculture sector formulates its budgets for consolidation at the MHCP level and subsequent passage by the National Assembly. 5.8. PRORURAL entities go through planning and budgeting cycles every year, but they are poorly integrated with SIGFA. The planning processes summarized in the annual operational plans (AOPs) are based on PRORURAL Incluyente components, and the SIGFA budgeting program structure is based on a list of programs and entities. The SIGFA program structure included a list of 37 programs in 2011, while by definition PRORURAL only has three (Table A1.10 in Annex 1). Although its subcomponents are more closely correlated with SIGFA, they do not match perfectly, and in some cases are impossible to associate with SIGFA programs. In addition, the PRORURAL AOPs have stated activities that have never been budgeted, such as the production plan and production M&E. Also on the AOP side, the names of subcomponents are different from the names of programs stated in the budget. MHCP and PRORURAL entities have revised the budget program structure with the intention to match the approaches, which partly explains why the budget program structure of PRORURAL has been changing, especially since 2009. Still, they need to be more closely aligned to get more intertemporal consistency of the MTBF indicators. 5.9. The difference in approaches between SIGFA and PRORURAL AOPs, has affected links between planning and budget preparation. Indeed, different concepts have influenced the quality of budget program structuring, as MHCP and sectors have to agree on basic concepts. Inthe agriculture sector, planning and defining goals and quantifiable indicators are based on the PRORURAL Incluyente logical framework. These efforts are reflected in the preparation of a single PRORURAL AOP, which in theory rests on the foundation budget formulation process. 5.10. Beyond the efforts to find common standards and practices, planning and budgeting require more thoroughgoing reform of the public sector. This is because the PRORURAL AOP and the budgets at PRORURAL autonomous entities are, in practice, divorced from each other, since the AOP is based on program results, while budgeting is based on program outputs. 5.11. Prorural entities formulate and execute their budget to a degree without considering the regulatory framework. MHCP has in place a complete and understandable regulatory framework for formulating the budget, in particular the MTBF, in accord with international best practice. MHCP has been improving the MTBF since 2006 by pilot programs and specialized technical assistance, to link sector strategic goals and objectives with budgeting processes. The framework includes detailed guidelines on how the sectors must adjust budget preparation to strategic objectives by formulating physical results indicators. The guidelines are expected to reflect the public policy results foreseen and expressed in the planning and budgeting program structure. 5.12. Budgeting and planning operate "the wrong way round"- first allocating a budget, then planning, which is inconsistent with the methodological guidelines of MHCP. Once the sectors know the ceiling has been determined, they begin to prepare the corresponding AOP, meaning that until 2008 MHCP requested the sectors to send in a demand for budget preparation, so they would have enough time to apply the guidelines in the MTBF. But this practice was discontinued because the sectors demanded resources above the final ceilings, returning the process to the starting point. 5.13. Although the budget calendar intends the central government budget to start in early June, in practice sectors start preparing the budget around early September. This is when MHCP communicates the final ceilings for the next year's budget. Table A. 1.1 1 in Annex 1 presents the activities of the budget calendar preparation in theory; in reality one can interpret Month 1 as June through mid-October. It analyzes the actions that are not executed and the ones partly executed. 5.14. The delay in communicating definitive ceilings for budget formulation by MHCP to PRORURAL entities in early September complicates budgeting. This leaves only a short time for the sectors to link planning and budgeting and causes the sectors to formulate budgets based on items of expenditure to ensure the proper functioning of entities and their budgets. While the sectors should have until the end of the month to prepare their budgets, based on the announced ceilings, in practice the SIGFA-FORM module is available for loading the budget for only eight days. This means the sectors have less than a month to prepare the budget and allocate budget item lines by expenditure item. Put otherwise, it is practically impossible to review the results of the programs and subprograms as an input for preparing the budget. 5.15. Due to the tight calendar, the focus is on keeping programs running rather than focusing on results through a program review, which would ensure high-quality expenditure. Budget preparation thus ends up being a political debate within the entities. In the agriculture sector, not even common standards are used to ensure effective bridges between planning and budgeting. These bridges should be constructed based on the MTBF of MHCP and on M&E systems. However, the MTBF has been only partly applied. 51 . Qult1fpoga,ugtn 5.16. A high quality of program budgeting is critical to ensure the quality of expenditures and the efficient delivery of products and services. The program budgeting approach intends to allocate resources to determine program categories to public entities in charge, with the objective of improving service delivery effectively and efficiently. Consequently, the program approach facilitates budget preparation, execution, control, and evaluation in physical and financial terms. The approach helps public entities link their strategic planning to the medium-term budget by pursuing results. With limited resources, the allocation implies a prioritization of activities considered strategic, and thus they receive preferential treatment by the program approach. In this sense the program approach enables public entities to explore alternatives for achieving the primary objectives using the resources available. 5.17. The PRORURAL governance and institutional capabilities program, which includes all the "central activities," represented 45 percent of the total budget in 2011, well above regional best practice. Central activities are associated with the overall production process, and are usually associated with activities that support the delivery of goods and services. These activities are associated with overheads that central or headquarters offices incur. This means that the sector program structure cannot entirely distinguish activities and costs that might be critical inputs to delivering a product or service. In this situation, the sector might confront challenges to vet particular program results because some key inputs are mixed in a common budget category of central activities, which represent a significant portion of the program structure. In Guatemala for instance, where program budgeting might be considered regional best practice, central activities are on average no more than 20 percent of the total budget (Box 5.2). Box 5.2: Regional best practice-a case study from Guatemala on results budgeting Since 2008 the Ministry of Finance, with support from the European Commission, has run a pilot program to improve results-budgeting processes. Within those processes a critical step has been to review the program structure of the education, interior, and health ministries. Results of the reviews are mixed, but the health sector deserves mention. In that sector, even though public policy was promoting a preventive rather than curative approach, the latter received more funds from the budget. To address this issue, the program review created two separate programs for both models, which facilitated the Ministry of Health in allocating more resources to preventive activities. In addition, the sector adopted medium-term results indicators such as the Millennium Development Goal for maternal and child mortality. One of the lessons is that even though there was internal resistance to the program reviews, the political will to make the public policy objectives more consistent with the budget allocations suggests that implementing a results-budgeting approach is possible. 5.18. PRORURAL entities experience frequent modifications in their budget and in the names of their programs and subprograms. This indicates that there are weaknesses in results-based program budgeting, as well as low levels of ownership of the MTBF and associated indicators. Because there is not much detail in the items of expenditure budgeted for activities, it is relatively easy to make changes. Further, the weak linkage between the preparation of the AOPs and the budget is reflected in a programmatic structure different in each process. This means that the codes and description of activities in the AOP and the budget vary, * although this does not necessarily imply a review of program contents, following best practices. MAGFOR had a more stable use of standards to operate its program structure because it was less keen on changing names to programs, subprograms, activities, and codes, unlike the other entities (Table 5.1). At a minimum, the entities should clarify the reasons why they change these elements so much. Table 5.1: PRORURAL changes of program structure, 2002-11 (%) Change MAGFOR IDR INTA INAFOR FONADEFO Program name 20.0 37.5 50.0 33.3 0.0 Program code 18.4 30.0 33.3 27.8 0.0 Subprogram name 6.9 40.0 0.0 32.0 0.0 Subprogram code 2.3 17.2 0.0 32.0 0.0 Activity names 45.6 81.7 60.1 56.0 20.0 Activity code 3.0 21.9 15.2 11.0 0.0 Source: Gutierrez Ossio (2012), based on Ministry of Agriculture and Forests information. Note: Table reflects the number of times a name of a program has changed against the total number of programs in a year. 5.19. Although the PRORURAL budget structure is kept unchanged within a year, the entities have a strong tendency to make internal budget modifications. This means that once the budget is approved by the National Assembly and they are ready to spend, they reallocate the budget lines many times (Table 5.2). This might be because, even though a program review exists, entities tend to switch the original allocations that were supposed to support the results of the program review. It is not clear why the programs decided to modify their budget by reallocating funds among lines. This might imply that inertial budgeting preparation is the rule. Table 5.2: Number of times that the budget is modified and number of budget lines that are involved in internal budget modifications by entity Budget modifications Budget line involved inbudget modifications Year MAGFOR IDR INAFOR INTA MAGFOR IDR INAFOR INTA 2006 297 91 29 38 2,117 111 358 161 2001 439 92 34 25 2,631 763 386 442 2008 398 166 28 249 2,262 1,178 293 103 2009 565 253 31 253 2,639 1,548 352 383 2010 723 191 38 401 2,949 1,629 470 2,084 2011 503 194 4 73 2,519 1,160 474 2,024 Source: Gutierrez Ossio (2012), based on Ministry of Agriculture and Forests information. osts and cIta ugtn 5.1.4. U itay 5.20. No effective delivery of goods or services will occur without unitary cost practice, which measures the actual cost of providing a service or a program, including variable and fixed costs. The regulations and guidelines promoted by MHCP are in line with best practice, but the above tables show that unitary cost practices, which support program budget preparation, are absent. If the PRORURAL entities had followed these practices, the significant internal budget reallocation should not have happened, as the inputs required to produce a good or service would not have been incorporated in the production function due to lack of resources, and thus there would have been no effective delivery of goods or services. As tools and methodologies to enable planning units to cost activities are lacking, the country and the agricultural sector need to think about new practices (common standards), tools (international accounting rules), methodologies (standardized approaches), systems (technology), and training (increase staff capacity). 5.21. Indirect costs are rarely incorporated in total unitary costs. This means that only direct costs of activities, such as consulting costs and inputs, are included but not indirect costs, such as salaries and utilities. Direct costs are included in the central expenditures category (i.e., expenditures that cannot be allocated to programs). In addition, SIGFA follows cash- rather than accrual-based budgeting, which means that costs that do not require cash, such as depreciation, are not properly accounted for-including in the budget estimates. Therefore, some facilities are not properly maintained, affecting the quality of services. Box 5.3illustrates the importance of proper accounting and the critical role of unitary cost estimations at INTA. Box 5.3: Case study from INTA on proper accounting and unitary cost estimations INTA provides technical assistance to small farmers to improve productivity. It uses facilities, laboratories and land to test the results of improved seeds. However, INTA cannot incorporate in the total cost function the opportunity costs of the land and the facilities' depreciation. And SIGFA and SIAF are not fully equipped to support INTA's intentions. Thus the budgeting process does not allow entities to properly estimate costs. As a consequence, service delivery will be affected, because INTA's facilities will gradually deteriorate. 5.22. As seen above, Nicaragua suffers from an inconsistent program structure. A different programmatic structure for budgeting exists for PRORURAL and the one that has to be delivered to MHCP based on its requirements (Figure 5.2). To date it has not been possible to make the two structures compatible in terms of information technology. The budget data introduced in the integrated planning system at PRORURAL institutions are in essence estimates, as the user moves down the hierarchic structure. This leads to difficulties regarding implementation and somewhat different numbers appear, depending on whether these have been calculated by the planning or by the budgeting unit. 5.1.6. r r i b p 5.23. The lack of program reviews affects the quality of expenditures. As a general recommendation the sector entities might start reviewing their program structure to match it with the MTBF guidelines. Of course those revisions should assume an educated guess to facilitate both the program review and budget preparation. Chile offers a useful example, where program reviews are led by the Ministry of Planning (Box 5.4). This example should alleviate the concern of PRORURAL entities that Figure 5.2: PRORURAL and MHCP structures - National programs: PNA, PNAIR, PNFEny A - Components Program ResultsSubprogram Lines of actionPrec Outputs/activities Atvt Source: Fajardo 2012. to be reviewed is tantamount to being canceled, and should motivate them to undertake this type of review. Box 5.4: Case study from Chile on program reviews Chile's public sector has a long tradition of reviewing results attained by programs in the budget. The review is led by the Ministry of Planning and involves academic institutions and consulting firms. The ministry selects a set of programs to assess whether they are achieving the results stated by public policies. The reviews show that most programs are aligned with policies' objectives. Only a few have been canceled, the rest are reformulated. The exercise is beneficial because it allows the sector and external evaluators to assess the quality of expenditures. 5.2. Financial management information systems 5.24. Financial management information systems (FMISs) support government financial processes and transactions in an automated way. They also remove the annual budget process from some of the influence of political interests and of institutions. In addition, FMISs help governments produce reports on the financial situation of the public sector to facilitate decisions on and accountability of public resources. Nicaragua's FMIS is SIGFA. The current version was developed in 2001 and has since been expanded and complemented with multiple functions and applications with the support of the World Bank and other donors. MHCP launched SIGFA-AUTONOMO in 2005, a standalone application to support decentralized entities in executing the budget. 5.25. MHCP has installed and maintained SIGFA to formulate and execute the central budget, keep record of all financial transactions in the central government, and produce financial statements and reports to support accountability functions in government. SIGFA supports core government financial management functions in the central government, and challenges and opportunities have been identified to update and consolidate PFM and accountability systems in the country. Nevertheless, in part due to technology constraints, the system faces limits on the service it can provide in different areas of the government's administrative and financial management cycle. 5.26. SIGFA could gain in efficiency, effectiveness, and accuracy thanks to a new PFM project. Indeed MHCP, with the Bank and other donors, is implementing a new PFM project to modernize the public finances management-PMSAF. The system should more closely integrate other related processes including current human resource, procurement, asset, revenue, and debt-management systems into a fully interoperable Government Resource Planning-type application."^ Likewise, using updated technology, the system could gain by reaching the spending-unit level to capture relevant data where and when each transaction occurs, and thus speed up consolidation, facilitate budget execution and control, and secure data consistency and accuracy. However, the new approach is still under construction, and it is expected that only by 2014 will budget preparation be carried out through the new solution. 5.2.2. Paall7I 5.27. Because S1GFA has weaknesses consolidating financial information, especially for the autonomous entities, sectors are using parallel systems. Indeed, the agencies use the SIAF for the book entries of transactions, particularly for Common Fund donors. This 34 Many countries are now moving to the adaptation of a type of integrated Enterprise Resource Planning system to modernize their FMIS tools to facilitate and automate budget formulation and execution, while improving financial management's internal controls, reporting, and accountability. duplicates the registration of transactions and makes it more complicated for entities in the sector to carry out their monitoring and follow-up tasks. The SIGFA systems, in turn, are used mainly in budget formulation through the SIGFA-FORM module, with accounting through SIGFA-Central and SIGFA-AUTONOMO. 5.28. The parallel systems are apparently due to PRORURAL donor requirements. Due to the high dependence on external resources, the PRORURAL entities decided rationally on picking up other financial systems to produce reports and account for expenditures. SIAF registers the programming and implementation of Common Fund resources and produces reports that meet donor requirements. The entities are expected to deal with two financial systems that are not integrated, wasting time and resources as these databases must be kept up to date, a task not carried out consistently. 5.29. SIGFA struggles to produce reports in a user-friendly manner, which complicates efforts of decision makers to evaluate spending quality (although SIGFA incorporates information to enable decision makers, donors, and the general public to audit PRORURAL expenditures.) When the Comptroller's Office (Contraloria General de la Republica) performed the annual budget audits it found limitations of the internal control mechanisms mainly because staff did not update information in SIGFA. This implied discrepancies between SIGFA and parallel systems. The position of the Comptroller's Office was that because of Law No. 550, the official means to support the audit should be SIGFA. 5.30. There is a lack of appropriate information recording for committed, accrued, and paid expenditures. From the sectors' perspective, the budget is executed when expenditure is accrued, meaning that the service has been provided or a good has been delivered. Once the service or product has been delivered and invoices have been submitted, the information is uploaded onto SIGFA. Although the system can register when a commitment or accrual is made, in practice expenditure stages are registered only when paid, preventing the Treasury from forecasting cash-flow needs. 5.31. There is a lack of connection among PFM and sector monitoring systems. Systematic processes for review and evaluation of programs and results are lacking, and MHCP's methodological guidelines are not applied in their entirety in formulating the budget in the MTBF framework. 5.32. Four PRORURAL entities have introduced the SISEVA monitoring system, an important tool for planning and monitoring actions, results, and impacts. It is a sectoral system that allows for planning, implementing, monitoring, evaluating, and learning as regards institutional management of all public institutions in the sector. A first version was developed in 2006, and it has since gradually improved. As an information technology, the SISEVA application started operating in 2010. SISEVA brings together a large number of indicators, which are used depending on the objective of M&E. There are indicators for inputs, outputs, results, and impacts. The SISEVA application is compatible with the different planning and monitoring systems at government level and with new projects from PRORURAL. 5.33. A major problem of SISEVA is that a description of the monitoring process exists, but it is not known to what extent it is implemented. There is also concern with reporting physical advance in strictly quantitative terms. Follow-up to the budget is not realistic, as data are registered based on estimates made by territorial representatives, rather than accounting documents. To some degree SISEVA is capable of supporting a system based on the performance of a budget allocation, though it is not exempt from constraints due to divergences in the programmatic structure between SISEVA and MHCP. It is recommended to strengthen capacities of staff using SISEVA, specifically regarding proper management of the monitoring system, making adequate analyses and using these as management tools. It is necessary to further integrate PRORURAL and MHCP programmatic approaches. 5.34. The SIGRUN monitoring system allows the Secretariat of the Presidency to monitor the commitments assumed by each institution, but duplicates work. There exists a demand for system outputs, both on the part of the institutions involved, which use these to monitor and evaluate plans and programs under their responsibility, as well as by other public agencies (MHCP) and SIGRUN. Its objective is to monitor outputs and results to which the public institutions have committed themselves. There is ample overlap between indicators in SIGRUN and SISEVA, and the planning units transfer information from the latter to the former, duplicating work. SIGRUN operates with a "stoplight system" that allows the Secretariat of the Presidency to monitor the commitments assumed by each institution and exerts pressure if an institution fails to comply. Sector institutions do not use SIGRUN results, and react only to demands placed on them by the Secretariat when outputs or results are delayed. 5.35. SISEVA introduces a participatory dimension known as "Assessment Synthesis," which incorporates the viewpoints of different actors involved in information analysis. This mechanism is known as the "Evaluation Room" and can be set up at managerial and territorial levels. The idea of evaluation rooms is very good, and several such exercises have taken place. However, to optimize results it is necessary to set up many of them, accompanied by training of participants. Monitoring is still done mainly by sector institutions and is not done in a sufficiently participatory manner. 5.2.6. [x' s evauaio 5.36. Evaluation processes in the sector are incipient and of low quality. While self-evaluation reports are generated annually, their quality 5 is poor.1 It is therefore not yet possible to speak of a sectoral evaluation system, but the improvement at SISEVA appears to be leading to better results evaluation. Still, there is clearly a long way to go. 5.37. Some of the major problems are: Absence of evaluation of AOPs for allocating resources. In theory at the outset of each planning cycle, an evaluation of the preceding AOP should take place, allowing the evaluation's results to be used in allocating resources in the new AOP. However, due to serious weaknesses in the analytical processes of M&E it is very likely that the feedback process still does not function adequately. This obstacle can be overcome by training staff and by technical assistance. 35 To date only two external evaluations of PRORURAL have taken place-the Mid-Term Evaluations (see Section 2.1). However, they did not entirely satisfy either the donors or participating institutions. * Lack of analytical studies of program impacts. No analytical studies on impacts of public spending in the sector have been made, except for evaluations made by projects and programs implemented separately within the sector. Also, no efficiency analyses are being made with the objective of generating a better quality/price ratio. It is recommended to strengthen the capacity of staff in planning units on aspects related to evaluation to ensure that the outputs of SISEVA are put to their best use. * Accountability toward donors, not to the general public. Accounting efforts are addressed mainly to donors rather than the population or other parts of society. The institutions lack clear guidelines regarding accountability. This general orientation needs to be changed. 5.3. Conclusions and recommendations 5.38. The institutional aspects are critical to ensuring high-quality public expenditures, and over the past decade the government has undertaken important reforms. In accord with international best practice, the introduction of the MTBF was a good step in transitioning from program to performance budgeting. Until a few years ago there were parallel planning processes, in which each institution had its own system, but progress has been made and PRORURAL Incluyente has achieved a standard planning process. 5.39. Although the government has much progress, it has a long way to catch up with regional best practice, which need underlies the following conclusions and recommendations. 5.40. Improve budget planning. Beyond the fundamental need to homogenize, or at least make compatible, the two budget structures of SIGFA and PRORURAL AOPs (allowing data to be exported), there is room for improvement in each of the three phases of preparation, formulation, and approval: Preparation. Definitive budget ceilings are based mainly on historical records, and there are no common guidelines for setting definitive budget ceilings in advance. Usually the budget ceilings do not allow for much margin of maneuver, given that most resources go to staff and are communicated to sectors only close to critical deadlines. Budget constraints mean that the scope for preparing the * S budget effectively at this stage is limited. It is recommended that MHCP establishes common guidelines to all institutions on how to set budget ceilings, based on previously established criteria, and analyze the possibility of increasing the margin of maneuver so units in the field can set priorities based on allocated resources. It is understood that the definition of budget priorities will come from the operational and strategic sector plans. * Formulation. Participation by other actors is limited in budget planning. Delays feature in recording the AOP and budget in SISEVA, helping to render budget formulation inertial, and budget revisions based on program reviews are largely absent. It would be best practice to encourage more participation, particularly by beneficiary farmers, and there should be more training for staff. Authorities at the institutions should be more demanding on deadlines. MHCP and the sector should start reviewing the program budget structure to streamline the links between the planning and budgeting processes. * Approval. Consultation and approval are too short to be truly effective. Moreover, the information approved is not shared with other actors at SISEVA level. The budget generated by SISEVA has a structure other than that approved by the administrative area. 5.41. Enhance the connection between planning and budgeting. Links between planning and budgeting are still weak in the agriculture sector even though PRORURAL provides a strategic vision and there is a sound MTBF methodology. Improve budget ceiling management. The first reason for the disconnect between planning and budgeting has been the late communication of definitive budget ceilings to allow the sector to plan and prepare the budget properly. The country should therefore explore ways in which it can inform the various sectors on budget ceilings and do so in advance, as set forth in the MTBF guidelines presented in early June each year. It is necessary to analyze MHCP's capacity to prepare forecasts on future income with the International Monetary Fund, the entity best positioned to provide the technical assistance the country needs to reach this objective. Without advancing the date at which budgets are communicated, it is very hard for a country to consolidate and anchor results-based budgeting, despite efforts to modernize PFM, for instance through PMSAF, which receives support from the European Commission, Inter-American Development Bank, and World Bank. * Adopt a common set of core standards. Even though a broad common strategic approach exists to plan and execute PRORURAL, at operational level the planning and budgeting processes are not aligned with the standards set by the MTBF. This has produced a disconnect between planning and budgeting, which should be aligned to ensure the achievement of strategic sector goals. Hence MHCP and the sector should agree on a common approach to align the planning with the budgeting process. In principle both should be able to agree on basic matters such as a common set of standards to codify the operational plans' activities in the same manner as the budget activities are agreed. It might be conducive to initiate a program review and harmonize the terminology of PRORURAL components into programs in the budget. Once harmonization is completed, MHCP and the sector should initiate a revision of the activities, subprograms, and programs to improve their content and, thus, the quality of expenditures. 5.42. Improve the quality of program budgeting. * Undertake a program review of the budget structure. Such a review is needed because of the lack of common approaches and standards to harmonize operational processes. The PRORURAL description and codification of components and subcomponents are results oriented. But the budget program structure is based on the delivery of services and products. Because the required inputs differ, so do the codification, names, and content of the activities. * Sharpen the focus on capital expenditures during budget planning. Capital expenditures have had a lower execution rate than current expenditures. In budget planning, PRORURAL entities had a tendency to focus on preparing the current expenditures to keep the entities running and left the capital expenditures for the next budget modification. Since capital expenditures depend heavily on donor and external funds, incorporating capital expenditures in the budget takes time. This affects current expenditures and the sustainability of the programs and projects. * Incorporate sources of financing currently off budget. MHCP and sector entities must make progress on incorporating sources of finance currently off budget to the budget, so as to maximize PRORURAL resources using a results-based approach. * Improve the estimate of unitary costs and capital budgeting. The regulations and guidelines of MHCP are best practice to measure the actual cost of providing a service or a program, but there is a lack of tools and methodologies to enable the planning units to cost activities. Also, costs that do not require cash, such as deprecation, are not properly registered. Thus the country and sector need to think about new practices (common standards), tools (international accounting rules), methodologies (standardized approaches), systems (technology), and training (increase the capacity of staff). * Start with program reviews to improve the quality of spending. It is necessary to establish a framework of incentives which guarantees to sector entities that program reviews do not necessarily imply a reduction in their resources. As a general recommendation the sector entities might start reviewing their program structure to match with the MTBF guidelines. Of course those revisions should assume an educated guess to facilitate both the program review and budget preparation. 5.43. Improve FMIS. * Use only one single information solution for PFM. The sector has been using more than one information system to assess the budget's quality: it uses SIGFA to execute the budget, and other systems to report to donors on the use of resources. For this reason MHCP should take advantage of the ongoing PMSAF project. This would ensure the new informatics solution provides the executing units with accounting software, as per international standards and practices, and that it is fully integrated to the entire budgeting process, from formulation and execution to the accounting stage. Moreover, PMSAF should train the staff involved, including the planning units at PRORURAL entities, so that they are in a position to make unit cost estimates using the accounting module of the new financial administration system. Further, MHCP should establish a process of dialogue with donors to explain the additional or different functions of the new information technology solution, so that they are willing to promote its use, too. * Produce integrated financial reports. The weak reporting capabilities of the information systems challenge management in getting accurate and useful information. Fortunately, Nicaragua is modernizing its FMIS through PMSAF. PMSAF opens a huge opportunity for the country to address some of the issues indicated here. It can provide a single integrated solution to manage both the financial and the administrative processes, so that the sector can stop using parallel information systems. * Improve information recording for committed, accrued and paid expenditures. Expenditures are registered in SIGFA only when paid, although for the sector the budget is executed when the service has been provided or the good delivered. PMSAF should address this issue to help the Treasury to plan the cash needs in advance. 5.44. Improve program M&E. * Undertake an effective integration between the M&E and the budgeting systems, and use a single M&E information solution. Although the sector has rolled out a sound M&E system (SISEVA), it is still confronting challenges to fully exploit its capabilities. As with budgeting processes, the M&E activities use more than one information solution, causing duplication of tasks and consuming a huge amount of staff time. In addition, SISEVA is not properly exploited in the sense that some critical financial information is not timely, so management does not get an accurate picture of progress toward physical goals. * Improve the analytical capabilities of staff in planning and budgeting. The evaluation processes have large potential to be done better-improving the quality of spending, starting with evaluating annual operational plans before allocating new resources, or elaborating studies on impacts of public spending in the sector. Moreover, the analytical capabilities of planning and budgeting staff should be strengthened to improve the quality of interpretation of reports coming from the information systems. * Improve program reviews, to assess whether the budgeted programs have been delivering the expected outcomes. Independent evidence-based impact evaluations should be conducted for all large current programs, including Bono Productivo Alimentario. References Alston, Julian M., Connie Chan-Kang, Michele C. Marra, Philip G. Pardey, and T. J. Wyatt. 2000. A Meto-Analysis of Rates of Return to Agricultural R&D. Ex Pede Herculem? IFPRI Research Report 113. Washington, DC: International Food Policy Research Institute. Anriquez, Gustavo. 2006. "Governance and Rural Public Expenditures in Latin America: The Impact on Rural Development." ESA Working Paper No. 07-01, June, Rome: Agricultural Development Economics Division, Food and Agriculture Organization of the United Nations. -- -. 2007. Beyond Agriculture? The Premise of the Rural Economy for Growth and Poverty Reduction. Electronic Journal of Agricultural and Development Economics, Food and Agriculture Organization, Agricultural and Development Economics Division 4 (1). 2012. "Efficiency and Equity of Rural Public Spending in Nicaragua: 2001-2011 ." Background paper for this report. Ara6z, Alejandro. 2012. An6lisis de la cooperaci6n oficial externa a1 sector agropecuorio y forestal, con enfasis a los fondos ofuera del presupuesto del gobierno de Nicaragua, Managua. Auguste, Sebastian, and Osmel Manzano, eds. 2012. Tiempo de cosecha? Desafios y oportunidades del sector agricloo en Centroomerico y 1a Republica Dominicono. Washington, DC: Inter-American Development Bank. Budinich, E. 2004. An6lisis del gasto p6blico en el sector productivo rural. Informe final. Cald6s, N. D. Coady, and J. A. Maluccio. 2004. "The Cost of Poverty Alleviation Transfer Programs: A Comparative Analysis of Three Programs in Latin America." Food Consumption and Nutrition Division, International Food Policy Research Institute. February 2004. www.ifpri.org/sites/default/ files/publications/fcndpl 74.pdf. Central Bank of Nicaragua. BCN 2011 Annual Report. 2012. http://www.bcn. gob. ni/publicaciones/anual/index.html?&va 1=0 Cransfield, J.A.L. Preckel, P. Hertel T. W., 2007. "Poverty analysis using an international cross-country demand system,"Policy Research Working Paper Series 4285, The World Bank. Cunha, Barbara. 2012. Nicaragua: promoting competitiveness and inclusive growth. Washington DC: The World Bank. Deininger, Klaus, Derek Byerlee, Jonathan Lindsay, Andrew Norton, Harris Selod, and Mercedes Stickler. 2011. Rising Global Interest in Farmland: Can It Bring Sustainable and Equitable Benefits? Washington, DC: World Bank. Del Gatto Del Gatto F., Navarro G., Faurby 0. Arguello A. 2006. Verificaci6n de la Legalidad en el Sector Forestal Nicaraguense. http://masrenace.wikispaces.com/file/view/ Verificacion+del+Aprovechamiento+Forestal+en+N icaragua. pdf Devarajan, Shantayanan, Vinaya Swaroop, and Heng-fu Zou 1996. "The Composition of Public Expenditure and Economic Growth." Journal of Monetary Economics 37 (2): 313-44. Economist Intelligence Unit. 2012. "Global Food Security Index." London. http:// foodsecurityindex.eiu.com/. Fajardo, Ra6l. 2012. An6lisis del planeomiento, preparaci6n, monitoreo y evoluaci6n del gasto p6blico en Nicaragua. Managua Fuglie, Keith 0. 2012. "Productivity Growth and Technology Capital in the Global Agricultural Economy." In Productivity Growth in Agriculture: An International Perspective, ed. Keith 0. Fuglie, Sun Ling Wang, and V. Eldon Ball. Oxfordshire, UK: CAB International. FUNIDES. 2007. "Propuesta de Herramientas para Fortalecer Programas de Proteccion Social." Divison de Estudios, Publicaciones, propuestas y Analisis. Junio. Gordillo, Gustavo, Jorge Ortega, and Rodrigo Wagner. 2004. "Enough is Not Enough: Improving Quality in Rural Spending." Paper prepared for the 10th World Bank Annual Bank Conference on Development Economics Latin American and Caribbean Meeting, San Jose, Costa Rica, November 3. Gutierrez Ossio, Jos6 Eduardo. 2012. "Nicaragua Public Expenditure Review: Budgeting Processes and Systems." Background paper for this report. IADB. 2012. Nicaragua: Hacio una agriculturo m6s inclusiva y competitiva. Presentation at the World Bank Knowledge Forum. Managua. IADB/RUTA. 2012. Castillo Vargas, Julio C., Peia, Hechtor, G6mez, Miguel R. Evaluaci6n de estructuras de soporte al sector agricola para Nicaragua. IADB-RUTA Working Paper. Imbens, G. W. and J. M. Wooldridge. 2009. "Recent Developments in the Econometrics of Program Evaluation." Journal of Economic Literature 47 (1): 5-86. INAFOR Statistical newsletter 2009. http://www.inafor.gob.ni/index. php?option=com content&view=article&id=23&Itemid=67 INIDE, World Development Indicators, and FAOSTAT. Laguna, Jos6 Ram6n. 2012. "An Evoluci6n del Gasto P6blico Agricola periodo 2002-2011: un an6lisis de la base de datos." Background paper for this report. L6pez, Ram6n. 2004. "Effect of the Structure of Rural Public Expenditures on Agricultural Growth and Rural Poverty in Latin America." IADB Publications 50958, Inter-American Development Bank, Washington, DC. L6pez, Ram6n, and Gregmar Galinato. 2007. "Should Government Stop Subsidies to Private Goods? Evidence from Rural Latin America." Journal of Public Economics 91 (5-6). Lorio, M.C. 2011. "Avances en la Aplicacion de la Ley de Seguridad Alimentaria y Nutricional." Instituto de Estudios Estrategicos en Politicas Publicas, Managua. Ludena, Carlos E., 2010, "Agricultural Productivity Growth, Efficiency Change and Technical Progress in Latin America and the Caribbean.", IADB Working Paper Series No. IADB-WB-1 86 MAGFOR. 2008. Subprograma Productivo Alimentario (PPA). Managua. MAGFOR. 2009. PRORURAL Incluyente 2010-2014. Managua MAGFOR. 2012. Presentoci6n: Hambre Cero. Programo Productivo Alimentorio. Manuagua. NITLAPAN 2009. Estudio de impacto de la segundo fose del FAT - Occidente y diseio de propuesto paro 1a tercera fose. Managua. Ortega, Jorge. 2012. "Estudio de Revisi6n del Gasto P6blico Agricola en Nicaragua, 2002-2011: Evaluaci6n del Gasto P6blico en Seguridad Alimentaria." Background paper for this report. Pardey, Philip G., Julian Alston, Jenni James, Paul Glewwe, Eran Binenbaum, Terry Hurley, and Stanley Wood. 2007. "Science, Technology and Skills." Background paper for the WDR 2008. Singh, I., L. Squire, and J. Strauss, eds. 1986. Agricultural Household Models. Extensions, Applications, and Policy. Baltimore, MD: John Hopkins University Press. Thiel, Hans. 2012. "El gasto p6blico en el sector forestal en Nicaragua." Background paper for this report. Torero, Maximo, and Thomas Haven. 2012. Unlocking Potential in Rural Areas: Geographic Analysis. Washington, DC: World Bank. Valdes, A., W. Foster, G. Anriquez, C. Azzarri, K. Covarrubias, B. Davis, S. DiGiuseppe, T. Essam, T. Hertz, A. P.de la 0, E. Quihones, K. Stamoulis, P. Winters and A. Zezza (2010). A profile of the rural poor. Background Paper for IFAD Rural Poverty Report 2010 Rome. Wiggins, S., and others. 2007. An6lisis del gasto p6blico del sector rural productivo. World Bank. 2008a. Nicaragua: Public Expenditure Review 2001-2006. Report No. 39807-NI. Washington, DC. -- -. 2008b. Nicaragua: Poverty Assessment. Report No. 39736-NI. Washington, DC. ---. 2012. "Central America Value Chain Assessment: Value Chain Reports." April, Sustainable Development Department, Latin America and the Caribbean. ｀ · && 沕 Annexes Annex 1: Figures, tables and maps Figure A I I : Percentage of producers using fertilizers and certified seeds, receiving technical assistance, and having access to credit, by departments, 2011 60% 50% 40% 30% 20% 10% 0% LE LUjflkil-L 45 te; 2 " Fertilizers Cr6dit " Certified seeds M Organic fertilizers " Technical Assistance Source: IVCENAGRO (2012); Elaboration by authors. Table A. 1.2: Regional distribution of poverty, 2005 and 2009 Share of Contribution to Contribution to Deatetpopulation Poet ae national poverty Poverty rate national poveqt Managua 24.5 20.9 10.6 22.5 12.8 Masaya 5.7 31.2 4.4 32.3 5.4 Rivas 3 52.5 3.3 35.1 1.8 Chantales 3.2 41.6 2.8 36.3 2.1 Granada 3 44.1 2.8 38.3 4.5 Chinandega 1.3 56.6 8.5 42 6.5 Carazo 3.3 39.8 2.1 43 5.4 le6n 6.9 52.5 7.5 43.9 5.1 Esteli 3.9 51.5 4.2 44.6 4.4 Boaco 3 51.6 3.2 47.6 4.5 Nueva Segovia 4.1 71.2 6 48.2 3.9 RMAN 6.1 70.8 8.9 54.2 7.4 RAAS 6 59 1.4 54.5 7.9 Motagalpa 9.1 65.9 12.4 58.4 9.7 Madriz 2.5 70.3 3.6 58.6 3.8 Jinotega 6.5 69.3 9.4 73.3 9.4 Rio San Juan 1.9 61.5 2.4 74.1 4.8 Source: LSMS 2005 and 2009; Anriquez 2012. Note: The 2005 survey sampling was designed to allow representativity at the department level, but the 2009 survey design did not contemplate representativity at this level. Therefore, small differ- ences across time should be evaluated with care, as well as small differences across regions in the 2009 survey. RAAN = Northern Atlantic Autonomous Region; RAAS = Southern Atlantic Autonomous Region. I Table A1.3: Gender and poverty Population Population Population Population Poverty Share Poverty share Poverty share Poverty share Ubn Rua Female-headed household 31.7 37.9 69.8 19.0 21.3 40.5 63.4 22.9 -13.8 -9.2 Male-headed household 30.4 62.1 70.4 81.0 26.4 59.5 63.3 17.1 -13.2 -10.1 Females 29.9 52.7 10.6 48.7 26.4 52.6 64.3 48.5 -11.8 -8.9 Males 32.0 41.3 10.1 51.3 27.3 41.4 62.5 51.5 -14.7 -10.8 Source: Anriquez (2012), using LSMS 2005 and 2009. Table A1 .4: The AOI in Latin American countries Rural public spending (FAOI) Agriculture public spending (ECLAC) Country 1985-89 1990-94 1995-2001 1980-89 1990-99 2000-03 2004-06 Mexico 1.59 1.42 1.38 2.06 1.58 0.80 0.75 Dominican Republic 1.13 1.30 0.69 0.69 1.18 0.68 0.74 Panama 0.69 0.40 0.60 0.46 0.28 0.30 0.32 Guatemala 0.11 0.14 0.12 0.16 0.19 0.21 0.23 Honduras 0.16 0.11 0.16 1.14 0.33 0.31 0.22 Nicaragua 0.32 0.35 0.39 0.17 0.16 0.15 El Salvador 0.49 0.23 0.15 0.13 Costa Rica 1.50 1.22 0.46 1.34 0.14 0.11 0.08 Brazil 0.45 0.66 0.52 Ecuador 0.22 0.33 0.41 Peru 0.13 0.48 0.35 Uruguay 0.11 0.22 0.21 Argentina 0.22 0.28 0.21 Paraguay 0.14 0.19 0.19 Venezuela 0.68 0.45 0.19 Chile 0.13 0.14 Rural public spending (FAO) Agriculture public spending (ECLAC) Country 1985-89 1990-94 1995-2001 1980-89 1990-99 2000-03 2004-06 Bolivia 0.33 0.07 0.13 Jamaica 0.38 0.19 0.10 Colombia 0.04 Average 0.55 0.47 0.34 0.84 0.59 0.35 0.33 Source: FAO and ECLAC; authors' calculations. Table A.1.5: Definition of Functional Composition Research laboratories. Service centers for breeding, R&D, Extension Family support, food assistance, productive assistance model, development, promotion, services to support production. Inputs Agricultural inputs, production bonus, seeds, seed production. Animal and plant health Detection of residues, good agricultural practices, pbytosunitury and veterinary diagnostics, pest eradication, inspection and control of imports and farms, registration of pesticides and fertilizers, disease prevention, epidemiological surveillance and campaigns. Productive development development, sustainable agriculture, production promotion, productive rural revival program, Rural capacity building. Natural resources green Developing agroforestry and silvopastoral grazing, watershed management, INAFOR, management municipalities. Administration Management, coordination, planning, regional offices, monitoring and evaluation, policy, management services, legal services, finance. roads Rural rehabilitation of roads, construction of roads, bridges, docks, drainage, repair, Study design and canstruction supervision. Rural electricity Solar systems, construction of distribution systems, mind systems, small hydropower to small communities. Capacity building Design, construction, equipment, rebabilitatian and expansion of labaratary animal and plant health, strengthening operations, institutional training, information systems, strengthening Public Investment System SNIP, rural youth program. Other costs Social economic development, local development, industry development. Figure A. 1.6: Agricultural public expenditures by source of funding, 2002-11 (2005 C$ million) MAGFOR INTA 100% 100% 80% 80% 60% 60% 40% -40% 20% 20% 0% 0% D0 000000-0- 00 CD00 C 00 -- CD CD I=) C C (, CD CD C) C:> ICD CD CD CDC DC " External Funding U External Funding a Domestic Funding H Domestic Funding IDR INAFOR 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% SExternal Funding 0 Extemnal Funding H Domestic Funding H Domestic Funding Source: MHCP; authors' elaboration. Table A.1.7: Source of funds of the PPA, 2007-201 1 Financing source Amount (millions) Treasury 625.2 (Nicaraguan Foundation) via FUNICA IFAD 28.7 European Union 32.1 China Taiwan 19.6 Venezuela (CARUNA) 316.4 (APAGRO) IADB 220.1 Austria (APAGRO) 13.3 for Agricultural Development International Fund 35.6 Total execution of all sources 1,351.1 Source: MAGFOR. Table A1.8: Links between the PRORURAL AOPs and the SIGFA program structure, 2011 A0P structure PRORURAL program structure SIGFA Component Subcomponent code Component code Subcomponento 1 PNA 1.1 Production plan, 1 PNA 1.2 Production M&E. 1 PNA 1.3 Food safety and nutritional security Food 1 PNA 1.4 Health and safety Agrosanitary services, food safety, animal health and livestock breeding, plant health, plant health and seeds, phytosanitary surveillance 1 PNA 1.5 Governance and capacity building activities Core 1 PNA 1.6 Integrated crop management management with emphasis on Integrated crop climate change 1 PNA 1.1 Livestock Innovation inlivestock, generation, and transfer of technology inmajor and minor livestock 1 PNA 1.8 Seed production biotechnology; Production of basic seeds and registered seed production and seed agro-food program 2 PINAIR 2.1 Governance activities Core 2 PNAIR 2.2 Human talentel 2 PiNAIR 2.3 Association strengtheningo 2 PNAIR 2.4 Value chainsi 2 PNAIR 2.5 Technological development Promotion of rural agretechnology 2 PNAIR 2.6 Product quality - 2 PNAIR 2.1 promotion Trade - 2 PNAIR 2.8 Productive development - 3 PNF 3.1 Forest governance and institutional Core activities 3 PNF 3.2 Forest management and conservation Development and forest conservation 3 PNF 3.3 Reforestation and forest restoration Regulation of forest resource management 3 PNF 3.4 Industry development and forestry - trade 3 PNF 3.5 Forest knowledge generation and Genetic improvement of forest resources management Source: Gutierrez Ossio (2012), based on MAGFOR information. a. Without budget resources. - = not available or cannot be compared. Table A.1 .9: Budget calendar according to the MTBF guidelines 1Action 1 Macroeconomic forecasting Responsible CB 1 0 1 0 1 0 1 0 0 2 Budget policy formulation OAE/budget office 3 Budget policy approval Minister of Finance 4 Formal request for budget needs MHCP 5 Training to execution units on Budget/public budget demand investment/IT offices 6 Demand formulation and Sectors submission 1 Program structure review Sectors/budget and public investment 8 Needs review and consolidation Budget and public investment 9 Presentation to the economic MHCP cabinet about the budget policy, sector demands, budget allocations, and ceilings 10 Presentation to the president MHCP about the budget policy, sector demands, budget allocations, and ceilings 1] Budget policy and ceiling Office of the Presidency approval 12 Communication to sectors of MHCP the budget policy and definitive ceilings 13 Review and definition of the Sectors/budget office entities' indicators 14 Draft of budget proposal by sector's entities with consultations and participation 15 Submission of the draft budget and the MTBF Sectors Sectors II 16 Review and consolidation of the Budget and public draft budget proposals investment 17 Review and consolidation of the Budget and tax offices funds sources income budget by 18 Integration and consolidation Budget and debt office of the public debt situation and sustainability analysis 19 Integration and consolidation of Budget office the draft budget law 20 Presentation to the economic MHCP cabinet the Draft Budget and METF 21 Presentation to the president the MHCP draft budget and METF 22 Adjustments and approval of the Office of the Presidency draft budget Law 23 Print out and submission to MHCP/budget office the National Assembly of the draft budget law and the MTBF attached Non-executed actions Executed actions untimely Executed actions on time Source: Gutierrez Ossio 2012. 0 Annex 2: Quality of agricultural exports The following charts show the relative quality ladders in the U.S. market as measured by the average unit prices received for countries' exports of a particular product to that market. Countries are ranked by unit values standardized by the 90th percentile value. The arrows indicate Nicaragua's position in these quality ladder for exports between 2000-02 and again between 2006-08. The 6-digit HS codes for each product follow: coffee (090111), processed meat (020230), gold (710812), sugar (170111), fresh meat (020130), groundnuts (120220), beans (071333), shrimps (030613). Figure: Relative Quality Ladders for Nicaragua agricultural Exports (2000-02 and 2006-08) .7 I ~ 5L ii Ran k Rank 8I r Rank Source: Author's Calculation using BACI data. Annex 3: Productivity Constraints in Key Export Sectors Box 5.5 Main Productivity Constraints in Key Export Sectors: Beef, Coffee and Shrimp Case Studies Beef Livestock represents one of the most important economic and exporting sectors in Nicaragua. In 201 1, exports of bovine meat reached USD$43 1 million. The meat value chain involves more than 100,000 jobs, comprised mainly of small ranchers in rural areas, workers at municipal and industrial slaughterhouses, and butchers in shops around the country. Ranching has been practiced traditionally under an extensive model. Cattle provide the basis for double-purpose businesses-milk and meat. For small producers, the first one provides the cash flow for small ranches and the second one is used for capital creation/investments. Slaughterhouses dominate exports. In 2011, the top four facilities accounted for approximately 93 percent of the sector's total export value, including the two main tariff lines of frozen boneless bovine meat and fresh boneless bovine meat. The first tariff line mainly involves shipments 3 to Venezuela and United States; 6 the second centers on exports to El Salvador and Puerto Rico. Key issues hinder productivity at the farm level. One involves genetics and animal health. Pregnancy rates are relatively low while death rates at birth are high. In addition, the fattening rate of livestock (kilograms/day) is relatively low, especially during the dry season when pasture availability decreases substantially. Small ranchers face additional logistics challenges linked to unpaved and temporary roads, which slow delivery and impact weight losses during transit. For slaughterhouses, electricity costs and regulatory instability are important challenges at the processing and export stages. Electricity costs are a factor because of the need for refrigeration. Exporting plants must comply with food-safety measures and certification, which change frequently. However, the biggest challenge for the industry and especially for beef exporting companies is developing a tracking system, which will allow slaughterhouses to certify quality and meet standard for trading with European countries. 36 Source: authors calculations based on information from Nicaraguan customs, 2012. Coffee Coffee represents one of the most important economic sectors in the Nicaraguan economy, not only as a source of export value but also as a generator of employment, both permanent and temporary.3 7 In 2011, coffee exports reached USD$426 million, ranking second among export products.38 Nicaragua has approximately 40,000 coffee producers.3 9 Productivity is still a major concern, ranging between 0.16 to 0.32 metric 0 tons per acre. This is much lower than local regional competitors (Costa Rica, Guatemala, and Honduras) and international leaders (Colombia, Brazil, and Vietnam). A few exporters"' with access to international buyers, technology, and financing dominate the export business. They hold greater market power than small and micro producers. In 2011, the top three exporting companies sold 45,810 metric tons, or about 53 percent of the country's total production. Several factors are associated with low productivity levels, especially among small producers. These include: (i) limited access to finance for the medium to long term; 4 2 (ii) low adoption of best agricultural practices/ technology;43 and (iii) high input costs (fertilizers). Access to medium- and long-term finance has direct impacts on the timing of coffee planting. Credit-constrained producers have to maintain old, low-productive plants. Delayed implementation of "good" agricultural practices not only affects coffee quality/productivity, but it could also become a barrier to access to international markets. Many markets are starting to require quality certification. Micro and small producers continue to implement old practices, such as field preparation (inadequate plot density, lack of soil analysis, use of low-yield coffee varieties) and inappropriate plant- nutrition techniques (fertilization mostly). In addition, many micro and small producers do not apply state-of-the-art infrastructure to develop an efficient wet process. This technology is critical to reducing quality-standard risks 37 It employed in average 311,031 workers during 2008-10. Source: Central Bank of Nicaragua. 38 This represented around 1.9 million of bags. 39 Source: Nicaraguan Coffee Council. 40 Source: Central Bank of Nicaragua. The bag contains 100 pounds. 41 In 2011, 40 exporters traded at least USD $1 million dollars. Source: Centro de Tramites de las Exportaciones. 42 Among the typical reasons are: (i) lack of property land titles, (ii) presentation of inadequate guarantees, (iii) lack of a specific financial instrument. 43 One of the key causes is the fact the international price of coffee is very volatile. In 2000-10, the U.S. index price ranged from a minimum of USD$77 to a maximum of USD$203 per bag. Source: International Coffee Organization. Therefore, small producers do not want to take more economic risks without having certain fair-market access conditions. for coffee beans. Finally, exporters face unnecessary delays in obtaining sanitary certifications from the Ministry of Agriculture and Forestry. For instance, it takes at least two days to get physical certification by a competent authority, even though an exporter can execute this procedure online. Shrimp In the past decade, Nicaragua followed the worldwide trend in shrimp and fisheries, with capture production declining 33 percent while the value of shrimp farming increasing 179 percent.4 4 This sector's export value made it important to the economy. In 2011, shrimp farming exports reached USD$95.43 million, ranking among the Top 10 products. The sector generates around 13,000 jobs."5 The main production zone is located within the Estero Real Natural Reserve in Chinandega. Most of the 104 small- and medium-sized cooperotivos and a couple of large exporting companies are located in this area. The sector's productivity varies with technology-artisanal, semi-extensive and extensive. Semi-extensive is the most common, with a yield range from 0.7 to 1.2 tons per hectare per harvest per year. However, yields drop to 0.2 tons per hectare per harvest for the artisanal method. Exporters are mostly vertically integrated firms. In 2011, the top four exporting groups and companies accounted for approximately 73 percent of the total farm-raised shrimp export value. Nicaraguan exports are concentrated in three main countries-the United States, Spain, and Taiwan, which represented around 70 percent of export value in 2011. Similarly, exporting firms limit themselves to a few buyer countries. For instance, SahIman Seafoods sold around 82 percent of its production to two main markets-France and Spain. However, some diversification has been achieved as the number of destinations increased from 10 countries in 2002 to 16 in 2011. Among them, Taiwan and Mexico are now important destinations for Nicaragua's exports, probably because of the signing of free- trade agreements. The sector's biggest challenge involves better control over diseases and quality standards, mainly in micro and small producers and cooperatives. These hatcheries continue to use artisanal practices, which affect productivity levels as well as biodiversity (because capture comes from 44 Source: Author's calculations based on information from Centro de Tramites de las Exportaciones de Nicaragua (CETREX). A 45 Source: Ren6 Escoto, La Cadena de Camar6n de Cultivo en Nicaragua, 2011. the diminishing natural habitats). The main constraints are: limited access to markets and the finance required for adoption of new technology. In addition, the habitat where the shrimp farms are located has less natural nutrients and more sediment, further eroding productivity. In medium and large shrimp farms, the most important threats are the lack of competition among feed providers (there is only one in the country-Cargill). Most exporting plants must comply with food-safety measures imposed by buying countries and clients. This implies a need for control mechanisms to be certified with Hazard Analysis Critical Control Points (HACCP). 4' This certification creates an entry barrier to small and medium producers because it requires both hard and soft investments. Formal relations among private firms within the national boundaries lag because small suppliers in most cases do not meet quality and food-safety standards. Thus, these relationships are on a spot basis, informal, and uncertain. 46 There are some key causes. First, small providers do not have formal relations with their clients. Second, "land concession" cannot be used as collateral. Third, most of financial-service providers do not have knowledge about shrimp farming 47 This certification requires having pre-requisites in place, including good manufacturing practices and standard operating procedures. Annex 4: Geographic analysis tool for prioritizing interventions This review suggests using an innovative geographic analysis to identify areas with the potential to improve productivity. This subsection is based a World Bank paper from the International Food Policy Research Institute (IFPRI; Torero and Haven 2012). The analysis characterizes micro-regions along four dimensions: poverty, agricultural potential, average farm efficiency, and market access. This tool, which uses an econometrically rigorous stochastic profit frontier estimation approach, allows policy makers to prioritize investments in agriculture and rural areas and to target intervention- agricultural extension, for example-to optimize agricultural potential in a given territory or municipality, as part of a broader optimization of overall agricultural public spending. This tool can be particularly useful to bring the current territorial approach of PRORURAL investments, based on four large areas, to a lower level of planning and monitoring based on similar variables. This World Bank review divides Nicaragua into micro-regions by characteristics, problems, and potential for development, using mapping technology and a range of data. This typology is based on climate and topography, production, access to roads and markets, off-farm job opportunities, population density, gender distribution and the presence of institutions (formal and informal) such as credit providers. To estimate the efficiency and profit potential of local farmers, the analysis includes biophysical data on the geography and a detailed geo-referenced household survey. Combining this data with other information such as poverty maps, the approach can diagnose the needs and potential solutions for the various micro-regions (map 2.2). Map 2.2: Micro-regions by poverty, by farmers' profit potential, and efficiency -s m . Source: Torero and Haven 2012. The micro-regions can then be classified by mixing potential and efficiency with poverty. For example, identified areas with high poverty combined with low productive potential, independently of their level of efficiency (red cell), conditional cash transfers and/or nutritional programs could be recommended, at least in the short term (table 2.2). However, if those areas were of medium-high potential (green cells), production strategies with (if necessary) nutritional programs could be promoted, according to their efficiency. Table 2.2: Example of a three-dimensional classification Micro-Regions Poverty Potential Efficiency Critical, lacking agricultural potential High Low High-Medium-Low Medium priority, no agricultural opportunities Medium Low High-Medium-Low Low priority low Low High-Medium-Low High priority High Medium-High High-Medium-Low Medium priority, with agricultural opportunities Medium Medium-High Medium-Low Low priority, with agricultural opportunities Low Medium-High Medium-Low High performance Low Medium-High High Source: Torero and Haven 2012. Map 2.3: Categories of micro-regions for Nicaragua Cl ... priyW11tDout d(griVltuNral oppolilih MO(dR1um Low prior4y High pri-rty Modiurn pr-oity-wth ag-illural oppoiliies LOWprionrlywI r ag culrtural opportunities H,gh petformane H,iglhploicic high i ionleyC high poverty Mutnicipal -rundars Source: Torero and Haven 2012. With this typology, policy makers can geographically target areas with different interventions. Areas with high poverty and high potential, but with inefficiencies may be high priority micro-regions, where appropriate policies can reduce these inefficiencies in production. The study suggests that areas with low potential of the land could reduce poverty through rural nonagricultural interventions like rural labor development and, in the short term, with safety net programs (figure 2.2). Figure 2.2: Prioritizing interventions based on agricultural potential and malnutrition Prioritize agricultural Cash transfer inthe development interventions short-run; Agricultural development inthe long-run - Prioritize non-agricultural transfer inthe Cash Z? -~ interventions (rural labor short-run; Non-agricultural development) development inthe long-run Poverty Source: Torero and Haven 2012. Adding a model that maps accessibility to the above characteristics allows analysts to identify areas that could develop quickly if properly connected, and others where access is not the main bottleneck. The accessibility map is obtained by "geo layers" of altitude, water bodies, roads, and land use (figure 2.3), revealing four key areas and types of public investment needed for Nicaragua (map 2.4). Figure 2.3: Accessibility map Data Layers Sro Source: Torero and Haven 2012. Map 2.4: Four key areas and types of public investment needed for Nicaragua 4%4 CMfI-I M,I-oA r .1I'I, WI-11n ~r Areas of high poverty with low potential for agriculture Areas of high poverty but with high potential for agricul- and significant number of microclimates. Mostly basic ture. Key policies in these areas should focus in identifying staples subsistence agriculture. Key policies should focus and resolving maior bottlenecks to better use the quality of on short term targeted assistance as the use of conditional the land and optimize its potential. cash transfers, school feeding, and so on. pn" UmfuT ,ShE.t ag-ftIIral o=p lrTasI Areas of low poverty rates with significant potential and Areas with moderate poverty rates and low potential and high efficiency. Given their high performance these re- medium and high efficiency. Despite high efficiency, agri- gions could be used to learn and replicate from them. cultural potential is low, resulting in high poverty. Policies in these areas should focus on nonfarm activities as a way to increase household income. Source: Torero and Haven 2012. *; Annex 5: Brief Technical Note: Efficiency Analysis of PRORURAL Public Spending Public spending is the main social development policy tool. It is expected that the execution of the spending is effective, i.e. that it complies with the objectives and suggested results, and/or efficient, i.e. maximize the results with the available resources or minimize the costs by achieving certain results. One indicator used to measure the efficiency of public spending is the cost- transfer rate (CTR), which measures the cost to transfer one unit of resources to a beneficiary. The interpretation of CTR is the following: CTR < 1: the expenditure is efficient CTR > 1 : the expenditure is inefficient The ideal is to have a CTR below 1, and Lo ideal es tener una TCT menor a 1, and the smaller the valuet, the more efficient the spending. Spending more efficiently does not mean that this is still effective, as this requires impact evaluation studies and then cost-benefit or cost-effectiveness analysis. However, execute an efficient spending can help to improve the impact of spending. Cald6s et al., (2004) derive a formula to calculate a the CTR baed on the impact o transfers base don a social welfare function. The proposed formula is: TCT= T+E Where: C= are the operational and administrative costs T= are the direct transfers to the beneficiaries in cash or in kind (ej. vouchers, inputs) E= are other transfers (services and spending) that reduce the costs to the beneficiaries (training, technical assistance, information, etc.) The formula is very simple, but the complexity is to identify the components within the execution of public spending. In the case of PRORURAL a review was conducted of the lines that make up the spending object of the Public Expenditure Database. These rows were allocated to each of the three components of CTR as shown in Table 1. This allocation is preliminary, requiring validation by the program coordinators of PRORURAL and by the Budget Planning and Control Units. With this exception, there was a first estimate for total spending in PRORURAL and spending on Food Security (Figure 1). In general, there is a worsening in efficiency between 2006- 2009 and 2010-2011, exceeding unity in the latter period. In comparative terms the efficiency of spending on food security worsened more in the last period. Table 1: Object of expenditure items assigned to the cost-transfer rate components Cost-Transfer Rate Components (CTR) Subject of spending Operational and Administrative Costs Direct Transfers Indirect Transfers ( C) (T) (E) 100. Personal services All None None 200. Non personal services except four that were classified All None 241, 243, 244 y249 E as 300. Materials and supplies Allexcept 21 that were classified 311, 312, 313, 314, None as T 315, 316, 317, 319, 322, 323, 325, 329, 344, 345, 363, 364, 365, 384, 385, 394, 396 400. Fixed assets except four that were classified All None 421, 422, 433 y451 as E 500. Current transfers 511, 512, 513, 514, 519, 581, 532 y539 571, 512, 574 y579 599 600. Capital transfers 694 - Losses on foreign exchange Allexcept one that were None transactions classified as C Cald6s, N. D. Coady, and J. A. Maluccio. 2004. The cost of poverty alleviation transfer programs: a comparative analysis of three programas in Latin America. Food Consumption and Nutrition Division,International Food Policy Research Institute. February 2004. http://www.ifpri.org/sites/ default/files/publications/fcndpl 74.pdf I 151 4 4.a **" IBRD) -IDA WORLD BANKGROUP> The World Bank 1818 H Street, NW, Washington, DC 20,433, USA. www.worldbank.org Än